Morning, everybody. Mike Halloran here with Baird. We are pleased to welcome the Regal Rexnord management team with us today. Joining us, Aamir Paul, CEO, Rob Rehard, CFO. We are going to dive right into Q&A session. As usual, if you have any questions, please either raise your hand or Rob, would you mind passing me the iPad there?
Yeah.
Or send me an email, and I will make sure that I look and integrate the questions into the conversation here. We are going to start higher level, more discussing why he took this role, and then his vision, and then dig into some of the more specific questions I know everyone has on the business itself. With that, hey, thanks for coming. Why do not we just start with why you decided to take the role and what makes you excited about the Regal Rexnord opportunity from here?
Great. Thanks for having us. Look, I spent 13 years at Dell, then 13 years at Schneider Electric, last leading our North American operations. Especially after COVID, you learn some interesting lessons about supply chains, that they went from just-in-time to just-in-case. You also learn that as we build critical infrastructure, that supply chain visibility and control becomes really important. If you think about what happens next, whether it is investments in robotics, aerospace and defense, the reshoring of manufacturing, the investments in continuing to build out AI infrastructure, and even critical minerals, Regal Rexnord has key components that play and support the supply chains in all those elements. That was super interesting. The company itself in its current configuration is relatively new.
If you go back to 2019, it was Regal Beloit, and these assets have been brought together, but the opportunity to continue to get the maximum value of the combination, I think, is still ahead of us. Lastly, I think there is a lot of innovation still to do, especially in the future areas like linear actuation, like electromechanical actuation and eVTOLs and things like that. There is a company working on getting you from O'Hare to downtown, I live downtown here, in about 15 minutes, and I am totally committed after their 10,000th flight is done. But they will be a customer of some of our solution stack. I think all of those things brought together, it was a great opportunity. I am happy to be here.
I think it's wise to get the first 10,000 out of the way before you're the experiment. That all makes sense. Where are you spending your time? What's the focal point in the short term? I'm sure a lot of this is just making sure you understand the business, visiting the facilities, understanding the products, visiting the customers. How would you say you're categorizing your time right now?
Exactly what you said. I've spent a lot of it visiting our manufacturing facilities, about 13 major sites across North America, engaged with about 20% by revenue of our customers, and then spending time with our teams. You got to remember that, whether it's Altra, which was former Fortive, which was former Danaher, or the Rexnord business, or the Emerson PT business, in a relatively short period of time, they're also different subcultures, right? So also understanding the teams and how we bring those cultures together. A lot of it has been focused in those categories. We also have some real term operating issues, which we'll talk about. So I wanted to get a sense of that. So, I think almost equal parts manufacturing, R&D, customers, and then our own teams.
On the most recent call, you, what I think laid out the equivalent of a thesis statement for the short term here, right? Which is, what are your three priorities strategically, operational improvement, sharpening focus, building a growth mindset? Why don't we talk about those three and what you specifically mean, starting with the operational improvement side? How would you characterize it? Maybe give some context to what Regal as a company has been doing before you got here, and what you feel the next step in the evolution—
Sure.
—is like.
Look, what I am most impressed by, what Rob and Louis and the rest of the team accomplished in this portfolio and assembling this set of capabilities in a relatively short period of time, and by the way, navigating COVID and tariffs and all of that, it is remarkable for a relatively small company to accomplish that much, I think is great. But that has left us with a couple years where our organic growth has not been where we want it to be. There is certainly been this gap between what is clear potential and the realized growth structure.
The first question was, okay, why is that, and how do we unlock that capacity? What is super interesting right now, even before I came in, but certainly in the last quarter, is we see the order picture accelerating, and in many fronts across the portfolio and healthier than we have seen it in many quarters. We are encouraged by that, but then our conversion of that to revenue is not where we want it to be, which is a little bit of, when we were putting these companies together, it was all about consolidation.
Yeah.
Streamlining, and now as the demand picture comes back, it is a different muscle that we have to go flex. That is what we are trying to work on. That is where operational excellence was that first bucket, right? We have to get that right. Some of that is short term, some of that is mid-term, and some of it is long term. We have data structures, ERP structures we have to clean up. Maybe the footprint that we have inherited is not the right ideal long-term footprint, but in the very short term, it is getting the order conversion back where we would like it to be. Second one was portfolio. I am struck by the complexity of the portfolio. The breadth of it is super exciting, but does everything fit? I will talk about the AMS business, which we declared we are going to put up for sale.
