Regal Rexnord Corporation (RRX) Q1 2026 Earnings Report, Transcript and Summary

Good day, and welcome to the Regal Rexnord First Quarter 2026 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Robert Barry, Vice President of Investor Relations. Please go ahead.

Great. Thank you, operator. Good morning. Welcome to Regal Rexnord's First Quarter 2026 Earnings Conference Call. Joining me today are Louis Pinkham, Chief Executive Officer; Rob Rehard, our Chief Financial Officer; and Rakesh Sachdev, Chairman of our Board of Directors. 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 regalrexnord.com's 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've included reconciliations between the non-GAAP financial information and the GAAP equivalent in the press release and in the presentation materials. Turning to Slide 3. Let me briefly review the agenda for today's call. Louis will lead off with brief opening remarks. Rakesh will then share remarks on our CEO succession, after which, Louis will provide an overview of our first quarter performance. Rob will then present our first quarter financial results in more detail and discuss our updated 2026 guidance. We'll 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 first quarter results and to get an update on our business. We appreciate your continued interest in Regal Rexnord. Before we get into first quarter performance, I would like to invite our Chairman, Rakesh Sachdev to spend a few minutes discussing our CEO succession. Rakesh?

Thank you, Louis, and good morning, everyone. As you likely saw, we announced on April 22 that Aamir Paul will succeed Louis as Regal Rexnord's sixth CEO. Aamir is joining Regal from Schneider Electric, where he has been a member of the Executive Committee and responsible for managing and growing their North American business, a business with roughly $17 billion in sales, an impressive growth track record and deep product and technological capabilities, including in data center and discrete automation, 2 highly strategic growth vectors for Regal Rexnord. But what really impressed my fellow board members and me about Aamir's background and why we believe that he is extremely well positioned to lead Regal through the next phase of growth is his sharp commercial acumen. His focus on driving innovation, guided by a deep understanding of customer needs and priorities makes us very confident that under Aamir's leadership, the strength of Regal Rexnord of unrivaled scale and scope, incredible brands, solid market positions and engineering and technological expertise can be leveraged to accelerate profitable growth. Given Aamir's commitments to his current employer, we expect he will assume the CEO role at Regal Rexnord no later than July 1. And I'm excited to see what he will accomplish once he is leading the Regal Rexnord team. I would also like to take this opportunity to thank Louis for many of his contributions to Regal Rexnord during his tenure as CEO. Seven years ago, we began a partnership that would reshape this company in ways few could have imagined from transformational changes to the portfolio, including creating a business with significant exposure to secular markets, more valuable technologies and unrivaled scale and scope to developing a deep bench of strong talent, Louis is leaving Regal much stronger and better positioned for growth than when he started. For this, the Board and I sincerely thank you, Louis, and wish you the best of luck in your retirement and all that the future may hold for you. And now I will turn the call back to Louis. Louis?

