Adam Farley

Adam Farley sought more detail on the operating inefficiencies in power generation, specifically their underlying cause and expectations for ramping improvement. He also asked about the total addressable market for Facet, its market position, and primary competitors.

Answer

Rich Lewis, Incoming President and CEO, explained that power generation inefficiencies stemmed from rebalancing the product portfolio and ramping up capacity at the Monterrey, Mexico facility, which involved process improvements and a dramatic increase in staffing. He expects continued improvement in output and productivity throughout the fiscal year as employees are trained and onboarded. Regarding Facet, Lewis stated it is a leader in its space, with a few historic players and a fragmented market beyond that. He noted Facet plays in commercial, marine, and military sectors, with significant headroom for growth, particularly in Donaldson's core industrial markets.

Adam Farley asked for more detail on the operating inefficiencies in power generation, specifically the underlying cause and expectations for ramp-up. He also inquired about the total addressable market, market position, and primary competitors for the pending Facet acquisition.

Answer

Rich Lewis, Incoming President and CEO, explained that power generation inefficiencies stemmed from rebalancing the product portfolio and ramping up capacity at the Monterrey, Mexico facility, including a dramatic increase in staffing and working through the learning curve. He expects continued improvement in output and productivity throughout the fiscal year. For Facet, Mr. Lewis stated they are a leader in their space, playing in commercial, marine, and military markets, with significant headroom for growth, especially in industrial markets.

Adam Farley asked about the drivers of strong mobile aftermarket growth, specifically if it was due to incremental share gains or carryover benefits, and if there was any restocking activity in the OE aftermarket channel. He also questioned the primary drivers of decrementals in the industrial segment for the quarter.

Answer

CEO Tod E. Carpenter stated that independent channel growth was a mix of share gains and carryover. For the OE aftermarket, he noted typical Q2 balance sheet management behavior, but overall pull-through levels are strong. CFO Brad Pogalz attributed industrial decrementals to gross margin pressure from higher operating costs and expense leverage, expecting improvement later in the year. COO Richard Lewis added that footprint optimization work, largely in this segment, will yield benefits in the latter part of the year.

Adam Farley, on for Nathan Jones from Stifel, followed up on the tariff discussion, asking about the potential for broader demand disruption or lower global growth resulting from tariff uncertainty, beyond the direct cost impact.

Answer

CEO Tod Carpenter acknowledged it was 'tough to say' but noted that while first-fit projects in industrial and mobile markets are seeing more caution, the aftermarket and service-based businesses continue to march along well. He stated the company is managing the situation carefully amidst the uncertainty.

Adam Farley, on for Nathan Jones, inquired about the operating margin outlook for the Mobile Solutions segment for the rest of the year and asked if there were any changes in the adoption rate of Donaldson's connected solutions given the industrial market deceleration.

Answer

CFO Brad Pogalz stated that margins for all three segments, including Mobile, are expected to improve in the second half of the year, driven by sales leverage and disciplined expense management. CEO Tod Carpenter added that the adoption of connected solutions is actually accelerating, with year-to-date growth of 30% in connected machines, which is strengthening customer relationships and driving replacement part sales.

Adam Farley followed up on the aftermarket business, asking about the underlying demand level after adjusting for destocking comps and market share gains, and whether demand was steady or accelerating.

Answer

CEO Tod Carpenter clarified that underlying vehicle utilization is steady, not accelerating, which reinforces that the strong performance in Mobile Solutions Aftermarket is primarily a share gain story. He credited strong execution and investments, such as new distribution centers, for the gains. He also reminded listeners that Q2 is typically a seasonally softer quarter for the aftermarket business due to holidays and lower agricultural and construction activity.

Adam Farley, on for Nathan Jones, asked about the primary drivers behind the impressive gross margin improvement beyond price/cost dynamics and for details on the on-road product line being rationalized.

Answer

CFO Scott Robinson attributed the strong gross margin performance to leverage on higher sales volume and improved manufacturing efficiencies, stating the company expects to maintain these levels. He explained that the on-road product line being exited is a non-strategic, non-technology-led product, and the decision was made to better align with the company's core focus despite the resulting revenue headwind.

Adam Farley with Stifel inquired about the primary drivers behind the accelerated cost synergy target for 2026 and whether the total cost synergy goal is expected to increase beyond the initial $70 million over time.

Answer

President and CEO David Cherechinsky attributed the accelerated cost synergies to the urgency created by the U.S. MRC Global ERP implementation issues, which is fast-tracking the migration of certain operations, particularly in the upstream sector, to DNOW's SAP system. This integration is expected to yield cost savings and mitigate revenue leakage. While not yet prepared to raise the long-term $70 million synergy target, he acknowledged potential opportunities, noting that earlier system integration decisions could bring savings forward, though the primary focus remains on growth and customer value.

