Regal Rexnord Corporation (RRX) Q2 2026 Earnings Report, Transcript and Summary

Good morning, and welcome to the Regal Rexnord Second Quarter 2026 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 of Investor Relations. Please go ahead.

Thank you, operator. Good morning, and welcome to Regal Rexnord's Second Quarter 2026 Earnings Conference Call. Joining me today are Aamir Paul, our Chief Executive Officer; and Rob Rehard, 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 these presentation materials. Turning to Slide 3. Let me briefly review the agenda for today's call. Please note that given Aamir's tenure with the company began on July 1, after the conclusion of our second quarter, we are going to modify our typical approach to the call. Aamir will lead off with some introductory comments. Rob will then provide an overview of our second quarter performance at the enterprise level, review our second quarter financial results in more detail by segment and conclude by discussing our updated 2026 guidance. We will then move to Q&A, after which the call will conclude. And with that, I'll turn it over to Aamir.

Thanks, Rob, and good morning, everyone. Thank you for joining us to discuss our second quarter results. We appreciate your interest in Regal Rexnord. I'm honored and excited to be Regal Rexnord's sixth CEO in our 71-year history, and I want to thank the Board for entrusting me with the responsibility of leading this exceptional company. I'd also like to thank my predecessor, Louis Pinkham. Given this is my first call, I thought I'd begin by sharing a bit about my background, why I decided to join and how I've spent my time over the past 5 weeks. I'll conclude with a few initial observations. So starting with my background. I'm a chemical engineer by training. Professionally, I began my career at Dell Technologies, where I spent 13 years split equally between Austin and London. My time at Dell was mostly in sales and marketing roles, including the transition to an omnichannel go-to-market. I joined Schneider Electric in 2013, first in the U.S. business, leading sales and operations and with the last 4 leading North American operations as a member of the Global Executive Committee. These experiences included global and local roles. They span sales, strategy, operations and business leadership. I have worked with customers and partners in markets that include data centers, energy technology, discrete and process automation as well as life cycle services. I came to Regal Rexnord because I see tremendous opportunities across the company's portfolio, strong channel positions, manufacturing scale and healthy balance sheet. This gives us the ability to address customer needs in a range of very attractive end markets. Regal Rexnord today is a highly capable provider of foundational components that are critical in a wide variety of applications. Some of these are tried and true, such as factory automation, aerospace and defense and air moving and some are emerging and exciting like robotics and eVTOL. It's also great to see our participation in the data center space, and I'm spending time with our teams there to explore our solution road map and understand our customer pipeline. Overall, our broad exposure across attractive end markets is exciting as we continue to build for the future. Now since joining the company on July 1, my primary focus has been listening and learning, and this will continue to be my focus in the coming months as I interact with our teams, our customers, channel and supply chain partners and our investors. Specifically to our investors and analysts, I look forward to spending time with you and understanding your perspectives. I want to thank you in advance for your patience as I balance relationship building with better understanding of our business and customers' needs. While I've only been on the job for 5 weeks, I want to share some early impressions. First is the strength of the team. I've been repeatedly impressed with their knowledge of our products, their commitment to serving our customers and their pride in being part of Regal Rexnord. While we have worked to finish on integration, we are increasingly engaging as one team to better serve our customers. Second is around our channel and customer relationships. In the first few conversations, it's clear that we have strong partnerships and trust that has been built over time. We will continue to raise the bar on how we execute to keep earning that trust every day. And finally, the strength of the franchise. We have great technology, trusted brands, a large installed base of products that support attractive aftermarket sales. Couple this with high-quality manufacturing and a culture of continuous improvement, and you have a foundation for building a platform for sustainable and profitable growth. And with that, I'll turn the call over to Rob.

