Good morning, and welcome to the Regal Rexnord Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Robert Barry, 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; Robert Rehard, our Chief Financial Officer; and Rakesh Sachdev, 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 described 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 these presentation materials. Turning to Slide 3. Let me briefly review the agenda for today's call. Louis will lead off with opening comments and overview of our 3Q performance and an update on our data center business. Rob Rehard 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 Rexnord. 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 6-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 the 80/20, expanding secular growth opportunities and driving continuous improvement. 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 we'll continue to execute on our profitable growth initiatives for the benefit of our customers, our associates and our…

Thanks, Louis, and good morning, everyone. Now let's review our operating performance by segment. Starting with Automation & Motion Control, or AMC. Sales in the third quarter were down 1% versus the prior year period on an organic basis, which was just shy of our expectations. The performance primarily reflects project timing in data center, weakness in the medical end market and further challenges sourcing rare earth magnets, which continued to limit our ability to ship certain high-margin products in the medical and defense markets. These headwinds were largely offset by strength in discrete automation and in aerospace. Regarding the challenges around rare earths, last quarter, we expected these were diminishing, especially for nondefense products, where we were making good progress with license approvals for exports from China and with our efforts to find alternative sources of supply. However, the situation worsened in the quarter as the rate of China license approvals slowed considerably. And it became clear that even in the absence of an official policy change, China was not approving export license applications for India, where we have a large facility making product for surgical applications. At this point, we are continuing to work on securing alternative sources of supply and making strategic production moves that facilitate exports from China. Given our experience navigating rare earth magnet approvals we've described, which is worse than we anticipated coming out of the second quarter, we now believe these headwinds will impact us through the end of the year and into early 2026. After which, we expect to see net benefits in the P&L from working down our past due backlog associated with these impacted products. I'll share more on this in the guidance section. Turning to margins. AMC's adjusted EBITDA margin in the quarter was 20.5%, which was on the…

[Operator Instructions] The first question today is from Michael Halloran with Baird.

First off, Louis, thanks for everything. Sorry hear you leaving, but you're absolutely leaving the company in a better spot, and I wish you nothing but the best moving forward.

Really appreciate that. Thanks, Mike.

So first, I certainly appreciate Rob's comments on the puts and takes in the fourth quarter. Could you reframe that a little bit and talk more about what that looks like sequentially? What is accelerating from 3Q? How are you framing the furnace versus the air cooling piece within PES? How do the data center pieces roll in? And just maybe talk about what's getting better, what's getting worse and some of the assumptions around the sequentials.

Yes. Happy to do that, Mike. When you first look at PES, a solid third quarter. Fourth quarter, we're expecting resi-HVAC to be down low double digits. Air conditioning will be down closer to 30% though, but furnace will be up high teens. On top of that, we're expecting commercial HVAC to be up mid-single digits, pool down low single digits and general commercial should be slightly up as well. And so when you think about the sequential -- the biggest driver of the sequential change and why we're now guiding PES down about 1%, it's really the fact that resi-HVAC in the third quarter was flat, and it will be down low double digits in fourth quarter. If you then go to AMC, Mike, it's really -- a big part of the discussion is data centers. Data center actually was down for us in third quarter by 40%. It's going to be up more than 50% in fourth quarter. We have it in the backlog. It's just around timing and scheduled shipments. That's the biggest driver of what's driving fourth quarter and some nice improvements that we're continuing to see in discrete automation in aerospace, but we will continue to have headwinds in medical, and we're starting to ramp production in anything that uses rare earth magnets. And we saw some slight improvement in Q3, and we're getting stronger in Q4, as Rob commented in his prepared remarks. And then lastly, going to IPS and the sequential for IPS. It's really project orders that are in our backlog. Actually, distribution for us in Q3 was down. So aftermarket, we would define aftermarket was down about 1% in Q3. We're not expecting that to tick up in Q4. What we are expecting is to execute on our project backlog that's in the backlog. So that's how we're thinking about the guide for Q4.