Adam Farley asked for more details on MRC Global's ERP transition, including its impact in Q4 2025, expected resolution timeline, and whether the issues were broad-based across U.S. operations. He also inquired about DNOW's 2026 organic growth expectations by sector or for legacy DNOW, and the main drivers for the accelerated cost synergy target in 2026, questioning if the total synergy target might increase over time.

Answer

David Cherechinsky, President and CEO, DNOW, explained that ERP issues were limited to U.S. MRC Global, causing revenue declines in Q3 and Q4 2025. He noted ongoing mitigation efforts, including leveraging DNOW systems for projects and deploying additional personnel, with stable revenues in gas utilities but significant impacts in upstream and downstream. For 2026, he projected flat to down upstream activity (except water management), growth in midstream and gas utilities, and a strong turnaround in downstream refining. He attributed accelerated year-one cost synergies to fast-tracking SAP migrations due to ERP urgency, and while not committing to a higher total synergy target, he suggested opportunities exist, emphasizing long-term growth potential.

Adam Farley of Stifel Financial Corp. inquired about the primary challenges of the MRC Global merger integration, how DNOW plans to manage risks and maintain employee focus, and the outlook for the second half of 2025, including guidance and potential for customer budget exhaustion.

Answer

CEO David Cherechinsky explained that the key to the integration is focusing externally on the customer and on growth opportunities presented by the combined entity's broader offerings. He emphasized aligning teams early to focus on the supply chain and customer needs. Regarding guidance, Cherechinsky stated he biases towards the middle of the full-year range, acknowledging that Q4 budget exhaustion is factored in and expected to be consistent with the typical 5% sequential decline seen in prior years.

Adam Farley of Stifel inquired about the impact of tariffs and inflation on DNOW's business, specifically asking which product areas are most affected and how gross margins might trend. He also asked about competitive pricing behavior and opportunities for market share gains and growth in adjacent markets like energy evolution and data centers.

Answer

CEO David Cherechinsky explained that while inventory costs are currently low, the company is seeing normal inflation plus new tariff impacts, particularly in imported valves where price increases could range from 3% to 35%. He expects a net favorable impact on gross margins but noted the timing is uncertain. Cherechinsky stated that DNOW's global buying power provides an advantage over smaller competitors. Executive Brad Wise added that DNOW is pursuing growth in adjacent markets like water processing, data centers (providing natural gas infrastructure and electrical components), and decarbonization, though CCUS and RNG projects remain lumpy.

Adam Farley asked if Zurn Elkay Water Solutions anticipates needing to implement additional price increases in 2026, beyond those already announced, in response to recent increases in metal prices and general inflation.

Answer

Todd Adams, Chairman and CEO, acknowledged monitoring metal prices and inflation but noted that supply chain optimizations are continuously reducing costs. He stated that any incremental pricing decisions would be judicious, and the company feels relatively well-positioned for the time being.

Adam Farley followed up on the M&A discussion, seeking more details on the new adjacencies or verticals identified through Zurn Elkay's strategic planning cycle. He also asked if the company anticipates or has already implemented additional price increases for 2026, considering recent metal price increases and general inflation.

Answer

Chairman and CEO Todd Adams described the new adjacencies as North American-based, related to water and professional-grade plumbing, leveraging existing products into different verticals, akin to their fire protection strategy. Regarding pricing, he stated the company is monitoring metal prices but feels well-positioned due to supply chain cost reductions, indicating any future price actions would be judicious.

Adam Farley asked about volume expectations, specifically addressing any pull-forward into Q3 and how to interpret the strong high-single-digit guidance for Q4 volume growth. He also inquired about the company's capital allocation priorities, given the increased dividend and share repurchase authorization, and whether anything has changed.

Answer

Todd Adams, Chairman and CEO, clarified that Q3 saw good volume growth, with modest pull-forward offset by residential market weakness, resulting in high-quality growth. David Polley, CFO, added that about $8 million was pulled from Q4 into Q3 due to a late September price increase, but unit volumes continue to grow nicely. Mr. Adams stated that capital allocation priorities remain consistent: reducing leverage, investing in core business, cultivating M&A, establishing a dividend, and evaluating stock value for repurchases.

Adam Farley inquired about volume expectations, specifically addressing any pull-forward into the third quarter and the strong high-single-digit guidance for the fourth quarter, and how to think about volume in the back half. He also asked about capital allocation priorities, given the increased dividend and share repurchase authorization.

