Regal Rexnord Q3 2026 Earnings Call Transcript

Regal Rexnord (NYSE:RRX) reported third-quarter financial results on Tuesday. The transcript from the company’s third-quarter earnings call has been provided below.

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Summary

Regal Rexnord’s Q3 2026 results included 6.1% organic sales growth and adjusted EPS of $2.72, which was $0.15 ahead of expectations.

The company announced strategic priorities focused on operational improvements, targeting high-potential growth opportunities and fostering a growth mindset.

Regal Rexnord is exploring a sale of its Autonomous Mobile Solutions business and conducting a comprehensive portfolio review.

Orders grew 5.7% year-over-year, with significant growth in the commercial HVAC and air moving portfolio. The company also noted operational challenges in plant execution and material planning.

Future guidance includes a slight increase in the sales outlook to $6.22 billion for 2026, with an adjusted EBITDA margin forecast of approximately 22%.

Full Transcript

OPERATOR

Good day and welcome to the Regal Rexnord third quarter 2026 earnings call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star and zero. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star and 1 on a touch-tone telephone. To withdraw your question, please press star and 2. Please note this event is being recorded.

I would now like to turn the conference over to Robert Barry. Please go ahead.

Robert Barry (Vice President of Investor Relations)

Thank you, operator. Good morning and welcome to Regal Rexnord’s third quarter 2026 earnings conference call. Joining me today are Aamir, our Chief Executive Officer, and Rob Rehard, our Chief Financial Officer. I’d 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 this slide we state that we are presenting certain non-GAAP financial measures that we believe are useful to our investors, and we’ve 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. Aamir will lead off with some opening comments, followed by highlights of our third quarter enterprise performance. Rob will then discuss our third quarter financial results in more detail, starting with the enterprise, followed by the segments, and concluding with our updated 2026 guidance. We’ll then move to Q&A, after which the call will conclude, and with that I’ll turn the call over to Aamir.

Aamir Paul (Chief Executive Officer)

Thanks, Rob, and good morning, everyone. Thank you for your interest in Regal Rexnord. I’d like to begin by providing an update on our strategic priorities, after which I will discuss our third quarter enterprise results. On our last earnings call I had been with the company for five weeks. I shared some early observations including the strength of our team, the trust we have built with our customers and channel partners, and the quality of our technologies, brands, and market positions. I also said my near-term focus would be engaging with our critical stakeholders to build a deeper understanding of the business. That’s what I’ve been doing. Four months into the role, I spent time with our teams, customers, and channel partners.

I have visited 13 plants and multiple R&D sites as well as meeting with customers and partners representing 20% of our sales. I’ve come away believing Regal Rexnord has the potential to drive faster and more profitable growth. I also have a clearer view of the work required to translate that potential into stronger delivered performance. At this stage, I see three core priorities to unleash this potential: 1) driving operational improvement, 2) focusing our resources on fewer, higher-potential growth opportunities, and 3) building a stronger growth mindset. Let me talk you through each. First, driving operational improvement. This starts with completing the last mile of integration following the significant transformation Regal Rexnord has undergone over the past five years. Our teams have accomplished a great deal, but important work remains to realize the full operational and commercial value of the portfolio we have assembled.

This work is primarily about optimizing our data and aligning our operating systems and simplifying processes across the company. Our goal is to serve customers as one Regal Rexnord, making it easier for them to access the full breadth of our combined portfolio. We’re continuing to align our teams and processes to respond faster, deliver more consistently, and remove friction across the quote-to-cash value stream. Our plant execution and material planning need to continue to improve. Demand has accelerated over the last couple of quarters and our plants are moving from a period focused on consolidation and cost optimization to one focused on growth. That transition has put pressure on plant execution and material planning, which we started to see last quarter. It’s now clear the transition requires more work than first anticipated. As a result, we have broadly paused plant consolidations to prioritize raising output.

We’ve also engaged targeted third-party support to accelerate our scaling actions. We expect these actions to start helping volume and, progressively, productivity. This will take time, and today these operational challenges are one factor weighing on our growth and margins. When we report fourth quarter results, we will provide guidance for ’27 and we will share more color on the timing of getting these operations performing at the targeted levels.

Our teams are appropriately focused, and it remains one of our highest priorities. The second opportunity is to sharpen our focus where we can best compete. This means concentrating our resources, time, and investments on fewer opportunities with greater upside. We cannot pursue every initiative with equal intensity. We need to be clear about where we have differentiated capabilities and where we have a right to win. To this end, we have begun a comprehensive review of our portfolio, working closely with our board and with the support of outside advisors.

Our goal is driving profitable growth, stronger returns, and directing capital to our most attractive opportunities. One framework informing our assessment is the rule of 30, under which a business’s organic sales growth plus its EBITDA margin equals or exceeds 30%. In addition to the rule of 30, there are also other metrics that are important. These include cash generation, return on invested capital, and capital intensity. We are evaluating every business dispassionately based on where we have a clear right to win, strong customer value, and structural growth potential.

Each of our three segments has both opportunities for improvements and attractive businesses. This process ultimately allows us to prioritize the businesses with the strongest growth profile and allocate resources accordingly. As this work progresses, we may identify businesses that are less aligned to our long-term strategic priorities and which may be more valuable under different ownership. We’re prepared to make fact-based strategic decisions to enhance shareholder value.

Today’s announcement that we’re exploring a sale of our Autonomous Mobile Solutions business, or AMS, in the AMC segment reflects this approach. AMS provides hardware and software that enables automated guided vehicles and autonomous mobile robots to navigate and operate in factories and warehouses. We believe this business has immense potential under the right ownership. Finally, we’re also evaluating opportunities to simplify our cost structure and improve operating efficiency across the company.

