리갈 렉스노드(RRX) 2026년 3분기 실적 콘퍼런스 콜: 성장 가속화, EPS 가이던스 상향

핵심 요약

• 2026년 3분기 오가닉 매출은 데이터 센터, 상업용 공조(HVAC) 및 이산 자동화 부문의 호조에 힘입어 전년 동기 대비 6.1% 증가했습니다. 일평균 수주는 5.7% 증가했으며, 데이터 센터를 제외하면 13.3% 증가했습니다.
• 조정 EPS는 IEEPA 관세 환급에 따른 순이익 0.18달러를 포함해 2.90달러를 기록했습니다. 관세 환급을 제외한 조정 EPS는 8.4% 증가한 2.72달러였습니다.
• 환급금을 제외한 조정 EBITDA는 3억 3,700만 달러, 마진율은 21.2%를 기록했습니다. 가격-원가 압박, 운영상의 문제 및 성장 투자 등이 수익성에 부담으로 작용했습니다.
• 리갈 렉스노드(Regal Rexnord)는 2026년 매출 전망치를 약 62억 2,000만 달러로 상향 조정하고 조정 EPS 가이던스를 10.60~10.90달러로 좁혔습니다. 연간 잉여현금흐름 가이던스는 6억 달러로 유지되었습니다.
• AMC 오가닉 매출은 데이터 센터와 이산 자동화에 힘입어 25.2% 성장했습니다. IPS 매출은 공장 가동 문제 및 자재 수급 제약으로 출하가 제한되면서 1.8% 감소했습니다.
• 경영진은 운영 개선, 포트폴리오 단순화 및 오가닉 성장을 최우선으로 추진하고 있습니다. 회사는 자율 이동 솔루션(Autonomous Mobile Solutions) 사업부 매각을 검토하고 있습니다.

주요 재무 데이터

사업 및 운영 실적

자동화 및 모션 제어 (AMC)

AMC 오가닉 매출은 25.2% 증가했으며, 데이터 센터를 제외하면 11.2% 증가했습니다. 성장은 전반적으로 이루어졌으며, 특히 데이터 센터와 이산 자동화의 기여가 두드러졌습니다.

전년도 총 1억 1,500만 달러 규모의 데이터 센터 스위치기어 수주 2건의 역기저 효과로 인해 일평균 수주는 4.9% 감소했습니다. 데이터 센터를 제외하면 수주는 21.4% 증가했습니다. 3분기로 예상되었던 1억 1,300만 달러 규모의 스위치기어 수주는 10월로 이월되었습니다.

E-Pods는 3분기에 경영진의 예상을 상회하는 약 2,500만 달러의 매출을 올렸습니다. 연초 이후 누적 스위치기어 매출은 158% 증가했으며, 회사는 현재 해당 사업이 2026년에 약 2억 달러의 매출을 달성할 것으로 예상하고 있습니다. AMC의 조정 EBITDA 마진율은 19.2%였으며, 환급금을 제외하면 18.7%였습니다.

산업용 파워트레인 솔루션 (IPS)

IPS 일평균 수주는 9.6% 증가했습니다. 에너지 수주는 30% 이상, 이산 자동화 수주는 약 30% 증가했으며, 금속 및 광업 부문은 10% 미만 후반대의 성장을 기록했습니다. 해당 부문의 2027년 출하 가능 수주잔고는 3분기 말 기준 전년 동기 대비 20% 증가했습니다.

오가닉 매출은 1.8% 감소했습니다. 경영진은 여러 공장의 생산량이 수요를 따라가지 못해 이월 수주잔고가 늘어나고 공장 고정비 배부가 감소했다고 밝혔습니다. 조정 EBITDA 마진율은 26.0%였으며, 환급금을 제외하면 25.2%였습니다.

회사는 자재 계획, 공급망 관리 및 제조 비효율성을 주요 제약 요인으로 꼽았습니다. 경영진은 생산량 증대와 수주잔고 감축을 우선시하기 위해 공장 통합 작업을 전반적으로 일시 중단했습니다.

전력 효율성 솔루션 (PES)

PES 일평균 수주는 12% 증가했으며, 상업용 공조 및 범용 모터 수주가 30% 이상 증가했습니다. 상업용 공조 수주는 데이터 센터 냉각 및 환기용 축류 팬과 확장된 플러그 팬 제품에 힘입어 60% 이상 성장했습니다.