Answer

CEO Todd Adams stated that Q3 saw good volume growth, even without the modest pull-forward, and Q4 guidance reflects similar momentum. He noted that some pull-forward was offset by incremental weakness in the residential market, resulting in high-quality growth. Mr. Adams reiterated consistent capital allocation priorities: reducing leverage, investing in the core business, cultivating M&A, establishing a dividend, and evaluating stock value for repurchases. CFO David Polley specified an $8 million pull-forward from Q4 to Q3 due to a September price increase, confirming unit volumes continue to grow nicely.

Adam Farley from Stifel, on behalf of Nathan Jones, asked whether potential tariff impacts were included in the 2025 guidance and questioned if sustained higher interest rates could affect the company's long-term growth.

Answer

Executive David Pauli clarified that the guidance does not include new tariff impacts due to the fluid environment, but he expressed confidence in the company's ability to manage them, citing significantly reduced exposure to China. CEO Todd Adams added that while not in the guidance, the company is prepared to act with supplier moves or targeted price increases. Regarding interest rates, Adams noted that the majority of their business is not highly sensitive to rates and the company remains focused on controllable growth drivers.

Adam Farley, on behalf of Nathan Jones, asked about expectations for the Q4 selling season in China, balancing typical seasonal strength with current headwinds. He also inquired about boiler sales, specifically if there was pre-buy activity and if the sales cycle was elongating.

Answer

Stephen Shafer, CEO, confirmed that Q4 is typically strong in China and their outlook assumes an uptick in volume compared to Q3, but noted increased pressure on year-over-year comps due to the discontinuation of subsidy programs. Regarding boilers, he acknowledged some pre-buy activity for 'inventoryable' sizes, which might create a slight headwind in Q4. However, he stated that quoting for larger Crest units remains steady, with no major elongation in the quoting-to-order cycle.

Adam Farley, on behalf of Nathan Jones from Stifel, asked about A. O. Smith's expectations for the fourth-quarter selling season in China, considering it's typically a stronger quarter due to shopping holidays, but also balancing current headwinds. Farley also inquired about the boiler segment, asking if the strength seen in the quarter included any pre-buy activity and if the boiler sales cycle was elongating due to market uncertainty.

Answer

Stephen Shafer, Chief Executive Officer, confirmed that the Q4 outlook for China assumes an uptick in volume compared to Q3, but noted that year-over-year comps would be pressured due to the discontinuation of subsidy programs, leading to uncertainty. Regarding boilers, Shafer acknowledged some pre-buy activity for "inventoryable" sizes, which might create a slight headwind in Q4. However, he stated that quoting for larger Crest units remains steady, and there's no significant elongation in the quoting-to-order cycle.

Adam Farley asked about the drivers behind Valmont Industries' record infrastructure margins, inquiring about the most impactful initiatives and remaining opportunities for expansion. He also questioned if utility capacity additions were tracking above the initial $100 million revenue target and if there was potential for further upside.

Answer

EVP and CFO Tom Liguori attributed margin benefits to a combination of pricing (due to market leadership and value-added services) and cost actions initiated by President and CEO Avner Applbaum. He highlighted future opportunities in utility expansions and high-margin agriculture products. President and CEO Avner Applbaum confirmed the company is on track to exceed the $100 million capacity benchmark, emphasizing a multi-layered approach to capacity and continuous investment in brownfield expansions, automation, and process improvements.

Adam Farley asked about the key drivers behind the record 17.8% infrastructure operating margins in Q3 2025 and identified future opportunities for continued margin expansion.

Answer

Tom Liguori, EVP and CFO, attributed the margin improvements to a combination of strategic pricing actions, cost reductions, and a favorable mix shift towards higher-margin offerings like aftermarket parts and AgSense 365. Avner Applbaum, President and CEO, further highlighted the impact of brownfield utility expansions on driving growth and efficiency.

Adam Farley of Stifel Financial Corp. questioned Valmont's strategy for its solar business, including the rationale for exiting the North American market and the profitability of the remaining operations. He also inquired about the impact of recent steel tariffs on the company's financial outlook and pricing strategy.

Answer

CEO Avner Applbaum explained that the North American solar exit was due to poor returns and regulatory uncertainty, while the profitable Italian and scalable Brazilian operations remain. CFO Thomas Liguori added that exiting the slightly loss-making business will be accretive to EPS. Regarding steel, Applbaum emphasized value-based pricing, while Liguori noted the company primarily uses US steel, making tariff impacts profit-neutral through supply chain adjustments and pricing.