We will move with urgency but also with prudence and discipline, and we will provide updates when we have something definitive to share. Third and finally, we have an opportunity to build a stronger growth mindset across the company. For several years, much of the organization’s attention has appropriately been directed towards the portfolio transformation, restructuring, and synergy execution work. Building on that work, our focus is now shifting to accelerating organic growth. It starts with spending more time understanding the unmet, unarticulated needs of our customers, anticipating where markets are headed, and bringing together technologies from across Regal Rexnord to solve customer problems.

In practical terms, that means deepening relationships with existing customers and expanding our commercial coverage to acquire new ones. There is also a cultural element to this work as we continue to build one culture across the teams that joined us from three predecessor companies. Where needed, we will adjust our go-to-market model and operating structure to achieve these goals. I remain excited about Regal Rexnord’s long-term potential. We have talented people, differentiated technologies, and trusted brands. Our opportunity is to translate those strengths into faster organic growth, higher margins, stronger cash generation, and improved returns on capital. The three priorities I outlined—driving operational improvement, sharpening our focus, and building a stronger growth mindset—will be critical to realizing this potential.

There is substantial work ahead, but I’m encouraged by our foundation and increasingly confident in our ability to build that higher-growth, higher-margin Regal Rexnord. Ultimately, our progress will be measured by results, and we intend to provide continued visibility into our execution and the impact of these initiatives in the quarters ahead. Now shifting to our third quarter performance, the Regal Rexnord team delivered solid third quarter performance. I want to say thank you to our global teams for all the hard work that went into delivering these results. Before I hand over the call to Rob to go over the financials in detail, there are a few headlines I’d like to touch on. Orders in the quarter were up 5.7% versus the prior year. On a daily basis we’re seeing healthy demand which broadened out during the quarter.

Of note was the acceleration in our PE’s, commercial HVAC and air moving portfolio, where we saw order growth of over 60%. We are encouraged by the customer feedback around our offerings in this space. Organic sales growth accelerated in the third quarter to 6.1% versus the prior year. Our adjusted EPS excluding refunds was $2.72, $0.15 ahead of our expected midpoint and up 8.4% versus the prior year. We also achieved an important milestone in our deleveraging journey, and our net debt to adjusted EBITDA is now 2.9x.

On the whole, we’re pleased but not satisfied with this performance. We believe we’re making progress towards delivering stronger and more predictable performance, but are clear-eyed about the work ahead. And with that I will turn the call over to Rob to go deeper into our enterprise results and the details of our operating performance by segment.

Rob Rehard (Executive Vice President and Chief Financial Officer)

Thanks Amer and good morning everyone. Our third quarter performance met or exceeded our targets for sales, adjusted EBITDA and adjusted earnings per share viewed with and without IEEPA tariff refunds. I also want to say thank you to our global team for all of the hard work that went into delivering these results. Orders in the quarter on a daily basis were up 5.7% versus the prior year or 13.3%. Excluding data center where we were impacted by project phasing, we’re seeing strong demand across all three segments.

In October, daily orders for the enterprise were up 24% or up 15% excluding data center. Shifting to sales, our organic sales growth accelerated in third quarter to 6.1% versus the prior year. Key drivers of our enterprise performance include data center, commercial HVAC and discrete automation. Turning to margins, our third quarter adjusted gross margin was 37.7% or 36.8% excluding $14.7 million of IEEPA tariff refunds. Our gross margin was up 10 basis points versus prior year or down 80 basis points excluding refunds. The decline versus prior year ex refunds reflects price cost pressure as well as operating performance headwinds partially offset by benefits from higher volume. Adjusted EBITDA margin in the quarter was 22.1% or 21.2% excluding refunds.

Adjusted EBITDA excluding refunds was $337 million, which was $2.5 million ahead of our guidance midpoint. The decline in our adjusted EBITDA margin excluding refunds versus the prior year reflects our gross margin performance in addition to higher growth investments. Shifting to earnings, adjusted earnings per share for the quarter was $2.90 or $2.72 excluding a net refund benefit worth $0.18 per share. Notably, our adjusted EPS excluding refunds was $0.15 ahead of our expectation midpoint and up 8.4% versus the prior year.

Finally, free cash flow was $194 million in the quarter. We continue to direct our post dividend cash flow to debt reduction and during the quarter reached an important milestone in our delevering journey with net debt to adjusted EBITDA ending the quarter at 2.9 times. And now I’ll shift to reviewing our operating performance by segment. As I review each segment’s performance, I will discuss our results with and without the impact of IEEPA tariff refunds.

As a reminder, last quarter we indicated that we expected $8 million of IEEPA tariff refunds in each of the back half quarters. Our actual performance reflects $14.7 million of net refunds in the third quarter. Our current guidance outlook assumes no further impact from refunds in the fourth quarter. The EBITDA impacts by segment are presented in our slides. Now turning to our third quarter segment performance starting with Automation and Motion Control, or AMC. Orders in AMC in the third quarter were down 4.9% on a daily basis versus the prior year period. The prior year included two large switchgear orders for the data center market that together were worth $115 million and did not repeat in the current year. However, we booked a $113 million switchgear order in October which we expected in the third quarter but slipped into the fourth quarter.