주거용 공조 및 수영장 제품을 포함한 소비자 연계 수주는 12% 감소했습니다. 상업용 시장의 11% 성장이 소비자 연계 시장의 10%대 중반 하락세를 상쇄하여 오가닉 매출은 소폭 상승했습니다. 조정 EBITDA 마진율은 19.7%였으며, 환급금을 제외하면 18.1%였습니다.

경영진 가이던스

AMC 연간 성장 가이던스는 기존 10%대 초반에서 10%대 중반으로 상향 조정되었습니다. 리갈 렉스노드는 4분기 4,000만 달러를 포함해 2026년 E-Pods 매출이 6,500만 달러에 달할 것으로 예상하고 있습니다. 경영진은 또한 2027년 E-Pods 매출을 약 5억 5,000만 달러로 전망했으며, 남은 작업은 2028년 초까지 이어질 것으로 내다봤습니다.

IPS 성장 가이던스는 보합~10% 미만 초반대로 하향 조정되었으며, 2026년 마진 전망치는 약 40bp(0.4%p) 낮아졌습니다. PES 매출 가이던스는 유지되었으나, 연간 마진 전망치는 약 70bp(0.7%p) 상승했습니다.

4분기 전망에는 추가적인 IEEPA 관세 환급 혜택이 반영되지 않았습니다.

리스크 및 주시 영역

• IPS 공장의 생산량은 자재 수급, 생산 일정 관리 및 제조 비효율성으로 인해 여전히 제약을 받고 있습니다. 경영진은 즉각적인 회복보다는 수 분기에 걸쳐 개선될 것으로 예상합니다.
• 가격-원가 압박으로 인해 환급금을 제외한 3분기 마진이 하락했습니다. 회사는 인플레이션에 대응하기 위해 2026년 4분기와 2027년 1분기에 추가적인 가격 인상 조치를 계획하고 있습니다.
• 항공우주 사업 부문은 공급업체 관련 제약과 엄격한 규정 준수 절차로 인해 생산량에 영향을 받을 수 있습니다.
• 차단기(Breaker) 수급 상황은 스위치기어 및 자동 절체 스위치 사업의 잠재적 제약 요인입니다.
• E-Pods의 경제성은 규모의 경제, 표준화된 설계 및 소수의 대형 고객에 의존합니다. 경영진은 과도한 맞춤화나 액체 냉각과 같은 생소한 기술 분야로의 확장이 사업성을 약화시킬 수 있다고 설명했습니다.
• 소비자 연계 PES 시장은 주거용 공조 및 수영장용 제품 합산 수주가 12% 감소하는 등 여전히 부진을 면치 못했습니다.

애널리스트 Q&A 주요 내용

경영진은 운영 회복에 2~3분기 정도가 소요될 것으로 예상하고 있습니다. 지연된 IPS 수주잔고는 잠재 성장률의 약 3.5%포인트를 차지하지만, 회사는 가동과 중단이 반복되는 생산 주기를 만들지 않고 생산량을 회복시킬 계획입니다.

포트폴리오 검토에서는 오가닉 성장률, EBITDA 마진율, 현금 창출력, 투하자본수익률(ROIC), 자본 집약도 및 전략적 부합성을 바탕으로 각 사업부를 평가할 예정입니다. 경영진은 오가닉 성장률과 EBITDA 마진율의 합이 30% 이상이어야 한다는 '30의 법칙(Rule of 30)'을 강조했습니다.

자율 이동 솔루션은 AMC 매출의 10% 미만 초반대 비중을 차지하고 있습니다. 경영진은 매각 가능성이 실적에 미치는 영향은 미미할 것으로 보고 있습니다.

E-Pods의 경우, 텍사스주 알링턴의 신공장은 표준화된 공정으로 전용 설계되었으며 2028년까지 충분한 생산 능력을 확보하고 있습니다. 출하는 예정대로 2027년 1분기에 시작해 연중 계속 확대될 것으로 예상됩니다.

경영진은 데이터 가시성을 개선하기 위해 전면적인 ERP 개편이 필요하지는 않다고 밝혔습니다. 회사는 기존 시스템 전반에 걸쳐 공통 데이터 표준을 수립하고 최신 툴을 활용해 계획 수립 및 가격 분석을 개선할 계획입니다.

