Regal Rexnord Corporation Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Sales and Earnings: Solid second quarter performance with sales down 1.2% organically, adjusted EPS up 8.3%; free cash flow $493M, $368.5M from accounts receivable securitization program.
• Cross-Sell Synergies: On track to deliver $250M in cross-sell synergies, with a $300M funnel of cross-sell opportunities and a win rate 10 points above enterprise average. Examples include a $3M powertrain sale to a cement manufacturer with significant aftermarket potential.
• Tariffs and Demand: Tariff impacts neutralizing, demand in key end markets near trough; backlog growth in IPS and AMC segments.
• Balance Sheet: Accounts receivable securitization facility closed at $400M, with $368.5M used to pay down debt, improving leverage ratios.

Segment Performance

• Automation and Motion Control (AMC): Sales down 3.4% organically vs prior year; adjusted EBITDA margin 19.5% (below expectations due to rare earth magnet delays and medical end market destocking); orders down 7.5% daily, book-to-bill 1.0.
• Industrial Powertrain Solutions (IPS): Sales down 4.4% organically vs prior year; adjusted EBITDA margin 26.9% (above expectation); orders up 3% daily, book-to-bill 1.01; backlog up 15% year-to-date.
• Power Efficiency Solutions (PES): Sales up 6.5% organically vs prior year; adjusted EBITDA margin 17.1% (above expectation); orders down 5.4% daily, book-to-bill 0.9; July orders down 3.6%.

Guidance

• Reaffirmed 2025 adjusted EPS midpoint, narrowing the range to $9.70-$10.30; sales guidance rising due to favorable FX rates and tariff-related pricing.
• Adjusted EBITDA margin expected at 22.5% (down from prior 23%) due to tariff impacts and rare earth challenges.
• AMC 2025 adjusted EBITDA margin range 20.5%-22.5% (down from prior); IPS revenue expected low single digits in Q3 and low to mid-single digits in H2; PES Q3 low single digits, back half down.

Risks

• Rare Earth Magnets: Challenges in procuring magnets led to temporary shutdowns and margin impacts; 90% of supply comes from China, with ongoing dual-sourcing efforts needed for defense applications.
• Tariffs: Ongoing uncertainty with limited customer spending impacts; gross annual unmitigated cost impact from tariffs fell to ~$125M.
• Macro Uncertainties: Industrial cycle momentum affected by macroeconomic and geopolitical factors, with ISM below 50% for over 2 years.

Question and Answer

• Q: Context on back half end market recovery and orders?

A: Louis Pinkham expects mid-single digit orders growth in second half, mid-single digit in IPS, low double digit in AMC (driven by data center), and PES relatively flat; revenue low single digits in second half and into 2026.

• Q: Rare earth magnets exposure and data center wins?

A: Rare earth magnets represent ~1% of sales, plant shut down in Q2 due to shortages but back up, data center wins due to customized solutions, funnel strong in data center space.

• Q: IPS reacceleration confidence?

A: Louis Pinkham notes backlog up 15% YTD in IPS, strong funnel, and not concerned with July flat orders as 1 month doesn't make a trend, expecting mid-single digit growth for the quarter.

• Q: AMC second half margin ramp?

A: Robert Rehard says back half, especially Q4, reflects higher shippable backlog, better mix, and rare earth cost pressure subsiding; Louis Pinkham highlights disciplined operations resolving rare earth issues through the year.

• Q: Accounts receivable facility capacity?

A: Robert Rehard states the facility is annually renewable, cost 150 basis points below current rates, and renewable with no capacity above $400M.