Great. Thank you, Rakesh. First, I would like to thank the Board of Directors and in particular, Rakesh, for giving me the opportunity to lead Regal Rexnord as well as for their guidance and partnership over these last 7 years as we worked hard to build the Regal Rexnord of today. It has been an incredible journey. And now I am excited to watch as Aamir leverages what we have built to take this business to what I am confident will be great and new heights. Since this is my last earnings call, I want to also take the opportunity to reiterate what an honor it has been to lead this great company through a transformation that I believe has better positioned Regal Rexnord to create value for all stakeholders. And to our analysts and shareholders in particular, thank you for your support and for your years of valuable feedback and robust dialogue. It has been a pleasure interacting with and in many cases, learning from you. And now on to our results. Our team delivered solid first quarter performance, which exceeded our enterprise guidance. So before continuing, I want to thank our 30,000 Regal Rexnord associates for their hard work and disciplined execution, in particular, around achieving market share gains and executing strategic investments to support future growth. Orders in the quarter on a daily basis were up 8.5% versus prior year, which resulted in our backlog rising 6.7% compared to the fourth quarter. In short, we are seeing evidence of both improving end markets and of our growth investments paying off. Orders at AMC were a standout positive, up 34% versus the prior year period on strength across all key verticals. Orders in IPS were down slightly in the quarter, which is due to large project timing, offset by orders in our shorter-cycle OEM business, which were up high single digits and orders in distribution, which were up low single digits versus the prior year. We attribute the strength in IPS short cycle and distribution orders to slowly recovering general industrial markets as well as to our outgrowth initiatives, including cross-sell synergies. Finally, orders in PES were down but better than expected. We are seeing strength in our commercial HVAC business in the U.S. and Asia Pacific and tentative signs that residential HVAC markets are finding a floor. We believe this is encouraging for PES' growth potential. But as Rob will elaborate, we are remaining measured with our outlook, particularly as it relates to residential HVAC due to the very short-cycle nature of this business. Enterprise orders in April were up 4.6% on a daily basis. We are pleased to see continued strength and positive orders in all segments following a strong first quarter. Shifting to sales. Our sales in the quarter were up 4.3% and up 1.6% on an organic basis versus the prior year. We saw broad-based growth outside of residential HVAC and with notable strength in data center, discrete automation and general industrial markets in IPS and AMC. From a segment perspective, we saw particular strength in AMC, which grew over 12% organically versus the prior year. The AMC team continues to do an excellent job executing its backlog and driving share gains in its largely secular markets. Turning to margins. Our first quarter adjusted gross margin was 37.7%, roughly in line with prior year. Our teams overcame headwinds from mix, higher-than-anticipated inflation, tariffs and rare earth magnets with solid execution on price realization, productivity, leverage from higher volumes and synergies. Adjusted EBITDA margin was 20.6%, down 120 basis points versus prior year. This performance reflects relative stability in our gross margin, volume leverage and disciplined discretionary cost management, net of higher strategic growth investments. As we have indicated previously, having achieved top quartile gross margins versus relevant industrial peers, we are shifting our strategic emphasis to driving stronger growth, including making targeted investments in new product development, our sales force and e-commerce technologies, among others. I believe the early fruits of such investments are apparent in multiple recent quarterly order rates, and we expect this dynamic to accelerate. Shifting to earnings. Adjusted earnings per share for the quarter was $2.17, up roughly 1% over the same period last year despite significant year-over-year headwinds, including tariffs, rare earth magnet availability and inflation. The continued benefit of cost synergies was a nice tailwind in the first quarter, and we expect this to continue as we move through the remainder of this year. Lastly, adjusted free cash flow was roughly flat in the quarter, consistent with our historical normal seasonality and our expectations, which included working capital investments to support our growing backlog. Of note, prior year results benefited from onetime working capital optimization initiatives. In summary, a really solid quarter. And with that, I'll turn the call over to Rob.