Excluding data center, AMC’s daily orders in the quarter were up 21.4% reflecting broad-based strength particularly in our aerospace and defense and discrete automation businesses. Book-to-bill in the third quarter for AMC was 0.95 or 1.07 excluding data center. In October, daily orders for AMC were up 38% or up 16% excluding data center. Turning to sales, AMC sales in the third quarter were up 25.2% versus the prior year period. On an organic basis, this performance reflects broad-based growth but with especially strong performance in the data center and discrete automation markets.

Sales excluding data center were up 11.2%. Notably, sales related to ePods contributed $25 million in the quarter, ahead of our expectations. Consistent with our order strength, sales in our switchgear business were up 158% on a year-to-date basis and are on track to hit roughly $200 million this year, exceeding our prior expectation of $180 million. Turning to margins, AMC’s adjusted EBITDA margin in the quarter was 19.2% or 18.7% excluding refunds versus the prior year.

Margins were down due to unfavorable price/cost mix and higher growth investments partially offset by the benefits of higher volume. Turning to Industrial Powertrain Solutions, or IPS. Orders in IPS on a daily basis were up 9.6% in the third quarter. Orders growth accelerated versus the second quarter rate with particular strength in the energy market where orders were up over 30%. Energy includes power generation and distributed power. While we are seeing very strong growth and a robust outlook tied to behind-the-meter power solutions for the data center market, in discrete automation orders were up nearly 30% and in metals and mining we saw high single-digit order growth.

By channel, third quarter orders in IPS were up 7% in distribution and also up 7% in short-cycle OEM and up over 20% in the OEM project business. Our team achieved record orders in the third quarter largely tied to metals and mining. As a reminder, the cadence of some large mining projects is a headwind to growth this year, but we believe it will be a nice growth contributor in 2027. Consistent with last quarter, we continue to see strong growth in our 2027 shippable backlog, ending Q3 up 20% from the same time last year.

Book-to-bill in the third quarter for IPS was 1.09. In October, daily orders for IPS were up 4%. Turning to sales, the segment’s third quarter sales declined 1.8% versus the prior year on an organic basis. While we are seeing strong orders and a growing backlog, output in a few IPS plants has not kept pace with demand, particularly in our shorter-cycle businesses. As a result, our past-due backlog increased and sales were below our expectations for the quarter.

This sales shortfall is also impacting margins given the volume impact on plant absorption. Adjusted EBITDA margin for IPS in the quarter was 26% or 25.2% excluding refunds. The decline versus prior year primarily relates to lower shipments along with operational challenges in the affected plants which we briefly commented on in our last earnings call. Last quarter we lowered our production expectations. As demand strengthened through the third quarter and we assessed the affected plants in greater detail, it became clear that improving their performance would take more work than we had anticipated.

The issues which our IPS team is actively working to address primarily fall into two categories: 1) supply chain management, planning and material availability, and 2) manufacturing inefficiencies that are weighing on productivity. The results are lower factory throughput and higher production costs. Our immediate priority is stabilizing output and reducing past-due backlog. We are prioritizing that work over more complex plant consolidations. While addressing materials flow and production efficiency, we expect shipment performance to improve progressively with productivity benefits building over several quarters.

We will share more detail on recovery timing and expected growth and margin impacts when we report fourth quarter and guide 2027. Turning to Power Efficiency Solutions, or PES. Orders in PES for the third quarter were up 12% on a daily basis. Orders in commercial markets, commercial HVAC and our General Purpose Motors business were up over 30% while orders in consumer-linked markets, residential HVAC and pool were down 12%. Commercial HVAC was a standout positive with order growth accelerating to over 60%, supported by our new products for the data center market in our air moving portfolio.

These include new axial fan solutions and our expanded plug fan offering which are used in data center ventilation and cooling applications including fan walls. As Amer mentioned in his opening remarks, the customer feedback on our newly launched products and roadmap has been encouraging. The demand for these solutions is projected to remain elevated. Orders in residential HVAC were flat in the quarter and we are cautiously optimistic that demand in this market can remain at least stable.

Book-to-bill in the quarter for PES was 1.14. In October, daily orders for PES were up 40%. Sales in the third quarter were up slightly versus the prior year. On an organic basis, commercial markets were up 11% in the quarter, on particular strength in commercial HVAC, up over 30%, more than offsetting weakness in consumer-linked markets which were down mid-teens. Turning to margins, adjusted EBITDA margin in the quarter for PES was 19.7% or 18.1% excluding refunds.

And now turning to the outlook on slide 12, we are modestly increasing our sales outlook and maintaining our adjusted EBITDA dollar outlook with stronger AMC growth and PES profitability offsetting weaker IPS performance. We are also raising our adjusted EPS guidance reflecting lower depreciation and tax expense. Starting with sales, we now expect approximately $6.22 billion or approximately 4.8% growth, compared with approximately $6.2 billion and 4.5% growth in our prior outlook.

The update factors stronger growth in AMC where we now expect $65 million of revenue related to ePods, partially offset by modestly weaker growth in IPS. Our adjusted EBITDA margin is now forecast to be approximately 22% for the year or 21.2% excluding refunds. We’ve also outlined in the table how we now expect depreciation of approximately $152 million and an adjusted effective tax rate of approximately 20.8% which compares to 21.5% in our prior outlook due to the implementation of certain tax planning strategies that will provide one-time benefits in the quarter and should structurally lower our effective tax rate going forward.

