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Good morning, and welcome to the Regal Rexnord Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Robert Barry, Vice President, Investor Relations. Please go ahead.

Great. Thank you, operator. Good morning, and welcome to Regal Rexnord's Third Quarter 2025 Earnings Conference Call. Joining me today are Louis Pinkham, our Chief Executive Officer; Robert Rehard, our Chief Financial Officer; and Rakesh Sachdev, Chairman of our Board of Directors. I would like to remind you that during today's call, you may hear forward-looking statements related to our future financial results, plans and business operations. Our actual results may differ materially from these projected or implied due to a variety of factors, which we described 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 have included reconciliations between the non-GAAP financial information and the GAAP equivalent in the press release and in these presentation materials. Turning to Slide 3. Let me briefly review the agenda for today's call. Louis will lead off with opening comments and overview of our 3Q performance and an update on our data center business. Rob Rehard will then present our third quarter financial results in more detail, review our 2025 guidance, provide an update on tariffs and offer some initial thoughts on 2026. We will then move to Q&A, after which, Louis will have some closing remarks. And with that, I'll turn the call over to Louis.

Great. Thanks, Rob, and good morning, everyone. Thanks for joining us to discuss our third quarter results and to get an update on our business. We appreciate your continued interest in Regal Rexnord. Before discussing our third quarter results, I would like to make some brief comments about the news regarding my succession, which we announced last night concurrently with our third quarter earnings release. It has been an immense honor to lead the company for the past 6-plus years. We have achieved a lot, inclusive of two major acquisitions and the divestiture of the Industrial segment, transformation of our portfolio, significant revenue growth, gross margin expansion and free cash flow acceleration and have positioned Regal Rexnord as a valued partner serving our customers' most critical needs. We have assembled a strong team of leaders who have built great teams that are focused on leveraging the 80/20, expanding secular growth opportunities and driving continuous improvement. Our portfolio is well positioned to grow, especially when the ISM returns to an expansionary period for industrial production. With third quarter sales up about 2% and orders up about 10%, along with our improving top line momentum, there is a lot to be excited about. So with that, and in light of some personal decisions that I recently made, the Board and I have agreed that this is a good time to initiate a transition plan to pass the baton to a new leader who will guide Regal Rexnord through the next phase of our growth journey over the coming several years. I look forward to continuing to lead the company until the Board identifies my successor. Rest assured, we have a strong team, and we'll continue to execute on our profitable growth initiatives for the benefit of our customers, our associates and our shareholders. In short, it is business as usual. And now on to the quarter. Our team delivered solid third quarter performance, nicely ahead of our expectations on orders, and roughly in line on sales and adjusted EBITDA, driven by over execution in PES and strong execution in IPS and AMC. Performance would have tracked even stronger if it were not for larger-than-expected pressures from two items out of our control: additional tariffs announced in August just after our Q2 earnings call and incremental challenges in sourcing rare earth magnets. Looking forward, our growth potential took a significant step higher in the quarter, driven by strong orders. These results, plus our expectation for further order strength in fourth quarter are setting us up for solid growth in 2026. In short, good results, great momentum. So before continuing, I want to take a moment to thank our 30,000 Regal Rexnord associates for their hard work and disciplined execution. Our associates continue to overmanage the impacts of tariffs and rare earth magnet constraints and are doing a great job working our commercial funnels to drive improved orders and performance. Now let me provide some specifics on our third quarter. Orders in the quarter on a daily basis were up 9.8% versus prior year, and book-to-bill was 1.05. We ended the quarter with our backlog up 6% versus the prior year. As I will elaborate on shortly, in the quarter, we booked $135 million of data center orders and then an additional $16 million order in October. This is a market where we are clearly gaining traction, and we are investing to support further growth. We also saw strong order growth in discrete automation and in our air moving business in PES for the data center and semicon markets, while IPS posted its fifth quarter in a row of positive orders growth against the backdrop of generally sluggish end markets. Our sales in the quarter were up 70 basis points versus the prior year on an organic basis, in line with our expectations for an inflection to growth. In the quarter, we saw particular strength in energy markets, discrete automation and aerospace, net of headwinds in medical as well as some project timing in data center. The latter clearly temporary as recent orders show we are building tremendous momentum in our data center business. For reference, on a year-to-date basis, enterprise organic sales are up slightly and are expected to be up low single digits for the year. Turning to margins. Our third quarter adjusted gross margin was 37.6%, down 80 basis points versus the prior year period on mix and impacts related to rare earth magnet availability and tariffs. Adjusted EBITDA margin was 22.7%, roughly flat versus prior year and reflects an $11 million synergy benefit, mostly offset by mix, tariffs and rare earth magnet pressure. Adjusted earnings per share for the quarter was $2.51, up versus the prior year. And lastly, we generated $174 million of