Thanks, Aamir, and good morning, everyone. I'll begin by covering our enterprise performance and then move to the segment discussions, followed by a guidance update. Our team delivered solid second quarter performance, and I want to begin by thanking our 30,000 Regal Rexnord associates for their hard work and disciplined execution. Orders in the quarter on a daily basis were up 8.8% versus the prior year or 8.1% excluding data center. Encouragingly, orders excluding our consumer-leaning businesses, residential HVAC and pool were up low double digits in the quarter. We are seeing evidence of both improving end markets and further returns on our growth investments. Orders at AMC were a standout positive, up 17.1% versus the prior year period and up 15% excluding data center, on broad-based positive momentum. Orders in IPS were up 6.7% versus the prior year on strength in the energy and general industrial markets. In PES, orders were up 3.5% on strength in commercial HVAC, which was largely offset by weakness in the consumer-weighted residential HVAC and pool markets. Enterprise orders in July were up 7% on a daily basis. Shifting to sales. Our sales in the quarter were up 4.2% versus the prior year and up 3.3% on an organic basis or up 6.1% excluding residential HVAC and pool. We saw broad-based growth with notable strength in data center, commercial HVAC, discrete automation and energy markets. AMC led the way on growth, up over 15% organically versus the prior year and up 8% excluding data center. The AMC team continues to execute its backlog and drive share gains in its largely secular markets. Turning to margins. Our second quarter adjusted gross margin was 39.8% or 37.8%, excluding IEEPA tariff refunds. We recorded $32 million of refunds in the quarter. I will discuss these refunds in greater detail in the guidance section of the presentation. Our second quarter gross margin performance versus prior year, excluding refunds, largely reflects our team's ability to overcome headwinds from a higher-than-anticipated inflation, mix, tariffs and rare earth magnets with leverage from higher volumes and benefits from synergies. Adjusted EBITDA margin was 23.5% or 21.5%, excluding refunds. Versus the prior year, the second quarter margin performance reflects the gross margin drivers I mentioned as well as growth investments. Notably, AMC's adjusted EBITDA margin improved this quarter and has room for further improvement, especially in the fourth quarter, which I will discuss in more detail later in the presentation. Shifting to earnings. Adjusted earnings per share for the quarter was $2.99 or $2.60, excluding the benefit from refunds, which equates to 5% adjusted earnings growth versus the prior year, excluding the refunds. Lastly, adjusted free cash flow was $154 million in the quarter, a nice sequential improvement aided by higher EBITDA, lower interest costs and normal seasonality. When comparing our second quarter cash flows to the prior year quarter, keep in mind that our cash flows in the second quarter of 2025 benefited from $369 million of proceeds from our accounts receivable securitization program. On the whole, a solid quarter. I'll now review our operating performance by segment. Starting with Automation and Motion Control, or AMC, Sales in the second quarter were up 15.6% versus the prior year period on an organic basis. This performance reflects broad-based strength, but with especially strong growth in data center, discrete automation and aerospace and defense. We attribute the strength to improving underlying end market momentum in AMC's largely secular markets and traction in our growth investments. Turning to margins. AMC's adjusted EBITDA margin in the quarter was 21.1% or 19.9%, excluding refunds. Versus the prior year, AMC margins were up 40 basis points, mainly reflecting higher volumes, partially offset by growth investments. Orders in AMC in the second quarter were up 17.1% versus the prior year, which reflects broad-based growth, but with particular strength in aerospace and defense, discrete automation and data center. As stated earlier, excluding data center, AMC's orders were up 15%. Book-to-bill in the second quarter for AMC was 1.02. July orders for AMC were up 7.4% on a daily basis versus the prior year period. Before I leave AMC, I'd like to highlight that in the first half, AMC's daily orders were up over 25% versus the prior year period. This performance is supporting the healthy top line growth AMC has been delivering and which we expect to continue. Keep in mind, however, that nearly half of this order growth reflects longer cycle projects and blanket orders that are expected to benefit the P&L in 2027 and in some cases, 2028. Turning to Industrial Powertrain Solutions, or IPS. Sales in the second quarter were up 2% versus the prior year on an organic basis, which was in line with our expectations. Growth in the quarter was led by the energy market, which includes power gen, where we are benefiting from strong growth in the data center market. A notable area of weakness was machinery off-highway, which includes pressure we are seeing in the ag market. I will also share some detail by channel. Our short-cycle OEM sales were up mid-single digits, which we believe is consistent with favorable ISM data, and our distribution channel sales were up low single digits. Adjusted EBITDA margin for IPS in the quarter was 27.1% or 25.9%, excluding refunds. Compared to the prior year, margins were down as expected due to the impact of product mix, growth investments and higher inflation. Orders in IPS on a daily basis were up 6.7% in the second quarter. The growth was broad-based, but with the largest contributions coming from the general industrial and energy markets. Notably, orders into the distributor channel accelerated, tracking up 8% in the quarter and consistent with a stronger short-cycle outlook. Orders for short-cycle OEM were up 4%, but that follows 9% growth last quarter, equating to just over 6% growth for the first half. So we continue to feel good about what we are seeing in short-cycle OEM. Finally, large project orders also accelerated, up 8%, aided by wins in metals and mining. This project strength has helped put our IPS shippable backlog for 2027 up over 20% versus where our 2026 shippable backlog stood at this time last year, an early positive sign for 2027. Book-to-bill in the second quarter for IPS was 1.06. July orders for IPS were up 7.7% on a daily basis versus the prior year period. Turning to Power Efficiency Solutions or PES. Sales in the second quarter were down 6.6% versus the prior year on an organic basis. The year-over-year decline was primarily driven by weakness in residential HVAC and pool. We believe that demand in residential HVAC remains weak due to a soft housing market, low consumer confidence and lingering pockets of excess channel inventories. At the same time, commercial HVAC remains a clear positive offset, aided by data center construction and continued traction in regional outgrowth initiatives. In the quarter, we also experienced incremental friction related to changes in Section 232 tariffs as some OEMs appeared to delay orders and production decisions ahead of the anticipated changes. And then again, as they reevaluated production plans following the tariff proclamations. In contrast, our commercial HVAC business remains strong and is gaining momentum, aided significantly by data center construction and in Asia continued demand from data center, along with traction on the team's regional outgrowth initiatives. Turning to margins. Adjusted EBITDA margin in the quarter for PES was 20.5% or 16.2% excluding refunds. This reflects weaker performance in the residential HVAC aftermarket due to greater caution in the channel and pockets of elevated distributor inventory as well as underperformance in pool distribution. Orders in PES for the second quarter were up 3.5% on a daily basis, with strength in commercial HVAC largely offset by weakness in residential HVAC and pool. Book-to-bill in the quarter for PES was 1.0. July orders for PES were up 5.4% on a daily basis versus the prior year period. Turning to the outlook. We are making some updates to reflect the dynamic