In terms of adjusted earnings per share, our adjusted guidance midpoint is $10.75 which compares to $10.60 previously. We’re also raising and narrowing our adjusted EPS guidance range to $10.60 to $10.90. The increase in adjusted EPS guidance reflects lower depreciation and tax expense. While our enterprise adjusted EBITDA outlook is unchanged, our full year free cash flow guidance remains $600 million. On slide 13, we provide more specific expectations for our performance by segment on revenue and adjusted EBITDA margin for the fourth quarter and for the full year. For reference, for the full year outlook, we are providing our margin assumptions both including and excluding IEEPA tariff refund impacts. We do not expect IEEPA refund impacts in the fourth quarter. I will flag the most notable changes and reference values excluding refunds when discussing this slide.

Starting with AMC, we are raising our full year growth to mid-teens from low double digits previously, which reflects broad-based strength across the business as well as higher ePod sales. After recognizing $25 million of ePod sales in third quarter, we now expect $40 million in fourth quarter, up from $15 million previously, or $65 million in total for 2026. For IPS, we are modestly lowering our 2026 growth expectation to flat to low single digits from low single digits previously, which includes a slightly lower growth expectation for fourth quarter.

The revised outlook reflects slower conversion of backlog into shipments as we address the plant execution issues. Our 2026 margin expectation is coming down about 40 basis points to factor the weaker operating performance I’ve described. Shifting to PES, our sales growth expectation is unchanged. However, our PES margin expectation for 2026 is rising about 70 basis points, factoring stronger third quarter performance as well as a higher expectation for fourth quarter, which is just over 100 basis points above the level implied in our prior segment margin outlook.

Before we open the call to questions, let me recap. We are making progress on multiple fronts. Our demand outlook is brightening with broad-based order strength. Our organic growth is improving in the back half versus the first. We made progress on free cash flow and our net debt leverage is now 2.9x. There is substantial work ahead and our focus is converting strong demand into shipments and cash, improving execution and delivering against our updated outlook.

And with that operator, we are now ready to take questions.

OPERATOR

We will now begin the question and answer session. To ask a question, you may press star and one on your touchtone telephone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and two. The first question comes from the line of Mike Halloran with Baird. Please go ahead.

Mike Halloran (Analyst at Baird)

Hey, good morning everyone. So why don’t we start on point one of your initiatives, Aamir? Maybe just give some more context on the operational side of things. You know, Rob’s comments seem to be pretty focused on the IPS segment. Maybe last quarter the intimation was maybe a little more AMC centric. So what divisions are we talking about? Maybe a little more specificity on what actions are specifically being taken and what type of timeline can we think about here? All else equal to getting to the point where we have more normalization between, you know, what the revenue looks like or the orders look like.

Excuse me. And when the output starts hitting to the customer.

Aamir Paul (Chief Executive Officer)

Yeah, no, fair question, Mike. So look, I think AMC has a few factories that are impacted, particularly in aerospace. Now in the case of AMC, we’re primarily working with our supply base because, as you know, across aerospace, that supply base ramp is something that we need to get right. And the way those processes are set up, there’s a lot of back and forth with those suppliers in a very sort of strict compliance process. So it’s really a supplier-first issue there.

There’s some planned output that we’re working through and, again, material planning is a big part of it. And I’ll come back to the common thread on data and how we do material planning. In IPS, it’s sort of an equal part supplier as well as internal execution. And I think there the biggest thing we’re working on is material planning, but also making sure that we’re getting mix right. Right. Sometimes the complexity of our SKU output means how we’re scheduling production runs in the factories can improve. Now look, all of these are solvable problems. Like I said, fixing the data foundation is an important area to start. We have most of our platforms on a common ERP, but we still have a number of secondary ERPs that we need to consolidate, which will make all this easier since we’ll have visibility and we’ll see progressive improvement.

But we want to fix it foundationally and you can see the order growth progressing. So we want to make sure it’s not a stop-and-start process, but something we can really accelerate from a timeline standpoint. You heard what Rob said about Q4. We’ll give you a bigger update in Q1 in terms of what we find through the quarter, but we’re looking at a couple of quarters to get back to where we think we’re performing at a peak level.

Mike Halloran (Analyst at Baird)

Appreciate that, and then maybe transition to the revenue side. So the idea then is that you can catch up on some of, specifically IPS, where, you know, maybe a little bit more of a lag on the short-cycle conversion to revenue than maybe we would have anticipated. So that should catch up on that timeline, if I hear you correctly. And then the follow-up to that is how do you think about the durability of the revenue dynamics across the end markets as we move into next year?

Anything you’re particularly worried about, foresee accelerating—any help there would be great. Appreciate it.

Aamir Paul (Chief Executive Officer)

Yeah, let me answer the second part and then I’ll come back to the first and ask Rob to weigh in as well. So durability—look, you know, one of the parts of the portfolio that I’m starting to really appreciate is the diversity of our exposure. That also means that there’s a lot of different end markets we’re looking at. Now, we think our positioning in aerospace and defense is very healthy and we expect that to continue. We see our positioning supporting the energy infrastructure buildout, especially behind the meter.

Energy solutions for data centers is quite healthy. We talked about the incredible response our air moving products are getting in PES, and of course there’s our data center exposure. Now, you know, you’ve seen what’s happening in the energy markets and the, you know, interest rate implications. So things are going to move and we’re not going to sort of get too far ahead of ourselves. But those foundational positions we think are strong and they were reflected in the October orders numbers that Rob shared. Go back to the first part of your question, which I’ll start and then have Rob complete—you know, late backlog in IPS, just late backlog, not total backlog, in itself is worth about three and a half points of growth.

So yes, there, as we execute and reduce late backlog and then, you know, continue to eat into our overall backlog, there is an improvement cycle. But we want to be cautious that we do that the right way so we can continue scaling. Rob?