free cash flow in the third quarter, which was used primarily to pay down debt. We ended the quarter with no variable rate debt. In summary, a solid third quarter, during which we delivered strong orders and a rising backlog, which keeps us optimistic about accelerating top line and earnings growth in fourth quarter and into 2026. Next, I'd like to elaborate on the significant momentum we are gaining in the data center market, which we believe can be needle moving to our enterprise sales growth. On the left side of this slide, we provide an overview of our diverse capabilities in the data center market. You can see that all three segments play, but our largest presence today is in our Thomson Power Systems business in AMC, where we are providing switchgear and transfer switches to support standby and backup power in data centers. This was a $30 million business 5 years ago and is on track to hit $130 million this year. The traction we are seeing in this fast-growing secular market is being driven by the success factors listed on the lower left of this slide. It starts with the quality of our products, demonstrated over 5 decades of service. What differentiates us is our ability and willingness to customize the system designed to best meet the needs of our customer. Our lead times are competitive, and in a market being fueled by remarkable levels of AI investment, lead times matter a lot. Our enterprise scale has been critical to getting us in the door with new and larger customers because it helps them get comfortable that we can deliver on our service and delivery commitments. Aftermarket service capabilities are a growing part of our value proposition as we invest in our service footprint. Lastly, and highly relevant in today's market, we are willing and able to make investments to flex our manufacturing capacity, which supports future growth and bolsters our service levels. On the right side of the slide, we describe our recent wins in the data center market worth $195 million. We have been very focused on building our commercial organization, which combined with our enterprise scale has allowed us to grow our bid pipeline to what today is approaching $1 billion. We are also seeing good data center growth in PES, which won a $20 million order in the quarter to provide HVAC chiller subsystems to cool hyperscale data centers. For perspective, PES' commercial HVAC business has been benefiting from data center growth for some time, especially in North America. What is different with this order is its scale. In short, our value proposition of technology differentiated subsystems to achieve the high levels of energy efficiency required by data center operators is resonating. You may remember that part of our growth strategy for PES is leveraging proven technologies in new secular markets. While not mentioned on this slide, the PES team also won a $7 million project in the quarter for a semicon clean room customer that included multiple fan solutions, including fan filter units. Our PES team is gaining traction, growing its business in new secular markets. And as you can see on the slide, is currently working a $100 million data center-related bid pipeline. As you know, we have been directing the majority of our growth investment to secular markets. In data center, that has included funding portfolio expansion into modular electrical pods or e-Pods. These turnkey power management solutions can help expedite data center construction by making the installation of critical power management content more plug-and-play. These e-Pods would typically contain our switchgear, transfer switches, power distribution units as well as air moving content. Regal is also project managing assembly of these e-Pods, including content from third parties. So part of our value proposition is providing a single source of contact for the customer and allowing the customer to procure power management content with a single SKU. We estimate the market size for e-Pods is roughly $10 billion. There are two particularly compelling attributes of this opportunity. One, it helps customers expedite their installation of new hyperscale data centers today. And two, it positions us to serve a market that many expect will evolve towards a network of smaller data centers that sit closer to the applications they are supporting. These edge data centers are forecast to number in the thousands and will likely be constructed using a few modular building blocks that contain all the requisite data center content. Our commercial team has been actively engaged with potential e-Pods customers, and our bid pipeline currently exceeds $400 million. So nearly half of AMC's total $1 billion data center bid pipeline I referenced earlier. In short, a tremendous new product opportunity for our customers and for Regal. To support the growth we have secured in our bidding on, we are investing to expand our capacity, both in our legacy power management systems and to support e-Pods. As you can see on this slide, the current footprint for our data center business in AMC includes two locations, one in British Columbia and one in Mexico. We recently started developing new capacity by expanding our British Columbia footprint and also developing a new site near Dallas, Texas, which will grow our footprint by over 50%. The Dallas facility is scheduled to begin shipping product by mid-2026. As a reminder, this business is relatively CapEx light, and so our investment is centered on light manufacturing, assembly and test equipment as well as adding the talent to support our expanding operations. This is a good example of how our significant enterprise resources allow us to respond quickly to attractive market opportunities. While our data center business today represents a small percentage of our enterprise sales, it is growing quickly, and we are investing across the spectrum of resources needed to support and fuel further growth. Starting in the coming quarters, we believe our data center business can contribute a point or more of growth to our enterprise growth rate at company accretive margins. In short, a huge opportunity for Regal that we are extremely excited about. And with that, I'll turn the call over to Rob.