environment. Before reviewing the specifics, I'll make a few high-level comments. We're very encouraged by the positive order momentum we're seeing, which is broad-based with growth in all 3 segments. We also continue to make progress paying down our debt and expect to be below 3x net debt leverage in the second half, an important milestone in our delevering journey. On Slide 10, the table on the left presents our principal guidance assumptions for 2026 as of today's update compared to our prior guidance when we reported first quarter results. The first column is our guidance provided on our first quarter call. The middle column is for reference and provides our current view on operating performance, excluding the impact of refunds, which is comparable view to our guidance at first quarter. The third column incorporates the benefit of refunds, which are now incorporated into our guidance. Our guidance now reflects an expected $48 million of refund benefits to EBITDA or $0.57 per share. This includes $32 million recorded in the second quarter and $8 million to be recorded in each of the second half quarters. Now returning to the table on this slide. Starting with sales, our guidance is unchanged at $6.2 billion and 4.5% growth. It now factors stronger growth in AMC, offset by weaker assumed growth in PES and IPS. Shifting to the margin outlook. Our adjusted EBITDA margin is now forecast to be 22.1% for this year or 21.3%, excluding the impact of refunds. The decline in our margin outlook, excluding these refunds, is being driven by 3 factors: one, a longer time line to realize planned productivity gains, in some cases, to prioritize service levels; two, a lag in price realization relative to a faster pace of inflation; three, modest mix impacts related to our revised segment growth outlooks. Regarding longer lead times to realize planned productivity savings, in some cases, we are slowing productivity actions to prioritize growth, particularly in AMC. In other cases, we are adding incremental conservatism on the time it takes to realize savings from our productivity actions. The last 2 factors, inflation and segment sales mix tend to be shorter cycle and now reflect the latest market conditions. Regarding inflation, in particular, all of our segments are seeing higher material, freight and energy costs in excess of our prior forecast. Further down in the table, we also outlined relevant below-the-line items, which are fairly consistent with prior guidance. Though I will flag our lower adjusted effective tax rate, primarily resulting from the regional mix of earnings in Q2 and benefits from our tax planning strategies. These assumptions resulted in an adjusted earnings per share guidance midpoint of $10.60, which is unchanged from our prior view. Given we are now halfway through the year, we have also narrowed our adjusted EPS guidance range to $10.35 to $10.85. For 2026, our cash flow guidance is now $600 million, down $50 million versus our prior target. The change primarily reflects improved order strength since we originally set our guide, which has become increasingly weighted to AMC, requiring incremental working capital investments. We are also assuming a more measured pace on executing our working capital reduction initiatives in light of the higher growth trajectory. Our healthy cash generation continues to enable good progress in paying down our debt, and we expect to see net debt leverage below 3x in the second half. Finally, regarding tariffs, the transition from Section 122 to announced Section 301 tariffs is minimal and is factored into our guidance. We continue to monitor this situation as it is rapidly evolving. On Slide 11, we provide more specific expectations for our performance by segment on revenue and adjusted EBITDA margin for third quarter and for the full year. For reference and comparability to our prior outlook, we are providing our margin assumptions for third quarter and the full year, both including and excluding IEEPA refund impacts. I will reference values, excluding IEEPA tariff refunds in discussing this slide. First, a few dynamics to note for the third quarter. In AMC, we expect sales to be modestly lower sequentially, reflecting some project activity that moved out of the quarter, including some that pulled into second quarter and some that shifted to fourth quarter. These product shifts, which carry favorable mix, contribute to a modest sequential margin decline in third quarter, followed by a step higher in fourth quarter. Despite these shifts, big picture, we believe AMC's margins have stabilized and expect the segment's second half margins to be above first half. We expect further margin expansion in AMC as we move through next year, but we are not providing any further guidance in that regard at this time. Our fourth quarter revenue outlook for AMC is now also benefiting from $15 million of ePOD sales. As a reminder, we have been waiting for build schedules tied to our initial ePOD orders to firm and had expected the majority of these sales to impact 2027 with some spillover into 2028 and potential for a modest amount of revenue to be recorded this year. We plan to provide further updates on the cadence of ePOD revenues when we have better clarity. Turning to IPS. We expect sales and margins to be higher in the second half versus the first half, reflecting orders performance and project shipment timing. However, within the back half, we do see sales and margins being modestly higher in fourth quarter versus in third quarter. For PES, sales and margins are expected to rise sequentially, largely due to normal seasonality. As a reminder, third quarter is the typical seasonal high point for PES margins, and we expect this year to follow that historic pattern and step down sequentially in fourth quarter. This year, we expect that fourth quarter step down to be larger because we anticipate less high-margin pool distribution prebuy activity than in a typical year given apparent destocking in the pool distributor channel. Now let me flag some annual assumptions that are changing. For AMC, we are raising our annual sales growth guidance to low double digits from high single digits, consistent with the segment's strong orders performance, along with the addition of the $15 million of ePOD revenue expected in the year. However, we are lowering the back half margin expectation due largely to the factors I covered earlier in the presentation. For IPS, we are lowering our annual sales growth guidance to low single digits from mid-single digits, primarily reflecting a weaker outlook for our large projects business, primarily tied to prior year metals and mining projects rolling off. Encouragingly, as I mentioned earlier, recent large project momentum has improved, though the benefits are likely to accrue in 2027. These headwinds are temporarily muting the benefits we are seeing from a recovery in short-cycle industrial markets. Shifting to margins. Our margin outlook for IPS is down about 80 basis points versus our prior assumption. Just under half of this decline is related to the lower top line outlook, and the remainder is associated with the factors I discussed earlier that are driving our enterprise EBITDA margin guidance revision. Finally, for PES, we are lowering our sales growth guidance to a flat to low single-digit decline. The change primarily reflects weaker residential HVAC and pool distribution markets that are mix accretive to the segment, partially offset by a stronger outlook for the commercial HVAC market. Our adjusted EBITDA margin outlook for PES is now expected to be about 1 point lower versus our prior assumption, reflecting higher inflation, lower volumes, less productivity and weaker mix. Before we open it to questions, I want to take a minute to reflect on the outlook for our business. For those who have been following us for some time, you know we have been focused on growth and deleveraging. Our order growth is approaching double digits, and our leverage is tracking to get below 3x in the back half. This trajectory should provide value creation opportunities for all our stakeholders, our customers, our associates and our shareholders. And with that, operator, we are now ready to take questions.

