BAIRD 2026 GLOBAL INDUSTRIAL CONFERENCE - Regal Rexnord Corporation

Good morning everybody, Mike Allen here with Baird. We're pleased to welcome the Regal Rex Nord management team with us today. Joining us, Amir Paul, CEO, Rob Rehart, CFO. We're going to dive right into Q&A session. So as usual, if you have any questions, please either raise your hand, or Rob, would you mind passing me the iPad there? Or send me an email, and I'll make sure that I look and integrate the questions into the conversation here. We're gonna start higher level, more discussing why he took this role and then kind of his vision, and then dig into some of the more specific questions I know everyone has on the business itself. So with that, hey, thanks for coming. So why don't we just start with why you decided to take the role and what makes you excited about the Regal Rexner opportunity from here? Great, thanks, for having us. So look, I spent 13 years at Dell, then 13 years at Schneider Electric, last leading our North American operations. And especially after COVID, you learn some interesting lessons about supply chains that they went from just in time to just in case. And you also learned that as we build critical infrastructure, that supply chain visibility and control becomes really important. So if you think about what happens next, whether it's investments in robotics, aerospace and defense, the reshoring of manufacturing, the investments, and continuing to build out AI infrastructure, and even critical minerals. Regal Rexnord has key components that play and support the supply chains and all those elements. So 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 sort of get the maximum value of the combination, I think is still ahead of us. And then lastly, I think there's a lot of innovation still to do, especially in the future areas like linear actuation, like actual electromechanical actuation and eVTOLs and things like that. There's a company working on getting you from O'Hare to downtown, I live downtown here, in about 15 minutes. And I'm totally committed after their 10,000 flight is done, but they will be a customer of some of our solution stack. So I think all of those things brought together, it was a great opportunity. I'm happy to be here. I think it's wise to get the first 10, 000 out of the way before you're the experiment. No, that all makes sense. And so then 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, but 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've got to remember that whether it's Ultra, which was former Fortiv, which is former Danaher or the Rexnord business or the Emerson PT business in a relatively short period of time there are also different subcultures right so also understanding the teams and the and how we bring those cultures together so a lot of 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 and I'm the most recent and 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 do you feel the next step in the evolution is like? Look, what I'm most impressed by, what Rob and Lewis and the rest of the team accomplished in this portfolio in 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 of years where our organic growth has not been where we want it to be. There's certainly been this gap between what is clear potential and the realized growth structure. And so the first question was, OK, well, why is that and how do we unlock that capacity? What's 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've seen in many quarters. So we're 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, you know, when we were putting these companies together, it was all about consolidation, streamlining. And now as the demand picture comes back, it's a different muscle that we have to go flex. So that's what we're trying to work on. So that'S where operational excellence was that first bucket, right? We have to get that right. Some of that is short-term, some of that as mid-term and some of it is long-term. We have data structures, ERP structures we have clean up. Maybe the footprint that we've inherited isn't the right idea, long-term footprint. But in the very short term, it's getting the order conversion back where we would like it to be. Second one was portfolio. I'm struck by the complexity of the portfolio. The breadth of it is super exciting, but does everything fit? I'll talk about the AMS business, which we declared we're 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 developer in Sweden writing software for autonomous vehicles strategically is not what you think of when you think about us. Right. Can we do it? Yes. Is it a great business? Yes, does it fit? I don't think so, because it takes away focus from what we're really trying to do in the core. So that was the first. We're 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. And then 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, Jeeva, Nova, Siemens Energy, we are part of that solution. We're a small part of the solution, but we're clinical 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 you know 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 you know two ultra businesses ANS Legacy Ultra, Legacy Regal, Rexnard How do you view the combination of these assets? Do you think these assets should be together? Do you thing this is the right vision as far as the holistic message? And then, you know, there's some cleanup to do underneath 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 megatrends that we talked about, right? So if we're going to invest in manufacturing and remanufacturing manufacturing in North America. If we're going to invest in making sure we have better control of critical minerals in our own sort of commodity supply chain, whether that's mining investments here, Oregon, 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 And 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's a lot more we can scale. And the factthat we make the motor and the fan and we can work with customers on different outcomes, whether it's throughput, you know, other parts of the world, energy efficiency and volumetric throughput matter. now in the US decibel levels matter a lot more and you can expect depending on you know what new regulations come in that will get even more intense so if you can get faster in developing a quieter fan I think that makes a big difference so great assets there and then you come to parts of AMC and whether it's our Portiscap brand or Clemorgan brand right the advanced motion control linear actuation capability airspace and defense capability are is fantastic so we're not trying to say here's how all of them fit right because some of those will not cross sell there's 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 right I don't know exactly when humanoid robots are gonna tip over when they're gonna have their sort of you know open AI moment but the fact that we can provide 10% of the content from