Great. Well, thanks, everyone for being here. It's my pleasure to have up next, Regal Rexnord Corporation, Louis Pinkham, Chief Executive, and Rob Rehard, our CFO. Maybe start off with, you know, the broad demand backdrop, specifically around the shorter cycle industrial activity in IPS and AMC. A lot of people sort of curious about if there's real green shoots in the U.S. industrial economy. Kind of what's your perspective on that?
You know, I think the indicators are pretty mixed at this point. And by the way, Julian, thank you for hosting us. It's a pleasure to be here, and it's good to see all of our investors. But to your question, I think it's pretty mixed. You know, it's good to see the ISM above 50. The commentary of the ISM, though, would say that GI is still pretty sluggish.
Yes.
We'll correlate it to then what do our orders look like?
Mm-hmm.
Our IPS orders were down about 50 basis points in January. They were up 3% in fourth quarter. Our backlog going into the year is up 6%. So, you know, some mixed signs.
Yeah.
We feel good about what we've been driving, and a big piece of our hypothesis through building the industrial powertrain and the IPS segment was around cross sell. Our cross sell today is about $90 million incremental in 2025.
Mm-hmm.
That was about $210 million. We had put out a goal of $250 by 2027, so we're well on that path. So when the markets do turn, you know, one month does not make a trend.
Mm-hmm.
Maybe three does.
Yeah.
When those markets turn, we're very, very well positioned.
Got it. And within, AMC, I suppose you had good pickup in automation demand, and we've heard that from one or two other companies here as well. Were there any kind of specific verticals driving that? Was it just an easy comp thing? Any color around that automation piece?
Yeah. So, you know, our automation orders the last 12 months are about up 6%, fourth quarter, up 9%. The market, though, that's driving it more than any other is defense.
Yeah.
The defense vertical, in particular in Europe. We're nicely positioned and have a strong footprint in engineering content in Europe, and with the sovereignty drive, it's a good position for us. On top of that, we've been investing pretty heavily in new products and, you know, in defense, it's often application-driven products, and so we feel good about our momentum there. For sure, that vertical will grow for Regal for a number of years to come.
Great. And, you know, it's been a couple of years since the... Three years almost now, since the Altra deal closed. Kind of how satisfied are you with the automation, you know, portfolio as it is, the things that you've done to improve that, sort of AMC, AMC business that, that came into Regal?
Yeah. I mean, we're very satisfied, and you know, this was a fantastic acquisition for Regal. We were not in the automation space. The ability to acquire the power transmission part of the business gave us the synergies that allow us to fund and move into automation. We've raised our R&D spend in automation, and so look at some of the programs we've talked about historically on our earnings call. eVTOL, our electromechanical actuator, wouldn't have come out of anything but that integration with Altra. And then when you think about our next steps of opportunities, Kollmorgen Essentials. Kollmorgen is our brand and motion control that really plays in the ultra-premium space, and Essentials moves us down and gives us a much greater served market.
We talked about on our last earnings call about $1 million of orders in fourth quarter and a path to $50 million by 2028. We're still driving that momentum, and so we love the technology that we got with Altra, especially in the automation space, and expect to do much more with it as the years progress.
Great. You know, relatively small part of the business, but within PES, you know, you've had that resi HVAC pressure. Seems like the OEMs are kind of saying, you know, the point of maximum decline for them was maybe three months ago now. You know, what are your sort of perspectives on that market? I think you've dialed in a pretty conservative guide for the year there.
We have and we wanted to be very measured here. We're expecting the market to be down, for us, high single digits, and that actually translates to down about mid-20s in the first quarter, down in the first half, and then a slight rebound in the second half. You know, if the OEMs are correct, that's a positive upside for us. But, you know, we talked about in the last earnings call that we did gain some share in-
Mm-hmm
the resi HVAC space in 2025. It's a good market for us. We like the market, but nobody knows how to forecast it. And we're inclusive of that, of that team. And so 9% of our sales, I hope the OEMs are right.
Yeah. And then I suppose what was most eye-catching at the results on the top line front was the data center orders. Maybe kind of remind the audience, you know, where you sit today, the total kind of percent of revenue, if you like, from data centers, and how that fits in different products in AMC and then PES segment-wise.