It allows us to write software for autonomous vehicles moving around factories and warehouses. Super exciting, lots of applications. We have some Fortune 50 companies that are big customers that are building on that platform. We have something like 50 software developers in Sweden. Now, pause for a second, right? If you thought of Regal Rexnord, 50 software developers in Sweden writing software for autonomous vehicles, strategically is not what you think of when you think of us, right? Can we do it? Yes. Is it a great business? Yes. Does it fit? I do not think so, because it takes away focus from what we are really trying to do in the core. That was the first. We are going to go through that whole portfolio assessment financially, looking at Rule of 30, return invested capital, free cash flow, but strategic fit as well, right?
Let's be great at fewer things and scale them faster. The last one is what I talked about in terms of culture. Different cultures, different companies coming together. How do we show up as one Regal Rexnord, and how do we have more of a customer centricity? Because we're critical, right? If you think about our couplings business, almost all the behind-the-meter energy infrastructure being built right now, GE Vernova, Siemens Energy, we are part of that solution. We're a small part of the solution, but we're critical to that delivered application. So, being closer to customers, understanding their unmet, unarticulated needs, and making sure we're building a great company for precision-engineered components for that infrastructure is the goal.
You know, I was struck by a question at dinner last night, which, on some level, there's an obvious answer because you did say yes to the Regal Rexnord CEO job. But when you look at the collection of assets that have been brought together between the Emerson PT business way back when, two Altra businesses, A&S, Legacy Altra, Legacy Regal, Rexnord, Aero. How do you view the combination of these assets? Do you think these assets should be together? Do you think this is the right vision as far as the holistic message? Then, there's some cleanup to do underneath—
Yeah.
—just because you're bringing a lot of things together.
The way I think about it is, it gives us exposure to some of these mega trends that we talked about. If we are going to invest in manufacturing and remanufacturing in North America, if we are going to invest in making sure we have better control of critical minerals in our own sort of commodity supply chain, whether that is mining investments here or, again, South America, if we are going to make sure our port infrastructure is rebuilt and rejuvenated, the PT business as a market share leader is a fantastic foundation. Then you go to PES, and we were talking last night about the excitement about air moving.
Yeah.
Our capability in that space, the fact that we have capacity. We talked about our commercial HVAC business getting a 60% order intake in the Q3 cycle. Super exciting, and we think there is a lot more we can scale. The fact that we make the motor and the fan, and we can work with customers on different outcomes, whether it is throughput, other parts of the world, energy efficiency and volumetric throughput matter. Now in the U.S., decibel levels matter a lot more, and you can expect, depending on what new regulations come in, that will get even more intense. If you can get faster in developing a quieter fan, I think that makes a big difference. Great assets there.
Then you come to parts of AMC, and whether it is our Portescap brand or Kollmorgen brand, the advanced motion control, linear actuation capability, aerospace and defense capability, it is fantastic. We are not trying to say, "Here is how all of them fit," because some of those will not cross-sell. There is a lot of cross-sell opportunity, but some of them will be independent. What we love the fact that we have distributed exposure across all these critical spaces.
I do not know exactly when humanoid robots are going to tip over, when they are going to have their sort of OpenAI moment. But the fact that we can provide 10% of the content from actuators, controls, gearing of a humanoid system, that is super exciting. When exactly will that happen? We do not know, but we want to keep working with those customers as they develop that. Traditional aerospace and defense, but also the neo-primes. We love that exposure to these mega trends, and then where we can sort of create more joint value at an engineering level, we will keep doing that.
No, that makes sense. Back to the operational improvement side, where would you say your focus is there? Obviously, IPS is where you highlighted there's some delivery challenges in the short term. I know it's not impacting your order rates yet. Are there any other parts of the portfolio that we should be thinking about? How broad is this operational improvement, and maybe what's the focal point on some of those initiatives?
Let me back up. You gave us the history, and you've followed us for a long time, and a lot of these assets in their prior companies were not exactly the places where a lot of investment was going in.
Yeah.
They're great assets, but they were run to sort of perform in the moment, right? I think there's a foundational uplift that we have to do across a lot of our footprint, consolidating it, getting the data structures right, modernizing equipment, but that's a longer-term journey. I would describe that in years, Horizon three. Horizon two is the data we talked about, because as we've consolidated, and that's post the integration work, we've ended up in scenarios where we have multiple ERPs servicing the same plant, right?
That's never great from a material planning or manufacturing planning standpoint. That's the next tier. The most immediate is material flow, material planning, and SIOP, right? That first one we think is a couple of quarters. We think both AMC and IPS have areas where we need to do better. In our PES portfolio, we actually had some challenges a few years ago, and the team has come out of it, so we're in reasonably good shape. Both AMC and IPS have areas of focus in that space right now. The last thing I'd say, in aerospace, it's not just us. It's also, there's a very strict certified supply chain.