Thanks, Louis, and good morning, everyone. Now let's review our operating performance by segment. Starting with Automation & Motion Control, or AMC. Sales in the third quarter were down 1% versus the prior year period on an organic basis, which was just shy of our expectations. The performance primarily reflects project timing in data center, weakness in the medical end market and further challenges sourcing rare earth magnets, which continued to limit our ability to ship certain high-margin products in the medical and defense markets. These headwinds were largely offset by strength in discrete automation and in aerospace. Regarding the challenges around rare earths, last quarter, we expected these were diminishing, especially for nondefense products, where we were making good progress with license approvals for exports from China and with our efforts to find alternative sources of supply. However, the situation worsened in the quarter as the rate of China license approvals slowed considerably. And it became clear that even in the absence of an official policy change, China was not approving export license applications for India, where we have a large facility making product for surgical applications. At this point, we are continuing to work on securing alternative sources of supply and making strategic production moves that facilitate exports from China. Given our experience navigating rare earth magnet approvals we've described, which is worse than we anticipated coming out of the second quarter, we now believe these headwinds will impact us through the end of the year and into early 2026. After which, we expect to see net benefits in the P&L from working down our past due backlog associated with these impacted products. I'll share more on this in the guidance section. Turning to margins. AMC's adjusted EBITDA margin in the quarter was 20.5%, which was on the lower end of our guidance range. The primary pressure was related to securing rare earth magnets. Orders in AMC in the third quarter were up a strong 31.7% versus prior year on a daily basis for a book-to-bill of 1.23. As discussed earlier, this performance is largely tied to winning two large orders in the data center market, worth a combined $115 million. Excluding these orders, orders in AMC would have been up 1%, reflecting strength in discrete automation with orders up 17%, net of weakness in medical and order lumpiness in the aerospace business. As Louis indicated earlier, this strong momentum in data center continued in October when we booked an additional order worth $60 million for a total of $175 million of recent data center orders in AMC. Of further note in the quarter, we received our first electromechanical actuator production order for eVTOL, and we booked $8 million of humanoid-related orders, adding to our momentum in both of these spaces. As a reminder, to the extent humanoid or eVTOL adoption grows, we are very well positioned to address this demand. Turning to Industrial Powertrain Solutions or IPS. Sales in the third quarter were up 1.6% versus the prior year on an organic basis, which was modestly above our expectations. The growth largely reflects strength in energy and metals and mining, with the segment's other markets relatively flat. Adjusted EBITDA margin for IPS in the quarter was 26.4%, about 50 basis points below our expectation and down slightly versus the prior year. Performance reflects synergy gains, offset by weaker-than-expected mix, including product and channel mix, along with the impact of tariffs. Orders in IPS on a daily basis were up 2.3% in the third quarter. This marks the fifth quarter in a row of positive orders growth for the segment and has contributed to the backlog growing 5% year-over-year. Book-to-bill in the third quarter for IPS was 0.96. Turning to Power Efficiency Solutions or PES. Sales in the third quarter were up just under 1% versus the prior year on an organic basis, which was in line with our expectations. The result primarily reflects strong growth in pool and in commercial HVAC. Within the residential HVAC portion of this -- of the business, which represents roughly 1/3 of the segment, sales of air conditioning units were down over 20%, which was offset by strength in furnace, resulting in residential HVAC overall being flat in the quarter. We would attribute the relative outperformance to our continued strong position in this market. Turning to margins. Adjusted EBITDA margin in the quarter for PES was 19%, which was above our expectation and up 120 basis points versus the prior year period, aided by favorable mix and strong cost management. Orders in PES for the third quarter were up 1.7% on a daily basis. As Louis highlighted in his remarks, this team is accelerating its growth in new secular markets such as semicon and data center. Book-to-bill in the quarter for PES was 1.02. Turning to the outlook on Slide 13. We are narrowing and lowering our adjusted EPS guidance to the range of $9.50 to $9.80 or $9.65 at the midpoint. Our revised assumptions are outlined in the table on this slide. Notably, our sales guidance is rising modestly, primarily to reflect initial revenue from our recent data center project wins and some additional tariff pricing net of incremental impacts from delayed shipments of products with rare earth magnets. Our adjusted EBITDA margin is now expected to be 22% versus our prior assumption of 22.5%, factoring what we now forecast to be net unfavorable tariff impacts in the year on a dollar basis and the mixed impacts of rare earth magnet-related shipment delays. We have also made some adjustments to certain below-the-line items, which are outlined in the table. With all of