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

Welcome, Aamir. Looking forward to working with you.

Likewise. Thank you.

So a couple of questions here. First, can we start kind of where you left off there, Rob. The order trends have been really good for a chunk of quarters here, even if you exclude the chunk ePOD orders. The revenue has lagged. A lot of the commentary you've had in the prepared remarks was setting up for 2027 with longer cycle type projects that are coming in. So maybe you can help put in context when you start thinking that the orders and revenue numbers can start converging. It feels like you feel cumulatively good about what the momentum on the orders look like. July seems to support that. And then any moving pieces that you think will prevent you from getting there as we exit this year into next year?

Yes, Mike, thanks for the question. So first of all, orders certainly do look to be very strong. As you said, we exited Q2 in a very good place. We, again, in July, saw orders strength at 7% overall for the business. So that's very good. There are some things that are lagging in terms of the sales side. I mean from an IPS perspective, we are seeing the large project activity, as we said, in mining, in particular, that's certainly weighing down on some of the growth rates that we're seeing this year. But that's really a timing issue. It's really an air pocket, if you will. And it should absolutely free up as we move into '27. As I said on the call, we have about 20% higher shippable backlog in '27 at this time versus what we would have had at the same time last year. So that gives us quite a bit of confidence as we move into the back half of this year and move into '27. From a PES standpoint, certainly, lots of noise there, market-driven, but feel very good about the order rates we're now starting to see. I'll point out that in PES, we saw orders in the second quarter of about 5% -- I'm sorry, at about 6.7%. We're now moving to about a little over 5% in July. That's good to see continuation there. But that's more of a market issue. And then from an AMC perspective, we've talked about it 15% excluding data center in the second quarter, very strong. So we really -- and this is why we took up the back half of the year for AMC, the way that we did. We do see that there's an opportunity to perform a little better within the range, but we are going to be a bit measured as we move into the back half of the year. But again, we don't see any visible obstacles beyond the macro. Most end markets feel very good to us. And we do think there's some opportunity in some that are very good with some outgrowth momentum there, especially in the areas of discrete automation, which we're moving up our assessment there from mid-single digit to high single digit in the year. And then aerospace and defense from -- there, we're seeing that move stronger. Data center from the 20s to high 20s now because of that market strength. So again, across the board, we feel very good about the future and about '27 in particular, getting back to where we know we are entitled and where we should be.