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 first quarter were up 12.1% versus the prior year period on an organic basis, which was above our expectations. The performance reflects broad-based strength, but with especially strong performance in data center, discrete automation and food and beverage. We would attribute the strength to improving underlying end market momentum in these secular markets as well as our growth investments, which are contributing to our sales growth. Notably, it's good to see the medical market improving. This is a market where we have high-margin, technology-rich products and one where improving demand should help us on both the growth and margin front in the future. Turning to margins. AMC's adjusted EBITDA margin in the quarter was 18.2%, which was roughly 2 points below our expectation, similar to a dynamic we experienced last quarter. We were pleased the team over executed on the top line, but where we saw the strongest growth in the quarter also resulted in greater-than-anticipated mix pressure. The majority of this pressure relates to stronger growth in OEM versus aftermarket and to a lesser extent, project timing in our small but high-margin industrial automation software business, where we now expect the majority of these deferred shipments to be delivered in Q2. When considering margin performance versus the prior year period, the business also saw headwinds from the anticipated unfavorable tariff price cost overhang and to a lesser extent, continued rare earth magnet supply constraints, along with higher growth investments. This business is making targeted strategic investments to pursue highly attractive growth opportunities where adjusted EBITDA margins may at least initially be slightly below our mid-20s expectation for where AMC should operate longer term. We saw some pressure related to this dynamic in the quarter, but expect it to alleviate as volumes associated with these opportunities rise. While not impacting the first quarter, ePODs are a great example with their targeted 20% plus adjusted EBITDA margins, but with high volumes that are expected to make meaningful contributions to EBITDA and earnings growth in future quarters. Orders in AMC in the first quarter were up 34%, which, as Louis mentioned, reflects broad-based growth. Excluding data center, AMC's orders were up 28%. A few notable highlights include aerospace and defense orders up 76%, medical up 53% and discrete automation up 18%. Book-to-bill in the first quarter for AMC was 1.24. The strong AMC order momentum carried into April with orders up 14% on a daily basis compared to April of the prior year. As in the quarter, growth remained broad-based with data center, aerospace and defense, discrete automation and medical, particularly strong. In summary, we are very pleased with the order strength we are seeing in AMC. Our growth investments are paying off and the secular tailwinds that characterize most of AMC's markets are increasingly apparent, which bolsters our confidence in the high single-digit organic growth outlook we have for this segment in 2026. Turning to Industrial Powertrain Solutions or IPS, sales in the first quarter were up 2.8% versus the prior year on an organic basis, which was ahead of our expectations. Growth in the quarter was broad-based, but with particular strength in the general industrial market. We believe this is consistent with signs of recovery in U.S. industrial markets as reflected in recent ISM data and with the gains we continue to achieve from our cross-sell and powertrain initiatives. We see these dynamics impacting IPS orders as well, which I will discuss shortly. Adjusted EBITDA margin for IPS in the quarter was 25%, within our margin guidance range, reflecting a higher mix of OEM versus aftermarket sales and modestly higher-than-planned commodity inflation. Versus prior year, margins were down as expected due to the impact of tariff price cost, higher growth investments and unfavorable mix, partially offset by synergy benefits. Orders in IPS on a daily basis were down 1.4% in the quarter. The decline was driven by the cadence of large project orders in the mining industry, which were very strong in the prior year period and often can be lumpy. Orders from our short-cycle OEM customers were up almost 9%, with distribution orders up low single digits and project orders down in the low teens. These short-cycle OEM orders are where we would expect to see the earliest benefits from a U.S. industrial cycle recovery. Book-to-bill in the first quarter for IPS was 1.09. April orders were up about 2% on a daily basis versus the prior year period. Turning to Power Efficiency Solutions or PES. Sales in the first quarter were down 10.3% versus the prior year on an organic basis, which was in line with our expectations. While the outlook for residential HVAC is showing some signs of brightening, including in the AHRI data, our sales in the quarter for this business were down over 20% as expected. On the flip side, we continue to see growth in our North America and Asia commercial HVAC businesses. Now turning to margins. Adjusted EBITDA margin in the quarter for PES was 15.8%, which was above the high end of our guidance range and up 160 basis points versus the prior year. This strong performance was achieved despite challenging end market conditions and largely reflects positive mix benefits. Orders in PES for the first quarter were down 60 basis points on a daily basis. And while down, exceeded our expectations on stronger performance in the residential distribution and commercial HVAC markets. Book-to-bill in the quarter for PES was 1.13. April orders in PES were up slightly on a daily basis. Now turning to the outlook on Slide 10. The table on the left outlines our principal assumptions for 2026 with today's update compared to our original guidance when we reported fourth quarter results. Starting with sales, as outlined in the table on the upper right corner of this slide, our guidance now assumes growth of roughly 4.5%, up 150 basis points versus our prior assumption, reflecting better-than-expected performance with almost all of our markets improving from where we entered 2026, which we haven't seen for a number of years. As we discussed last quarter, several of our end markets have the potential for stronger growth in 2026, in particular, general industrial and discrete automation given recent expansionary ISM readings. One quarter into the year, we believe we are seeing ISM-related tailwinds in our sales and orders, both in IPS and AMC and are also a bit more optimistic about commercial and residential HVAC markets in PES. In addition, in AMC, we are seeing acceleration in aerospace and defense, discrete automation and medical. Shifting to the margin outlook. Our adjusted EBITDA margin is now forecast at 22.2% for this year, up 20 basis points over the prior year, but down modestly versus our prior guidance. This change