Regal Rexnord Corporation (RRX) Earnings Call Transcript & Summary

Good morning, and welcome to the Regal Rexnord Second Quarter 2026 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 of Investor Relations. Please go ahead.

Thank you, operator. Good morning, and welcome to Regal Rexnord's Second 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 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. Please note that given Aamir's tenure with the company began on July 1 after the conclusion of our second quarter, we are going to modify our typical approach to the call. Aamir will lead off with some introductory comments, Rob will then provide an overview of our second quarter performance at the enterprise level, review our second quarter financial results in more detail by segment and conclude by discussing our updated 2026 guidance. We will then move to Q&A, after which the call will conclude. And with that, I'll turn it over to Aamir.

Thanks, Rob, and good morning, everyone. Thank you for joining us to discuss our second quarter results. We appreciate your interest in Regal Rexnord. I'm honored and excited to be Regal Rexnord 6 CEO in our 71-year history, and I want to thank the Board for entrusting me with the responsibility of leading this exceptional company. I'd also like to thank my predecessor, Louis Menken. Given this is my first call, I thought I'd begin by sharing a bit about my background, why I decided to join and how I've spent my time over the past 5 weeks. I'll conclude with a few initial observations. So starting with my background. I'm a chemical engineer by training. Professionally, I began my career at Dell Technologies, where I spent 13 years, split equally between Austin and London. My time at Dell was mostly in sales and marketing roles, including the transition to an omnichannel go-to-market. I joined Schneider Electric in 2013, first, in the U.S. business, leading Sales and Operations, and with the last 4 leading North American operations as a member of the Global Executive Committee. These experiences included global and local roles, they span sales, strategy, operations and business leadership. I have worked with customers and partners in markets that include data centers, energy technology, discrete and process automation as well as life cycle services. I came to Regal Rexnord because I see tremendous opportunities across the company's portfolio, strong channel positions, manufacturing scale and healthy balance sheet. This gives us the ability to address customer needs in a range of very attractive end markets. Regal Rexnord today is a highly capable provider of foundational components that are critical in a wide variety of applications. Some of these are tried and true such as factory automation, aerospace and defense and air moving, and some are emerging and exciting like robotics and eVTOL. It's also great to see our participation in the data center space, and I'm spending time with our teams there to explore our solution road map and understand our customer pipeline. Overall, our broad exposure across attractive end markets is exciting as we continue to build for the future. Now since joining the company on July 1, my primary focus has been listening and learning, and this will continue to be my focus in the coming months as I interact with our teams, our customers, channel and supply chain partners and our investors. Specifically to our investors and analysts, I look forward to spending time with you in understanding your perspectives. I want to thank you in advance for your patience as I balance relationship building with better understanding of our business and customers' needs. While I've only been on the job for 5 weeks, I want to share some early impressions. First is the strength of the team. I've been repeatedly impressed with their knowledge of our products, their commitment to serving our customers and their pride in being part of Regal Rexnord. While we have worked to finish on integration, we are increasingly engaging as 1 team to better serve our customers. Second is around the channel and customer relationships. In the first few conversations, it's clear that we have strong partnerships and trust that has been built over time. We will continue to raise the bar on how we execute to keep earning that trust every day. And finally, the strength of the franchise. We have great technology, trusted brands, a large installed base of products that support attractive aftermarket sales. Couple this with high-quality manufacturing and a culture of continuous improvement, and you have a foundation for building a platform for sustainable and profitable growth. And with that, I'll turn the call over to Rob.

