Regal Rexnord Corp Q4 FY2025 Earnings Call

Good day, and welcome to the Regal Rexnord Fourth Quarter 2025 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Rob Barry, Vice President, Investor Relations. Please go ahead.

Great. Thank you, operator. Good morning, and welcome to Regal Rexnord's Fourth Quarter 2025 Earnings Conference Call. Joining me today are Louis Pinkham, our Chief Executive Officer; and Rob Rehard, our Chief Financial Officer. I would 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 the 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. Louis will lead off with opening comments and an overview of our fourth quarter and full year performance and the discussion of our recent data center wins. Rob Rehard will then present our fourth quarter financial results in more detail and introduce our 2026 guidance. We'll then move to Q&A, after which, Louis will have some closing remarks. And with that, I'll turn the call over to Louis.

Thanks, Rob, and good morning, everyone. Thanks for joining us to discuss our fourth quarter results and to get an update on our business. We appreciate your continued interest in Regal Rexnord. Before we get into the quarter, I want to provide you with an update on the CEO search. The Board Search Committee has been working diligently, and our process is progressing as expected. We will update you as new information becomes available. Now on to our results. Our team delivered solid fourth quarter performance, ending the year on a high note. Fourth quarter aligned with our expectations on adjusted earnings per share. We saw tremendous order strength and a backlog exiting 2025 up 50% versus the prior year, giving us extremely positive momentum as we begin 2026. While our Data Center business is clearly performing exceptionally well, we also saw healthy orders in other parts of our business, especially Discrete Automation and Aerospace and Defense. Before continuing, I want to take a moment to thank our 30,000 Regal Rexnord associates for their hard work and disciplined execution, in particular, driving our new product pipelines, our cross-sell initiatives and building our commercial funnels to drive stronger and more profitable growth. Now let me provide some specifics on our fourth quarter performance, starting with orders. Orders in the quarter on a daily basis were up 53.8% versus the prior year and book-to-bill was 1.48. In the quarter, we booked orders worth approximately $735 million for our new e-Pod solution, which comprises our proven power management content, including switchgear, automatic transfer switches and power distribution units. You may remember we discussed e-Pods on our third quarter call when we mentioned an opportunity funnel worth over $400 million and a $1 billion funnel for our Data Center business more broadly. In Q4, we also built momentum in Discrete Automation, which saw orders grow 9%; in Aerospace and Defense, with orders up 21%; and in IPS, where orders grew over 3% and which we believe reflects outperformance in end markets that were challenged by a sub-50 ISM. Excluding the large e-Pods orders, our enterprise orders grew 2.7% in the quarter. Shifting to sales. Our sales in the quarter were up 2.9% versus the prior year on an organic basis, demonstrating accelerating organic growth. We saw particular strength in AMC, which grew over 15% organically. The AMC team did an excellent job executing its backlog and benefiting from share gains in its largely secular markets. We saw weakness in PES in the quarter, which was more severe than expected given headwinds in the residential HVAC market. IPS continued to achieve steady growth, outperforming sluggish industrial markets. Turning to margins. Our fourth quarter adjusted gross margin was 37.6%, up 50 basis points versus the prior year. Our teams overcame tariff and mix headwinds with continued strong execution on synergies, good price realization and benefits from volume leverage. Adjusted EBITDA margin was 21.6%, roughly flat versus the prior year, reflecting our gross margin expansion, volume leverage and disciplined discretionary cost management, which offset higher growth investments. Adjusted earnings per share for the quarter was $2.51, up 7.3% versus the prior year. Lastly, we generated $141 million of free cash flow in the fourth quarter. We ended the quarter with our net debt leverage coming down to 3.1. In summary, a strong fourth quarter characterized by solid adjusted EPS growth, exceptionally strong orders and a rising backlog giving us positive momentum as we begin 2026. At the beginning of a new year, it is always good to reflect on the success of the prior year. In 2025, our orders grew 15.5% for the year on a daily basis, led by AMC up 53%; followed by IPS up 4%; and PES, which was down 5%. Sales for the year were up 80 basis points on an organic basis with acceleration as the year progressed, strength in aerospace and defense, discrete automation, energy, data center, commercial HVAC and an incremental $90 million of cross-sell and powertrain synergies were partially offset by headwinds in general and industrial and medical. Turning to margins for 2025. Our adjusted EBITDA margins were 22%, roughly flat to the prior year on a comparable basis reflecting good execution in a tough operating environment. Our teams overcame headwinds from tariffs, rare earth magnet availability