Yeah. Today, data center is only really about 3% of Regal. 2% power management, so paralleling switchgear, switchgear, automatic transfer switches, power distribution units, and about 1% is in hermetic motors and air moving solutions. Now, we're very pleased with the nearly $1 billion of orders that we received in 2025. That likely translates to data center becoming a low teens part of Regal in 2027, and we wanna build off that. We've got good technology. We're valued by our openness to customize. Our say-do is strong. We've been in the industry for 50 years, so this is not new to us. Now, the ePOD solution-
Yeah.
that we announced
Mm-hmm.
-a big win of $735 million of orders for multiple data centers in 2027. That is a new solution, but the reality is that 50% of our content in that solution, which is switchgear, power distribution units-
Mm-hmm.
other automatic transfer switches, along with the air moving side. And so, yeah, we're excited about the future of data center and how it's gonna have an impact on Regal.
How do you think sort of about your competitive position in that data center business? Kind of what allowed, do you think, to win those large orders, which no one seemed to be expecting from the outside?
Yeah. You know, we have a good reputation in the business. Our say-do around... oftentimes it has to do with the ability to meet the schedule of the project and to ship on time, bluntly. We have a good reputation about being able to do that. On top of that, we're very easy to do business with, and we will customize to meet the specific needs of the end user or the customer, and that is valued. Those couple of things, and the fact that we are a $6 billion company with a pretty-
Yeah
strong balance sheet and capability. You know, we won a bit more than we expected. We talked about coming out of third quarter earnings, that our funnel was about $400 million of ePODs. We were kind of on the edge, and we weren't really sure, and in the end, we pretty much won everything we expected and a little more. And so we're very pleased with that.
You know, you talked about how it's the delivery, a lot of that, $700 million, is for delivery or rev recognition in 2027 for Regal. You know, how's your kind of capacity ramp up going for that data center business? You know, how confident are you in your own suppliers being on time, in, in full there?
Yeah. So, you know, we had some indication that we were likely going to win some portion of this, even coming out of third quarter. That's why we announced the expansion of our-
Yeah
-capacity in Canada, about the same square footage in Texas. That is well on its path.
Mm.
By the middle of this year, we'll be able to ship product out of Texas. So we feel good about the capacity and recognize this is light assembly and test. This is not a significant CapEx investment. We talked about $5 million to set up the manufacturing facility-
Mm-hmm
for the assembly facility in Texas. So this is not so difficult. It really is all around the supply chain and managing the supply chain. But we have excellent relationships at executive levels, at the, the key suppliers, and I feel pretty confident that we're gonna be able to meet those, the requirements of 2027 and beyond. Because, again, I want to emphasize, this is not- this is all about Regal continuing to grow in this space and differentiating ourselves in this space. That's our goal.
How would you frame the sort of remaining funnel of business that you're going for to try and win orders? You know, you overperformed your goal wildly the last three or four months. You know, how has that sort of led to a revision, maybe of the view of how big the funnel is out there?
Well, we're still building on the funnel, honestly. The funnel today for us is about $600 million. It's more leaning towards switchgear than ePODs at this point, because we won the majority of what we expected to, or even more on ePOD, so the funnel-
Mm.
today, but we plan on growing that funnel. The opportunity is significant here, and we believe this is a market that's gonna continue to grow. But the reality is we're a very small share player, and so there's plenty of room for us.
If you wanted to try and sort of help us frame the opportunity, you know, you had that $878 million of orders in the fourth quarter. Again, it seemed to sort of erupt from nowhere from the outside, so it's hard to kind of understand what could be left on new orders the year ahead, for example, or next 18 months. You know, any way you'd frame the addressable market or?
You, you know, we did come out, and we said, I believe we said the addressable market was about $25 billion of potential.
Yeah.
Compare that to where we play today.
Yeah.
Right? The funnel is $600 million. We wanna grow that funnel. We believe that, our sales in 2027 as a percentage-
Yeah
of Regal could be, yeah, low teens.
Yeah.
What does that mean for us? Maybe $800 million-$900 million. We wanna grow from there.
Yeah.
So that means we're gonna need to get some orders this year that will feed 28.... That's how I would think about it. We're not gonna try to put any more clarity on that, because another question our investors like to ask us is: What's our win rate?
Yes.
