Regal Rexnord Corporation (RRX) Earnings

Management highlights

### New CEO Introductory Comments - New CEO Aamir Paul joined Regal Rexnord on July 1, 2026, after senior leadership roles at Schneider Electric and Dell Technologies, with deep experience in sales, operations, and end markets including data centers, automation, and energy technology. - Paul's initial 5-week focus has been on listening and learning from internal teams, customers, supply chain partners, and investors, and this will remain his priority through the first 100 days. - Early observations: strong, committed employee team; deep, trusted long-term customer and channel partnerships; and a strong foundational franchise with trusted brands, a large installed base for attractive aftermarket sales, high-quality manufacturing, and a culture of continuous improvement. - Paul sees significant long-term opportunity in Regal Rexnord's exposure to attractive secular end markets including robotics, eVTOL, and data centers. ### Enterprise Operational Performance - Overall enterprise Q2 2026 daily orders were up 8.8% YoY (8.1% excluding data center, up low double digits excluding consumer-leaning residential HVAC and pool businesses). Overall July 2026 daily orders were up 7% YoY. - Q2 2026 sales grew 4.2% YoY (3.3% organic, 6.1% excluding residential HVAC and pool), with broad-based growth led by data center, commercial HVAC, discrete automation, and energy markets. - Adjusted gross margin was 39.8% (37.8% excluding $32 million in IEPA tariff refunds). Adjusted EBITDA margin was 23.5% (21.5% excluding refunds), and adjusted EPS was $2.99 ($2.60 excluding refunds, representing 5% YoY adjusted growth). Adjusted free cash flow was $154 million, with strong sequential improvement. - The company continues to make progress deleveraging its balance sheet, and expects net debt leverage to fall below 3x in the second half of 2026.

Guidance

- Full year 2026 sales guidance is maintained at $6.2 billion (4.5% full year growth), with stronger expected growth in AMC offset by weaker expected growth in IPS and PES. - Adjusted EBITDA margin guidance is now 22.1% for full year 2026 (21.3% excluding the $48 million total expected IEPA tariff refund benefit). The margin outlook excluding refunds was lowered due to: 1) extended timelines to achieve planned productivity gains, as the company slowed productivity initiatives to prioritize service levels during a period of stronger than expected growth; 2) lagging price realization relative to faster than expected inflation; 3) modest negative mix impacts from revised segment growth outlooks. - Adjusted EPS guidance midpoint is maintained at $10.60, with the range narrowed to $10.35 to $10.85, incorporating the $0.57 per share benefit from tariff refunds. - Full year 2026 adjusted free cash flow guidance is lowered by $50 million to $600 million, driven by incremental working capital investments required for stronger than expected order growth weighted to AMC, and a more measured pace of working capital reduction initiatives. - Segment guidance changes: AMC annual sales growth guidance is raised to low double digits from prior high single digits; IPS annual sales growth guidance is lowered to low single digits from prior mid single digits; PES full year sales guidance is revised to a flat to low single-digit decline from prior growth expectations. All three segments have lower adjusted EBITDA margin outlooks compared to prior guidance. - Second half 2026 expectations: AMC second half margins are expected to be above first half levels, with a modest sequential margin decline in Q3 (from project timing shifts) followed by a step-up in Q4; IPS sales and margins are expected to be higher in H2 versus H1, with modest improvement from Q3 to Q4; PES sales and margins rise sequentially to a typical seasonal high in Q3, then step down more than usual in Q4 due to limited pre-buy activity in pool distribution amid channel destocking.

Segment performance

1. Automation and Motion Control (AMC): Organic sales grew 15.6% year-over-year (YoY), driven by broad strength in data center, discrete automation, and aerospace and defense. Q2 orders were up 17.1% YoY (15% excluding data center), with a book-to-bill ratio of 1.02. Adjusted EBITDA margin was 21.1% (19.9% excluding IEPA tariff refunds), up 40 basis points YoY. H1 2026 daily orders were up over 25% YoY, with nearly half of this growth tied to longer-cycle projects that will impact earnings in 2027-2028. July 2026 daily orders were up 7.4% YoY. Revenue contribution: AMC is the company's fastest growing segment, accounting for the majority of the firm's top-line growth in Q2 2026. 2. Industrial Powertrain Solutions (IPS): Organic sales grew 2% YoY (in line with expectations), led by strength in the energy market partially offset by weakness in off-highway/agriculture machinery. Short-cycle OEM sales grew mid-single digits, and distribution channel sales grew low single digits. Q2 orders were up 6.7% YoY on a daily basis, with a book-to-bill ratio of 1.06. Adjusted EBITDA margin was 27.1% (25.9% excluding refunds), down YoY due to mix, growth investments, and higher inflation. 2027 shippable backlog is up over 20% compared to 2026 backlog at the same point last year. July 2026 daily orders were up 7.7% YoY. 3. Power Efficiency Solutions (PES): Organic sales declined 6.6% YoY, driven by weakness in residential HVAC and pool markets, partially offset by strong growth in commercial HVAC (supported by data center construction). Q2 orders were up 3.5% YoY on a daily basis, with a book-to-bill ratio of 1.0. Adjusted EBITDA margin was 20.5% (16.2% excluding refunds), pressured by weak residential HVAC aftermarket performance and underperformance in pool distribution. July 2026 daily orders were up 5.4% YoY.