this said, the majority of our guidance changes due to margin headwinds caused by newly introduced and increased tariffs, along with additional rare earth magnet supply chain constraints. Regarding free cash flow, we are now expecting to generate $625 million this year. The decline versus our prior guidance largely reflects the impact of the following three items: one, higher tariff costs associated with the expanded scope of Section 232 tariffs, coupled with the significantly increased India tariffs; two, the impact of strategic working capital investments, particularly those tied to the large data center orders we announced, along with supply assurance inventory for rare earth magnets; and three, higher cash interest costs given the timing and amount of cash flows relative to prior expectations. We see both the tariffs and the working capital investments as timing related as we expect the impact of pricing on tariffs to flow through once that inventory is sold in the first half of 2026. On Slide 14, we are updating our expectations regarding tariff impacts. The gross annual unmitigated cost impact from tariffs as of our last update when we reported second quarter was $125 million. Based on tariffs in place today, that value has risen to $175 million, largely reflecting the rise in India tariffs to 50% and the expanded scope of Section 232 tariffs on steel, aluminum and copper. Given the extent of the tariff increases and the limited time left in the year to implement mitigation actions and price changes, we now expect to have a net tariff impact on a dollar cost basis of approximately $17 million this year. Furthermore, we now expect to be dollar cost neutral on tariffs by the middle of next year and to be margin neutral on tariffs by the end of next year. We see opportunity for this to accelerate, especially if the India tariff is meaningfully reduced. On the right-hand side of the slide, we lay out our principal mitigation actions, which we shared last quarter and which our teams continue to overmanage on a daily basis. On Slide 15, we provide more specific expectations for our performance by segment, on revenue and adjusted EBITDA margin for fourth quarter and for the full year. Let me outline the primary changes to our full year outlook since our last update by segment. For AMC, we are now expecting sales to be up low single digits versus flat to up single previously, reflecting stronger shipments in data center and discrete automation, net of impacts from rare earth availability on shipments to the medical and defense markets. Our adjusted EBITDA margin outlook for AMC is now 50 basis points lower at the midpoint, mainly reflecting incremental rare earth volume and mix impacts worth approximately $8 million, of which we recognized about $3 million in third quarter. We expect the recovery of rare earth magnet supply to continue into early 2026 versus by the end of this year, as discussed in our last earnings call, through resourcing efforts aimed at eliminating the need for China to approve export licenses for shipments to India. For IPS, our outlook for the segment's adjusted EBITDA margin is now 50 basis points lower at the midpoint, mainly factoring in an unfavorable net tariff impact, primarily associated with the expanded scope of the Section 232 tariffs. Lastly, for PES, our outlook for the segment's adjusted EBITDA margin is now 50 basis points lower at the midpoint, also factoring an unfavorable net tariff impact primarily associated with the increase in tariff rates on India to 50%, including a 25% penalty tariff added in August. While we are experiencing some margin pressures from tariffs and rare earths, we remain confident in our midterm ability to achieve our 40% gross margin and 25% adjusted EBITDA margin targets. Our teams continue to execute well on what is in our control. Finally, as I wrap up my prepared remarks, I would like to share a few high-level thoughts on our outlook for 2026. From a sales perspective, we are clearly building momentum as we enter next year, given our strong orders in third quarter, the order strength we're already seeing in fourth quarter, sizable 2026 shippable backlogs in our IPS and AMC segments and growing tailwinds from our cross-sell synergies. Tariff pricing should also be a tailwind, as with any recovery in our end markets, which, for the most part, we believe are at or near trough levels of demand. Given ongoing macro and tariff-related uncertainties, we are going to remain measured in our approach to framing out the year. And for now, we think sales in 2026 should grow at a low to mid-single-digit rate. From a margin perspective, we have an additional $40 million of cost synergies anticipated in 2026 and would expect upside from achieving price/cost and then margin neutrality on tariff headwinds. But again, the margin neutrality is not expected until the end of 2026. We would expect organic growth to lever at roughly 35% overall, higher in AMC and IPS and lower in PES, consistent with the gross margin differences between these businesses. Finally, from a balance sheet perspective, we expect meaningful further progress in 2026 on delevering and for our net debt leverage to end the year at roughly 2.5x. This assumes we generate almost $900 million of free cash flow in the year, which would represent free cash flow margins in the low teens. In short, we are increasingly enthusiastic about our prospects in 2026, especially the potential for improved top line performance, but also more broadly about an ability to drive improvements throughout the P&L, on the balance sheet and in our cash flow performance. And with that, operator, we are now ready to take questions.