And then related then, maybe a similar thought process on margins and when you think you can get that more normal flow-through into the profitability line. Maybe a finer point on that, just specifically around when mix starts normalizing, when you think you catch up on price cost? And any nuance there? And I know people probably specifically care about the AMC segment with those comments. So any help you could give us would be great.

Sure. We do think that from a forward progression standpoint on rates, on margins, in particular, in AMC, as you mentioned, absolutely expect that we will continue to make progress as mix improves, especially in some of those businesses that tend to be higher margin within that business, such as discrete automation and then data center will come through for the switchgear side of the business. Those things are going to certainly come as we exit this year and move into next year. From a rate progression standpoint, the way we're looking at it right now is if you take from a modeling perspective, if you take kind of the jump-off point from this year and use those rates as we exit the year and then assume a bit of progress on price productivity and, of course, volume, that's how I would model it going forward. It's going to -- it's a little bit dependent upon the inflation that we continue to see through the business, our price capture and our ability to be a bit more margin accretive as we move forward. We have to get past the point we are today. But at this point, that's kind of the directional guidance I would provide, but we'll certainly provide more detail as we move into next year.

The next question is from Jeff Hammond with KeyBanc Capital Markets.

Aamir, welcome to the call and to Regal. So I want to really drill down on the service level issue. I'm wondering, one, do you feel like you're losing any share because your service levels are lighter? I think you mentioned AMC, but it's just a little surprising to see you lower IPS as we start to inflect on short cycle. Are you seeing those service level issues outside of AMC as well? Maybe just more color on this service level issue.

Yes, sure. Thanks, Jeff. And let me be very clear. It is not that our service levels are declining. It's more to protect the service levels and continue -- but sometimes when you have the kind of growth that we're seeing flow through the business, in particular, in AMC, we would look to slow down some of those productivity programs so that we can ensure that those service levels maintain. We have zero instances of service levels declining though. And outside of AMC, it's more conservatism on timing than it is the service level protection.

The only thing I would add, and it's week 5, so there's still a lot for me to learn. But as we looked at this, I think one of the assessments that was made was we're seeing more growth than even the teams were projecting from an order standpoint. And given this team has been working so hard to secure that, we wanted to make sure we didn't disrupt anything. Now some of these planned moves were part of sort of scheduled consolidation of our footprint. And we decided to make a choice to say, look, let's make sure we get the growth curve right. So that's just strategically how we would thought about it and reset that timing a little bit.

Okay. Great. And then just on ePOD, can you just talk about the new facility ramp? It sounds like you're going to ship some, so that's good. You talked, I think, initially about margin profile. Are you thinking about the ePOD business? Are you thinking about that any differently? And then visibility on when you would see additional orders? I think you've been talking about 4Q, 1Q, but maybe just talk about the pipeline there.

Yes. First of all, let me -- I'll kick this off as it relates to the facility. It's on schedule. The infrastructure is nearly complete. The leadership team has been hired. We're in the process of ramping up direct labor. So we're on track to be operational in time to support customer production schedules. So we're very close to being capable of producing at this time. As it relates to the margin profile and the -- we're still assuming at this time, since we haven't produced ePOD yet that our prior projections are still on track, which we've communicated was approximately 20%. And then as you look forward and look to additional ePOD orders, we have said that we might expect something on that front, maybe late in the year or early next year to those customers. And Aamir, you may have some additional commentary on that front.

Yes. Thanks, Rob. Look, if you step back, we were invited to enter this space through customer relationships we've had in Thomson Power for some time. And as you know, this is simply about time to power. The labor issues in construction are such that modular delivery allows for time to power to be accelerated. And so these customers, and there are a set of them asked us to enter the space because they weren't satisfied with the quality and delivery they were getting, and they've had that relationship with us. Now we've been working with those customers to lock design that's done. And those customers alone have a pipeline that we can scale with. Of course, once we get through the first set of deliveries, we'll assess our profitability, as Rob mentioned, and also look at sort of how much we want to expand outside of those set of customers. But that available volume even within that set can allow us to grow. The key is that we understand the pacing of that from their standpoint and our standpoint.