Rob Rehard (Executive Vice President and Chief Financial Officer)

Yeah, I think you covered off on most of the key points. I think that the, you know, the path to backlog certainly weighed on our ability, and we think that as we get that down to hit the availability criteria that we look for in each of our facilities, we should see that come down and recover here, as you said, within the next couple of quarters or so.

Mike Halloran (Analyst at Baird)

Thanks, Aamir.

OPERATOR

The next question comes from Jeff Hammond with KeyBanc Capital Markets. Please go ahead.

Jeff Hammond (Analyst at KeyBanc Capital Markets)

Hey, good morning, guys. Hey, maybe starting with the portfolio review, if you can give us any kind of framework or sense of how big AMS—the business you’re selling—is. And then, you know, do you think of this as more pruning through the portfolio or could we see something more substantial? I guess what stands out is, you know, PES relative to kind of that rule of 30 that you referenced. Thanks.

Aamir Paul (Chief Executive Officer)

Yeah, look, I’ll ask Rob to comment on AMS, but let me take the broader aspect. Right. The idea is, as I said in my comments, to look at everything from those multiple vectors. Right. So rule of 30, return on invested capital, free cash flow generation, and strategic and market fit. And if that leads us to a certain size or a certain sort of subsegment of the businesses, you know, the data will guide us. Right. We’re not coming in with any predetermined conclusions.

We want to have something that is sustainably a rule of 30 business or moving in that direction, as well as meeting our criteria on free cash flow generation and return on invested capital. Now, on PES in particular, you know, we talked about the commercial HVAC results and the growth we’re seeing and the feedback we’re getting on air moving. So I think it’s important to note that we have to go deeper than the headline segment positions. Today’s announcement about AMS is in the AMC. I’m sure there are parts we’ll find even in IPS, so we’ll look everywhere. We are not going in with any predetermined answers in terms of sizing. And as we learn more, we’ll share more starting in our next call.

Coming back to your AMS question, let me hand it to Rob.

Rob Rehard (Executive Vice President and Chief Financial Officer)

Yeah. So AMS, as Aamir described during the call, provides that hardware and software. It has a low-single-digit percentage of AMC sales from a sizing perspective. You know, we won’t speculate on value or timing of things, but we don’t see any material impact on earnings as a result of this action.

Aamir Paul (Chief Executive Officer)

The only thing I would add is that’s an example of a business with great software development at its core. Right. And our conclusion primarily was driven by the fact that, hey, we think other people with great software expertise could turn this into a juggernaut. So that’s just an example of our thought process. Right. It wasn’t just the financial metrics, but also that strategic fit to where we’re great versus where other people can be better owners.

Jeff Hammond (Analyst at KeyBanc Capital Markets)

Okay, great. And then just on data center, I guess one, a lot of supply constraints in this commercial air moving—any kind of plans for capacity expansion? And then separately, ePOD, you know, Aamir, you said last quarter, hey, you know, we want to look at this business—are we the right player? Just any, you know, further comments on how you’re thinking about that ePOD opportunity. Thanks.

Aamir Paul (Chief Executive Officer)

Yeah, absolutely. So let me start with air moving. We’re aware of those constraints, but the fact that we can integrate the motor and the fan actually has put us in a really nice position. And right now we see ourselves as having capacity, which is part of why you see the customer response and the market response. So we’re excited about the potential and, of course, we want to be prudent and disciplined in terms of how we scale, but we feel good about where we are and how we can meet the customer demand in this space.

On ePODs, I think you know what I’ll keep coming back to: I think of our data center business in three categories, right. One is all our distributed exposure to AI infrastructure buildout, be it the energy markets, cooling infrastructure. So we’ve never quoted that as data center business. But of course, like most of the economy, it’s driven by AI infrastructure buildout. Then you have a direct engagement where we’re selling either switchgear, automatic transfer switches, the servicing of startup and commissioning, or the ePOD.

So that’s what we’ll talk about as data center. And within that, the switchgear/ATS business is growing at very healthy rates. Rob talked about those numbers. Our order book is growing. And frankly, one of the things that I’ve really challenged the team—and they’re doing a nice job—is expanding our commercial coverage. Right. We just need to get more sellers on the street. And that’s exactly what we’re doing. And we’ll keep doing that. So good business, good brand, strong trust, and great opportunity to keep going at those market levels.

The only thing that would sort of impact us is breaker supply, which, of course, we source like everyone who’s a panel builder. Now come to ePOD. I think what we feel better about—I feel better about—is actually that, at the right scale, this can be an interesting business for us. What do I mean by that? I mean we need to have few customers that we’re doing lots of volume with, because that’s where our efficiency comes in. Remember, our content mix in ePOD is about 30%. So our value add comes both on the integration side, the testing and validation element, and the supply chain efficiencies.

If we’re going to do that with dozens of customers, the unit economics start falling apart. So does it all have to be $700 million orders? No, but it has to be of size. And the good news is, in addition to the one customer that we’re scaling with, which, I’ll remind you, has enough demand to consume all our capacity, we’re also in design validation with three other accounts that can buy at scale. Now we have to be competitive. We have to understand sort of the timing of their requirements.

So I think we’re getting a size of what kind of business we want to operate in, and then we have to stay disciplined, both in terms of pursuing that kind of business and disciplined in our cost structure so that we can hit the margin thresholds, which is, of course, critical for us.

Jeff Hammond (Analyst at KeyBanc Capital Markets)

Very helpful, thank you.

OPERATOR

The next question comes from Kyle Menges with Citigroup. Please go ahead.