and mix, by effectively executing on synergies worth $54 million in addition to price realization discipline and good discretionary cost management. Adjusted earnings per share for the year was $9.65, up nearly 6% versus the prior year. Adjusted free cash flow was $893 million, including the ARS program we launched in second quarter. Our cash flow allowed us to pay down over $700 million of debt in 2025. In summary, I would characterize 2025 as a year of executing a wide range of growth initiatives, which are starting to pay off, giving us increasingly positive momentum. It was also a year of achieving margin stability in the face of external pressures outside of our control. As we enter 2026, I believe we are extremely well-positioned, in particular, giving traction on our growth initiatives. One of these initiatives in the data center market is where I'd like to turn next. On this slide, we are providing additional details on the orders we received during the fourth quarter for our e-Pods offering. As discussed on our third quarter call, these turnkey power management solutions, which we launched in early 2025, are designed to expedite data center construction by making the installation of power management content more plug and play. The pods, which are tailored to specific customer needs, comprise content drawn from our long-standing power management portfolio which includes switchgear, transfer switches and power distribution units as well as from our thermal management offering, which includes hermetic motors and air-moving solutions. Regal is also project managing the assembly of the pods, including content from third parties. So part of our value proposition is providing a single source of contact for the customer and allowing customers to procure a suite of power management content with a single SKU. As you can see on this slide, we were awarded orders for e-Pods with a base value of approximately $735 million. So why are we winning this business? It starts with our 50-year track record of quality and performance in power management. Our product solutions are tried and true. Second, our customization capabilities. This is a differentiator for Regal and ability and willingness to customize the system design to best meet the needs of our customers. Third, the strength and durability of our supply chain relationships, which help enable the next success factor, our high service levels around on-time delivery and lead time. Equally important, we have shown across our business an ability to support high service levels while manufacturing at scale. Another driver of these wins, the scale and scope of Regal Rexnord. Orders of this magnitude are facilitated by the backing of our $6 billion enterprise. Customers value our ability to balance agility and velocity with disciplined execution as they contend with a feverish pace of AI-driven development. In short, we are seeing the power of our evolved Regal Rexnord portfolio to support differentiated growth. As part of the new Regal Rexnord, what was a $30 million power management business 5 years ago and a $120 million business today has a defined path to roughly $1 billion in sales over the next 2 years. Viewed more holistically, these wins demonstrate that our enterprise growth strategy is gaining momentum, in particular, investing to address rising demand in targeted secular markets. We are working the strategy in many areas, which is where I would like to turn next. On this slide, we highlight key secular growth verticals where we are directing the majority of our new product, e-commerce and channel investments. In the middle column, we provide examples of new products we have launched to address relevant customer needs in each vertical. And on the right, we highlight a few notable examples where we are seeing traction in the marketplace. We already discussed e-Pods in the data center market. Our electromechanical actuators for the emerging eVTOL market, which we developed through a partnership with Honeywell, is another great example. Various third-party forecasts are calling for significant growth in eVTOL unit volumes in the coming years, and we are well positioned with over $200,000 of chipset potential per plane. Next, our Kollmorgen Essentials product, which launched at the end of 2025, where we are leveraging our motion control technology for the ultra-premium market in an offering designed for the much larger, high- and mid-premium market segment. Initial market reception has been strong, and we believe we are on track to meet our goal for $50 million of sales from this new offering by 2028. Finally, we have developed a range of differentiated solutions to support robotic actuation, which spans humanoid, cobots and robotic surgery applications. Our teams are currently working an opportunity funnel in excess of $200 million across these applications and have already been experiencing strong double-digit compounded growth in robotic actuation in recent years. The common theme here is Regal Rexnord making a range of growth investments in the high potential secular market, which are starting to pay off. What we are experiencing in data center is one more advanced example. Positively, we see tremendous additional upside as both our offerings and earlier-stage markets such as eVTOL and humanoid continue to mature. And with that, I will turn the call over to Rob.

