Regal Rexnord Corporation 2026 Q2 Earnings Call

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 three, let me briefly review the agenda for today's call. Please note that given Aamir's tenure with the company began on July 1st, 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. 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 five weeks. 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 omni-channel 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 lifecycle 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. Some are emergent and exciting, like robotics and eVTOL. It's also great to see our participation in the data center space. I'm spending time with our teams there to explore our solution roadmap and understand our customer pipeline. Overall, our broad exposure across attractive end markets is exciting as we continue to build for the future. Since joining the company on July 1st, my primary focus has been listening and learning. 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 five 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 work 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. 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, you have a foundation for building a platform for sustainable and profitable growth. With that, I'll turn the call over to Rob.

Thanks, Aamir, good morning, everyone. I'll begin by covering our enterprise performance then move to the segment discussions, followed by a guidance update. Our team delivered solid second quarter performance. 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 further returns on our growth investments. Orders at AMC were a standout positive, up 17.1% versus the prior year period, 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, 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, up 3.3% on an organic basis, up 6.1% excluding residential HVAC and pool.

We saw broad-based growth with notable strength in data center, commercial HVAC, discrete automation, energy markets. AMC led the way on growth, up over 15% organically versus the prior year, 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%, 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, rare earth magnets with leverage from higher volumes benefits from synergies. Adjusted EBITDA margin was 23.5%, 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 has room for further improvement, especially in the fourth quarter, I will discuss in more detail later in the presentation. Shifting to earnings, adjusted earnings per share for the quarter was $2.99, $2.60 excluding the benefit from refunds, 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, 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 will now review our operating performance by segment. Starting with Automation & 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 would like to highlight 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.