Yeah.
— with third parties, and the whole industry is struggling with that. So we're really working with our big customers to certify more smaller partners for precision parts of that process.
No, that makes sense. And how do you view the timeline on some of these growth.
Like I said, phase one is a couple of quarters.
Yeah.
Phase two, I think is going to at least be a year, and then beyond that, we're going to keep investing and consolidating.
Then another timeline question. How do you think about the timeline for some of the portfolio review decisions you need to make?
I got a lot of advice from the board, from investors, and I think it is a measure twice, cut once kind of decision, right?
Good.
We want to be thoughtful. We have a good framework. We have already completed the first assessment with a third party, with voice of the customer. We have looked at market share trends, cost trends, so we have a lot of data. Now it is about, can we structure the right deals and get the right partners? But we are not going to wait for some big reveal. As we make decisions, we will update you, and so you should expect some update at the next call, and then we will go from there.
Maybe how does the Rule of 30 fit into this framework? There are some pieces in there of PES that maybe seem logically challenged to hit that Rule of 30. Maybe I am wrong. Maybe there is more opportunity there, but maybe discuss what the Rule of 30 is from your perspective and how you think you can apply it.
Yeah. Simply put, it is your sales growth plus your EBITDA, right? If you look at the whole company, Regal Rexnord, the last few years, roughly Rule of 22. We have not had much sales growth, but our EBITDA quality has been in that 21, 22 range. This year, you are seeing us progress to 25. Now the question is, how do we go from that to 30? Once you get to 30, you are in the sort of top quartile of industrials. It is just a heuristic, right?
We are also looking at free cash flow, capital intensity, return on invested capital, market share, synergies in terms of core processes. So, it is not like a pass/fail on a single metric. But it is a useful heuristic to get everybody in the company thinking the right way. Yes, there may be parts of the portfolio that do not fit, then we will make those choices. But not just on that variable. That is just a quick starting point.
Last one on the kind of the three strategic priorities here. How does one go about building that appropriate growth mindset? One of the things I was struck by last night, I suppose, was just in certain areas, fewer customers, maybe more scale. In other areas, it might be different mindset. So, how do you go about having the right focus organizationally?
I think part of it is literally just what do you prioritize time and effort and energy on, right? Again, like I said, prior to this, these businesses were not in investment mode. Second, when we got them together, there was a lot of consolidation. I think now we have to go back and say, "Okay, where can we scale?" We have some great examples where customers have trusted us with critical parts of their processes. We know there are other customers out there in the universe that have the same application environments that we can go solve problems for. How do we build that acquisition muscle?
We tend to have more of a farming focus. We serve our existing customers incredibly well, but that commercial coverage and get acquisition right, I think is something we have to do. Our R&D roadmaps, right? Are we thinking incrementally, or are we making sure they're more informed by customer feedback? Not just customer feedback in North America, but if you want to think about the robotics world, what's the latest cutting-edge feature cost functionality coming out of China, and how close or far from that are we? It's just that Satya Nadella had this great term, go from a know-it-all to a learn-it-all. I think that's a wonderful way to think about it.
No, that makes sense. Maybe let's pivot to some of the growth opportunities and what you're seeing from a demand perspective today. How do you think about the entitled growth of the portfolio?
I'm going to tap in a friend here in a second, but look, we're super excited to see the growth in IPS, right? And IPS in the last two quarters, our growth rate is about 3x the prior six average. It's a clear step up. Even in the last month that we talked about on the earnings call, you see an acceleration. Given that that's a space where our market share positions are in the top three in most cases, that's super exciting. Again, we have operational issues to go solve. It's one of our most profitable businesses, and we're excited.
What we think actually, if you think of these mega trends about reshoring, building our own supply chain on minerals, ensuring that we upgrade our infrastructure, of course, it'll be lumpy as our gearing business has shown us, but we think there's real opportunity. We haven't talked about data centers, which is sort of an incredible outcome, but we still see, while we have a small and focused data center business, that business is growing.
Our sales Q3 year- to -date were over 150% off a small base in the scheme of data center infrastructure, but we see good growth in that business. Then we are really excited about not only air moving, but also the future bets that we have in different parts of AMC. Aerospace and defense, we think both in commercial and defense is going to keep going for some time. As we have learned, making predictions about the future are complicated. Announcing earnings on the day of the election was an interesting experience as one example. But I think the portfolio, the end market focus, and the brand positions give us confidence in terms of sustaining growth.