Thanks, Aamir, and good morning, everyone. I'll begin by covering our enterprise performance and then move to the segment discussions, followed by a guidance update. Our team delivered solid second quarter performance, and I want to begin by thanking our 30,000 Regal Rexnord associates for their hard work and disciplined execution. Orders in the quarter on a daily basis were up 8.8% versus the prior year or 8.1% excluding data center. Encouragingly, orders, excluding our consumer leading businesses, residential HVAC and pool, were up low double digits in the quarter. We are seeing evidence of both improving end markets and further returns on our growth investments. Orders at AMC were a standout positive, up 17.1% versus the prior year period, and up 15% excluding data center on broad-based positive momentum. Orders in IPS were up 6.7% versus the prior year, on strength in the energy and general industrial markets. In PES, orders were up 3.5%, on strength in commercial HVAC, which was largely offset by weakness in the consumer weighted residential HVAC and pool markets. Enterprise orders in July were up 7% on a daily basis. Shifting to sales. Our sales in the quarter were up 4.2% versus the prior year and at 3.3% on an organic basis, or up 6.1% excluding residential HVAC and pool. We saw broad-based growth with notable strength in data center, commercial HVAC, discrete automation and energy markets. AMC led the way on growth, up over 15% organically versus the prior year and up 8% excluding data center. The AMC team continues to execute its backlog and drive share gains in its largely secular markets. Turning to margins. Our second quarter adjusted gross margin was 39.8% or 37.8%, excluding IEEPA tariff refunds. We recorded $32 million of refunds in the quarter. I will discuss these refunds in greater detail in the guidance section of the presentation. Our second quarter gross margin performance versus prior year, excluding refunds, largely reflects our team's ability to overcome headwinds from a higher-than-anticipated inflation, mix, tariffs and rare earth magnets with leverage from higher volumes and benefits from synergies. Adjusted EBITDA margin was 23.5% or 21.5% excluding refunds. Versus the prior year, the second quarter margin performance reflects the gross margin drivers I mentioned as well as growth investments. Notably, AMC's adjusted EBITDA margin improved this quarter and has room for further improvement, especially in the fourth quarter, which I will discuss in more detail later in the presentation. Shifting to earnings. Adjusted earnings per share for the quarter was $2.99 or $2.60 excluding the benefit from refunds, which equates to 5% adjusted earnings growth versus the prior year excluding the refunds. Lastly, adjusted free cash flow was $154 million in the quarter, a nice sequential improvement aided by higher EBITDA, lower interest costs and normal seasonality. When comparing our second quarter cash flows to the prior year quarter, keep in mind that our cash flows in the second quarter of 2025 benefited from $369 million of proceeds from our accounts receivable securitization program. On the whole, a solid quarter. I'll now review our operating performance by segment. Starting with Automation and Motion Control, or AMC, Sales in the second quarter were up 15.6% versus the prior year period on an organic basis. This performance reflects broad-based strength, but with a especially strong growth in data center, discrete automation and aerospace and defense. We attribute the strength in improving underlying end market momentum in AMC's largely secular markets and traction in our growth investments. Turning to margins, AMC's adjusted EBITDA margin in the quarter was 21.1% or 19.9% excluding refunds. Versus the prior year, AMC margins were up 40 basis points, mainly reflecting higher volumes, partially offset by growth investments. Orders in AMC in the second quarter were up 17.1% versus the prior year, which reflects broad-based growth, but with particular strength in aerospace and defense, discrete automation and data center. As stated earlier, excluding data center, AMC's orders were up 15%. Book-to-bill in the second quarter for AMC was 1.02. July orders for AMC were up 7.4% on a daily basis versus the prior year period. Before I leave AMC, I'd like to highlight that, in the first half, AMC's daily orders were up over 25% versus the prior year period. This performance is supporting the healthy top line growth AMC has been delivering, and which we expect to continue. Keep in mind, however, that nearly half of this order growth reflects longer cycle projects and blanket orders that are expected to benefit the P&L in 2027, and, in some cases, 2028. Turning to Industrial Powertrain Solutions, or IPS. Sales in the second quarter were up 2% versus the prior year on an organic basis, which was in line with our expectations. Growth in the quarter was led by the energy market, which includes power gen, where we are benefiting from strong growth in the data center market. A notable area of weakness was machinery off-highway which includes pressure we are seeing in the ag market. I will also share some detail by chance. Our short-cycle OEM sales were up mid-single digits, which we believe is consistent with favorable ISM data, and our distribution channel sales were up low single digits. Adjusted EBITDA margin for IPS in the quarter was 27.1% or 25.9% excluding refunds. Compared to the prior year, margins were down as expected