실적발표 컨퍼런스 콜 전문

전체 실적 발표 컨퍼런스 콜 녹취록

경영진 발표

Operator

[Operator Instructions]. Good day, and welcome to the Regal Rexnord Third Quarter 2026 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Robert Barry. Please go ahead.

Robert Barry

Thank you, operator. Good morning, and welcome to Regal Rexnord's Third Quarter 2026 Earnings Conference Call. Joining me today are Aamir Paul, 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

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 5 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. 4 months into the role, I spent time with our teams, customers and channel partners. I have visited 30 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 unlock this potential. One, driving operational improvement. Two, focusing our resources on fewer and higher potential growth opportunities; and three, building a stronger growth mindset. Let me talk you through each.

First, driving operational improvement. This starts was completing the last mile of integration following the significant transformation Regal Rexnord has undergone over the past 5 years. Our teams have accomplished a great deal, but important work remains to realize the full operational and commercial value of the portfolio we've assembled. This work is primarily about optimizing our data 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 accelerated over the last couple of quarters, and our plans 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 [indiscernible] 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's 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 advisers. 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' 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 including 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 3 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 organization's attention has appropriately been directed towards the portfolio transmission, 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 a 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 PES 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 de-leveraging 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.

Robert Rehard

Thanks, Aamir, 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.

Order 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 3 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 the 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 2.9x.

And now I'll shift reviewing our operating performance by segment. As I review each segment 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 impact 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 E-Pods 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 benefit 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, where 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 project 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 a in our last earnings call. Last quarter, we lowered our production expectations. As demand strengthened through the third quarter and we assess 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. One, supply chain management, planning and material availability and two, 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 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 Aamir mentioned in his opening remarks, the customer feedback on our newly launched products and road map 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 [indiscernible].

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 factor stronger growth in AMC, where we now expect $65 million of revenue related to E-Pods, 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 onetime benefits in the quarter and to 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 in 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 E-Pods sales. After recognizing [ $27 ] million of E-Pods sales in third quarter, we now expect $40 million in the fourth quarter, up from $15 million previously, $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 full 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

[Operator Instructions] The first question comes from the line of Mike Halloran with Baird.

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Michael Halloran

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. 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 time line can we think about here, all else equal to getting to the point where we have more normalization between what the revenue looks like or the orders look like, excuse me, and when the output starts hitting to the customer?

Aamir Paul

Yes. 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 we it's really a supplier first issue there. There's some plant 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.

And IPS, 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 time line 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.

Michael Halloran

No, I appreciate that. And then maybe transitioning to the revenue side. So the idea then is that you can catch up on some of specifically IPS, 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 time line, 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 [indiscernible] see accelerating? Any help there would be great.

Aamir Paul

Yes. 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, 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 sort of positioning in aerospace and defense is very healthy, and we expect that to continue. We see our positioning supporting the energy infrastructure build-out, especially behind the meter energy solutions for data centers is quite healthy. We talked about the incredible response our Air Moving products we're getting in PES. And of course, there's our data center exposure.

Now you've seen what's happening in the energy markets and the 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, so I'll start and then have Rob complete. Late backlog in IPS just late backlog, not total backlog in itself is worth about 3.5 points of growth. So yes, as we execute and reduce late backlog and then 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?

Robert Rehard

Yes, I think you covered off on most of the key points. I think that the past due 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 recovery, as you said, within the next couple of quarters or so.

Operator

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

Jeffrey Hammond

Maybe starting with the portfolio review. One, if you can give us any kind of framework or sense of how big that -- the business you're selling is? And then do you think of this as more pruning through the portfolio? Or could we see something more substantial? I guess what stands out is PES relative to kind of that Rule of 30 that you referenced?

Aamir Paul

Yes. 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 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, 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. We are 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 talked -- 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 I'm sure [indiscernible] parts will find even an IPS. So we'll look everywhere. We are not going in with the 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.

Robert Rehard

Yes. So AMS, as Aamir described during the call, it provides that hardware and software. It has a low single-digit percentage of AMC sales perspective. 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

The only thing I would add is that's an example of a business with great software development at its core. right? And our contusion primarily was driven by the fact that we think other people with great software expertise could turn us 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.

Jeffrey Hammond

Okay. Great. And then just on data center, I guess, one, lot of supply constraints in this commercially Air Moving. Any kind of plans for capacity expansion? And then separately, E-Pod, Amir, you said last quarter, hey, we want to look at this business? Are we the right player. Just any further comments on how you're thinking about that E-Pods opportunity?