Adam Farley of Stifel inquired about the timing and effectiveness of pricing actions taken to offset tariff impacts, asking if there is a lag, and questioned the sustainability of the strong 30% growth seen in the Telecommunications business for the remainder of the year.

Answer

CEO Avner Applbaum explained that tariff mitigation is split evenly between pricing and supply chain actions. He noted that while pricing on new utility bids is immediate, repricing of existing backlog items will be reflected more in the second half. Regarding Telecom, Applbaum stated that order rates remain strong as carriers continue 5G upgrades and network modernization, citing Verizon's reaffirmed CapEx spend as a positive indicator for continued investment in the sector.

Adam Farley, on for Nathan Jones, questioned the drivers behind the positive outlook for China and Southeast Asia, asking which industries were performing well. He also asked about the price-to-cost impact on margins, particularly in relation to tariffs.

Answer

President & CEO Shyam Kambeyanda attributed the strength in China to ESAB's focus on the top-tier market, particularly in the energy and high-speed rail sectors. He noted Southeast Asia is recovering due to manufacturing infrastructure improvements. CFO Kevin Johnson confirmed that the company was price-cost neutral against tariffs during the quarter, covering all tariff costs with price increases.

Inquired about the drivers of growth in China and Southeast Asia and the impact of price versus cost on margins, particularly in relation to tariffs.

Answer

Growth in China is driven by the energy, high-speed rail, and high-end infrastructure sectors. Southeast Asia is recovering with manufacturing shifts. The company successfully covered all tariff costs with price increases, resulting in price/cost neutrality for the quarter, though it caused some gross margin compression.

Adam Farley of Stifel Financial Corp. asked about the drivers of the positive outlook in China and Southeast Asia, questioning which industries are performing well. He also inquired about the price-to-cost impact on margins, particularly in relation to covering tariffs.

Answer

President & CEO Shyam Kambeyanda attributed strength in China to ESAB's focus on the energy, high-speed rail, and high-end infrastructure sectors. He noted Southeast Asia is recovering due to manufacturing infrastructure improvements. CFO Kevin Johnson confirmed that the company was price-cost neutral against tariffs, successfully covering the costs with price increases, which caused some gross margin compression.

Adam Farley from Stifel Financial Corp. asked about regional differences in pricing versus input costs and whether the price-cost dynamic remained favorable. He also questioned if ESAB has any key product or channel gaps to address in high-growth South Asian markets like India and Bangladesh.

Answer

CEO Shyam Kambeyanda confirmed a positive net price dynamic in both the Americas and Europe, driven by pricing discipline and mix shift. CFO Kevin Johnson added that for Q4, the Americas will see positive price and negative volume, while EMEA/APAC will see the reverse, with both segments remaining margin positive. On South Asia, Mr. Kambeyanda highlighted a focus on building brand equity, training centers, and e-commerce to leverage their dominant market position.

Adam Farley, on for Nathan Jones, asked for a breakdown of the strong CCT segment orders, seeking to understand the split between market share gains and overall market growth. He also questioned the specific foreign exchange dynamics that led to margin compression in the Motion Technologies segment.

Answer

CFO Emmanuel Caprais explained that the CCT segment's 9% organic order growth was primarily fueled by significant share gains in the defense sector, with both legacy and the acquired Kesaria businesses winning content on coveted platforms. Regarding Motion Technologies, Caprais clarified that a weaker U.S. dollar creates a negative transactional FX impact that disproportionately affects that segment's margins, despite being a positive for translation.

Adam Farley of Stifel Financial Corp. questioned which CCT components are most exposed to tariffs and whether customers are actively deferring capital investments.

Answer

CEO Luca Savi explained that CCT's tariff exposure is mainly on connectors traded between the U.S. and Mexico, and mitigation relies on pricing actions for non-USMCA products rather than resourcing. He also stated that the company is not seeing a trend of customers deferring capital investments, as evidenced by strong project orders and a robust project funnel, suggesting the cautious outlook is based on macro prudence rather than observed behavior.

Adam Farley inquired about the cost impact from steel and aluminum tariffs and the progress of the Lindsay, Nebraska manufacturing modernization, including its effect on margins.

Answer

SVP & CFO Brian Ketcham stated that steel tariff impacts have been minimal as price hikes have not held, though other tariffs have a mid-single-digit impact managed by pricing actions. President and CEO Randy Wood confirmed the modernization project is on track. Ketcham detailed that recent margin expansion was primarily driven by international volume leverage and operational efficiencies across all factories, with growing subscription revenue also contributing.