due to the impact of product mix, growth investments and higher inflation. Orders in IPS on a daily basis were up 6.7% in the second quarter. The growth was broad-based, but with the largest contributions coming from the general industrial and energy markets. Notably, orders into the distributor channel accelerated, tracking up 8% in the quarter and consistent with a stronger short-cycle outlook. Orders for short-cycle OEM were up 4%, but that follows 9% growth last quarter, equating to just over 6% growth from the first half. So we continue to feel good about what we are seeing in short cycle OEM. Finally, large project orders also accelerated, up 8%, aided by wins in metals and mining. This project strength has helped put our IPS shippable backlog for 2027 up over 20% versus where our 2026 shippable backlog stood at this time last year, an early positive sign for 2027. Book-to-bill in the second quarter for IPS was $1.06. July orders for IPS were up 7.7% on a daily basis versus the prior year period. Turning to Power Efficiency Solutions, or PES. Sales in the second quarter were down 6.6% versus the prior year on an organic basis. The year-over-year decline was primarily driven by weakness in residential HVAC and pool. We believe that demand in residential HVAC remained weak due to a soft housing market, low consumer confidence and lingering pockets of excess channel inventories. At the same time, commercial HVAC remains a clear positive offset, aided by data center construction and continued traction in regional outgrowth initiatives. In the quarter, we also experienced incremental friction related to changes in Section 232 tariffs as some OEMs appear to delay orders and production decisions ahead of the anticipated changes, and then again, as they reevaluated production plans following the tariff proclamations. In contrast, our commercial HVAC business remains strong and is gaining momentum, aided significantly by data center construction and in Asia continued demand from data center, along with traction on the team's regional outgrowth initiatives. Turning to margins. Adjusted EBITDA margin in the quarter for PES was 20.5% or 16.2% excluding refunds. This reflects weaker performance in the residential HVAC aftermarket due to greater caution in the channel and pockets of elevated distributor inventory as well as underperformance in pool distribution. Orders in PES for the second quarter were up 3.5% on a daily basis, with strength in commercial HVAC largely offset by weakness in residential HVAC and pool. Book-to-bill in the quarter for PES was 1.0. July orders for PES were up 5.4% on a daily basis versus the prior year period. Turning to the outlook. We are making some updates to reflect the dynamic environment. Before reviewing the specifics, I'll make a few high-level comments. We're very encouraged by the positive order momentum we're seeing, which is broad-based with growth in all 3 segments. We also continue to make progress paying down our debt and expect to be below 3x net debt leverage in the second half, an important milestone in our delevering journey. On Slide 10, the table on the left presents our principal guidance assumptions for 2026 as of today's update, compared to our prior guidance when we reported first quarter results. The first column is our guidance provided on our first quarter call. The middle column is for reference, and provides our current view on operating performance, excluding the impact of refunds, which is comparable view to our guidance at first quarter. The third column incorporates the benefit of refunds, which are now incorporated into our guidance. Our guidance now reflects an expected $48 million of refund benefits to EBITDA or $0.57 per share. This includes $32 million recorded in the second quarter and $8 million to be recorded in each of the second half quarters. Now returning to the table on this slide. Starting with sales, our guidance is unchanged at $6.2 billion and 4.5% growth. It now factors stronger growth in AMC, offset by weaker assumed growth in PES and IPS. Shifting to the margin outlook. Our adjusted EBITDA margin is now forecast to be 22.1% for this year, or 21.3% excluding the impact of refunds. The decline in our margin outlook excluding these refunds, is being driven by 3 factors: one, a longer time line to realize planned productivity gains, in some cases, to prioritize service levels; two, a lag in price realization relative to a faster pace of inflation; three, modest mix impacts related to our revised segment growth outlooks. Regarding longer lead times to realize planned productivity savings, in some cases, we are slowing productivity actions to prioritize growth, particularly in AMC. In other cases, we are adding incremental conservatism on the time it takes to realize savings from our productivity actions. The last 2 factors, inflation and segment sales mix, tend to be shorter cycle and now reflect the latest market conditions. Regarding inflation, in particular, all of our segments are seeing higher material, freight and energy costs in excess of our prior forecast. Further down on the table, we also outlined relevant below-the-line items, which are fairly consistent with prior guidance. Though I will flag our lower adjusted effective tax rate primarily resulting from the regional mix of earnings in Q2 and benefits from our tax planning strategies. These assumptions resulted in adjusted earnings per share guidance midpoint of $10.60, which is unchanged from our