largely reflects weaker assumed short-cycle mix in AMC, which we experienced in Q1 due to a mix that was more weighted to OEM versus aftermarket sales, which we now assume continues for the rest of the year. We see this as a more measured assumption for our full year guide. This change also contemplates stronger OEM growth in IPS and in our residential HVAC OEM business in PES. At the midpoint of our guidance, we assume that as our end markets improve, growth is stronger in our OEM versus aftermarket sales, which creates unfavorable mix pressure on margin. At the higher end of our range, we assume a more favorable aftermarket OEM mix dynamic and a more historic short-cycle margin mix profile. In addition, our current backlog, particularly in AMC, supports an even stronger margin profile in the second half. However, we are intentionally remaining measured given what we have described, along with current geopolitical and macro uncertainties. Further down in the table, we also outline relevant below-the-line items, which are fairly consistent with prior guidance. These assumptions result in an adjusted earnings per share guidance range of $10.20 to $11, which is unchanged, and the midpoint equates to approximately 10% adjusted earnings per share growth. For 2026, our cash flow guidance also remains unchanged at $650 million. Our cash flow in the first quarter was roughly flat, which was consistent with our expectations and reflects normal seasonality in the business as well as investments in working capital that we are making to support our growth. Finally, regarding tariffs. We are lowering our estimated unmitigated annual impact to $127 million from $155 million previously. The change since our fourth quarter report factors the replacement of IEEPA tariffs with Section 122 tariffs at 10% and recent revisions to Section 232 tariffs. This revised impact estimate neither accounts for new Section 301 tariffs, which could be implemented later this year nor potential IEEPA refunds. Specific to the status of potential IEEPA tariff refunds, we are actively monitoring the refund process. However, it is new, complex and evolving. At this point, we have not received any tariff refunds. Despite these various fluctuations in tariffs, our outlook is consistent with our previous views. We still expect to be dollar cost neutral by the middle of 2026 and be margin neutral by the end of the year. Before I leave this slide, it is noteworthy that the revisions to the 232 tariffs are creating new share gain opportunities for our PES business. We have high levels of U.S. steel content in many of our motors, which is enabled by our in-region manufacturing footprint. Some of our OEM customers are interested in buying these motors to increase the percentage of U.S. sourced metal content in their products to qualify for a lower tariff rate when those finished goods are imported into the U.S. We expect to comment more on this opportunity as it evolves. On Slide 11, we provide more specific expectations for our performance by segment on revenue and adjusted EBITDA margin for second quarter and for the full year. First, a few dynamics to note for the second quarter. In AMC, we expect sales to be modestly higher sequentially, consistent with AMC's strong orders and its shippable backlog. AMC margins should also improve sequentially on slightly better mix and less tariff price cost pressure. For IPS, we expect sales to rise sequentially, mainly reflecting its shippable backlog, which we believe is benefiting from slowly recovering short-cycle industrial OEM markets and continued progress on our cross-sell initiatives. Margins should rise sequentially on improving tariff price/cost dynamics and higher volumes. For PES, sales are also expected to rise sequentially due to normal seasonality and less pressure on residential HVAC volumes. PES margins are expected to rise on the higher volumes and improving tariff price cost. Now let me flag annual assumptions that are changing. For AMC, we are raising our annual sales growth guidance to high single digits from mid-single digits, consistent with the stronger Q1 performance in this business. The improvement spans AMC's end markets, consistent with the broad-based strength in orders we have seen, but with more notable acceleration in our OEM markets. As I stated earlier, this acceleration in our OEM markets contributes to us lowering the high end of AMC's guided adjusted EBITDA margin range for a midpoint of approximately 20.5%. And as I also stated previously, we see an opportunity to achieve the higher end of this range given our current backlog profile and potentially stronger shorter-cycle margins, but are intentionally remaining measured at this point in the year. For IPS, we are raising our annual sales growth guidance to mid-single digits from low single digits, reflecting signs of improving short-cycle industrial end markets evident in our orders. However, the midpoint of our margin outlook for IPS is down 50 basis points versus our prior assumption, reflecting an expectation based on current run rates of stronger growth in the OEM business, which creates a modest mix headwind. Finally, for PES, we are raising our sales growth guidance from flat to flat to low single-digit growth, which reflects an incrementally less weakness in residential HVAC. Specifically, we now assume residential HVAC volumes are down mid-single digits versus high single digits previously. Our revision reflects slightly more positive industry data points and recent OEM commentary. Even with our strong first quarter margin execution, given the better performance we now see in residential HVAC and other mix headwinds, we have slightly lowered our margin guidance range midpoint. As I close out my prepared remarks and reflect on our performance through the first quarter, we're off to a solid start. Our end markets are improving. Our growth investments are paying off, and these dynamics are visible in our orders. We are seeing particular strength in AMC, but also growth in our short-cycle OEM business within IPS and are encouraged by our April orders in PES stabilizing. Margins faced a little more pressure than originally planned in the first quarter, but we see a path to sequential margin improvement in each of the next 3 quarters based on our current backlog position. We are holding our earnings guidance, but believe there are opportunities for upside if the positive demand momentum proves durable and if the margin mix currently in our backlog maintains. Consistent with our prior approach, we are excluding our remaining cost synergies from our guidance, which continues to help derisk our forecast. In short, we feel very good about how the year is tracking and believe the growth potential for our transformed portfolio and its associated secular markets is accelerating, making an exciting time to be a part of Regal Rexnord. And with that, operator, we are now ready to take questions.