Yes. No, super helpful. And then a follow-up is just the data center content you put out there. I mean, obviously, those are some pretty big numbers you're putting on the table as far as what the opportunity set looks like. I think you said this year is somewhere around $130 million. You had $190 million plus of orders. What does that look like from a ramp in the next year based on what you see now? And then maybe more importantly, this $1.1 billion between the couple of segments of potential -- how does that shake out in terms of being meaningful to the Regal portfolio over the next few years? Like what kind of ramp are we talking to? What's the win rate, entitlement, things like that? Just kind of any framing that you can give us on a multiyear would be helpful.

Yes. Let me try to give you my thoughts on it. We're really excited. We're excited. We've been investing, and it's kind of all coming to some fruition here. First, I want to -- and I said in my prepared remarks, but our Thomson data center business has actually been growing at a very nice CAGR over the last 5 years. It's at about $130 million. We would expect that to actually grow maybe even double, over the next 2 years. And so that will give you a little perspective of how we're thinking that translates. The backlog is strong. We're winning because of our -- the scale of our company, our commitment to service, but also our willingness to customize to the specific needs of our customers. And some of our competitors are not as willing to do that. And so that has been a benefit. I think there -- and of course, right, we're investing in capacity expansion in both Texas and in our facility in British Columbia. Probably the biggest challenge in the market is the supply chain, though, of components and switching components. But beyond that, we feel really good about our potential here. And so we're -- as I said in my prepared remarks, we would expect this to have meaningful impact on our growth, maybe 1.5 -- 1 to 1.5 points for next year. And we'll continue to invest and grow here. I think it could be a large part of Regal Rexnord overall business for the future. Hopefully, that's helpful, Mike.

The next question is from Julian Mitchell with Barclays.

Louis, sorry to see you go, but I wish you well and thanks for all the efforts down the years.

Thanks, Julian.

Just wanted to start off with the commentary sort of into next year. You've spoken to that low to mid-single-digit organic sales growth firm-wide. It seems like 1 to 1.5 points of that is coming from data center, so a couple of points from the rest of the company. So maybe a couple of things. One is, help us understand the sort of data center overall percent of revenue or dollar revenue this year, so we can understand the jumping off point into 2026. And then should we expect the operating leverage on that volume growth is very limited in the first half because of tariffs and rare earths and so forth?

Well, specific to data center, tariff in rare earth wouldn't have an impact, Julian. Data center for us today is -- the Thomson business, as I spoke to, is about $130 million. Outside of that, data center is about 3% of all of Regal. So you would say about an incremental $50 million. We do expect that to become a more meaningful part in '26 and as we move forward. I think that answers the majority of your...

I think the only other part would be that the margins on the data center business will be roughly segment average. And so we see that to be accretive -- margin accretive for the enterprise.

Yes, great point.

That's helpful. And yes, just a follow-up, sorry. My question was on the operating leverage for next -- it was more around total enterprise because I guess you've got this extra headwind affecting the 2025 guidance from rare earths and tariffs for Regal firm-wide. So maybe help us understand kind of the phasing of that headwind to profits as we step through the next couple of quarters versus what you saw in Q3. I'm just trying to understand if there should be overall much margin expansion in the next few quarters from volume leverage, or it's all offset by the tariffs and rare earth headwinds?

Well, overall, the leverage we expect around 35%, overall for the business. I'm going to give you -- there's two parts to my answer. 35% in the business. It's roughly 40% to 45% for AMC and IPS and lower for PES. The way that would phase in is you'd get a little better benefit in the back half, obviously, as we become more -- as we get to margin neutrality. So it would be more back half weighted than front half weighted. But overall, about 30% to 35% for the year is what our expectation would be. But the first couple of quarters will be margin challenged as we expect to be dollar cost neutral, as we talked about, by the time we get to the end of the first half of next year and margin neutral, not until the back half. So that's the way it would phase from half to half.