Thanks, Louis, and good morning, everyone. Now let's review our operating performance by segment. Starting with Automation and Motion Control, or AMC. Sales in the fourth quarter were up 15.2% versus the prior year period on an organic basis, which was ahead of our expectations. The performance reflects broad-based growth but with particular strength in data center, in Aerospace and Defense and in Discrete Automation. We would attribute the strength to underlying end market momentum in these secular markets as well as to our outgrowth initiatives, including cross-sell activities, which continue to gain traction. I would also point out that the medical market was flat after 4 quarters of destocking-related declines. This is another secular market where we are extremely well positioned with high-margin, technology-rich products, and we are very happy to see this market appearing poised to improve. We continued to face headwinds in the quarter related to rare earth magnet availability, but these were in line with our expectations and our plans to secure alternative sources of supply are on track. Turning to margins. AMC's adjusted EBITDA margin in the quarter was 20.5%, which was below our expectations and down roughly 1 point versus the prior year. While we were pleased to see the team over-execute on its backlog during the fourth quarter, some of the incremental volume, which was weighted to OEM versus distribution sales, created mix headwinds. Orders in AMC in the fourth quarter were up 190%, primarily reflecting the large e-Pod orders, Louis discussed earlier. Excluding the e-Pods orders, AMC's orders were up 19.2% versus the prior year on a daily basis, primarily reflecting the strength in Data Center, Aerospace & Defense and Discrete Automation. Notably, orders in Discrete Automation were up just over 9% in the quarter and are up about 6% on a rolling 12-month basis, reflecting growing momentum in this market. The momentum we are building in automation bodes well for our growth and margin outlook given the above-average conversion rate on these products. January orders for AMC were up 3.9% on a daily basis. Now before I leave AMC, I'd like to emphasize that the growth we saw as we exited the year reinforces our belief that the strength of the markets served, along with our differentiated products and solutions, help set up AMC to consistently achieve the mid- to high single-digit growth that we expect from this segment. Now turning to Industrial Powertrain Solutions, or IPS. Sales in the fourth quarter were up 3.7% versus the prior year on an organic basis, which was in line with our expectations. The growth was broad-based, but with particular strength in the metals and mining and energy markets. We are encouraged by this performance, which we believe evidences share gains given the ISM remain in contraction as we exited 2025. In particular, the IPS team continues to work our various cross-sell and powertrain initiatives, and we can see these results showing up in our performance. Adjusted EBITDA margin for IPS in the quarter was 25.7%, within our expectations and just below the prior year. Performance versus prior year was impacted by weaker mix, the impact of tariffs and higher growth investments, partially offset by continued strong synergy gains. Orders in IPS, on a daily basis, were up 3.3% in the fourth quarter, the sixth quarter in a row of positive orders growth for this segment, which contributed to the backlog ending the year up 6% versus prior year. Book-to-bill in the fourth quarter for IPS was $0.96. January orders were down 0.5% on a daily basis. Turning to Power Efficiency Solutions, or PES. Sales in the fourth quarter were down 10.7% versus the prior year on an organic basis, which was below our expectation. The shortfall was due to weaker performance in residential HVAC which we would attribute primarily to more severe channel destocking after the A2L regulatory transition, which was partially offset by strength in commercial HVAC. Speaking further on the residential HVAC market, it is important to note that if you follow the AHRI market volume data, central air conditioners were down about 26% year-to-date through November, but Regal was only down about 7%. We don't believe all of this is due to share gain, but 2025 was clearly a year of strong market outperformance for PES in the residential HVAC space. Turning to margins. Adjusted EBITDA margin in the quarter for PES was 15.6%, which was above our expectations and up 30 basis points versus the prior year. This strong performance, achieved despite challenging end market conditions, reflects both strong cost management by the team as well as mix benefits. Orders in PES for the fourth quarter were down 15.9% on a daily basis, directionally consistent with views we had previously articulated tied to channel destocking and weak consumer and housing metrics. Book-to-bill in the quarter for PES was 0.91. January orders in PES were up 3.8% on a daily basis. Turning to the outlook on Slide 12. The table on the left outlines our principal assumptions for 2026. Starting with sales, our guidance assumes growth of