[Operator Instructions] The first question today comes from Mike Halloran with Baird.

Congratulations, Louis. Enjoy the time off. Obviously, enjoyed working with you quite a bit and wish you nothing but the best moving forward. So can we start on the guidance a little bit here and just kind of dovetailing off of Rob's comments at the end there. I think it's essentially one of those. Can we just dig into the points of conservatism and the moving pieces here? It seems like the daily order rates suggest there's upside potential to the guidance if the trajectory continues. Could you confirm that one way or another, but then maybe also talk about the moving pieces between mix, which seems like a bigger headwind, although there's some conservatism there maybe as well as the tariffs being a positive for you and then obviously, the synergies not being included. So can you just wrap that together with -- in a more holistic thought process on where the conservatism is in here and then why the philosophy behind that?

Yes, Mike, thanks for the question. So really, when you think about the conservatism as you look at the kind of midpoint of where we're staying on earnings at this point versus the high end of the range, it really -- the conservatism really is around -- it's really mix more than anything. It is look, we are seeing a mix closer to OEM versus aftermarket, which is primarily in AMC, which is most of the impact that you saw in the first quarter. And what we're doing is we're profiling the rest of the year based on that dynamic. And so if the rest of the year ends up closer to our historical mix of OEM versus aftermarket and starts to pick up more aftermarket in that short-cycle demand, we will see likely closer to the higher end of the range, along with the profile of our current backlog does support a slightly higher margin profile in the back half of the year. But given where we are today with continued uncertainty, the geopolitical risk, everything else that we see going on in the world, we're feeling a little bit -- it's best to be a bit measured right now. The other thing I would tell you, Mike, I don't want to lose sight of this is we continue to be very confident in our guide. The reason is because we don't have the cost synergies embedded for the rest of the year. We have potential for ePOD shipments coming into 2026 that have not been embedded in our guidance today. But if it does come in, it's a fourth quarter event, and the potential for IEEPA refunds, which, as I said, we don't have embedded because we haven't received any yet, but that could also be something that helps us either achieve or exceed the guidance that we've put out there today. So hopefully, that helps a little bit, just kind of getting you to where we feel good about the guide and the potential for higher end. And I think, Louis, you also had a few things you wanted to add.

Yes. Thanks, Rob, and that's spot on. And then I would just add to the first part of your question, Mike. Yes, we feel good about our order rates right now. And this is the first time in a while we're confident in our revenues. I mean we always set what closest to the pin, but we see a path with 8.5% orders in the first quarter, 4.6% orders in April that if this momentum continues, revenue will help us as well get to the top end. Right now, though, we're going to be measured. We've got some changes going on, as you well know. And it's just the right thing to do, we think.

Yes. No, that makes sense. And then maybe just give a state of the union on the data center side of things. Last couple of quarters, you've been a little more forthcoming in the deck specifically about where you were in terms of ePOD, ePOD funnel, where the traditional business funnel was on the data center side and then where you were in the manufacturing plant build-out. Could you just update us on those topics holistically and anything else you think might be relevant to that conversation?