[Operator Instructions] The first question today is from Michael Halloran with Baird.

First off, Louis, thanks for everything. Sorry hear you leaving, but you're absolutely leaving the company in a better spot, and I wish you nothing but the best moving forward.

Really appreciate that. Thanks, Mike.

So first, I certainly appreciate Rob's comments on the puts and takes in the fourth quarter. Could you reframe that a little bit and talk more about what that looks like sequentially? What is accelerating from 3Q? How are you framing the furnace versus the air cooling piece within PES? How do the data center pieces roll in? And just maybe talk about what's getting better, what's getting worse and some of the assumptions around the sequentials.

Yes. Happy to do that, Mike. When you first look at PES, a solid third quarter. Fourth quarter, we're expecting resi-HVAC to be down low double digits. Air conditioning will be down closer to 30% though, but furnace will be up high teens. On top of that, we're expecting commercial HVAC to be up mid-single digits, pool down low single digits and general commercial should be slightly up as well. And so when you think about the sequential -- the biggest driver of the sequential change and why we're now guiding PES down about 1%, it's really the fact that resi-HVAC in the third quarter was flat, and it will be down low double digits in fourth quarter. If you then go to AMC, Mike, it's really -- a big part of the discussion is data centers. Data center actually was down for us in third quarter by 40%. It's going to be up more than 50% in fourth quarter. We have it in the backlog. It's just around timing and scheduled shipments. That's the biggest driver of what's driving fourth quarter and some nice improvements that we're continuing to see in discrete automation in aerospace, but we will continue to have headwinds in medical, and we're starting to ramp production in anything that uses rare earth magnets. And we saw some slight improvement in Q3, and we're getting stronger in Q4, as Rob commented in his prepared remarks. And then lastly, going to IPS and the sequential for IPS. It's really project orders that are in our backlog. Actually, distribution for us in Q3 was down. So aftermarket, we would define aftermarket was down about 1% in Q3. We're not expecting that to tick up in Q4. What we are expecting is to execute on our project backlog that's in the backlog. So that's how we're thinking about the guide for Q4.

Yes. No, super helpful. And then a follow-up is just the data center content you put out there. I mean, obviously, those are some pretty big numbers you're putting on the table as far as what the opportunity set looks like. I think you said this year is somewhere around $130 million. You had $190 million plus of orders. What does that look like from a ramp in the next year based on what you see now? And then maybe more importantly, this $1.1 billion between the couple of segments of potential -- how does that shake out in terms of being meaningful to the Regal portfolio over the next few years? Like what kind of ramp are we talking to? What's the win rate, entitlement, things like that? Just kind of any framing that you can give us on a multiyear would be helpful.

Yes. Let me try to give you my thoughts on it. We're really excited. We're excited. We've been investing, and it's kind of all coming to some fruition here. First, I want to -- and I said in my prepared remarks, but our Thomson data center business has actually been growing at a very nice CAGR over the last 5 years. It's at about $130 million. We would expect that to actually grow maybe even double, over the next 2 years. And so that will give you a little perspective of how we're thinking that translates. The backlog is strong. We're winning because of our -- the scale of our company, our commitment to service, but also our willingness to customize to the specific needs of our customers. And some of our competitors are not as willing to do that. And so that has been a benefit. I think there -- and of course, right, we're investing in capacity expansion in both Texas and in our facility in British Columbia. Probably the biggest challenge in the market is the supply chain, though, of components and switching components. But beyond that, we feel really good about our potential here. And so we're -- as I said in my prepared remarks, we would expect this to have meaningful impact on our growth, maybe 1.5 -- 1 to 1.5 points for next year. And we'll continue to invest and grow here. I think it could be a large part of Regal Rexnord overall business for the future. Hopefully, that's helpful, Mike.

The next question is from Julian Mitchell with Barclays.

Louis, sorry to see you go, but I wish you well and thanks for all the efforts down the years.

Thanks, Julian.

Just wanted to start off with the commentary sort of into next year. You've spoken to that low to mid-single-digit organic sales growth firm-wide. It seems like 1 to 1.5 points of that is coming from data center, so a couple of points from the rest of the company. So maybe a couple of things. One is, help us understand the sort of data center overall percent of revenue or dollar revenue this year, so we can understand the jumping off point into 2026. And then should we expect the operating leverage on that volume growth is very limited in the first half because of tariffs and rare earths and so forth?