Well, our win rate, if you go off of the $400 million funnel, was 175%. So we clearly don't have that locked down yet.
Yeah.
This is nascent for us. We're trying to figure it out a little bit, but feel really good about our reputation, our position, and the opportunity for us to grow.
As you said, it's a sort of a wide gap from the $600 million funnel to the $25 billion TAM.
Yeah.
The delta there is what? It's a mix of... I don't know, assuming you don't capture a majority of things you go for, or it's a constraint of capacity on your end to ramp. Like, what are some of the factors that are-
The biggest delta-
Yeah.
We know the market is visibility. So our visibility is, you don't put it, we don't put an opportunity in our funnel.
Yeah
-unless it's an active opportunity that we're working to win.
Okay. Yeah.
So we're also trying to grow our sales force, and we're trying to grow our position, and so I would expect the funnel to grow. That's the biggest differentiator between $600 million and $25 billion.
Got it. And the profitability on this activity is sort of commensurate with the segment, the respective kind of segment level, or?
Yeah, we say a little above 20%. I mean-
Yeah
... we've got about 50% of the content on the ePODs.
Yeah.
So it nets to about 20%. Of course, you know, we'll continue to work productivity measures to improve that as we go forward, but that's kind of our starting point here, as we kind of get through this and kick off the project. We'll get a little, you know, water under the bridge, and then we'll kind of true that up as we move along, but that's our expectation.
Great. When you think about the, the top line, getting to know a very hard market to forecast the last couple of years, not just PES, but the industrial side as well. When you kind of went into this year, and were framing the, the guidance, you know, was there any kind of change in approach, attempt to be more conservative, perhaps, just given that the last couple of years have been difficult to forecast revenue?
I would say very similar to last year, measured. We came out for 2025 to be flat. We were up a point. Most of that point was tariff pricing, but-
Mm-hmm.
So we forecasted.
Yeah
On the aggregate of Regal pretty well. We're coming into this year and thinking about the same thing. We're not seeing a lot of market tailwind. We believe it should come, but we're not betting on it.
Yeah.
Pleased to see ISM above 50, but again-
Mm-hmm
... we're not betting on it. Where we are betting is, it's pretty clear that data centers are gonna grow for us, and so 1.5 points out of data center. It's pretty clear that we're gonna get some price that still overcome some of the tariff challenges.
Yeah.
So 1 point, 1.5, and that's why we came out and we said low single-digit growth for this year. Now, we think we're at bottom of many of these markets, and as they inflate up, we're gonna benefit from that.
How should we think about the earnings or margin cadence through the year? You know, and sort of comps move around with tariffs and, and some of the rare earths headwind and that type of thing. So if we're thinking about kind of sequential progression or quarterly sort of phasing of earnings or margin, anything we should bear in mind this year?
Yeah, you know, we came out and said first quarter's gonna be a bit pressured. We think about 21% EBITDA margins in the first quarter, and then we progressively get better from there as we ellipse the... Or we are getting past the rare earth magnet supply chain issues by the mid part of the year. Tariffs, we get a little bit. We should be priced dollar neutral by the middle of the year and work towards margin neutral by the end of the year.
Mix benefits us as we move towards the back half of the year, particularly in AMC, where we would expect, and where we see the highest growth opportunity in the year, as we get to some of those higher margin businesses like automation and, you know, defense and medical. These others are very high, higher margin relative to the rest of the business coming online. If you look at it from just a cadence of improvement as we go through the year, and we start with 21%, we expect around 200-250 basis points from that 21% range to kind of move quarter to quarter, you know, pretty ratably as we move through the year. And so we'll end the year at a much better position than when we start the year.
And that's what we have built into the guide. The EPS, by the way, it's about 45%-55% first half, second half EPS. Remember, we also get about $30 million of interest expense savings as we move through the year as well. So that's benefiting the earnings side.
Great. You know, when you think about margin levers this year, you know, price cost is sort of neutralish by midyear, so that's not really a factor. You have some synergies in there that I think you characterized as a sort of, cushion, effectively. So maybe help us understand kind of the levers there, 'cause you're not dialing in a lot of volume growth.