roughly 3%, comprised of 1 to 1.5 points from the large data center project we have won and roughly 1.5 points from price, which is largely tariff related. Outside of data center, we assume that volume growth across all other end markets is roughly flat on a net basis. Several of our end markets have the potential for stronger growth in 2026, and we were pleased to see the January ISM above 50, which has generally been in contraction territory for roughly 3 years. That said, one month does not make a trend, and we are intentionally adopting a more measured approach at the beginning of the year. This allows us to carefully monitor developments and make adjustments to our assumptions and guidance only when justified by new information or changing market dynamics. For example, we would like to see the ISM remain above 50 for a sustained period of time before becoming more constructive on our market growth assumptions. Another area we are carefully monitoring is our Data Center business. We continue to actively pursue a robust pipeline of bids, which could translate into orders eligible for shipment within 2026. Additionally, as delivery schedules for the e-Pod orders already secured are finalized, there is the possibility that some of these sales may be recognized in late 2026 rather than in our current plan for 2027. Should these factors materialize, they could offer upside potential to our existing guidance. However, until delivery dates are confirmed, we will maintain our prudent and measured outlook. Our adjusted EBITDA margin is forecast to rise 50 basis points to 22.5%. The increase reflects our mid-30s incremental margin applied to the growth we are forecasting. Note that while we fully expect to realize $40 million of cost synergies this year, we are treating those as a contingency against unforeseen P&L pressures, which we believe helps derisk our guidance. The table also outlines relevant below-the-line items. These assumptions result in an adjusted earnings per share guidance range of $10.20 to $11. The low and high ends of the range factor a combination of slower or faster top line growth and to a lesser extent, modestly lower or higher adjusted EBITDA margins. The midpoint of the range of $10.60 equates to approximately 10% adjusted earnings per share growth. For 2026, our cash flow guidance is set at approximately $650 million. This figure reflects our need to invest in working capital throughout the year to support the robust growth occurring in our data center business. Finally, regarding tariffs. Our guidance embeds all current tariffs in place today. It also reflects the recently announced update to India tariffs. With this update, our annualized unmitigated impact is now roughly $155 million. Consistent with our previous views, we expect to be dollar cost neutral on tariffs cited by the middle of 2026 and to be margin neutral on tariffs by the end of this year. On Slide 13, we provide more specific expectations for our performance by segment on revenue and adjusted EBITDA margin for the first quarter and the full year. Let me flag a few key assumptions that should help with modeling. One, we assume modestly lower revenue in the first quarter relative to the fourth quarter, largely reflecting normal seasonality across our businesses and expected destocking pressures in residential HVAC in PES. We expect annual sales to be weighted roughly 49% to 51% between the first half and the second half of the year. Second, we expect enterprise adjusted EBITDA margins to be roughly 21% in the first quarter and to improve sequentially, tied primarily to improving tariff-related price cost, improving mix as we gain top line traction in our AMC segment and other cost productivity actions. A more steady sequential trend is expected for IPS and AMC, while PES margins are seen tracking at a cadence similar to what we saw in 2025 with a peak in the third quarter related to seasonality. Lastly, we expect the first quarter to be the low point for adjusted EPS due to all of the items I just discussed and for our adjusted earnings per share to be weighted roughly 48% to 52% between the first half and the second half of the year, which is comparable to the weighting we saw in 2025. As I reflect on our guidance for the year, I believe we have outlined a compelling and achievable plan that delivers improved top-line growth, some margin expansion and double-digit earnings per share growth. We attempted to balance our strong orders momentum, higher backlog, ample secular growth opportunities in markets largely at or near trough demand and a path to further margin expansion with a degree of measured prudence. This view anticipates persistent weakness in global industrial markets and a volatile global geopolitical and trade policy environments. For example, our guidance does not embed any improvement to the 2025 ending ISM. Rest assured, our teams remain focused on executing the many compelling opportunities in front of them, and we are confident we can deliver a year that results in meaningful value creation for our shareholders. And with that, operator, we are now ready to take questions.