Sure, Mike. Happy to, and I might jump around. A couple of things. We talked about an expansion in our Canada facility. We're already using that operation. I was there at the beginning of April, and we're producing switchgear through that facility today. I then went on to our new Texas facility, and we're well on our path. We've got material already coming in. We will be producing in that facility by midyear. ERP is up and running. We're well suited to the capacity expansion that we need. Specific to data center, I mean, we're still very, very bullish. This is a market where we're nicely positioned. We've been winning quite a bit. We had significant orders growth. But remember, the business is pretty lumpy. They tend to be larger projects, and they're getting even larger. The $735 million order we announced coming out of fourth quarter, beginning of first quarter is a great example of that. I think the real question is -- so we really don't have any more of an update on the funnel itself. We talked about a $600 million switchgear funnel coming out of last quarter. It's about the same. Our win rates are pretty stabilized. And again, we had some nice orders growth in switchgear in first quarter. Now specific to ePOD, nothing has changed in our expectation here. We are in discussion with our customers about future demand beyond 2027 when the majority of our current ePOD backlog will ship. Our customers expect this market to continue to grow into the foreseeable future. And so the best way to think about this is our expectation is that our sales in '27 are probably somewhere around the $900-ish million. And we expect that we would be able to grow off of that in '28. And so therefore, even though we're not giving you clarity on the funnel, we would expect to see orders towards the end of this year or the beginning of next year to fill in the demand for '28. But everything we're hearing from our customers suggests that, that is going to occur. Hopefully, that packages everything in your question and happy to clarify anything if you'd like.

The next question comes from Jeff Hammond with KeyBanc.

This is David Tarantino on for Jeff. And Louis, I want to pass along our thanks and good luck from both Jeff and I. Maybe just on IPS, great to see some more positive momentum here. So maybe could you give us some color on what's reflected in the guide here relative to what you're hearing from your customers, particularly around the short-cycle distribution customers?

Yes. We're being a little more measured than maybe what you've heard from some of our distribution customers and the public statements. The distribution orders in the first quarter were up low single digits. Distribution orders in April were up mid-single digits. So it does feel like it's accelerating a little bit, but we're being measured with an expectation of full year sales for IPS at mid-single digit.

Okay. Great. And then maybe on the margins more specifically in AMC, could you give us some color on the degree of mix and rare earth headwinds and how you expect this to evolve moving forward? Any more color on that margin bridge year-over-year would be helpful.

Yes. So specific to rare earth, just I'll cover off, there's probably about 30 basis points of headwinds related to rare earth. But the mix impact that I described in my prepared remarks related to the short-cycle weighting towards OEM versus aftermarket. That mix was maybe just north of maybe 100 basis points of impact to EBITDA. The second was really related to that high-margin automation software sales that slipped from Q1 to Q2. That's probably another 50 basis points of headwind in the first quarter. And then finally, there's another 50 basis points as well because we're about 2 full points below where we thought we would be. So there's about another 50 basis points related to the timing of tariff price cost. It's not -- it's never perfect. We're a little bit off by, as I said, about 50 basis points relative to what we had expected, but fully expect to resolve that as we move through Q2.

The next question comes from Kyle Menges with Citigroup.

I was hoping to get a little bit of clarification just on the data center sales cadence that you guys are laying out. It seems like data center sales might have been $175 million or so in 2025. And I'm curious what that will look like in 2026. And then I believe you had said $900 million for 2027. Is that total data center sales that you're referencing? And how much of that is the ePOD?

Yes. So Kyle, so actually, 2025 for data center was $120 million for Regal. And our expectation for data center for '26 is $180 million, no ePOD in that number. And our expectation for '27, but we're not guiding yet. We've got to figure it all out, would be to see growth on that piece. That's the switchgear piece with an expectation of switchgear probably being at about $240 million and ePOD then would be additive to that and anywhere from, call it, $700 million. And that's how we get to the $900 million plus for 2027. Hopefully, that was helpful.

That was helpful. And to think about just maybe margin as well in 2027 within AMC, if I think about maybe you're on a path to get to the higher end of the margin guide for this year closer to 21% with the ePOD and more switchgear sales coming in, in 2027. Maybe you get some growth from the other end markets in AMC. Just what's your level of confidence that AMC could continue to see margin expansion in '27?