prior view. Given we are now halfway through the year, we have also narrowed our adjusted EPS guidance range to $10.35 to $10.85. For 2026, our cash flow guidance is now $600 million, down $50 million versus our prior target. The change primarily reflects improved order strength since we originally set our guide, which has become increasingly weighted to AMC, requiring incremental working capital investments. We are also assuming a more measured pace on executing our working capital reduction initiatives in light of the higher growth trajectory. Our healthy cash generation continues to enable good progress in paying down our debt, and we expect to see net debt leverage below 3x in the second half. Finally, regarding tariffs, the transition from Section 122 to announced Section 301 tariffs is minimal and is factored into our guidance. We continue to monitor this situation as it is rapidly evolving. On Slide 11, we provide more specific expectations for our performance by segment on revenue and adjusted EBITDA margin for third quarter and for the full year. For reference and comparability to our prior outlook, we are providing our margin assumptions for third quarter and the full year, both including and excluding IEEPA refund impacts. I will reference values excluding IEEPA tariff refunds in discussing this slide. First, a few dynamics to note for the third quarter. In AMC, we expect sales to be modestly lower sequentially, reflecting some project activity that moved out of the quarter, including some that pulled into second quarter and some that shifted to fourth quarter. These product shifts, which carry favorable mix, contributed to a modest sequential margin decline in third quarter, followed by a step higher in fourth quarter. Despite these shifts, big picture, we believe AMC's margins have stabilized and expect the segment's second half margins to be above first half. We expect further margin expansion in AMC as we move through next year, but we are not providing any further guidance in that regard at this time. Our fourth quarter revenue outlook for AMC is now also benefiting from $15 million of ePod sales. As a reminder, we have been waiting for build schedules tied to our initial ePod orders to firm and had expected the majority of these sales to impact 2027 with some spillover into 2028, and potential for a modest amount of revenue to be recorded this year. We plan to provide further updates on the cadence of ePOD revenues when we have better clarity. Turning to IPS. We expect sales and margins to be higher in the second half versus the first half, reflecting orders performance and project shipment timing. However, within the back half, we do see sales and margins being modestly higher in the fourth quarter versus in the third quarter. For PES, sales and margins are expected to rise sequentially, largely due to normal seasonality. As a reminder, third quarter is the typical seasonal high point for PES margins, and we expect this year to follow that historic pattern and step down sequentially in the fourth quarter. This year, we expect that fourth quarter step down to be larger because we anticipate less high-margin pool distribution pre-buy activity than in a typical year given apparent destocking in the pool distributor channel. Now let me flag some annual assumptions that are changing. For AMC, we are raising our annual sales growth guidance to low double digits from high single digits, consistent with the segment's strong order performance, along with the addition of the $15 million of ePOD revenue expected in the year. However, we are lowering the back half margin expectation due largely to the factors I covered earlier in the presentation. For IPS, we are lowering our annual sales growth guidance to low single digits from mid-single digits, primarily reflecting a weaker outlook for our large projects business primarily tied to prior year metals and mining projects rolling off. Encouragingly, as I mentioned earlier, recent large project momentum has improved, though the benefits are likely to accrue in 2027. These headwinds are temporarily muting the benefits we are seeing from a recovery in short-cycle industrial markets. Shifting to margins. Our margin outlook for IPS is down about 80 basis points versus our prior assumption. Just under half of this decline is related to the lower top line outlook. And the remainder is associated with the factors I discussed earlier that are driving our enterprise EBITDA margin guidance revision. Finally, for PES, we are lowering our sales growth guidance to a flat to low single-digit decline. The change primarily reflects weaker residential HVAC and pool distribution markets that are mix accretive to the segment, partially offset by a stronger outlook for the commercial HVAC market. Our adjusted EBITDA margin outlook for PES is now expected to be about 1 point lower versus our prior assumption, reflecting higher inflation, lower volumes, less productivity and weaker mix. Before we open it to questions, I want to take a minute to reflect on the outlook for our business. For those who have been following us for some time, you know we have been focused on growth and deleveraging. Our order growth is approaching double digits, and our leverage is tracking to get below 3x in the back half. This trajectory should provide value creation opportunities for all our stakeholders, our customers, our associates and our shareholders. And with that, operator, we are now ready to take questions.

