Regal Rexnord Targets $250M Synergy Boost from Data Center Growth

Key Highlights from Regal Rexnord Corporation’s Q2 2025 Earnings Call

During the second quarter of 2025, Regal Rexnord Corporation (RRX) delivered a performance that met expectations in terms of sales and slightly exceeded adjusted earnings per share. The company's leadership emphasized confidence in mitigating the impact of tariffs on its adjusted 2025 EBITDA and earnings, with an aim to achieve adjusted EBITDA margin neutrality in the first half of 2026.

CEO Louis Vernon Pinkham noted that organic sales declined by 1.2% year-over-year, primarily due to project timing in the metals and mining segment within the Industrial Products Segment (IPS), as well as constraints in rare earth magnet availability affecting higher-margin shipments in the Aerospace & Motion Components (AMC) division. However, these challenges were partially offset by strong performance in residential and commercial HVAC and aerospace markets.

Orders for the quarter were down 2.5%, with a book-to-bill ratio of 0.98. A significant $35 million data center order for AMC was highlighted, expected to be the first of five similar orders. This single project could provide a meaningful boost to the company’s enterprise growth rate in the following year.

Pinkham also emphasized progress on cross-sell synergies, stating that the company is on track to deliver at least $250 million in synergies from the Rexnord and Altra transactions. Through the end of last year, $120 million in cross-sell synergies had been achieved, with an additional $50 million expected this year.

Financial Performance and Outlook

The CFO, Robert J. Rehard, reported that the second quarter adjusted gross margin was 38.2%, aided by $17 million in cost synergies. Additionally, the completion of a $400 million accounts receivable securitization program generated $368.5 million in proceeds, which were used to pay down variable bank debt. This move is expected to be net accretive to earnings by allowing the company to accelerate paying down higher-cost debt.

The company reaffirmed its midpoint for 2025 adjusted EPS guidance and narrowed the range to $9.70 to $10.30. Sales guidance was modestly raised, reflecting improved foreign exchange rates and tariff-related pricing. Adjusted EBITDA margin guidance was revised to 22.5% from 23%.

Pinkham expressed optimism about future sales growth, expecting low single-digit growth in the back half of 2025 and into 2026, supported by backlog growth in IPS and AMC. The main risk to guidance remains a slower recovery in rare earth magnet availability, while potential upside comes from data center wins and a positive ISM turn.

Segment Performance and Guidance

AMC’s 2025 adjusted EBITDA margin is expected to fall between 20.5% and 22.5%, down 150 basis points from prior expectations due to higher rare earth costs and mix. However, the company expects to return to 24%-26% margins in the midterm.

In the second quarter, adjusted earnings per share were $2.48, up 8.3% year-over-year. Free cash flow reached $493 million, including $368.5 million from the accounts receivable securitization.

AMC sales fell 3.4% organically, impacted by weakness in the medical market and rare earth magnet shortages, but offset by strength in aerospace. AMC adjusted EBITDA margin was 19.5%. Orders in AMC were down 7.5%, though July orders rose 21.5% due to new data center wins.

IPS sales declined 4.4% organically, attributed to project timing in metals and mining. Adjusted EBITDA margin was 26.9%, with IPS backlog up 15% year-to-date.

PES sales grew 6.5% organically, driven by residential HVAC. Adjusted EBITDA margin was 17.1%, with orders down 5.4% due to HVAC destocking.

Analyst Questions and Management Responses

Analysts asked about end market recovery and rare earth exposure. Pinkham explained that rare earth magnets account for about 1% of sales but caused shipment delays due to China trade policy. He stated that these challenges have largely been addressed and that shipments are expected to catch up in the back half of the year, particularly in the fourth quarter.

Regarding IPS backlog and growth expectations, Pinkham indicated that the company expects to enter next year with low single-digit growth, noting a strong funnel and a 15% increase in backlog year-to-date.

On the impact of rare earths, CFO Rehard estimated about $6 million in Q2, with around $10 million in sales affected. Full-year impact is expected to be $5 million.

Analysts also inquired about AMC plant status and medical market visibility. Pinkham confirmed that the plant is running, with supply improving and medical inventories balancing out. On automation, backlogs are up and expected to drive margins higher.

Concerns about data center customer concentration were addressed, with Pinkham stating that the company has won a few orders in July from different customers, reducing reliance on any single client.

Sentiment and Strategic Focus

Analysts displayed a neutral to slightly positive tone, focusing on clarity regarding rare earth impacts, margin outlook, and end market recovery. Management remained confident in prepared remarks, emphasizing disciplined execution and progress on synergies, while acknowledging some caution regarding rare earth supply and macroeconomic uncertainty.

Compared to the previous quarter, management’s tone remained optimistic but more focused on risk management and supply chain challenges. Analysts’ focus shifted toward rare earth supply chain risks, margin volatility, and data center order momentum.

Strategic emphasis evolved to include accounts receivable securitization and deleveraging, along with execution on cross-sell synergies and data center market expansion.

Risks and Final Takeaway

Management identified rare earth magnet availability and tariff volatility as key risks, noting temporary headwinds and ongoing mitigation through dual sourcing and supply chain adjustments. While no clear signs of tariff-related demand deterioration were observed, the company continues to monitor for changes.

Analysts raised concerns about margin variability, rare earth supply, and potential order lumpiness, especially in AMC and IPS.

Regal Rexnord’s management expressed confidence in their ability to meet 2025 targets, supported by robust cross-sell synergies, growing backlog, and momentum in data center orders. The company is actively mitigating risks from rare earth magnet shortages and tariffs, leveraging operational discipline and cost synergies to drive margin improvement and free cash flow. These efforts, combined with new market wins and a strengthened balance sheet, position the company well for continued value creation into 2026.