actuators controls gearing of a humanoid system that's super exciting when exactly will that happen we don't know but we want to keep working with those customers as they develop that traditional airspace and defense but also the neo primes right so we love that exposure to these mega trends and then where we can sort of create more joint value at an engineering level we'll 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 followed us for a long time. A lot of these assets in their prior companies were not exactly, you know, the places where a lot of investment was going in yeah so they're great assets but they were run to sort of perform in the moment right and so I think I think there is a foundational uplift that we have to do across a lot of our footprint consolidating and 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 We've ended up in scenarios where we have multiple ERPs servicing the same plan, right? And that's never great from a planning, material planning or manufacturing planning standpoint. So that's the next tier. And then the most immediate is material flow, material planting, and SIOP, right. And so 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 but 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 with third parties and the whole industry is struggling with that so we 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 feel the timeline like I said phase Phase one is a couple of quarters. Phase two, I think, is going to at least be a year. And then beyond that, we're going to keep investing and consolidating. And then another timeline question. How do you think about the timeline for some of the portfolio review decisions you need to make? You know, I got a lot of advice from the board, from investors. And I think it's a measure twice, cut once kind of decision, right? We want to be thoughtful. We have a good framework. We've already completed the first assessment with a third party, with voice of the customer. We've looked at market share trends, cost trends. So we have a lot of data. Now it's about, you know, can we structure the right deals and get the right partners? But we're not going to wait for some big reveal. As we make decisions, we'll update you. And so you should expect, you Know, some update at the next call and then we'll go from there. Maybe, how does the rule of 30 fit into this framework? you know, there's some pieces in there of PES that maybe seem logically challenged to hit that rule of 30. Maybe I'm wrong. Maybe there's more opportunity there, but maybe discuss what the rule 30 is from your perspective and how you think you can apply it. Yeah, simply put, it's your sales growth plus your EBITDA, right? And if you look at the whole company, Regal Direction over the last few years, roughly rule of 22, we haven't had much sales growth, but our EBITda quality has been in that 21, 22 range. This year, you're seeing us progress to 25. Now the question is, how do we go from that to 30? And once you get to 30, you are in the sort of top quartile of industrials. But it's just a heuristic, right? We're also looking at free cash flow, capital intensity, return invested capital, market share, synergies in terms of core processes. So it's not like a fast fail in a single metric, but it's a useful heuristics to get everybody in the company thinking the right way and yes there may be parts of the portfolio that don't fit and then we'll make those choices but not just on that variable that's just a quick starting point and then last one on the the kind of three strategic priorities here how does one go about building that appropriate growth mindset it's just about you know one of the things I was struck by last night I suppose was just in certain areas fewer company 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 when we were again like i said prior to this these businesses were not in investment mode then 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 environment so we can go solve problems for how do we build that acquisition muscle we 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 it's something we have to do our r&d roadmaps right are we thinking incrementally 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 you know what's the latest cutting-edge feature cost functionality coming out of China and how close or far from that are we so it's just that you know 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 were 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. So it's a clear step up. And even in the last month that we talked about on the earnings call, you see an acceleration. And given that that's a space where our market share positions are in the top three in most cases, that's super exciting. So again, we have operational issues to go solve. It's one of our most profitable businesses, and we're excited. And 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 will be lumpy as our gearing business has shown us, but we think there's a 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 air-to-date were over 150%, off a small base in the scheme of data center infrastructure, but we see good growth in that business. And then we're really excited about not only air moving, but also the future best 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. So, you know, as we've 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. Anything you want to add to that? Yeah, because if I think about the sequentials here, the sequential trends are, I mean, you guys cover so many end markets, so nothing's 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, you know, Palmer mentioned the October order rates and just, you know, 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, yet 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 your content, the importance of your content leads the way for the EPOD opportunity. Yeah, so the way to think about Regal in this space is we have a brand called Thompson Power Systems that for a long time has been known for great quality as a panel builder. And a panel builder is we're taking breakers from the major OEMs, the Schneiders, the Eatons, ABBs, 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. So it could be a generator. It could be battery solution. It could be the grid itself. Those are the core capabilities we've had. That business, like I said, Q3 air-to-date, growing 150% plus in sales. And we're expanding that coverage and we love that business and will continue to be one of the larger panel builders in that space. And 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 so 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 and 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 so when you go from stick build to modular you're basically taking all the integration work that happening on the jobsite 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. And the reason we want to do that is we like your Switchgears, but