Aamir Paul

Yes, absolutely. So let me start with air moving. We are 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 E-Pods, I think what I've -- 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 is driven by AI infrastructure build-out. Then you have a direct engagement where we're selling either switchgear, automatic transfer switches, the servicing of start-up and commissioning or the E-Pods. 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 are 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 I come to E-Pods. 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 a few customers that were doing lots of volume because that's where our efficiency comes in. Remember, our content mix in E-Pods 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 discipline in our cost structure so that we can hit the margin thresholds, which is, of course, critical for us.

Operator

The next question comes from Kyle Menges with Citigroup.

Kyle Menges

Maybe following up on the E-Pod 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 for E-Pods look like as far as your content or maybe margin profile? Or just any color you could provide there would be helpful.

Robert Rehard

Yes. Thanks, Kyle. Let me take the first part of your question, and then I'll let 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 $65 million that we expect this year, we now expect about $550 million or so next year. I would say that roughly split between -- from a revenue standpoint, roughly split between the first and second half of the year with the remainder, we're extending into early 2028.

Aamir Paul

Yes. 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 designed lock. Now we've got that design lock after almost 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 -- and 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 and fire prevention fire suppression and then in cooling. And so we have sort of our own content, but also our portfolio of partners that were going to these clients within saying, let's iterate and designs together, let's iterate in 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 we're going into a universe of suppliers we're not engaged with and 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

Got it. That's helpful. And then Aamir, just 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 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 -- or do we need to wait for an Investor Day in 2027? Or will some of the stuff on strategy and portfolio changes just kind of continue to come out in drips and drabs as you learn more.

Aamir Paul

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 appropriate balance is what we're trying to do. So we're not going to keep you just waiting. As we come to definitive conclusions, we'll share information. And then I do think it's that sometimes towards the end of next year, we'll have sort of a broader strategy review. We haven't locked-on 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 going to keep you waiting. As we come to conclusions and we feel like we have a good position or a good partner, a good buyer 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 basis where we have the best chance to win and outperform.

Operator

The next question comes from Nicole DeBlase with Deutsche Bank.

Nicole DeBlase

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 -- do you also see opportunity for maybe more strategic pricing, better price cost results over the next several years?

Robert Rehard

Yes. So let me kick this one off. So inflation did accelerate slightly in the third quarter, but 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. 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

And look, the only thing I would add is -- it goes back to the foundation work I talked about in terms of getting data right, right? If we can get all our transaction sets or 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 varying in each business because of history, right? These were three separate companies operating in different systems. So getting that foundational structure right, I think we'll unlock future opportunities.

Now even within our current system, the larger the yield 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 DeBlase

Okay. Understood. 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 E-Pods, the underlying organic growth is it looks kind of low, with pretty big detail 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?

Robert Rehard

Yes. I think it's based on -- certainly, our orders have been very strong. And in 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. There we do see strong growth in medical and discrete automation. But as you say, E-Pods and certainly came in a lot stronger switchgears 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.

Operator

The next question comes from Julian Mitchell with JPMorgan.

Unknown Analyst

Maybe just wanted to start with the sort of overall thoughts on the EBITDA margin of the company. So I guess with some very different volume and cost environment. It's been flattish and about 21% for several years now. And I wondered, Aamir, as you're looking at the outlook, 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 to [indiscernible]?

Aamir Paul

Look, I won't get into next year. We'll talk about that. in our Q1 cycle. But 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 build on the momentum and both reinvest strategically in the right places and gradually build on this baseline. Now we have to dig into the work. We have to see the mix across segments. But it's not -- as you said, we've been at a certain threshold for time. So we don't want to get into a scenario where we're waiting too long to improve on both sides of the equations. 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.

Unknown Analyst

That's helpful. And then maybe just a more specific question on AMC specifically. I suppose in recent years, we've had volume growth, some M&A cost synergies, price cost positive, most of the time, but the margins have done what they've done. And every 6 months, there's a different reason that [indiscernible] what explains that. I just wondered from your perspective, 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 the margin trajectory has been what it's been? And anything sort of informing that standpoint around [indiscernible] called profitability that we expect.