Well, specific to data center, tariff in rare earth wouldn't have an impact, Julian. Data center for us today is -- the Thomson business, as I spoke to, is about $130 million. Outside of that, data center is about 3% of all of Regal. So you would say about an incremental $50 million. We do expect that to become a more meaningful part in '26 and as we move forward. I think that answers the majority of your...

I think the only other part would be that the margins on the data center business will be roughly segment average. And so we see that to be accretive -- margin accretive for the enterprise.

Yes, great point.

That's helpful. And yes, just a follow-up, sorry. My question was on the operating leverage for next -- it was more around total enterprise because I guess you've got this extra headwind affecting the 2025 guidance from rare earths and tariffs for Regal firm-wide. So maybe help us understand kind of the phasing of that headwind to profits as we step through the next couple of quarters versus what you saw in Q3. I'm just trying to understand if there should be overall much margin expansion in the next few quarters from volume leverage, or it's all offset by the tariffs and rare earth headwinds?

Well, overall, the leverage we expect around 35%, overall for the business. I'm going to give you -- there's two parts to my answer. 35% in the business. It's roughly 40% to 45% for AMC and IPS and lower for PES. The way that would phase in is you'd get a little better benefit in the back half, obviously, as we become more -- as we get to margin neutrality. So it would be more back half weighted than front half weighted. But overall, about 30% to 35% for the year is what our expectation would be. But the first couple of quarters will be margin challenged as we expect to be dollar cost neutral, as we talked about, by the time we get to the end of the first half of next year and margin neutral, not until the back half. So that's the way it would phase from half to half.

The next question is from Jeff Hammond with KeyBanc.

Louis, best of luck, and I'll echo Julian and Mike's comments.

Thanks, Jeff.

Just maybe staying on the margin dynamic. I think you said $40 million of integration savings. And then, Rob, I think you said you think the tariff thing is maybe a net -- or price cost is maybe a net tailwind into '26. So how should we think about price cost or this tariff noise maybe getting less bad or better, and the rare earth kind of fixing itself in terms of a delta '25 to '26?

I think it's a bit early to get too specific at this time. I think that the -- we do absolutely expect that rare earths, we will get through the rare earth challenges early in '26. That should not be a problem. As I said, we've got about $13 million now of rare earth headwinds as we exit this year, which is an incremental $8 million from what we said coming out of the second quarter. We do think that most of that we'll be able to get through pretty quickly, maybe by the first half of next year, and then we'll move through the back half at a much better rate than we're seeing first half. But as far as more detail than that, we're not ready to get to that level of detail until we put out fourth quarter results and provide official guidance.

Okay. Great. And then I guess as your tariff -- I know India may come down, but I guess as your tariff pressure kind of moved higher, are you finding it harder to get price, and maybe more particularly in PES, given the customer concentration? And then just separately, if you could just touch on what's driving the furnace growth? I don't know if there's share gains or there's no destocking dynamic or what?

Yes. So let me comment on tariffs first, outside of PES. We will be price -- we will be tariff neutral, and we'll work to be margin neutral. It's just the timing of that, the 232 derivative tariff coming out right after our last earnings call, it just takes time to implement for IPS and AMC. And so we would expect, as Rob said, that will ramp in the first half of next year. Same for PES. However, a little bit more pressure because of the India influence. And so we feel good about -- and we've talked about this, our global footprint and the differentiation of that global footprint. If tariffs stay at 50% for India, we will need to move that production. But we have not made that decision yet. But if we have to, we will. And so I'm not worried about our ability to offset it. But to Rob's point, it will be margin neutral by the end of next year, and cost neutral by the middle of next year. That gives us a little time to manage. Now let me address your furnace question. Furnace is about 40% of our resi-HVAC business. And I'll just remind you that furnace was down pretty significantly in '23, a little bit stronger in '24. And we think there's actually some more room to return to normal levels. We believe our outperformance in this market, though, is we are gaining share due to our differentiated and IP-protected technology. And so from that standpoint, we feel very good about furnace and our position in that marketplace. Hopefully, Jeff, that helps.

The next question is from Kyle Menges with Citigroup.

And Louis, sad to see you go. It was great working with you and best of luck.

Yes, thank you.

Yes. I mean I would love to just maybe unpack the $1 billion or so of data center pipeline that you identified. I suppose how did you guys kind of arrive at that figure? And then just what's your sense of what? Win rate could be -- or maybe what a respectable win rate would be for you guys, would be helpful.