The first question comes from Mike Halloran from Baird.

So can we start on the data center side of things and the e-Pods wins? Maybe frame it up in a couple of ways. One, how do you think about the margin profile of this type of business? Is it comparative to the segment level as well? And then secondarily, could you just walk through what that opportunity looks like and frame it from here? You're talking about north of $1 billion last quarter. This is a $735 million transaction. It gets you pretty darn close to that. So what does this look like? What does this run rate look like from your perspectives? And how to think about the opportunity set after we just got such a great order number?

Yes, Mike, thanks for the question. I'll start with the second question first. We're thrilled with the $735 million order, and we talked about a $400 million funnel in the last quarter call, and so clearly, we outperformed here. We want to build on that, and we believe we have the capability to do that. Hence, part of the reason why we started expanding capacity and announced our capacity expansion in the last quarterly call. So we feel good about the offering here in our future potential and that it will grow from here. Now specific to margins and specific to these projects, we would expect adjusted EBITDA margins to be in the 20%-plus range. Our content is a little less than 50% of the bill of material, and we would expect our normal gross margins there. And then we are being compensated a fair margin for the product that's being sourced and then assembled and sold as the e-Pods. So again, expect adjusted EBITDA margin to be in the 20%-plus range, but then expect also that in time, as we drive productivity and supply chain actions, that we would expect to ramp that program margins as well. Hopefully, that helps.

Yes, it did. If we set aside the data center aspect and reflect on where we were in the third quarter, do you believe the trends within the Industrial businesses indicate a recovery is on the horizon? Rob mentioned that one month of PMI does not establish a trend and that any improvement is not necessarily included in guidance, but I'm interested to know if you are noticing positive signals in your business that would suggest a recovery.

It's mixed, honestly, Mike. We ended last quarter and our OEMs started accelerating; distribution slowed down. We didn't see much change of that in January, although we feel good about our order positions of January and our ability to make our guide for the year, but we didn't see a change of that. We are optimistic about the strength of the ISM coming out of January. But we'd like to see a couple more months of that strong together and then a little bit more strength in the distribution channel as well before we say we think we're on a path to strong recovery. But based on our measured approach to our guide, we feel really good.

The next question comes from Julian Mitchell from Barclays.

Maybe my question is about the margin outlook. The margins seemed to be down or flat to down in AMC and IPS in the fourth quarter. It appears that the first quarter is showing a similar year-on-year decline despite solid revenue. I'm trying to understand how we should view the margin improvement trajectory for IPS and AMC throughout the year. Additionally, what are your expectations regarding price costs, considering the recent trends in metal and chip prices? I'm looking to get insight into what kind of operating leverage increase we might see later in the year. That would be helpful, please.

Yes, Julian, thanks for your question. Let me begin by saying that AMC is more critical to the narrative than IPS. We anticipate strong margins for IPS moving forward and feel positive about our direction there. Regarding AMC, the fourth quarter's product and channel mix were significant contributors to the results. For instance, we experienced a slowdown in distributor sales as customers worked on managing their balance sheets, which impacted performance. However, we are seeing stronger project growth, particularly in the food and beverage sector in Europe, where volume is increasing despite a lower margin profile. Until we see improvement from the mix effects related to medical and discrete automation, particularly due to the availability of rare earth magnets, we expect continued pressure on AMC margins. As we look into the first quarter of 2026, especially in the early part of the year, we foresee persistent challenges tied to rare earth magnets, impacting our medical segment and parts of Defense and Discrete Automation. Nonetheless, we do expect margin improvements in the latter half of the year, with AMC margins anticipated to increase by about 40 basis points for the year at the midpoint. We are not factoring in any mix improvements at this point, using our current mix to project future margins, although there is potential for enhancement. However, we recognize that reaching our targeted range, around 24%, may take longer. To achieve this goal, we need to increase volume and improve the mix, particularly in medical, defense, and distribution. Rare earth magnets are projected to pose a 50 basis point headwind through 2025, expected to dissipate by mid-year. Additionally, we anticipate that tariff margins will become neutral towards the end of the year. That’s essential to getting back to the 24% target. Regarding the tariff impact you inquired about, our current stance is that by mid-year, we expect price and cost to be dollar neutral, and by year-end, we aim for margin neutrality.

That's very helpful. And then just my follow-up. You mentioned sort of costs of growth and fully understand that approach, and you've laid out very clearly on the P&L margins. Maybe on the free cash flow side, I think you'd alluded a couple of times late last year to a $900 million-ish free cash number for this year. I think the formal guide is $650 million. So just trying to understand the delta there because it looks like the revenue and EBITDA outlook is pretty similar maybe to what you thought a couple of months ago. So just maybe flesh out that delta in the free cash flow assumption today versus maybe what you were thinking a couple of months ago?

Yes, that's a great question. Let me explain. It really comes down to two main factors. First, we are making significant investments, particularly in our data center business, expecting to invest between $50 million and $100 million throughout the year. This is factored into our current cash flow projections. Second, when we set the forecast of nearly $900 million, the supply chain landscape has changed significantly due to issues like tariffs and rare earth materials, along with various uncertainties we face daily. Consequently, we are adopting a more cautious approach to our guidance for 2026. We have developed a target we believe we can achieve without relying heavily on additional working capital. As a result, we cut the working capital impact from our previous forecast by about half. This adjustment is what reduced our guidance from the earlier estimate of $900 million to $650 million. It would have been around $750 million if not for the working capital changes and the investments we're making in data centers. I hope this clarifies the situation. It really boils down to these two factors, all related to working capital.