Aamir Paul

It's a great question. It's one I spent a lot 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 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 those -- 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 on AMC. And I think at least part of the dilemma over the last few years has been managing a very long tail of complexity and different kinds of businesses that we have to sort of be more thoughtful about. And that's where the first action we're taking. 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 there's more opportunity. So that's one element. And then, of course, there's some operating execution issues which going to category one. But Interestingly enough, most people when I talk about portfolio go a different direction, but actually simplification across the enterprise is a big part of that effort.

Operator

The next question comes from Nigel Coe with of Wolfe.

Nigel Coe

Great. We've covered looking at a lot of the major subjects already, but I do want to go back to E-Pods. So Aamir, your comments around having the right scale with the limited number of customers I think [indiscernible]. Is three or four customers at scale at the right level. And I'm wondering if you could maybe talk about where you think production capacity will be by the end of FY '27, let's say. And -- what is your confidence that this business will scale seamlessly to that level that you've talked about for 2027 in light of the problems you've had with some of the legacy plants.

Aamir Paul

So let's start with that part of the question, right? How good do we feel about gating. I think that's where we have some good confidence because we purpose-built the structure, right? This is not something that we've acquired that was 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 the ERP from day one. So I'm actually quite excited about the throughput and scaling of this new facility in Arlington and Texas.

And I think that's we're making sure that we stick to compound, we stick to a 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 probably, if there were complexity is right, if the scale is right, right? I think complexity is the biggest thing 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 build-out. 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 lock designs, is something 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, right?

We want to work with people A, who want to use our switchgear, first of all, right, critical rule #1. 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 side. So that's sort of the vetting discussion. We've had some really great conversations where we've 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. Look, I told you we could probably scale with just one account. Their demand is sufficient that if they wanted to 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 well, 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.

Operator

The next question comes from Joe Ritchie at Goldman Sachs.

Joseph Ritchie

Aamir, I 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 4 months into your role?

Aamir Paul

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 the Regal Rexnord because that's relatively a 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. We're 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 cover at [indiscernible], 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. So -- but getting more commercial coverage for those brands that are in good end markets. Air moving, for example, right now, great opportunity, right? 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 think would come next, and I'm keen to sort of 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 areas where you're excited and then dial up the R&D [indiscernible]. 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 is what we have, portfolio next and then absolutely R&D intensity.

And [indiscernible] 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. .

Joseph Ritchie

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

Aamir Paul

I think it's interesting, right? So the 13 facilities have been to the plant management at that plant and their leadership team that matters, right? And frankly, in some cases, the tenure of those leaders are relatively new. Talented people, but new to the company. So I think atomically, in that four walls, getting the right team and getting them working together, getting the right plant leadership and we have some areas where we have to do it, not because the incumbents were great, but just because we have new people.

Now I think where the real opportunity comes in is the enterprise-wide planning, right? So 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 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 are the horizontal efforts at the enterprise level are what we have to get right. Of course, the [indiscernible] unit of the talent at the plant level is right. And then across the board, are there going to be some places where we upgrade.

Sure. 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're absolutely will have areas where we will be upgrading people across the enterprise. .

Operator

Our last question for today's call comes from Chris Dankert with DA Davidson.

Christopher Dankert

Just one real big question for you here. I mean it sounds like you were underwhelmed with some of the data capabilities, particularly in IPS. To get that data and visibility where you feel it needs to be. Are we talking about just some new tools and dashboards. Are we talking about a complete ERP overhaul. Maybe just kind of what time and capital investments are required to get that data where you want it?

Aamir Paul

It's not a complete ERP overhaul. And frankly, the exciting thing about doing this in this age is the tools and capabilities that I've done this in my career in prior calls, and your optionality today with the agentic tools, the ability to abstract data differently to contextualize differently, I think is if you're going to do it. It's the most exciting time to sort of go tackle the problem, right? But no, it's not going to be -- let's move all of these things into one big ERP transformation. That is definitely not the approach we're going to take.

I think the first thing is identifying common standards of data, different companies, they grew up with different architectures. Our RBS system has begun that, but needs to go deeper. And frankly, it needs to have less opt out capability, right? So we're going to sort of push more common standards in that system. And then working with our IT teams looking at ways that without changing the plumbing on the code to cap structure, can we create more visibility is the goal. And I think the tool set today that's available is probably the best it's ever been to allow you to do things like that.

Operator

Ladies and gentlemen, this concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Goodbye.