Kyle Menges (Analyst at Citigroup)

Great. Thanks for taking my questions, guys. Maybe following up on the EPOD, you’re now expecting to book 50 million more in revenue this year than you had expected last quarter. I mean, I understand it’s on a percentage of completion basis. So maybe you’re not actually expecting to ship any in 4Q, but would love to hear. I mean, it seems like the manufacturing ramp-up is perhaps progressing a little bit better than expectations. Are you still thinking about shipping in 1Q or could we see some first units shipping in the fourth quarter?

And then I guess would just love to hear about any notable changes that we should think about in the design validation for these three other accounts versus maybe what the initial batch of EPODs look like as far as your content or maybe margin profile, or just any color you could provide there would be helpful. Thank you.

Rob Rehard (Executive Vice President and Chief Financial Officer)

Yes, thanks, Kyle. Let me take the first part of your question and then I’ll have Aamir take the second half. From a shipment standpoint, we do continue to expect to start shipments in the first quarter and ramp throughout the year. From a revenue standpoint, based on the, you know, $65 million that we expect this year, we now expect about $550 million or so next year. We would say that’s roughly split between the first and second half of the year, with the remainder extending into early 2028.

Aamir Paul (Chief Executive Officer)

Yeah. And then on the second part of your question about what we’re finding, this is exactly the conversation, right. The great thing about our current anchor tenant is we have design lock now. We got that design lock after almost six months of back-and-forth work. And we went from sort of one sort of basis of design to a fundamentally different one. So the design lock does take time. What we’re trying to do is work with clients that value what we’re bringing from the switchgear and automatic transfer switch side, value our partnerships in fire prevention, fire suppression and then in cooling. And so we have sort of our own content, but also a portfolio of partners that we’re going to these clients with and saying, let’s iterate on designs together, let’s iterate on capacity and timing together.

When they are coming back with things that take us into areas that we don’t know how to do or take us into areas where we’re going into a universe of suppliers we’re not engaged with, then that becomes a poor fit. And we had one example like that. There are other examples where they actually like that offer set, and now we’re going deeper into design. So as long as the component set is the same, the flow is the same, then if they want a slightly different configuration that’s manageable.

When they’re taking us out into sort of capabilities, say like liquid cooling that we don’t know how to do and we haven’t done before, then we want to be prudent. Other people in the market can handle that.

Kyle Menges (Analyst at Citigroup)

Got it. That’s helpful. And then Aamir, this is my follow-up question, more related to how you’re thinking about, or maybe how we should think about, timing of when we could get some bigger announcements, whether it be on the strategy or maybe portfolio, further portfolio actions, perhaps bigger. I’m curious when maybe your review of strategy and portfolio could conclude and maybe we get some bigger announcements after that. I’m curious how that timing might look like.

I mean, it sounds like maybe we’ll get a more substantive update when you report 4Q, or do we need to wait for an Investor Day in 2020? Or will some of this stuff on strategy and portfolio changes just kind of continue to come out in drips and drabs as you learn more?

Aamir Paul (Chief Executive Officer)

Look, it’s a good question. It’s one that we debate a lot and we’re getting a lot of input from our board, and the balance is go fast but be very thoughtful. So that’s exactly the right balance, and it’s the appropriate balance, is what we’re trying to do. So we’re not going to keep you just waiting. You know, as we come to definitive conclusions, we’ll share information. And then I do think it’s appropriate that sometime towards the end of next year we’ll have sort of a broader strategy review.

We haven’t locked any dates or timing, so we’ll confirm that in the Q1 cycle in terms of a date for an event or something like that. But we’re also not going to keep you waiting as we come to conclusions. And if we feel like we have a good place, position, or a good partner, or a good buyer, we’ll move with urgency. We think this is important because the way I think about the portfolio review is actually allowing us to free up resources to put into the parts of the businesses that we know we have greatest conviction, greatest differentiation around. So the faster we do that, the faster we both simplify the company and allow ourselves to play on the bases where we have the best chance to win and outperform.

Kyle Menges (Analyst at Citigroup)

Helpful. Thanks, Aamir.

OPERATOR

The next question comes from Nicole de Blase with Deutsche Bank. Please go ahead.

Nicole de Blase (Analyst at Deutsche Bank)

Yeah, thank you. Good morning, guys. Just wanted to double-click a bit on price/cost. If you could talk a bit more about the magnitude of the headwind that you faced in the quarter, how that’s kind of shaping up within your implied 4Q guidance. And I guess, Aamir, like any thoughts on, you know, do you also see opportunity for maybe more strategic pricing, better price/cost results, you know, over the next several years?

Rob Rehard (Executive Vice President and Chief Financial Officer)

Yeah. So let me kick this one off. So inflation did accelerate slightly in the third quarter. Most of that was captured in our prior guidance, so we had a small incremental headwind there, which is now reflected in our current guidance. You know, price actions, we did take those in Q3, but additional price is expected in Q4 and Q1 to stay ahead of that continued inflation pressure heading into 2027.

Aamir Paul (Chief Executive Officer)

And look, the only thing I would add is it goes back to that foundation work I talked about in terms of getting data right. If we can get all our transaction sets, our data, our cost information, then there are lots of exciting tools that we could have that help us get smarter and more strategic about our pricing mechanisms. Today we’re working on models that are slightly variant in each business because of the history, right. These were three separate companies operating in different systems.

So getting that foundational structure right, I think, will unlock future opportunities. Now, even within our current system, the larger the deal structure gets, the longer the term of the contract, I feel good about the price disciplines that are in place. But of course, with the analytic engines available, I think there’s more opportunity once we get the data structures cleaned up.