Yes, Kyle, this is Rob. So I absolutely think we're going to continue to see margin expansion. Remember, we're battling through first half of this year where we're trying to catch up both on the rare earth side and on the tariff price cost side that we do expect, as I said, to be overall for the business and within AMC to be margin neutral by the time we exit the year. Now from that point, and given the backlog profile and the orders performance in the higher-margin businesses within AMC, I would expect that mix will play a nice part in improving margins as we move through '27. It is a bit premature to guide at this time, but there's absolutely a path to get to that -- back to that range that we had previously provided within a reasonable period of time. We aren't quite ready to say what that is yet because of the headwinds we have this year. But we -- and also the fact that we're bringing in so much in terms of the ePOD order, which in 2027, which we've said should be 20% plus margins. And so therefore, that's going to weigh a bit on the mix, but we will happily trade a bit of margin for the growth we're getting out of that business.

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

The next question comes from Julian Mitchell with Barclays.

Yes, I wish you well, Louis, and good to have you on the call, Rakesh. Maybe one first question is just trying to understand again the AMC margin framework. I understand there's some near-term headwinds, but I think this was the 11th quarter in a row of AMC margins falling year-on-year in Q1, and you're assuming that they expand year-on-year in the back half. So I just wondered, there are those very specific items that might turn around, but there's been a longer-term margin deterioration. So maybe any context around the confidence that, that reverses? And then mix has been mentioned many, many times as to a firm-wide margin headwind. Maybe just help us understand the delta of OEM versus aftermarket margin for Regal company-wide, please?

Yes. Let me take the first part, and then Louis, you can add as we move forward. So let's talk a little bit about AMC margins because you brought up something in terms of the historical performance of this business and how we have this pressure. I think this is maybe 4 quarters now that we've had rare earth magnet supply issues. That certainly has weighed on margins within the business as have tariffs. Last year, we were -- we saw a lot in terms of the medical destock that was much worse than what we planned. And then most recently, we've seen a stronger-than-expected growth in the OEM business. So that's -- and the OEM is at a lower margin profile than you would see on the aftermarket, some of the stronger margin businesses within AMC. So the good news is that we're seeing acceleration across most of those AMC markets with some of those like medical and discrete automation having well above fleet average margin profile. So we have -- based on the profile of our backlog today, we feel very good about the improvements that we see going into the back half of the year, coupled with the fact that we do believe we'll be past the rare earth magnet issue that I just talked about, and we believe that tariff price cost will become neutral on a margin basis by the end of the year. All of that gives us confidence as we move into the back half.

And Julian, to the second part of your question, OEM versus aftermarket margin, there's anywhere from a 10- to 20-point differential between OEM and aftermarket. But as you well know with our business, we need the OEM to drive the installed base, and we expect over a 20-year period, 6x that revenue in aftermarket at 10 to 20 points higher. And so we're thrilled to see OEMs starting to accelerate as well because that is the long-term benefit for Regal.

That's very helpful color. And then just a follow-up on this point on data centers. A couple of things there. One is, Louis, you made it sound like maybe I misunderstood that there might not be ePOD orders of any scale before perhaps towards the end of the year. I just wanted to check if that's the base assumption. And also that $900 million of revenue-ish in 2027 for data center, am I right in thinking you have capacity to do a lot more? It's a sort of outsourced low vertical integration kind of assembly model. So I'm assuming you could do a lot higher than that if the orders come in.

And the answer is yes to both of your questions. We put a plan together and the Texas expansion does allow us to expand. Our first path is really a single shift of production that then would allow us to meet the current demand profile, and we could easily expand to a second shift. Specific to your order question, I mean, we're -- right now, our planning has us forecasted orders at -- large orders at the end of the year. You are spot on. It doesn't mean we're not talking to our customers and perhaps there'll be some drop-ins before that. But our expectation is that the orders to fill '28 will come in towards the end of this year, beginning of next.

The next question comes from Tomo Sano with JPMorgan.

This is Ethan on for Tomo, and we both want to say, thanks to Louis. So our question is today is orders were really strong in AMC regarding outside of the data centers. Can we get an update on maybe the $200 million pipeline? And potential progress within robotic actuation?