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

Welcome, Aamir. Looking forward to work with you.

Likewise. Thank you.

So a couple of questions here. First, can we start kind of where you left off there, the order trends have been really good for a chunk of quarters here, even if you exclude the Chunky ePOD orders. The revenue has lagged a lot of the commentary you've had in the prepared remarks was setting up for 2027 with longer cycle type projects that are coming in. So maybe you can help put in context when you start thinking that the orders and revenue numbers can start converging. It feels like you feel cumulatively good about what the momentum on the orders look like, July so to support that. And then any moving pieces that you think will prevent you from getting there as we exit this year into next year?

Yes, Mike, thanks for the question. So first of all, orders certainly do look to be very strong. As you said, we exited Q2 in a very good place. We, again, in July, saw orders strength at 7% overall for the business. So that's very good. There are some things that are lagging in terms of the sell side. I mean from an IPS perspective, we are seeing the large project activity, as we said, in mining, in particular. That's certainly weighing down on some of the the growth rates that we're seeing this year. But that's really a timing issue. It's really an air pocket, if you will, and it should absolutely free up as we move into '27. As I said on the call, we have about 20% higher shippable backlog in '27 at this time versus what we would have had at the same time last year. So that gives us quite a bit of confidence as we move into the back half of this year and move into '27. From a PES standpoint, certainly, lots of noise there, market-driven, but feel very good about the order rates we're now starting to see. I'll point out that, in PES, we saw orders in the second quarter about 5% -- I'm sorry, at about 6.7%. We're now moving to about 5 -- a little over 5% in July. That's good to see continuation there. That's more of a market issue. And then from an AMC perspective, we've talked about a 15% excluding data center in the second quarter, very strong. So we really -- and this is why we took up the back half of the year for AMC the way that we did. We do see that there's an opportunity to perform a little better within the range, but we are going to be a bit measured as we move into the back half of the year. But again, we don't see any visible obstacles beyond the macro. Most end markets feel very good to us. And we do think there's some opportunity in some that are very good with some outgrowth momentum there, especially in the areas of discrete automation, which we were moving up our assessment there from mid-single digit to high single digit in the year. And then aerospace and defense, from there, we're seeing that move stronger, data center from the 20s to high 20s now because of that market strength. So again, across the board, we feel very good about the future and about '27 in particular getting back to where we know we are entitled and where we should be.

And then related then maybe a similar thought process on margins, and when do you think you can get that more normal flow-through into the profitability line, maybe a finer point on that, just specifically around when mix starts normalizing, when you think you catch up on price cost, any nuance there? And I know people probably specifically care about the AMC segment with those comments. So any help you could give us would be great.