Nicole de Blase (Analyst at Deutsche Bank)

Okay, understood. Thanks, Rob and Aamir. And then just maybe a question on AMC. If I kind of back out what you guys are embedding now for the fourth quarter with respect to EPODs, the underlying organic growth looks kind of low, pretty big decel versus what you reported in 3Q. Can you just dig into that and maybe if there’s some conservatism baked in? Just thinking about how strong the orders have been recently. Thank you.

Rob Rehard (Executive Vice President and Chief Financial Officer)

Yeah, I think it’s based on, certainly, our orders have been very strong, and aerospace and defense in particular has been particularly strong. But many of those orders are more longer projects, so we see those moving into 2027. We do see strong growth in medical and discrete automation. But as you say, EPODs certainly came in a lot stronger. Switchgear is coming in a lot stronger than what we had originally anticipated. So net-net is still strong in the fourth quarter, but some of that strong orders growth is flowing into ’27, and that’s the primary takeaway.

Nicole de Blase (Analyst at Deutsche Bank)

Understood. Thanks, Rob. I’ll pass it on.

OPERATOR

The next question comes from Julian Mitchell with JP Morgan. Please go ahead.

Julian Mitchell (Analyst at JP Morgan)

Hi, good morning. Maybe just wanted to start with the sort of overall thoughts on the EBITDA margin of the company. So I guess, you know, with some very different volume and cost environments, it’s been flattish at about 21% for several years now. And I wondered, Aamir, as you’re looking at the outlook, you know, is the priority to sort of reinvest more first, get the growth up, so that may imply some margin headwinds, say next year, or are you sort of very focused on kind of holding the line on EBITDA margins while reinvesting for growth on top of that?

Aamir Paul (Chief Executive Officer)

Look, I won’t get into next year. We’ll talk about that in our Q1 cycle. But, you know, I think if we can go back to the first priority I said — get our operational execution where we want it to be — there’s no reason that we can’t build on the momentum and both reinvest strategically in the right places and gradually build on this baseline. Now, you know, we have to dig into the work, we have to see the mix across segments, but it’s not, you know, as you said, we’ve been at a certain threshold for a time, so we don’t want to get into a scenario where we’re waiting too long to improve on both sides of the equation.

Rule of 30 has both elements, top-line growth and EBITDA quality. And we’re going to work on both elements. The pace, of course — I think the growth engine comes first — and I think that’s the right way to think about how the flow-through should work in the P&L.

Julian Mitchell (Analyst at JP Morgan)

That’s helpful. And then maybe just a more specific question on AMC specifically. You know, I suppose in recent years we’ve had volume growth, M&A cost synergies, price/cost positive most of the time, but the margins have done what they’ve done, and every three or six months there’s a different reason that hurt. What explains that? I just wondered, from your perspective, you know, several months in, are there any sort of one or two things within that AMC segment in particular that might help us understand from the outside why the margin trajectory has been what it’s been, and anything sort of informing that standpoint around sort of EPOD profitability that we can expect.

Aamir Paul (Chief Executive Officer)

You know, it’s a great question. It’s one I’ve spent a lot of sort of forensic investigation on to try and just get my own head around it. And the teams have been very helpful, sharing history and where we started from and what’s changed. I won’t, you know, get into too much detail, but the headline I’ll give you is we’ve got to simplify, right. Like we have a couple of big, important franchise businesses there — great brands, great market positions — and I think sometimes the complexity and diversity of businesses we have allows us, or distracts us.

And that’s where the second part, where the portfolio action is so important, and as we build scale, right, because some of the businesses that we think are fantastic and we are super excited about need more scale. And so as we get scale, we’ll get more predictable. And I think that’s the answer in AMC. And I think at least part of the dilemma over the last few years has been managing a very long tail of complexity in different kinds of businesses that we have to sort of be more thoughtful about. And that’s where, you know, the first action we’re taking — you know, this is an exciting software business, but it’s just not where we’re going to be great, and someone else can make it great — and, you know, there’s more opportunity. So that’s one element.

And then of course there’s some operation execution issues, which go into category one. But interestingly enough, most people, you know, when I talk about portfolio, go a different direction. But actually, simplification across the enterprise is a big part of that effort.

Julian Mitchell (Analyst at JP Morgan)

Great, thank you.

OPERATOR

The next question comes from Nigel Cole with Wolf. Please go ahead.

Nigel Cole (Analyst at Wolfe Research)

Oh, great. Thanks. Good morning. We covered a lot of the major subjects already, but I did want to go back to EPOD. So Aamir, your comments around having the right scale with a limited number of customers, I think resonates. Is three or four customers at scale the right level? And I’m wondering if you could maybe talk about where you think production capacity will be by the end of

Aamir Paul (Chief Executive Officer)

So let’s start with that part of the question, right? How good do we feel about scaling? I think that’s where we have some good confidence because we purpose-built this structure, right? This is not, you know, something that we’ve acquired that was, you know, part of a different company and we’re trying to sort of integrate or rejuvenate. This is brand-new construction. We’ve thought about the flow, we’ve thought about material planning, we’ve thought about the ERP from day one.

We’ve trained the people on that ERP from day one. So I’m actually quite excited about the throughput and scaling of this new facility in Arlington in Texas. And I think that’s where making sure that we stick to Kanban, we stick to few customers with few bills and we’re just getting throughput. Right? More volume, standard design, common runs will allow for good scaling both in delivery quality and ultimately productivity. Are three or four customers enough? You know, probably, if the complexity is right, if the scale is right. Right. I think complexity is the biggest thing, you know, because you meet these clients and they all have needs.