The next question is from Jeff Hammond with KeyBanc.

Louis, best of luck, and I'll echo Julian and Mike's comments.

Thanks, Jeff.

Just maybe staying on the margin dynamic. I think you said $40 million of integration savings. And then, Rob, I think you said you think the tariff thing is maybe a net -- or price cost is maybe a net tailwind into '26. So how should we think about price cost or this tariff noise maybe getting less bad or better, and the rare earth kind of fixing itself in terms of a delta '25 to '26?

I think it's a bit early to get too specific at this time. I think that the -- we do absolutely expect that rare earths, we will get through the rare earth challenges early in '26. That should not be a problem. As I said, we've got about $13 million now of rare earth headwinds as we exit this year, which is an incremental $8 million from what we said coming out of the second quarter. We do think that most of that we'll be able to get through pretty quickly, maybe by the first half of next year, and then we'll move through the back half at a much better rate than we're seeing first half. But as far as more detail than that, we're not ready to get to that level of detail until we put out fourth quarter results and provide official guidance.

Okay. Great. And then I guess as your tariff -- I know India may come down, but I guess as your tariff pressure kind of moved higher, are you finding it harder to get price, and maybe more particularly in PES, given the customer concentration? And then just separately, if you could just touch on what's driving the furnace growth? I don't know if there's share gains or there's no destocking dynamic or what?

Yes. So let me comment on tariffs first, outside of PES. We will be price -- we will be tariff neutral, and we'll work to be margin neutral. It's just the timing of that, the 232 derivative tariff coming out right after our last earnings call, it just takes time to implement for IPS and AMC. And so we would expect, as Rob said, that will ramp in the first half of next year. Same for PES. However, a little bit more pressure because of the India influence. And so we feel good about -- and we've talked about this, our global footprint and the differentiation of that global footprint. If tariffs stay at 50% for India, we will need to move that production. But we have not made that decision yet. But if we have to, we will. And so I'm not worried about our ability to offset it. But to Rob's point, it will be margin neutral by the end of next year, and cost neutral by the middle of next year. That gives us a little time to manage. Now let me address your furnace question. Furnace is about 40% of our resi-HVAC business. And I'll just remind you that furnace was down pretty significantly in '23, a little bit stronger in '24. And we think there's actually some more room to return to normal levels. We believe our outperformance in this market, though, is we are gaining share due to our differentiated and IP-protected technology. And so from that standpoint, we feel very good about furnace and our position in that marketplace. Hopefully, Jeff, that helps.

The next question is from Kyle Menges with Citigroup.

And Louis, sad to see you go. It was great working with you and best of luck.

Yes, thank you.

Yes. I mean I would love to just maybe unpack the $1 billion or so of data center pipeline that you identified. I suppose how did you guys kind of arrive at that figure? And then just what's your sense of what? Win rate could be -- or maybe what a respectable win rate would be for you guys, would be helpful.

Yes, Kyle, it's really quite a great question, but it's hard to give you a very clear answer. I can tell you though that the funnel is made up of a number of large projects with a number of customers. We have been investing significantly in our commercial team. And so this is not a focused view. There's a number out there. There's a couple that are -- big projects that are hyperscale related. We've also invested pretty significantly in expanding our portfolio into e-Pods and being able to provide that solution set. To give you a number on win rate would be tough. It really would. The recent two really nice bigger orders that we received, we were hopeful in negotiating and feeling good, but that was a big win for us. And so I think where I would go with this for now is be assured, we're investing -- we've invested in our commercial teams, we're investing in capacity, and we're going to continue to drive growth in this space. And so we believe it will be a meaningful part of Regal for the future. And then we'll have to come back to give you a little more clarity on how we think about win rates after a bit of time.

Makes sense. And then maybe turning to free cash flow. I can appreciate some of the reasons why free cash flow guide was lowered for this year. But I am just curious, your confidence level in free cash flow being better next year and then ability to execute on further deleveraging. And I guess, it would be helpful to hear a ballpark of how much lower interest expense could potentially be next year as well.