Sure. We do think that from a forward progression standpoint on rates, on margins, in particular, in AMC, as you mentioned, absolutely expect that we will continue to make progress as mix improves, especially in some of those businesses that tend to be higher margin within that business such as discrete automation. And then data center will come through for the switchgear side of the business. Those things are going to certainly come as we exit this year and move into next year. From a rate progression standpoint, the way we're looking at it right now is, if you take -- from a modeling perspective, you take kind of the jump-off point from this year and use those rates as we exit the year and then assume a bit of progress on price, productivity and of course, volume, that's how I would model it going forward. It's a little bit dependent upon the inflation that we continue to see through the business, our price capture and our ability to be a bit more margin accretive as we move forward. We have to get past the point we are today. But at this point, that's kind of the directional guidance I would provide, but we'll certainly provide more detail as we move into next year.

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

Aamir, welcome to the call and to Regal.

Thank you.

So I want to really drill down on the service level issue. I'm wondering, one, do you feel like you're losing any share because your service levels are lighter? I think you mentioned AMC, but it's just a little surprising to see you lower IPS as we start to inflect on short cycle. Are you seeing those service level issues outside of AMC as well? Maybe just more color on the service level issue.

Yes, sure. Thanks, Jeff. And let me be very clear. It is not that our service levels are declining. It's more to protect the service levels and continue. And sometimes, when you have the kind of growth that we're seeing flow through the business, in particular, in AMC, we would look to slow down some of those productivity programs so that we can ensure that those service levels maintain. We have zero instances of service levels declining though. And outside of AMC, it's more conservatism on timing than it is the service level protection.

The only thing I would add, and it's week 5, so there's still a lot for me to learn. But as we looked at this, I think one of the assessments that was made was, we're seeing more growth than even the teams were projecting from an order standpoint. And given this team has been working so hard to secure that, we wanted to make sure we didn't disrupt anything. Now some of these plant moves were part of sort of scheduled consolidation of our footprint. And we decided to make a choice to say, "Look, let's make sure we get the growth curve right." So that's just strategically how we have thought about it and reset that timing a little bit.

Okay. Great. And then just on ePod, can you just talk about the new facility ramp? It sounds like you're going to ship some, so that's good. You talked, I think, initially about margin profile. Are you thinking about -- of the ePod business? Are you thinking about that any differently? And then visibility on when you would see additional orders? I think you've been talking about 4Q, 1Q, but maybe just talk about the pipeline there?

Yes. First of all, let me -- I'll kick this off as it relates to the facility. It's on schedule. The infrastructure is nearly complete. The leadership team has been hired. We're in the process of ramping up direct labor. So we're on track to be operational in time to support customer production schedules. So we're very close to being capable of producing at this time. As it relates to the margin profile and the -- we're still assuming at this time, since we haven't produced on ePod yet that our prior projections are still on track, which we've communicated was approximately 20%. And then as you look forward and look to additional ePod orders, we have said that we might expect something on that front maybe late in the year or early next year to those customers. And Aamir, you may have some additional commentary on that front.

Yes. Thanks, Rob. Look, If you step back, we were invited to enter the space through customer relationships we've had in Thompson Power for some time. And as you know, this is simply about time to power. The labor issues and construction are such that modular delivery allows for time to power to be accelerated. And so these customers and their set of them asked us to enter the space because they weren't satisfied with the quality and delivery that we're getting, and they've had that relationship with us. Now we've been working with those customers to lock design that's done. And those customers alone have a pipeline that we can scale with. Of course, once we get through the first set of deliveries, we'll assess our profitability, as Rob mentioned, and also look at sort of how much we want to expand outside of those set of customers. But that available volume, even within that set, can allow us to grow. The key is that we understand the pacing of that from their standpoint and our standpoint.

The next question is from Kyle Menges with Citigroup.

Great. And Aamir, I look forward to working with you. Maybe starting just on the data center orders in the quarter. I mean, it didn't seem like much -- and I mean, I'd just love to hear an update on the pipeline of traditional switch gear. I think last quarter, it had been around $600 million. So I'm just curious, maybe why we haven't seen more conversion on that pipeline over the last couple of quarters, and just how to think about that going forward?