And we know this is a great solve for the labor shortage in the infrastructure buildout. So we know the shift to modular is going to continue. But their ability to get their own designs locked and how much and how quickly they want to keep those locked-in designs is something, you know, we’re really trying to be careful about because there are other players with a lot more flexibility and scale that can take on the complexity of a different scale of customer.

We want to work with people, A, who want to use our switchgear. First of all, right. Critical rule number one. If you don’t want to use our switchgear, what are we talking about? Because we’re not an integrator. So if you want to use our switchgear, you want to use our automatic transfer switches, then let’s talk about whether we can also act as a supply chain acceleration point for you by integrating them into a modular solution stack. So that’s sort of the vetting discussion.

We’ve had some really great conversations where we both concluded we’re not a good fit and others where people, as they learn more, are getting more excited. And so that’s sort of the scaling process. But what the right number is, you know, look, I told you we could probably scale with just one account. Their demand is sufficient that if they wanted to, you know, get concentrated, we could do that and they could do that. So we’ll see how that plays out in terms of capacity. Right now, what we’ve built in Texas takes us comfortably into 2028. And then we’ll, based on what happens in these design and conversations, we can scale. The site itself has the ability to scale and we’re also working on single shifts, so we have additional shift capacity.

Thank you.

OPERATOR

The next question comes from Joe Ritchie and Goldman Sachs. Please go ahead.

Joe Ritchie (Analyst at Goldman Sachs)

Thank you. Good morning, guys. Aamir, appreciate you laying out your three-pronged approach to creating value. I would imagine that the accelerating organic growth part is probably going to take the longest. You talked a little bit about some investment that you might need to make. Just curious if you had to just kind of holistically think through the type of investment that would be necessary, whether it’s additional feet on the street, higher R&D. How are you thinking about things today? I know you’re only four months into your role.

Aamir Paul (Chief Executive Officer)

I appreciate you saying only, Joe, but look, here’s the current sort of thought process, right? And it fits into those three categories. First is let’s sell what we have. We have some great brands. I have been so impressed by the brand loyalty and trust that our customers have, albeit in some cases not with Regal Rexnord, because that’s a relatively new brand that didn’t exist. But if you go to our product brands, unbelievable trust. And we even had some third-party voice-of-customer work done, and the entity doing that work for us was surprised by how we scored in some of those categories.

So that’s a real asset. And so there the question is, if there’s any opportunity to get coverage scaling, that’s the easiest thing to do, go get coverage first. Right. And that doesn’t all have to be feet on the street. It can be inside sales, it can be partners. We have great distribution assets that we can work with more effectively. But getting more commercial coverage for those brands that are in good end markets, air moving, for example, right now, great opportunity, we can make it.

We have availability, we have great design. Let’s get more people out there talking about it. Then the second part becomes portfolio. Because R&D you would think would come next. And I’m keen to do more in R&D. I think our R&D expense and our Vitality Index are things we can go into. But first we have to narrow the portfolio. We can’t sprinkle that across and I think that’s a mistake. Right, so narrow the portfolio first, pick the areas where you’re excited and then dial up the R&D Vitality Index. And by the way, some of that is not just feature innovation, some of that is innovation that lowers cost structures, which I think is also equally valued by customers.

So commercial coverage first with what we have, portfolio next and then absolutely R&D intensity. Commercial coverage with some long cycle deals will take time, but getting the people out I think is something we’re doing. And so we have that effort already underway. The other two are more sort of gradual efforts.

Joe Ritchie (Analyst at Goldman Sachs)

That’s helpful, thank you. And then I guess maybe just touching on some of the operational challenges that you guys have described. I’m just curious, again, you know, recognizing your relatively short tenure on the job, like how would you characterize the bench strength from an operational perspective and, you know, whether, you know, changes might need to be necessitated just in terms of making sure that you guys are operating at a higher level?

Aamir Paul (Chief Executive Officer)

You know, I think it’s interesting. Right, so the 13 facilities I’ve been to, the plant management at the ground at that plant and their leadership team. That matters. Right. And frankly, in some cases, the tenure of those leaders is relatively new. Talented people, but new to the company. So I think, atomically, in that four walls, getting the right team in, getting them working together, getting the right plant leadership in, we have some areas where we have to do it, not because the incumbents weren’t great, but just because we have new people now.

I think where the real opportunity comes in is the enterprise-wide planning. Right. So, you know, how are we thinking about effective material planning across the board? How are we thinking about the right engagement with our suppliers already? And I’m very pleased with our team. We had our first-ever supplier day, and when we brought suppliers in not to talk about one segment or one division, but to talk about the company, we orchestrated that event.

It was a couple of days where they actually went in to see what we were doing in other segments that they weren’t suppliers to. And guess what? Our suppliers identified opportunities across many parts of our business where they could go deeper. So we have an opportunity to simplify fewer, deeper supplier relationships where we’re more important to them and they’re more important to us. So I think those sort of horizontal efforts at the enterprise level are really what we have to get right. Of course, the atomic unit of the talent at the plant level is right. And then, you know, across the board, are there going to be some places where we upgrade? Sure. You know, look, assessing the talent is one of those where I’m going to take more time because I want to get it right. But we absolutely will have areas where we will be upgrading people across the enterprise.

Joe Ritchie (Analyst at Goldman Sachs)

Very helpful, thank you.

OPERATOR

Our last question for today’s call comes from Chris Dunkert with DA D