Yes. Ethan, you're absolutely correct. Orders were strong outside of data center. Orders in AMC, not including our data center business, were up 28%. Discrete automation was up 18%. The automation funnel is actually growing. So it's growing beyond that $200 million, but your question was specific to humanoid. Humanoid in the quarter, we only saw a little bit over $1 million of orders. But I remind you that last year, we saw $40 million of orders. What gives us confidence in our position in humanoids is we're seeing more and more cross-sell opportunity. So we saw about $0.5 million in our micro gearing business to another OEM. We're seeing more positioning for our brake and clutches business. And that really reinforces the strength of Regal Rexnord in our scale and scope and leveraging our cross-sell drive to accelerate the growth of the business. And I'll remind you, cross-sell strategically is important to Regal. In Q1 -- and so I'm pivoting a little bit because I think it's an important point, Ethan. Q1 '26, we saw a 34% increase in our cross-sell and our funnel grew by 18%. So we are well on our path to our target. Last year, we saw $210 million of cross-sell. This year, we'll likely get to our target a year early of $250 million plus. So maybe a little more answer than you wanted, Ethan. So I apologize for that, but hopefully, that was helpful.

Yes. That was helpful. And just following up on the cross-selling and potential synergies. Is there an update on the synergies that were realized during the quarter as well as potential ones for this year, if there's any additional outlook that we could see in the future potentially?

Well, listen, we're going to continue to drive our cross-sell initiatives. So we've said it many times that if a customer is buying one of our products, they need to buy all of our products, yet less than 20% of our customers are buying 2 or more of our product families. And so there's plenty of upside. And so for now, we're still on our path to a $250 million target of cross-sell. And like I said, we will achieve actually exceed that this year. And so feel really good about our cross-sell and the activity there.

[Operator Instructions] The next question comes from Joe Ritchie with Goldman Sachs.

And Louis, I can't believe it's been 7 years. Wish you the best, and thank you for everything.

Yes. Thanks, Joe. I can't believe it's been 7 years either.

Crazy. So my first question, look, it's great to see the order momentum across the other businesses outside of data center. I guess just with the disruption that we're seeing in the Middle East, I'm curious whether your customers have said anything about trying to secure their supply chains earlier, maybe kind of purchasing ahead of schedule. Just any commentary around that? Obviously, some of the end markets that you called out, things like discrete automation and aero have had supply chain issues in the past. So I'm just trying to understand that dynamic a little bit better.

Yes, Joe, we've really not heard any of that from our customers. A couple of things I would note. We -- first of all, our exposure to the Middle East is low. It's less than 1%. We do not leverage the Strait of Hormuz or any of the logistics in the region. Certainly, the oil and gas inflation is going to have an impact on logistics costs, but that's the only thing that we see as a concern. And it's unfortunate to put it this way because I think it's an unfortunate situation. But the war likely will be a benefit to Regal. We're seeing incredible strength in our defense business. And although oil and gas is only a couple of percent of our revenue, we're seeing significant strength there right now. So unfortunately, it's -- the war is a benefit to Regal, and we're not hearing anything from our customers that says, they're pulling forward, they're concerned about the supply chain, at least not at this time.

Okay. Great. That's really good to hear. And then I guess my follow-up to Rob, just on the tariff impact going forward. So clear that the unmitigated piece has gone down since last quarter. Pricing has kind of remained the same. As you're thinking about kind of like the cadence for 2Q, I'm trying to understand whether we -- this is net positive in the second quarter? Is it positive from a margin standpoint in the second quarter? Just help me understand that just based on the impact that you saw in the first quarter.

Yes. No, there won't be much of any impact at all in the second quarter. We capitalize tariffs into our inventory. And therefore, based on our terms, we wouldn't expect to see much of anything until maybe the fourth quarter and even then. We're probably talking a few -- $3 million, $4 million if that as it comes through the year based on our capitalization and those turns. So we're not expecting anything in the second quarter. We would expect maybe a bit in the fourth.

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. It is with mixed emotions that I close my last earnings call. I am so proud of all that our team has accomplished. We have transformed Regal Rexnord into a higher-performing enterprise with a differentiated portfolio and incredibly strong team, well positioned to accelerate profitable growth. I am also extremely excited about Regal's future under the leadership of our newly announced CEO, Aamir Paul. I believe that he will help our team capitalize on all that we have built to create tremendous value for our key stakeholders. Once I pass the baton, I am looking forward to watching Regal's journey progress as one of those stakeholders. 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.