Yeah.
Anything you want to add to that?
Yeah, because if I think about the sequentials here, the sequential trends are. You guys cover so many end markets, so nothing is ever going to be perfect, but the cumulative sequential dynamics are what you would have wanted to see, right?
Oh, absolutely. I mean, if you think about the, Aamir mentioned the October order rates and just how we continue to see the growth in the business. I mean, we see, within AMC, October was 38% growth in orders, or 16% excluding data center. You had 40% growth in PES, which is really commercial HVAC on that air moving side. Another 4% in IPS coming off of record orders in Q3. So, the sequentials are good. The continuation is fantastic, and we just look for the conversion now to sales as we move forward.
No, that makes sense. You mentioned data centers. Why don't we pivot there quickly? Maybe talk about your approach to this and maybe how the importance of your content leads the way for the ePOD opportunity.
Yeah. The way to think about Regal in this space is we have a brand called Thomson Power Systems that, for a long time, has been known for great quality as a panel builder. A panel builder is, we're taking breakers from the major OEMs, the Schneiders, the Eatons, ABB's, Siemens, and we are taking the customer design for low voltage and medium voltage power infrastructure, or automatic transfer switches, which are the mechanism to switch between one energy input feed and another. It could be a generator, it could be a battery solution, it could be the grid itself.
Those are the core capabilities we've had. That business, like I said, Q3 year -to -date growing 150% + in sales. We're expanding that coverage, and we love that business, and we'll continue to be one of the larger panel builders in that space. If you look at the panel builder space, a lot of private equity-backed systems that are new, but may not have the engineering depth, balance sheet, manufacturing capability we bring to bear. Our customers are with us. We can expand commercial coverage.
Now, what's happening in the data center industry is, one of the bottlenecks is energy, but the second is labor availability. To solve labor availability, you have to take the work that was being done on the job site and move it into a factory environment. When you go from stick build to modular, you're basically taking all the integration work that was happening on the job site to a factory. One of our largest clients that was buying switchgear came to us and said, "We want you to build modules for us. The reason we want you to do that is we like your switchgear, but we want you to solve this labor arbitrage problem."
That's what got us into ePODs. That's why it was such a large order. The dynamic we think about going forward is we want more clients like that, clients that will do design work with us, build it on our power infrastructure, low voltage and medium voltage, and then we will buy whatever components they want on the UPS and cooling side. The more scale we have, the more consistency we have, the more we think that can be an interesting business. We are not trying to run around and build one custom ePOD for 50 different clients. There are other people who do that. That is great. That is not our business.
It seems the challenge here is just you need to get more of the ePODs in service, prove out the proof of concept. You are having the conversations with others, but it is the proof of concept that just needs to get in the market before the next-
Exactly. Can we show them that quality uplift, that delivery uplift, that supply chain management? Frankly, I mean, think about a co-location company, right? Their pedigree is finance and real estate. They have built a lot of capability in supply chain management. If we can say, "We are going to manage the supply chain. We will interface with all the component providers. We will bring that together. We will do the thermals and quality testing for you and deliver you a module that you can just plug in," there is a lot of value creation. I want to make sure we are also getting paid for that.
Yeah.
Because we do not have the aspirations that a PE-backed panel builder does from a profitability standpoint. So, that is the balance we are going through. We think there is a real niche for that to be built. We have to demonstrate that, and that is the journey we are on.
First shipment is?
Q1.
Q1.
The testing and validation with our existing client is happening now. Then, like I said, we're in the design phase with a few additional clients.
I think you also feel happy about the, or encouraged by the opportunity to broaden out where you're selling your existing content, right?
Yeah, exactly. Air moving could be a great example of that.
That is a perfect segue. Maybe talk about why you are excited about the air moving. I think one of the confusion points is that you have had the asset, and maybe just sold them to different markets historically. So, maybe talk about what you had, why that enables this transition, and why you are excited.
Look, we have had axial fans and plug fans for some time, as you said. I think we were focused with some European acquisitions, and a lot of the major providers happened to be in the same place in Germany. What we found is we were growing much faster with data center infrastructure in Asia, especially in China. You can think of the major names there, Baidu, Tencent, Alibaba. They had a different decibel level requirement. As we realized that there was a service gap in North America, because of the constraints of the other providers, we took on the challenge of that engineering gap.