The next question comes from Jeff Hammond from KeyBanc Capital Markets.

Yes. So just back on this e-Pod. It looks like you're going to ship all of this $735 million in '27. Is that correct? And then just on Slide 7, maybe just level set us on individually or collectively, how you think what your percentage of mix of business is kind of in the secular growth bucket?

Yes. So Jeff, we do not have a firm schedule at this time. The expectation is that we would start shipping in beginning of 2027. We'll probably hang over a little bit into '28. There's also a possibility it could pull a little bit into '26 as well. So as we get more firm path, we would expect those orders would ship over a 15- to 18-month period in total. Specific to Slide 7, we talked about 40% to 50% of the markets that we serve are secular markets. Now with this data center opportunity and our acceleration of growth, that's just expanding. And so this is why we're putting so much investment in these specific markets is with new products and solutions and commercial initiatives, and we feel that this is going to help accelerate our growth for the future.

The next question comes from Julian Mitchell from Barclays.

Maybe my question is about the margin outlook. The margins in AMC and IPS were down or flat to down in the fourth quarter, and it seems like the first quarter has a similar year-on-year decline alongside solid revenue. I'm trying to understand the margin improvement trajectory in IPS and AMC throughout the year. Also, what are your expectations regarding price costs, considering the trends in metals and chip prices? I would like to know what kind of operating leverage we may see later in the year. That would be helpful, please.

Thank you for the question, Julian. I believe AMC is the more important aspect here compared to IPS. We still anticipate strong margins for IPS going forward and are optimistic about its direction. Regarding AMC, I want to highlight a few points. The product and channel mix in the fourth quarter were key factors. For instance, we noticed a slowdown in distributor sales towards the year-end as customers managed their balance sheets, which affected the results. We are also observing stronger project growth, particularly in food and beverage within our conveying division in Europe, where we are seeing increased volume albeit with a lower margin profile. Overall, until we overcome the mix impact from the medical and discrete automation sectors, mainly influenced by the availability of rare earth magnets, we are likely to experience some pressure on our AMC margins. Looking ahead to the first quarter of 2026 and the first half of the year, we expect continued pressure linked to rare earth magnets, especially affecting AMC and impacting medical, defense, and discrete automation segments. However, we anticipate improvements in the latter half of the year. For the full year, we expect AMC margins to improve by about 40 basis points at the midpoint. We are not accounting for any improvements in our mix at this moment, using our current mix to project future margins. There is potential for improvement, but despite this, we see it may take a bit longer to reach the target range we discussed at Investor Day, which is approximately 24%. Several key factors must materialize to achieve that number: first, we need increased volume; second, the mix must stabilize, particularly in medical, defense, and distribution. Rare earth magnets are estimated to be a 50 basis point headwind through 2025, which we expect to resolve by mid-year, providing a boost. Lastly, by the end of the year, the impact of tariffs should become neutral in terms of margins, which is crucial for reaching the 24% range. Concerning the tariff impact and your query about price costs, we currently believe that by mid-year, we will achieve price/cost dollar neutrality, with margins becoming neutral by the end of the year.

That's very helpful. And then just my follow-up. You mentioned sort of costs of growth and fully understand that approach, and you've laid out very clearly on the P&L margins. Maybe on the free cash flow side, I think you'd alluded a couple of times late last year to a $900 million-ish free cash number for this year. I think the formal guide is $650 million. So just trying to understand the delta there because it looks like the revenue and EBITDA outlook is pretty similar maybe to what you thought a couple of months ago. So just maybe flesh out that delta in the free cash flow assumption today versus maybe what you were thinking a couple of months ago?

Yes, that's an important question, and I'll explain it for you. It really boils down to two key factors. First, there is the investment we're making in our data center business, which we anticipate will amount to about $50 million to $100 million as we progress through the year. This is accounted for in our current cash flow projection. The second factor is that when we initially set the forecast close to $900 million, the supply chain landscape has significantly changed, largely due to tariffs, rare earth materials, and other uncertainties we face daily. We are now adopting a more cautious approach in setting guidance for 2026, leading us to create a projection we believe we can achieve without needing much additional working capital. Consequently, we have halved the impact of working capital from the previous forecast. This adjustment is why the guide decreased from the prior estimate of $900 million to $650 million. Without the considerations of working capital and the investment in data centers, the figure would be closer to $750 million. I hope that clarifies things. It really centers around those two aspects, particularly working capital.