The next question is from Kyle Menges with Citigroup.

And Aamir, I look forward to working with you. Maybe starting just on the data center orders in the quarter. I mean it didn't seem like much. And -- I mean, I'd just love to hear an update on the pipeline of traditional switchgear. I think last quarter, it had been around $600 million. So I'm just curious maybe why we haven't seen more conversion on that pipeline over the last couple of quarters and just how to think about that going forward?

Well, first of all -- and thanks, Kyle, for the question. We do see switchgear growing at market levels and have that pipeline to support for sure. So from a switchgear standpoint, we still expect that this year, we should be around $180 million in switchgear moving higher than that next year, maybe as much as $240 million or so, $250 million next year. So switchgear is very much on track, and we feel very good about that. And as we move through the remainder of this year, as I said, the ePOD, we did not expect to get anything from an order standpoint. Our switchgear funnel still remains around the same level as what we've communicated previously. So that really hasn't changed.

Got it. And then just curious on the July orders. It sounds like decelerated a little bit versus the second quarter. Would just be helpful to unpack the July orders, maybe what you're seeing by segment and what's decelerating versus accelerating perhaps?

Yes. So really, it's just AMC primarily that's decelerating and that really is just timing. We've got -- it's a project business. It's very lumpy. You can see movement up and down in AMC for sure, as you go through a particular quarter. But we still feel very good about the backlog and the order rates that we see. From -- the other segments, we feel very good. We saw IPS accelerate. So that was great to see. And then PES, we -- as I said before, PES also is starting to show a little bit of strength as we move through July. So feel good about that as well. There's no markets that we feel that based on July results, we would change our perspective as we look towards the back half of the year. Things are very much aligned to our expectations.

The next question is from Nicole DeBlase with Deutsche Bank.

Welcome, Aamir, looking forward to working with you. I guess maybe just starting with the guidance change. You guys are embedding a step-up to 5% growth in the second half versus, I think, 3% in 2Q. I know orders have been better, which helps provide confidence, but the comp is a bit tougher relative to the first half. So just thinking through like the level of confidence that you guys have in the second half outcome and if you've embedded any sort of contingencies to make that guidance a bit more conservative.

Well, certainly, the orders underpin the confidence that we see as we move into the back half. And the step-up is very much informed by what we're seeing on those order rates and the backlog, the shippable backlog, in particular, as we set up both Q3 and Q4. So there is additional upside opportunity for sure as we move through the back half of the year. Where we saw the greatest change from a positive perspective would be AMC. We did step down both IPS and PES. But again, feel very good about the back half with, as I said, opportunity in the range -- within the range.

Okay. And then maybe just if we could put a finer point on price cost. How would you think about what's embedded in the second half? Like is price cost still a headwind throughout both 3Q and 4Q? And have you already taken pricing actions necessary to get back to price/cost neutral and whether that happens in the second half or more in 2027?

Right. So we absolutely expect modest headwinds in the second half as it relates to price cost. And it's really around the inflation side on price/cost. There's the price tariff recovery, which we still see that we'll be margin neutral by the end of the year. The price/cost, we do expect that we will be a bit behind from a price/cost standpoint. But again, it's very hard to size. It's very much dependent upon the rate of inflation and the level of inflation flowing through the business as well as other mitigating actions that we can take. But we are absolutely implementing price increases. We have scheduled price increases as we move through the back half of this year, have been implementing price increases along the way as we move through Q2 and do that consistently. even as much as adding surcharges in certain cases where when you've got the war going on in oil and gas doing what it's doing and its impact on resins and the like, sometimes you have to surcharge things. But bottom line is, look, we're going to continue to execute our discipline around price cost, and we feel good about what we have embedded in the back half, and we will continue to raise prices to ensure that we can get back to a reasonable margin on those areas where we're seeing the most pressure.

And the only thing I would add is just on the channel side, there is specific timing effects here, right, because we have a mechanism where it takes a certain amount of time for that price to flow through. So we can even work with our partners to announce it. But by the time it shows up in the sell-out numbers, there's a lag, whereas the inflation numbers are pretty much immediate. So there's a timing in terms of understanding what we're chasing in terms of net coverage number, as Rob said. And then there's the timing of the effect of the increases we've put in the market. And so both of those are factors that we're working through.

The next question is from Tomo Sano with JPMorgan.

Congratulations, Aamir, for a new role. As you ramp into the CEO role, could you share your first 100-day priorities and where you expect to spend the most time, customers, operations, portfolio, talent and capital allocation?