As we progressively reduced that noise level, those fans can be brought over, and we are just getting started. So, we think there is a real opportunity. Interestingly enough, we also have capacity. So, we have that dual opportunity, which is why you are seeing that order rate expand at the rate it is expanding. It was a great example of a product portfolio that was existing, performing well in a different market, that we had to adapt for the needs of the North American market, and we are still in the way doing that. Some of the customers that are here actually are working with us in doing that.
Maybe shift gears to the A&D side. Maybe just a little bit how you play and why you are excited about the opportunity to scale that side of the business.
You know, I fly a lot, right? Every Boeing aircraft in its landing system has significant components that are made by us, right? I was in Boeing's facility in Portland as they are coming out of sort of a platform pause that they had that they are now scaling, and this is just on the commercial side, and it is fascinating to see how quickly they are trying to ramp up and get that facility going. The operating teams in that Portland facility have been working with Regal and its sort of legacy companies for over 50 years.
So that spec, that long-term validation, that testing, going through the certifications required in aerospace is an incredibly sticky business, and we are already working on the next generation of platforms with the majors. Where we have to go learn new things is how to do the same thing with neo-primes, where the development cycles are very, very different. In the traditional defense space and commercial aerospace space, we have been a critical component provider. The thing we are trying to now figure out is what other components are out there where maybe they are stressed about the supply chain security, and could those be things organically or one day inorganically we could help consolidate and be a better partner for them?
Some of that is about that growth mindset shift, right?
Exactly.
Yeah. Maybe the same conversation on the robotic side. Where does Regal play today, and what is the opportunity to scale on that side also?
Gearing motors, actuators, and I think all of those in combination, the miniaturization of that, whether in. By the way, we think of robotics as the broader definition of that, right? Humanoids gets a lot of attention, but that is a subset application. There is medical robotics, there is warehouse automation solutions, some of the stuff happening in pick, pack, and ship solutions is super exciting. We have opportunities across all parts of robotics, and the idea is to create subsystems where we can deliver faster growth and scaling.
Today, especially in the humanoids, the shipment rates are still in the sort of 10 units a week, 20 units a week. When they scale to hundreds, if not thousands, that step up in manufacturing is not all going to be vertically integrated. Today, the vertical integration is driven by this need to iterate development really quickly, but when it goes to scaling, we think there is going to be a big shift in how they are built. That is exactly what we have seen in China, and we want to be prepared for that opportunity here.
A couple shorter term things. Maybe talk a little bit about dynamics as you see them today, thoughts into 2027, kind of any framework that you think, even at a high level.
Well, for Q4, we talked about what we see happening. I think we laid out our priorities, the short-term things we want to do. One of the things that Rob and I have reflected on since we have had the opportunity to work together is, there has always been this promise, but our say-do ratio hasn't been where we want it to be. You and I have talked about that. I think one of the things we want to get right is, let us go make sure that we are predictable. Maybe not as exciting as you would always want us to be, but certainly a lot more predictable. We are going to take our time, and that is why we haven't talked much about 2027. But really make sure we lay out plans where you can count on us doing what we say we are going to do.
Yeah. I can appreciate that. Maybe put some of the We talked operationally earlier. Maybe put that in context of how you are thinking about margins long term as laid out at the analyst day. I think the AMC piece sticks out. I think that is a focal point for people, that say-do ratio. Is a mid-20% EBITDA margin on the table still for that segment over time as you start getting the right mix? Obviously, the ePOD piece changes that equation a little bit, but if you strip that out, is that still part of the thought process?
I think consistently getting to Rule of 30 is the goal, right? Again, if you think about top line growth and quality improvement. By the way, we need to get better at both.
Yeah.
Do not ever confuse that. Just saying we are going to get this rate and whatever growth we can get after that is upside is the wrong mindset. That is not the growth mindset. We are looking at all of our businesses to consistently get to Rule of 30 and then build from there. That is how we are thinking about AMC as well.
Then maybe last one, how are you thinking about capital priorities, both the next 12 months, 18 months, whatever it is? But then once you get the balance sheet where you want it to be, where will the focal point be?
We were super excited after a lot of hard work Rob and team have done that we got below 3x. The pace and trajectory of that is exactly what we've been communicating. So that remains the first priority. Then after that, I think, look, we'll look at returning capital to shareholders, but also there's a lot of growth. We have these assets where we can scale, so bolt-ons would be something we would look at. But that's for tomorrow. Today, short term is just getting the deleverage down to where we are happy with it.
Oh, great. Well, please join me in thanking Aamir and Rob for their time with us today. Management will be available outside in Salon Room C, just around the corner there on my left, your right. Thank you. Have a great day.