The next question comes from Kyle Mendez, Randy from Citigroup.

This is Randi on behalf of Kyle. To start with automation, it was encouraging to see strong order performance this quarter. Could you provide some insights into the demand trends driving those orders? Specifically, it would be helpful to differentiate between your new products and the robotics opportunities versus the traditional automation markets. Additionally, could you discuss the shippable backlog for 2026 in automation?

Yes, thank you for the question. Our orders increased by approximately 9% in the quarter for automation. The 12-month rolling figure is up about 6%. We discussed the Kollmorgen Essentials product launch during the quarter and are optimistic about its momentum and growth. However, we only recorded about $1 million in orders from that initiative, which was a minor contributor to the overall 9% increase. We are continuing to make progress with humanoid OEMs and are selling our sub-assembled solutions. We anticipate double-digit growth in robotics, a trend we've experienced for the past several years and expect to continue in the future. I hope that clarifies things.

Yes. Got it. That's very helpful. And then just shifting over to PES. I mean it sounds like destocking was a little bit more than you expected in the fourth quarter. So just curious as to how that informs your outlook for resi HVAC in particular in 2026? And what is your confidence level and some of that pressure starting to alleviate in the second half of the year?

Our outlook remains unchanged, despite experiencing more pressure in the fourth quarter than anticipated. We are projecting that residential HVAC will decline by high single digits in 2026. The first quarter will present a challenging comparison for us. Most of the decline is expected in the first half, with some recovery anticipated in the second half. In considering the market, it faced a significant downturn in 2025. So, when you inquire about our confidence in the second half, it largely stems from the comparison rather than our ability to accurately forecast this market. I hope this perspective is useful.

The next question comes from Tomo Sano from JPMorgan.

Regarding robotics actuations and $200 million-plus pipeline, could you share the latest developments and your expectations for orders in 2026 and 2027, please?

Yes. No, we're really excited about our pipeline. We're excited about the new products we're launching, Tomo. When we talked about the Kollmorgen Essentials that moves us into a much larger TAM market. But right now, we're not suggesting anything different than what we've said in the past, which is low double-digit growth. There's also lots of potential in humanoids, and that's gaining traction. But it's a little early for us to say it's going to accelerate. And so although we were really pleased with the order rates we saw in 2025, we feel we're nicely and well positioned with a number of OEMs in North America, but we're not going to provide any further guidance than low double digits for our automation business right now.

That's a helpful. And just a follow up on your net leverage target for 2026. And how are you thinking about the capital allocation priorities, please?

Yes. The net leverage target for 2026, as the guidance would suggest is about 2.7x by the end of the year. It means that by mid-part of the year, we should be right around 3x. And then we're starting to year about 3.1 coming out of last year. From a capital allocation standpoint, we would certainly continue to prioritize debt pay-down as we move through the year. Of course, we have other capital priorities as well as we've talked about earlier today in some of those investments that we're making in inventory and the like. So we expect to continue to do that and invest in great CapEx projects with very quick paybacks. But overall, that's the way we're thinking about it, and we'll continue down that path until we get to kind of our communicated range that we talked about, our target is less than 2.5x, until we start doing something that might include some other options on capital allocation.

The next question comes from Nigel Coe from Wolfe Research.

We have covered a lot of ground. Going back to the e-Pod, I want to clarify your expectation of a 20% EBITDA margin. I assume you expect the gross margin to be closer to 30%. Is this what you anticipate on average, or is that more of a goal as you ramp up and learn, considering this is a relatively new business for you? I wouldn't expect you to achieve 20% from day one. Could you please clarify that? Additionally, do you have any protection against inflation in raw materials? Steel prices can fluctuate significantly, so I'm curious what safeguards you have in place for raw materials.

Yes, we expect to start with a margin of around 20% and then improve from there. However, we don't anticipate exceeding our target margins for the AMC business. Our initial margin potential is projected to be around 20%. In terms of hedging, we do hedge for copper and aluminum, but steel is not included in our program. We are confident in our hedging strategy for this project and have factored in risks related to the supply chain and inflation. Overall, we feel optimistic about starting at a 20% margin and growing from that point.