Yes. So the free cash flow going into next year, so if we bridge off of this year, which we're saying $625 million, and I said in my prepared remarks that we expect to be at almost $900 million next year. The way we get there is we would expect some growth, so some EBITDA expansion, and then we would expect maybe another $60 million, $70 million coming through working capital to help us bridge the gap a bit, along with lower cash restructuring. Cash interest comes down, we expect by a good $40 million next year. And then there's some offsets, of course, on cash taxes and a bit of CapEx, but those are the main bridge items to get to $900 million. So we feel pretty good. I mean the free cash flow this year was certainly hampered by some of the inventory challenges that I've talked about. And while we're still expecting this year that we'll get some improvement in working capital as we close out the year, it was not where we expected it to be as we entered the year from a working capital standpoint. And so we feel good about next year being able to drive out more of that inventory and bridging more of that gap. As far as the leverage standpoint. From a leverage standpoint, we expect that we'll end next year at roughly 2.5x. That incorporates the $900 million that we have in free cash flow. Helping to pay down the debt, we have a bond that's coming due, that we are currently working through the -- and finalizing the strategy. Here, we expect to have that done here in the next month or so. And then we will have a term loan that is also prepayable. We expect that to be as much -- maybe about $900 million. And so that should execute in the first quarter, and we will then make progress paying down that loan, which would come from the $900 million of free cash. So that's the way we're thinking about it. And so our ability to get down to 2.5x, we think, is very good. And we do expect that we can generate this cash flow and have good visibility on how to get there.

The next question is from Tomo Sano with JPMorgan.

This is Tomo. Louis, although we have only just recently met, I wanted to say thank you for your leadership and wish you continued success.

Thank you, Tomo. Thank you so much.

My question is, could you share more details on the CEO succession process, including timeline, criteria for the new leader, and how you are ensuring continuity in strategies and execution, please?

Yes. Tom, thank you. And I'm actually going to pass it initially to Rakesh Sachdev, our Chairman of the Board, who has some prepared remarks that he'd like to share. So Rakesh?

Thanks, Louis. Yes. I think as you look at where the company is and the work that Louis and the team have done over the last 6 years, it's really quite remarkable, the transformation that has taken place. This is a company that is now very decentralized. There's a strong bench of leaders. You can -- you heard Louis talk about the cash flow generation in this business. It's a high gross margin business. We've got scale, and we are at the heels of seeing some significant growth. So we are in a great place. Louis and the Board, we've been having this discussion about the next phase of growth in this company for the next several years. And we decided this might be a good time. And we have started a process. We have recruited a leading executive search firm. We have kicked off the process just now. And we'll be very thoughtful and very deliberate in appointing the succession -- successor to Louis. And Louis is, of course, going to stay on, and he's -- as we said, it's business as usual until we find and appoint the new CEO leader. So I expect it will take about 4 to 6 months before we appoint somebody, but there is no rush. We want to make sure we find and appoint the best leader. We have a search committee in the Board. There are four of us, three CEOs, one active CEO, two former CEOs. So we've got some great eyes on making this decision. And rest assured, we will find a great person to fill in this role. So with that, Louis, I'll turn it back to you.

Yes. Thanks, Rakesh. And Tomo, just to emphasize Rakesh's point there and as I said earlier, we are going to ensure it's a smooth and orderly transition. And with our team -- our team has never been stronger, deep into the organization. And the message is business as usual. That's where we're going to be focused on what's in our control and continue to execute as we have done in the past. So hopefully, that was helpful, Tomo.

The next question is from Nigel Coe with Wolfe Research.

Maybe a question for the Chairman again. Are you fully committed to an external candidate? Or are there other internal options as well? And when you think about the profile of the person you're seeking, would it be with a very similar background to Louis in terms of operational chops? Or are you looking for maybe slightly different attributes?