Yes, Kyle, it's really quite a great question, but it's hard to give you a very clear answer. I can tell you though that the funnel is made up of a number of large projects with a number of customers. We have been investing significantly in our commercial team. And so this is not a focused view. There's a number out there. There's a couple that are -- big projects that are hyperscale related. We've also invested pretty significantly in expanding our portfolio into e-Pods and being able to provide that solution set. To give you a number on win rate would be tough. It really would. The recent two really nice bigger orders that we received, we were hopeful in negotiating and feeling good, but that was a big win for us. And so I think where I would go with this for now is be assured, we're investing -- we've invested in our commercial teams, we're investing in capacity, and we're going to continue to drive growth in this space. And so we believe it will be a meaningful part of Regal for the future. And then we'll have to come back to give you a little more clarity on how we think about win rates after a bit of time.

Makes sense. And then maybe turning to free cash flow. I can appreciate some of the reasons why free cash flow guide was lowered for this year. But I am just curious, your confidence level in free cash flow being better next year and then ability to execute on further deleveraging. And I guess, it would be helpful to hear a ballpark of how much lower interest expense could potentially be next year as well.

Yes. So the free cash flow going into next year, so if we bridge off of this year, which we're saying $625 million, and I said in my prepared remarks that we expect to be at almost $900 million next year. The way we get there is we would expect some growth, so some EBITDA expansion, and then we would expect maybe another $60 million, $70 million coming through working capital to help us bridge the gap a bit, along with lower cash restructuring. Cash interest comes down, we expect by a good $40 million next year. And then there's some offsets, of course, on cash taxes and a bit of CapEx, but those are the main bridge items to get to $900 million. So we feel pretty good. I mean the free cash flow this year was certainly hampered by some of the inventory challenges that I've talked about. And while we're still expecting this year that we'll get some improvement in working capital as we close out the year, it was not where we expected it to be as we entered the year from a working capital standpoint. And so we feel good about next year being able to drive out more of that inventory and bridging more of that gap. As far as the leverage standpoint. From a leverage standpoint, we expect that we'll end next year at roughly 2.5x. That incorporates the $900 million that we have in free cash flow. Helping to pay down the debt, we have a bond that's coming due, that we are currently working through the -- and finalizing the strategy. Here, we expect to have that done here in the next month or so. And then we will have a term loan that is also prepayable. We expect that to be as much -- maybe about $900 million. And so that should execute in the first quarter, and we will then make progress paying down that loan, which would come from the $900 million of free cash. So that's the way we're thinking about it. And so our ability to get down to 2.5x, we think, is very good. And we do expect that we can generate this cash flow and have good visibility on how to get there.

The next question is from Tomo Sano with JPMorgan.

This is Tomo. Louis, although we have only just recently met, I wanted to say thank you for your leadership and wish you continued success.

Thank you, Tomo. Thank you so much.

My question is, could you share more details on the CEO succession process, including timeline, criteria for the new leader, and how you are ensuring continuity in strategies and execution, please?

Yes. Tom, thank you. And I'm actually going to pass it initially to Rakesh Sachdev, our Chairman of the Board, who has some prepared remarks that he'd like to share. So Rakesh?

Thanks, Louis. Yes. I think as you look at where the company is and the work that Louis and the team have done over the last 6 years, it's really quite remarkable, the transformation that has taken place. This is a company that is now very decentralized. There's a strong bench of leaders. You can -- you heard Louis talk about the cash flow generation in this business. It's a high gross margin business. We've got scale, and we are at the heels of seeing some significant growth. So we are in a great place. Louis and the Board, we've been having this discussion about the next phase of growth in this company for the next several years. And we decided this might be a good time. And we have started a process. We have recruited a leading executive search firm. We have kicked off the process just now. And we'll be very thoughtful and very deliberate in appointing the succession -- successor to Louis. And Louis is, of course, going to stay on, and he's -- as we said, it's business as usual until we find and appoint the new CEO leader. So I expect it will take about 4 to 6 months before we appoint somebody, but there is no rush. We want to make sure we find and appoint the best leader. We have a search committee in the Board. There are four of us, three CEOs, one active CEO, two former CEOs. So we've got some great eyes on making this decision. And rest assured, we will find a great person to fill in this role. So with that, Louis, I'll turn it back to you.