Yeah, I think that you, so you called out the one, the $40 million of cost synergies, which we've said, "Hey, we're gonna use that as a hedge as we get into the year," just because it's not... In other words, it's not in our guide today, just 'cause we need a little buffer, knowing that there's some unknowns out there that we're gonna likely counter. The other things that we're talking about are, you know, the main things on the margin side are what we just kind of went through, quite frankly. It has to do with the tariffs. Getting back to, to margin neutral is about the rare earth magnets getting behind us and in the mix, and then volume comes in as well.
The other things that, quite frankly, aren't built into our guidance today, you know, we've got-- We're assuming at this point that the markets in which we're participating are kind of where they are today, and we don't see a lot of inflection at this point. ISM is a great example. We talked about it a little bit earlier. We're not banking on anything inflecting yet, even though, you know, 50% of IPS, for example, is correlated to the ISM. We want a few months before we start seeing that. That would be a nice benefit to us in the year, should that stay above 50 like it is in January. Again, as Louis mentioned, we were down a bit in January, in IPS, about half a point. Again, wait and see a bit.
And then the other markets that are coming back, as we talked about in AMC in particular, are very good. And so that could be a bit of a benefit to us as well. We're not banking on that at this point. It's not built into the guide, should I say, but certainly supports a better... especially a better second half as we go through the year.
How are we thinking about operating leverage? You know, what's assumed in that second half margin guide, operating leverage at Regal, and what should we expect sort of medium term?
You know, look, we say about 30%-35% in leverage. I think if you think about it from the standpoint of we exited 2025 at about a 38% gross margin, fall through is pretty good. We should get 30%-35% is very reasonable. Our current guide embeds about a 39% gross margin for 2026. So again, very reasonable to assume that, and it's certainly a little stronger on the IPS side, and then from there, it steps down AMC and then PDS. But overall, 30%-35% is very reasonable, and that's what's embedded in our current guidance.
Great. And on the pricing front, you know, how you sounded pretty confident on getting that price. No signs of kind of fatigue by customers or them starting to push back. You know, is everyone kind of keeping rank competitively and handling costs the same way?
Yeah, I, you know, I wouldn't say there's no fatigue, and I wouldn't say there's no pushback, 'cause our sales leaders are doing an excellent job of managing this. You'd be blind not to know that there's inflation and there's tariffs, and there's things that you have to cover. You know, our customers are looking for us to try to put our best foot forward, which we always do. You know, one of the things that you're talking about, margin potential and what we drive, you know, we're, Regal Rexnord Business System is very important to how we run our business, and it's built off of 80/20, driving Quad 1, and our A customers are highly valued customers and are highly valued products.
It's also lean, and it's taking waste over burning variation out of all processes. Now, think about what we've done over the last three and a half years. We've combined three big, relatively large companies.
Mm-hmm.
We have no more plans of consolidation going into, to 2027. I'm sure there'll be one or two plant consolidation, but nothing to what we've been going through for the last few years. And so now it's doubling down on lean and driving lean in our factories. And I think we're at probably third, fourth innings of opportunities there to drive further margin growth.
Got it. And if you think about the sort of segments there for a second, is it fair to say PES might be more leaned out than the rest, just because it didn't have the acquisition?
That's very fair. Yeah.
And-
It's higher... It tends to be a bit higher volume.
Yeah.
Not as much mix. There's still plenty of mix, but it's not to the level of, our, AMC or IPS businesses. That's absolutely right.
PES's place in the portfolio, you know, you made a, a good case for it at the Investor Day, you know, a couple of years ago. I guess as the experience in the interim of the end markets or how you see it, the motors there fit with the powertrains, any sort of dilution of that view of the PES place in the business or not? It's not-
No, if anything, I think it's accelerating that. We're seeing some nice momentum moving more and more into air moving. We talked about coming out of the third quarter call, about $20 million of orders in data centers.
Mm-hmm.
We didn't talk about this in the fourth quarter call, but we're winning more in air moving, in data centers, in clean rooms. It's a-
Mm.
It's a business that will grow. It will grow with Regal. And, we like the margin potential and our position, and by the way, thank goodness for its cash flow, because it's paying for the two big acquisitions we did.
Yeah. Okay, fair enough. And on the point on free cash flow, you know, a bit of a hit to conversion this year, partly for sort of funding the growth investments. When do we see that free cash, you think, normalize?