Thanks for the question. Yes, absolutely. We are doing a comprehensive search. We are looking at external candidates. We're not going to rule out internal candidates, but you can imagine that this is going to be a very comprehensive search, a thoughtful search. And yes, we will be looking for a candidate who has demonstrated strong leadership skills, like Louis has had, running complex global businesses. We're going to be focused on growth. Operations has always been in the DNA of Regal Rexnord, and we've got some great folks who are leading that. But we also need commercial and growth leadership, which we'll be looking for in the next leader who is going to lead this company. So -- and the cultural aspect is also very important. We have created a great culture in this company, and we want to make sure that whoever leads this company will continue to foster that culture going forward.

That's great. And Louis, look, I've covered the stock for 20 years. And the last 7 years have easily been the best. So you've done an incredible job of really changing the game for this company. So it will be sad to see you go.

Thank you, Nigel.

But no [Audio Gap] the data center. I mean I know we've [Audio Gap] how should we think about the contribution margins on the backlog you're building? And can you maybe just be a little bit -- kind of a bit more precise on when you expect to have this new facility up and running?

Yes. So we're -- so I'm going to go backwards. And Nigel, you're cutting out a little bit, but I think I got the intent here. We are initiating the program for setting up that new facility as we speak. We will be hiring personnel through this quarter into next, starting training. And we would expect that we will have product flowing through the facility in Q1, but not shipping until Q2 and later part of Q2. That's the initial project plan. From a contribution margin perspective, all of our evaluation at this point, Nigel, based on what we've bid and quoted is that this will be fleet average margins for AMC, which is actually accretive for Regal. This will be a benefit for Regal as a total business. Now realize, when you think about these pods, a big part of the bill of material is our Regal product, our parallel and switchgear, our automatic transfer switches, our PDUs. And also, I want to emphasize that we're going to put our air moving products in these systems as well. And so we feel really good about where they're positioned and the margins that we will receive.

And I would just add that, the investments we're making today that we mentioned earlier are very CapEx light. This is more of assembly and test. And so that's important to note. This should not weigh on margins as we move forward.

The next question is from Christopher Glynn with Oppenheimer.

Louis, it's been a pleasure working with you and best of luck there.

Thanks, Chris.

And it sounds like we'll be with you for a couple more quarters anyway. I had a question on the discrete automation orders. I think you said they're up 17%. Just curious how you characterize that narrow, big project, lumpy or pretty diversified? Is it a hockey stick? Or did you have a pretty -- an easier comparison? I can't recall 3Q last year. Is this just a significant sequential move, is really kind of the [Audio Gap].

[Audio Gap] And on top of that, that -- and we talked about this at our Investor Day, we did lose [Audio Gap]. We are starting to get orders, and this is just another indicator of we are investing more in technology. We're trying to expand our served market and feel really good about our position in discrete automation. But again, probably the one piece I would call out to emphasize the point is, defense was quite strong in the quarter.

And then a quick follow-up on the eVTOL initial order there. Is that going to be kind of very sporadic? Or is that starting to ramp?

It's sporadic for now. It's not ramping. The point of emphasizing it, though, and I know you all know this, but in the aerospace industry, when you start a production order, that means you're moving forward. And if you listened to some of the announcements, for example, the LA Olympics has a contract out for 50 eVTOLs for taxis. We'll see if that comes to true fruition. But this is a market that if it accelerates, Regal Rexnord is well positioned. So that's why we shared it in the prepared remarks.

This concludes our question-and-answer session. I would like to turn the conference back over to Louis 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 third quarter in all segments for what was in our control. Most importantly, strong orders in the quarter and order strength in fourth quarter should set us up for solid growth in 2026. Stronger growth, anticipated additional margin gains, including improved tariff and rare earth mitigation, expectations for further cash flow growth and plans to reduce net leverage ratios below 3x means we are poised to create increasingly significant value for our shareholders and other key stakeholders in 2026 and beyond. Thank you again for joining us today, and thank you for your interest in Regal Rexnord.

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