That's a pretty good list you have there. No, look, I mean, in all seriousness, I have sectorial experience in many of the businesses, but I think it's really important to do exactly what you just mentioned, which is get out there and meet customers, meet partners. We have the privilege, in some cases, of decade-long relationships with our channels and end customers and just get their perspective. What are we doing well? What can we do better? Where are we best-in-class and where are we chasing best-in-class. We have gone through a lot of consolidation work as we went through the acquisitions and portfolio changes. So culture, even the teams and understanding where we are on that and how we move towards one Regal Rexnord and the solutions we can provide. So that means spending time in region with our teams. And then we talked about some of these factory consolidation moves and our execution on that front. Getting an industrial company to get into growth mode is exciting, but it's a step function change in how you operate, so making sure we're ready for that. So yes, a lot of time on the road with Rob Barry, I will also be carving out time to come meet with our investors and analysts, and I look forward to spending time with many of you as we do that. But understanding the business through the lens of our people, our customers and our operations is priority #1.

And how does your experience running Schneider's North American business shape your view of eVTOL robotics, including humanoid and data centers? And now that you're in seat, how has that influenced your [indiscernible] priorities?

Yes, that's a great question. If you look at my career, I was at Dell and then I went to Schneider. And when I joined Schneider in 2013, the way we talk about energy technology today and energy being intertwined with data centers was not as obvious. Certainly, to me, it may have been to sort of some folks in Silicon Valley. But for me, watching that journey and things going from sort of not being obvious to becoming so critical was an interesting view. And what attracts me to Regal is not only do we have a footprint today in exciting parts of our business, but we are building the foundation layer for tomorrow. If you think about the biggest application of AI and physical AI and the introduction of robotics, the fact that we are such a core part of those systems is terribly exciting. So I've had already the opportunity to meet with the CEO of one of the largest U.S. robotic companies, and I plan to go down to Austin and spend some time with them. And same thing on the eVTOL side. Those are longer cycle things, but it's great to see us on the ground floor co-engineering those solutions. And those markets will develop slowly until they happen overnight, and we plan to be ready.

The next question is from Tim Thein with Raymond James.

Welcome, Aamir. Maybe Rob, just on IPS, the guidance for the third quarter effectively flattish revenue sequentially. We talked a lot about some of the building momentum in the order board and some of the short-cycle indicators. So is that a -- is there a seasonal element to that? Or what would you kind of highlight in terms of why we wouldn't maybe see a little bit more sequential acceleration there on the top line?

Yes. It's really -- there isn't a lot of seasonality within IPS. It's fairly minimal. But distribution, we'd say on that side, we expect that to be again, relatively -- improving relative to Q2. So short cycle, we expect to be a positive in the third quarter. We think that it's somewhat offset a bit by ag or machinery off-highway and then other projects are certainly -- the timing on projects are certainly weighing, but we do see a bit stronger activity as we move from third quarter to fourth quarter for IPS. So that -- we do see some improvement as we move forward as some of those projects start to flex upward and don't have any reservations on that front. And from a margin perspective, it's -- there is a bit of inflection in the margins in third quarter. That's just all volume and mix of the volume that you've been talking about. Some of the higher-margin businesses shifted from third quarter to second quarter. And so that also happened to -- within the IPS segment.

Okay. And Aamir, I know it's early days here, but what the cross-sell has been one of the opportunities that your predecessor was really kind of hitting on and that being a huge opportunity for Regal. And your -- what you've seen thus far, I mean, how do you view that opportunity of just kind of the 1 plus 1 equals 3 idea within Regal?

I buy into it completely. And when I mentioned moving from the brands that we're so proud to have into one Regal Rexnord, that's exactly it. Now to make that happen, we need to keep working on the second or last stages of our integration efforts. For example, if you're a seller in one of our divisions, how easy is it and how quickly can you quote for another? And how quickly do our systems give you access to the right information or how quickly if you need a subject matter expert, can you get them on. So that's the internal sort of friction that we're trying to eliminate so that our salespeople can not only continue to service their existing customers but expand into those secondary lines. Now that's a lot easier when we have direct end user OEM relationships. And again, we're thinking differently about our sales structure. So that is an evolutionary process, but the opportunity and the math that has been shared on that, I completely buy into.

The next question is from Joe Ritchie with Goldman Sachs.

Welcome, Aamir. So I want to really kind of focus on your background, Aamir. So obviously, been at Schneider since 2013, last 4 years running North America. Last 4 years really coincided with like pretty acute pressures that we're seeing across the supply chain, a lot of inflation. I'm just curious like maybe you can highlight some of the things that you learned during that time frame that could be relevant as you're taking the seat at Regal Rexnord.