Great. And congratulations on the order, fantastic news. And then maybe just a follow-up on the CEO succession. Obviously, it's now been several months in progress, so just wondering where you are on finding the person to fill those big shoes?

Yes. No. As I said in my prepared remarks, the Search Committee has been working hard at this, and they're making progress. We're down to a select few, and so our expectation is that we should be able to make an announcement in the near future.

The next question comes from Joe Ritchie from Goldman Sachs.

I would like to ask about the ePod offering. Louis, you mentioned various data center projects, but I'm wondering if you're selling to multiple customers or just one. Who are your customers? Are you selling directly to integrators, co-locators, or hyperscalers? Any additional information you can provide would be helpful.

Joe, thanks for the question. Consistent with our prior practices though here, we're not going to provide a lot of detail. And of course, we have confidentiality agreements in place as well. And so we wouldn't be able to provide specifics. But you answered the question correctly. We are selling into co-lo, hyperscaler. It is multiple customers and multiple data center projects in North America.

Okay, that's helpful. How should I think about the content per megawatt? The $735 million figure is significant. What content per megawatt are you actually providing with these e-Pods? Also, is this primarily for low voltage or medium voltage type switchgear and other power equipment that goes inside?

Yes, Joe, it's a great question. And unfortunately, I'm not going to be able to answer the first part of the question. I don't have the specifics there. But as we've talked about in the past, Regal has low-voltage and medium voltage switchgear, paralleling switchgear, low-voltage power distribution units and automatic transfer switches. Our part of the bill of material is around 40% to 50%. The other part of the bill of material is going to be things like the container, UPSs. And so that's what makes up the project offering. I'll make sure that I'm better prepared next time, though, on the power question you asked. But hopefully, that gives you a little perspective.

The next question comes from Christopher Glynn from Oppenheimer.

Sticking with the e-Pods still. So $735 million out of a $400 million pipeline a few months ago. Curious if you could provide any color on what that pipeline looks like now? And could we see another quarter of orders like this or even more than one over the next year?

Yes, Chris, I appreciate the question. And my answer right now is likely not. The pipeline is about $600 million in size for all of our data center business. But when you think about capacity and the fact that we're pretty filled up through '27. I don't expect large orders. But I say that and our sales teams for this business are incentivized to grow this business beyond the projects that we've already won today. And so do expect that this is going to be an area of focus for Regal and that we will talk about data center opportunities for many quarters to come.

Okay. And then I'm not sure if you gave the CapEx guide, I'd like to hear that. And also on the $200 million-plus robotic automation funnel, are you incumbent there? Is that funnel stuff you're already specified on?

I will address the second part of your question and leave the first for Rob. Regarding the $200 million funnel, the answer is yes, we are involved in some of it. We've already provided details on parts of that funnel, and with others, we are focused on building relationships. I recently reviewed a report from our team about humanoid robotics, which highlighted 10 key OEMs we are targeting in the U.S. We are currently on the platforms of three of them, selling subassemblies, while we are still working to get integrated with the remaining seven. Therefore, my response about the $200 million is that it consists of a mix.

Great. And from a CapEx perspective, we're looking at about $120 million in CapEx in the year, primarily to support growth and then some of the SCOFR activities or supply chain realignments that are currently in the plan to achieve the $40 million of cost synergies. That, as I stated earlier, are not embedded in our current guidance, but gives us a degree of risk mitigation, if you will, as we approach the year.

Okay. And then separately, and you said IPS backlog was up 6% year-over-year?

Yes, that's correct. Coming into the year, IPS' backlog is up 6% as compared to the same period last year.

This concludes our question-and-answer session. I would like to turn the conference back over to Louis Pinkham for closing remarks.

Thank you, operator, and thanks to our investors and analysts for joining us today. My closing message today is simple: our growth strategy is working, and we are gaining momentum. This is apparent in our improving organic sales growth and in our tremendous order and backlog growth. And we see so much more opportunity ahead of us as we continue to execute our growth playbook across our secular market with additional upside to the extent our end markets improve. Encouragingly, we are seeing early positive signs in a number of key markets. In short, I believe we are better positioned than ever before to create increasingly significant value for our stakeholders in 2026 and beyond. Thank you again for joining us today, and thank you for your interest in Regal Rexnord.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.