Well, first of all -- and thanks, Kyle, for the question. We do see Switch here growing at market level and have that pipeline to support for sure. So from a switchgear standpoint, we still expect that this year, we should be around $180 million in switchgear, moving higher than that next year, maybe as much as $240 million or so, $250 million next year. So switchgear is very much on track, and we feel very good about that. And as we move through the remainder of this year, as I said, ePods, we did not expect to get anything from an order standpoint. Our switchgear funnel still remains around the same level as what we've communicated previously. So that really hasn't changed.

Got it. And then just curious on the July orders, it sounds like decelerated a little bit versus the second quarter. Would just be helpful to unpack the July orders, maybe what you're seeing by segment and what's decelerating versus accelerating perhaps?

Yes. So it really -- it's just AMC primarily that's decelerating and that really is just timing. We've got -- it's a project business. It's very lumpy. You can see movement up and down in AMC for sure, as you go through a particular quarter. But we still feel very good about the backlog and the order rates that we see. From the other segments, we feel very good. We saw IPS accelerate. So that was great to see. And then PES, we -- as I said before, PES also is starting to show a little bit of strength as we move through July. So feel good about that as well. There's no markets that we feel that, based on July results, we would change our perspective as we look towards the back half of the year. Things are very much aligned to our expectations.

The next question is from Nicole DeBlase with Deutsche Bank.

And welcome, Aamir. Looking forward to working with you.

Thank you.

I guess maybe just starting with the guidance change. You guys are embedding a step up to 5% growth in the second half versus, I think, 3% in 2Q. I know orders have been better, which helps provide confidence, but the comp is a bit tougher relative to the first half. So just thinking through like the level of confidence that you guys have in the second half second half outcome. And if you've embedded any sort of contingencies to make that guidance a bit more conservative?

Well, certainly, the orders underpin the confidence that we see as we move into the back half. And the step-up is very much informed by what we're seeing on those order rates and the backlog, the shippable backlog in particular as we set up both Q3 and Q4. So there is additional upside opportunity for sure as we move through the back half of the year, where we saw the greatest change from a positive perspective would be AMC. We did step down both IPS and PES, but again, feel very good about the back half with, as I said, opportunity in the range within the range.

Okay. And then maybe just if we could put a finer point on price/cost, how would you think about what's embedded in the second half, like if price/cost still a headwind throughout both 3Q and 4Q? And have you already taken pricing actions necessary to get back to price/cost neutral? And whether that happens in the second half or more in 2027?

Right. So we absolutely expect modest headwinds in the second half as it relates to price/cost. And it's really around the inflation side on price/cost. There's the price tariff recovery, which we still see that will be margin neutral by the end of the year. The price/cost, we do expect that we will be a bit behind from a price/cost standpoint. But again, it's very hard to size. It's very much dependent upon the rate of inflation and the level of inflation flowing through the business as well as other mitigating actions that we can take, but we are absolutely implementing price increases. We have scheduled price increases as we move through the back half of this year, have been implementing price increases along the way as we move through Q2 and do that consistently, even as much as adding surcharges in certain cases where when you've got the war going on and oil and gas doing what it's doing and its impact on resins and the like, sometimes you have to surcharge things. But bottom line is, look, we're going to continue to execute our discipline around price/cost, and we feel good about what we have embedded in the back half, and we will continue to raise prices to ensure that we can get back to a reasonable margin on those areas where we're seeing the most pressure.

And the only thing I would add is just on the channel side, there is specific timing effects here, right, because we have a mechanism where it takes a certain amount of time for that price to flow through. So we can even work with our partners to announce it. But by the time it shows up in the sell-out numbers, there's a lag, whereas the inflation numbers are pretty much immediate. So there's a timing in terms of understanding what we're chasing in terms of net coverage numbers are offset, and then there's the timing of the effect of the increases we've put in the market. And so both of those are factors that we're working through.