we want You to solve this labor arbitrage problem. And so that's what got us into EPODs. That's why it was such a large order. And 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'll 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's great but that's 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're having the conversations with others but it's the proof of concept that just needs to get in the market before the next. Exactly. And 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're not, you know, they've built a lot of capability in supply chain management, but if we can say we're going to manage the supply chain, we'll interface with all the component providers, we'll bring that together we'll do the thermals and quality testing for you and deliver you a module that you can just plug in there's a lot of value creation I want to make sure we're also getting paid for that yeah because we don't have the aspirations that a PE back panel builder does from a profitability standpoint so that's the balance we're going through we think there's a real niche for that to be built we have to demonstrate that and that's the journey we're on and first shipment is q1 q1 the testing and validation with our existing client is happening now and then like I said we're in the design phase with a few additional clients and 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 and air moving could be a great example that's a perfect segue maybe talk about why you're excited about the air moving I I think one of the confusion points is that you've 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're excited. Look, we've 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 happen to be in the same place in Germany. But what we found is we were growing much faster with data center infrastructure in Asia, especially in China. And you can think of the major names there, Baidu, Tencent, Alibaba. They had a different decibel level requirement. And 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. And as we progressively reduce that noise level, those fans can be brought over, and we're just getting started. So we think there's a real opportunity. Interestingly enough, we also have capacity. So we have that dual opportunity, which is why you're seeing that order rate expand and the rate is expanding. But 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 were still in the way doing that. And some of the customers that are here actually are working with us and doing that. Maybe shift gears to the A&D side. Maybe just a little bit how you play and why you're excited about the opportunity to scale that side of the business. You know, we, I fly a lot, right? Every Boeing aircraft in its landing system has significant components that are made by us, right. And I was in Boeing's facility in Portland as they're coming out of sort of a platform pause that they had that they're now scaling. And this is just on the commercial side. And it's fascinating to see how quickly they're trying to ramp up and get that facility going. And 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 airspace is an incredibly sticky business, and we're 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. But in the traditional defense space and commercial airspace space, we've been a critical component provider. And the thing we're trying to now figure out is what other components are out there where maybe they're stressed about the supply chain security and we you know could those be things organically or one day inorganically we could help consolidate and be a better partner for them and some of that's about that growth mindset shift right exactly yeah um maybe the same conversation um on the robotic side um where does regal play today and what's the opportunity to scale on that side also gearing motors actuators and I think all of those in combination you know the miniaturization of that whether in and by the way we didn't think of robotics as the broadest definition of that right so humanoids gets a lot of attention but that's a subset application there's medical robotics there's warehouse automation solutions some of the stuff happening in pick back and ship solutions is super exciting so 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 you know the shipment rates are still in the sort of 10 units of we 20 units a week when they scale the 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's going to be a big shift in how they're built that's exactly what we've seen in china and and we want to be prepared for that opportunity here and then a couple shorter term things maybe maybe maybe talk a little bit about dynamics as you see them today thoughts into 27 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. You know, one of the things that Rob and I have reflected on since we've had the opportunity to work together is there's always been this promise, but our say-do ratio hasn't been where we want it to be. And you and I've talked about that. So I think one of things we wanna get right is, you know, let's go make sure that we are predictable. Maybe not as exciting as you always want us to be, but certainly a lot more predictable. And so we're going to take our time, and that's why we haven't talked much about 27, but really make sure we lay out plans where you can count on us doing what we say we're going to do. Yeah, and I can appreciate that. And maybe put some of the, we talked operationally earlier, maybe put that in context of how you're thinking about margins long term as laid out by at the analyst day. I think, you know, the AMCP sticks out. I think that's a focal point for people that say due 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 process? I think consistently getting to rule of 30 is the goal, right? And so, again, if you think about top-line growth and quality improvement. By the way, we need to get better at both. Don't ever confuse that. But just saying we're going to get this rate and whatever growth we can get after that is upside, it's the wrong mindset. That's not the growth mindset. So we're looking at all of our businesses just consistently get to rule 30 and then build from there. And that's how we're thinking about AMC as well. And 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 um we were super excited after a lot of hard work rob and team have done that we've gone below three um the pace and trajectory of that is exactly what we've been communicating um so that remains the first priority um and then after that i think you know look we'll look at uh returning capital shareholders but also there's a lot of growth you know we have these assets where we can scale and so bolt-ons would be something we would look at but but that's for tomorrow today your term is just getting the the leverage down to where we are happy with it oh great well please join me in thanking Amar 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