I imagine many things, but a therapy session wasn't one of them. Look, as you said, it was an incredibly demanding period for not just us, the entire sector because we were coming out of the COVID recovery and then we had sort of this next revolution of AI and everything that, that's brought since 2022. So scaling, right, was the name of the game. And then you couple that with last year's Liberation Day and localization became even more important. So there were a lot of moving parts. And look, I could spend a lot of time talking about this and happy to when we meet. But if I distill it down to 3 things, take care of the customer first, deliver, get your supply chain right, right? Do not disappoint on that front. Second, make sure that your long-term strategy, you're super clear on because you can't play whack-a-mole. If you start playing reactive in terms of sourcing or supply chain, you're just going to be in trouble, right? Like guess which country is going to have a higher tariff is not a winning strategy. And then third, structurally make sure that once you get that right, you earn the right to price to value, right? And I think that sequence of operation isn't always perfect, but it's a lot harder to go ask customers for price if you're not delivering or you're messing up their supply chain. So win the delivery battle, then make sure you're structurally doing the right things and then that gives you the platform to deserve the price that your delivery affords you. Again, we could go a lot deeper, but I think that those are the scars I carry with me, and that's what we're trying to replicate here.

That's super helpful. And yes, I look forward to definitely going deeper. Just my one quick follow-up. You guys have talked about this data center opportunity and how it kind of -- for a lot of the investors that have paid attention to Regal Rexnord for a long period of time, it seemingly kind of came out of like nowhere, right? And the way -- I guess, as you're thinking about this opportunity and the relationships that you already have with hyperscalers, colocators, how are you thinking about potentially like scaling that business and bringing some of that commercial culture that you had at Schneider to Regal?

Well, starting with our portfolio is different. In fact, some of the solutions we deliver integrate content from Tier 1 providers like ABB, Schneider, Eaton and others. But I think there's a lot -- back to your first part of your question, there's a lot right now where the hyperscalers just want reliability and they have such acute time to power schedules that they want partners they can count on to deliver. The shift from stick build to modular is very much driven by that labor arbitrage issue that modular allows you to get right. Then you come to the relationships Regal already has, which invited them to join this business. I think if we can prove, and that's our intention that we can do this more effectively, scale with higher quality, make sure we get the basics right. The opportunity is certainly there, but we want to make sure it also works for us in terms of the profit profile, given our content is not as high as some of the other players in the space. And then the last element of this that's exciting is there are elements in air moving, especially in PES that we can add to this. Because not all of these modular solutions are going to be liquid cooled. So it's a combination, right? We want to make sure we can scale what we're building, demonstrate that it's best-in-class, demonstrate that works for us from a profitability standpoint. And then because we built it for a set of customers, we'll first compete for their share of wallet. And if for some reason, that doesn't take up our capacity, then, of course, there are other market opportunities to pursue. But there is a sequence of operations there with a lot of stage gates that we have to cross.

The next question is from Chris Dankert with D.A. Davidson.

I wanted to dig in just a little bit on the project order dynamic in the project activity in IPS rather. Have we expected to backfill those? Did some of that just not renew? Maybe can we quantify how big that project roll-off headwind is? Anything you can kind of give us there?

Yes. It's -- first of all, IPS, it's about -- 25% of IPS is projects or longer cycle. So we are backfilling. So we certainly see progress, but a lot of that is coming in '27. But it is -- and as I said earlier, it's a little bit more just an air gap that we see as timing related. We see it fully recoverable as you move into '27 come through '26. And that really is -- all there is to it. There really isn't much more than that. Overall, the order activity is very good, but it really, again, is 2027 delivery.

Appreciate it. And then just briefly on rare earths, and apologies if I missed it already. It sounds like we're still fighting on the price cost side. But just on rare earth magnet availability, how are we set on that front? Do we have supply that we need to deliver on time?

Well, as it relates to commercial uses, both our sourcing and mitigation actions are progressing, and we believe we will be mostly mitigated within this quarter. However, it's important to note that the pace of progress for approvals for defense applications, that's where it really remains slow. So -- and not only that, but you couple that with the fact that the demand environment on this front is improving, that exacerbates the issue. So at this point, the primary risk is for us not being able to maybe participate in servicing the additional demand at the level we would like to and less an implication on our current backlog.

The next question is from Christopher Glynn with Oppenheimer.

Just a quick one, and we have a follow-up. But I was wondering the remaining $0.18 tariff refund benefit in the guide. Is that entirely in the third quarter?

The tariff refunds are split, it's $16 million, $8 million in each quarter.

This concludes our question-and-answer session, and the conference has also now concluded. Thank you for attending today's presentation. You may now disconnect.