Risks & headwinds

- Higher than expected inflation for materials, freight, and energy across all segments, with price realization lagging inflation, creating ongoing price-cost headwinds in the second half of 2026. - Rare earth magnet supply: progress on sourcing and mitigation for commercial use is on track to be mostly complete by the end of Q3 2026, but approval progress for defense applications remains slow, which may limit the company's ability to meet growing defense sector demand, though current backlog is not at risk. - Weak demand in consumer-facing end markets: soft housing market, low consumer confidence, and excess channel inventory continue to pressure residential HVAC and pool markets. - Longer cycle order growth means top-line and margin benefits from recent strong order activity will mostly accrue in 2027 and 2028 rather than in 2026, creating a timing gap between strong orders and revenue growth in 2026. - Evolving tariff regulations created near-term order delays from OEM customers in Q2 2026, and the situation remains rapidly evolving. - Large project roll-off from prior year metals and mining projects creates a temporary 2026 top-line headwind for IPS, with new large project wins mostly accruing to 2027.

Analyst Q&A

• Q: Strong order growth has been sustained for multiple quarters, but revenue growth has lagged due to the long-cycle nature of many new orders. When can we expect orders and revenue to converge, and are there any obstacles to this convergence as we enter 2027?

  A: The lag between orders and revenue is largely a timing issue. IPS has a temporary air pocket from prior large metals and mining projects rolling off, but 2027 shippable backlog is already 20% higher than 2026 backlog was at this point last year. All segments have sustained positive order momentum entering the second half, and management does not see any major obstacles beyond general macro risk, with strong momentum across key end markets including discrete automation, aerospace and defense, and data center that will drive revenue growth in 2027.

• Q: Management noted that it slowed productivity initiatives to protect service levels during the current growth surge. Is this leading to lower service levels, and are you losing share as a result?

  A: Service levels have not declined, the slowdown is just to maintain current strong service levels amid faster than expected order growth, particularly at AMC. Outside AMC, the change to productivity timelines is just added conservatism, not a response to service level issues. The decision to delay some planned plant footprint consolidation was a strategic choice to avoid disrupting the stronger than expected order growth the business is currently seeing.

• Q: What are new CEO Aamir Paul's top priorities in his first 100 days on the job?

  A: The top priority is learning the business from the perspective of key stakeholders: meeting with customers and channel partners to understand their perspectives on Regal's strengths and areas for improvement, spending time with regional internal teams to advance integration and build a unified One Regal Rexnord culture, and reviewing ongoing factory consolidation and operational execution to ensure the business is prepared to scale for growth. Paul also plans to meet with investors and analysts to share updates and understand their perspectives.

• Q: What is the update on the EPOD (modular power) business, including facility ramp, margin outlook, and future order pipeline?

  A: The new EPOD facility is on schedule, with infrastructure nearly complete and hiring nearly finished, and will be operational on time to support customer delivery schedules. Management still expects the EPOD business to have an approximately 20% margin profile, matching prior projections. The initial customer pipeline is secured from long-standing Regal customers that invited Regal to enter this market to improve on existing delivery and quality alternatives, and this existing pipeline provides enough volume to scale the business. Additional orders from new customers are expected to come in late 2026 or early 2027, with $15 million of EPOD revenue now expected to be recognized in Q4 2026.

• Q: July order growth decelerated slightly from Q2 levels. What is driving this deceleration, and does it change your second half outlook?

  A: The deceleration is almost entirely concentrated in AMC, and it is purely due to the lumpy timing of large project orders, not a change in underlying demand. IPS order growth actually accelerated in July, and PES also showed improved strength. Management still feels very comfortable with the current backlog and order trajectory, and the July results do not change the second half 2026 guidance.