Yes. Thanks, Rakesh. And Tomo, just to emphasize Rakesh's point there and as I said earlier, we are going to ensure it's a smooth and orderly transition. And with our team -- our team has never been stronger, deep into the organization. And the message is business as usual. That's where we're going to be focused on what's in our control and continue to execute as we have done in the past. So hopefully, that was helpful, Tomo.

The next question is from Nigel Coe with Wolfe Research.

Maybe a question for the Chairman again. Are you fully committed to an external candidate? Or are there other internal options as well? And when you think about the profile of the person you're seeking, would it be with a very similar background to Louis in terms of operational chops? Or are you looking for maybe slightly different attributes?

Thanks for the question. Yes, absolutely. We are doing a comprehensive search. We are looking at external candidates. We're not going to rule out internal candidates, but you can imagine that this is going to be a very comprehensive search, a thoughtful search. And yes, we will be looking for a candidate who has demonstrated strong leadership skills, like Louis has had, running complex global businesses. We're going to be focused on growth. Operations has always been in the DNA of Regal Rexnord, and we've got some great folks who are leading that. But we also need commercial and growth leadership, which we'll be looking for in the next leader who is going to lead this company. So -- and the cultural aspect is also very important. We have created a great culture in this company, and we want to make sure that whoever leads this company will continue to foster that culture going forward.

That's great. And Louis, look, I've covered the stock for 20 years. And the last 7 years have easily been the best. So you've done an incredible job of really changing the game for this company. So it will be sad to see you go.

Thank you, Nigel.

But no [Audio Gap] the data center. I mean I know we've [Audio Gap] how should we think about the contribution margins on the backlog you're building? And can you maybe just be a little bit -- kind of a bit more precise on when you expect to have this new facility up and running?

Yes. So we're -- so I'm going to go backwards. And Nigel, you're cutting out a little bit, but I think I got the intent here. We are initiating the program for setting up that new facility as we speak. We will be hiring personnel through this quarter into next, starting training. And we would expect that we will have product flowing through the facility in Q1, but not shipping until Q2 and later part of Q2. That's the initial project plan. From a contribution margin perspective, all of our evaluation at this point, Nigel, based on what we've bid and quoted is that this will be fleet average margins for AMC, which is actually accretive for Regal. This will be a benefit for Regal as a total business. Now realize, when you think about these pods, a big part of the bill of material is our Regal product, our parallel and switchgear, our automatic transfer switches, our PDUs. And also, I want to emphasize that we're going to put our air moving products in these systems as well. And so we feel really good about where they're positioned and the margins that we will receive.

And I would just add that, the investments we're making today that we mentioned earlier are very CapEx light. This is more of assembly and test. And so that's important to note. This should not weigh on margins as we move forward.

The next question is from Christopher Glynn with Oppenheimer.

Louis, it's been a pleasure working with you and best of luck there.

Thanks, Chris.

And it sounds like we'll be with you for a couple more quarters anyway. I had a question on the discrete automation orders. I think you said they're up 17%. Just curious how you characterize that narrow, big project, lumpy or pretty diversified? Is it a hockey stick? Or did you have a pretty -- an easier comparison? I can't recall 3Q last year. Is this just a significant sequential move, is really kind of the [Audio Gap].

[Audio Gap] And on top of that, that -- and we talked about this at our Investor Day, we did lose [Audio Gap]. We are starting to get orders, and this is just another indicator of we are investing more in technology. We're trying to expand our served market and feel really good about our position in discrete automation. But again, probably the one piece I would call out to emphasize the point is, defense was quite strong in the quarter.

And then a quick follow-up on the eVTOL initial order there. Is that going to be kind of very sporadic? Or is that starting to ramp?

It's sporadic for now. It's not ramping. The point of emphasizing it, though, and I know you all know this, but in the aerospace industry, when you start a production order, that means you're moving forward. And if you listened to some of the announcements, for example, the LA Olympics has a contract out for 50 eVTOLs for taxis. We'll see if that comes to true fruition. But this is a market that if it accelerates, Regal Rexnord is well positioned. So that's why we shared it in the prepared remarks.

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

Thank you, operator, and thanks to our investors and analysts for joining us today. Our team delivered strong performance in third quarter in all segments for what was in our control. Most importantly, strong orders in the quarter and order strength in fourth quarter should set us up for solid growth in 2026. Stronger growth, anticipated additional margin gains, including improved tariff and rare earth mitigation, expectations for further cash flow growth and plans to reduce net leverage ratios below 3x means we are poised to create increasingly significant value for our shareholders and other key stakeholders in 2026 and beyond. Thank you again for joining us today, and thank you for your interest in Regal Rexnord.