Yeah. It's absolutely, we expect that in 2027. I mean, as we're gonna make about $150 million dollar investment, we're in capital investment to support the $735 million ePOD data center order we've been talking about.
Mm-hmm.
You know, we start... That starts to come through in 2027... expect that to move to a much better position at that time. We also have some opportunity on just the rest of the working capital, side of things in terms of inventory, and that we absolutely have room to improve our inventory position and our days to free up some capital there as well. So free cash flow, absolutely, we should see an improvement back to more of what we would expect and would have expected once we get past this, the data center investment side.
How are we thinking about kind of leverage? You know, there was the securitization in 2025, cash flows increasing this year, even with some of those headwinds, investing for growth. Any sort of contemplated measures to accelerate delevering, or it's more around let the EBITDA increase and that will bring leverage down naturally?
Yeah, I think that we'll end this year at probably around 2.7 x on a net basis. We should be therefore below, you know, two by the time we get, you know, through the next year. You know, once we get around 2.5 x, you know, use of cash could change a bit. We're gonna prioritize paying down debt at this time.
Yeah.
We may change, but we will likely, once we get below 2.5x, start looking at maybe a little more opportunistic share buybacks, maybe look to increase the dividend, get back to that schedule again. You know, we have a good funnel of opportunities in terms of, you know, smaller bolt-ons, nothing, you know, transformative. Smaller bolt-ons that we certainly in our AMC segment, along the automation side, that would make a lot of sense for us. Again, I see that we could get to below 2x and stay around below, below 2x with the cash that we generate, still doing all those things I just talked about.
Mm.
I think it should be fairly balanced down the road, but we've got to get below that 2.5x, quite frankly, which should happen early next year.
Louis, you talked about the sort of, you know, leaning into 80/20 and lean in the IPS and AMC segments. And you know, as a clear view on the products and customers to focus on. Just wondered if you thought that, you know, doing that organically was enough, or is there some view to, you know, do you chip away any of the... or divest any of the pieces of those two segments? You know, now you've seen how they've played out for several years, each after the two big acquisitions. Or you think actually, no, what you have is it all sort of fits together?
Yeah, no, we like everything in our portfolio today.
Yeah.
We think we have good scale and scope in IPS and PES. AMC, there's still some opportunities, so we would say in time-
Mm-hmm.
-when it makes sense, that there's bolt-ons that could make us stronger. We, we have no intent to see any kind of, at least at this point-
Yeah
... of looking at any kind of divestiture in those two segments. My point earlier, though, and I want to emphasize this: I think we're further along with 80/20. 80/20, we know how to run our business-
Yeah
-by 80/20. Where there's opportunity still, though, is Lean, and that's what we're gonna be driving.
Is that gonna be sort of a very centralized push, or what's the, you know, the mechanism to make?
No, I mean, so, so we're at, we actually have a, a Regal Rexnord Business System leadership team meeting going on right now. We have 100 plants, roughly.
Mm-hmm.
Every plant above $25 million has an RBS leader that focuses on-
Okay.
-continuous improvement, that reports to a plant manager. Every division, we have 20 divisions, has an RBS director who-
Mm.
-facilitates our CI roadmaps and are driving our plan. Every segment has an RBS VP, and then we have an EVP or SVP at my level. It's important to us.
Mm.
Continuous improvement is critically important, and we have invested there, and we will continue to invest there.
Great. And with that, we'll switch to audience response survey questions, please. So the first one is around the current ownership of Regal Rexnord. So popular name. Secondly, it's around the general bias to Regal at present. So generally very positive. Thirdly is on through cycle EPS growth versus the, you know, multi-industry average here. Slightly above the peer set. Next question is around usage of cash, and we were just having that discussion a little bit. Mostly debt paydown still. Next question is valuation. You know, what's the appropriate PE multiple for Regal? Sort of blends to 20-ish times. And then last question, what's the biggest kind of anchor or headwind on the valuation multiple today? It's organic growth. Great. So with that, thanks very much.
I think, Louis, you know, this may be your last time here, so, thanks for all the support down the years and, you know, really appreciated you being here, answering these questions. And, you know, we wish you all the best, and, thanks, Rob, as well, for being here.
Yeah. Thanks, Louis.
Thank you very much.
Thank you.
Thanks. Thank you.