Adam Farley, on for Nathan Jones at Stifel, questioned whether the domestic irrigation market could absorb another round of price increases in response to tariffs. He also posed a hypothetical question about whether a prolonged trade war could shift agricultural investment and production towards Brazil, potentially benefiting the company's operations there.

Answer

CFO Brian Ketcham responded that the company has already implemented pricing actions due to steel costs and feels confident it can pass along the anticipated mid-single-digit tariff impact, as competitors face the same pressures. CEO Randy Wood agreed that a trade war could shift global grain supply dynamics to benefit countries like Brazil, and he emphasized that Lindsay's global footprint allows it to react quickly to capitalize on such shifts in demand.

Adam Farley from Stifel inquired about the market outlook for Brazil, specifically if it is bottoming out, and asked about the nature of pricing pressure and the overall price-cost dynamic in the domestic irrigation market.

Answer

CEO Randy Wood stated that the Brazil market appears to be leveling off, with no expectation for significant further deterioration or near-term improvement, though new credit programs could provide some uplift. CFO Brian Ketcham addressed pricing, noting that while list prices are unchanged, there has been selective discounting. He characterized the current price-cost dynamic as margin-neutral, with softer steel prices being offset by inflation in other raw materials.

Adam Farley of Stifel inquired about the impact of inflation and tariffs on the business, asking which product areas are seeing the most price increases and how gross margins might be affected. He also questioned if the Q1 inventory increase was a strategic move to get ahead of tariffs and asked for an update on market share opportunities within the growing Gas Utilities sector.

Answer

CEO Rob Saltiel explained that the tariff situation is dynamic, with the largest impacts on imported steel products and goods from China. He detailed MRC Global's mitigation strategies, including leveraging its domestic sourcing (over 60% of U.S. sales) and working with suppliers. Saltiel confirmed they did strategically build some inventory in Q1. He also expressed optimism for the Gas Utilities sector's return to growth, citing new customer opportunities and the IMTEC Services joint venture. CFO Kelly Youngblood added that the Gas Utilities backlog was up 26% year-to-date through April, underscoring the positive momentum.

Adam Farley, on for Nathan Jones, asked if Lincoln Electric aims to expand margins with its tariff-related price increases, deviating from a simple cost pass-through. He also questioned whether the company would retain pricing gains if tariffs were to be reduced in the future.

Answer

CFO Gabriel Bruno reiterated the company's consistent strategy of remaining price-cost neutral. CEO Steven Hedlund expanded on this, stating the goal is to defend overall profitability by using a combination of pricing, productivity initiatives, cost savings, and sourcing alternatives. Their objective is to hold the full-year adjusted operating margin flat to down 50 basis points. Regarding a hypothetical tariff reduction, Bruno said the company would remain agile and responsive to market conditions rather than commit to a specific action.

Adam Farley, on for Nathan Jones, asked about any areas of relative strength by geography, end market, or product. He also inquired about how new product introductions were being received in the current weak demand environment.

Answer

CFO Gabriel Bruno identified pockets of strength, including energy investments in the Middle East, steady demand in HVAC and specialty gas, and positive trends in Asia Pacific and the Harris Products Group. CEO Steven Hedlund added that while new products were extremely well-received at a recent trade show, it remains to be seen when that enthusiasm will convert to orders given the cautious macroeconomic environment. Bruno reiterated that new products are a key long-term growth driver.

Adam Farley, on for Nathan Jones, asked which segments are experiencing the most significant near-term revenue headwinds from 80/20 'Quad 4' product exits. He also inquired if the 80/20 analysis has identified 'Quad 1' areas for potential growth investments.

Answer

President and CEO John Stauch identified the Water Solutions segment as seeing the most impact from 80/20 portfolio simplification actions, which are being undertaken to drive margin improvement. He confirmed that the 80/20 process has successfully identified 'Quad 1' customers and products across all businesses, creating opportunities to partner more effectively and drive focused growth.

Adam Farley asked if the strong APMEA growth was primarily driven by the data center business in China and inquired about the drivers and outlook for the strong institutional and light industrial construction markets in the Americas.

Answer

CEO Robert Pagano confirmed that the growth in APMEA was driven by both data centers in China and strong performance in the Middle East. He also noted that the institutional market in the Americas, particularly schools and hospitals, has been historically steady and is expected to continue its stable performance.

Adam Farley, on for Nathan Jones, asked about the primary drivers behind the strong margin performance in Process Flow Technologies. He also inquired whether PFT or Aerospace & Electronics stands to benefit more from the company's 80/20 deployment.

Answer

CFO Rich Maue attributed PFT's strong margins to solid price/cost performance, strong productivity, and higher volumes, reiterating the 35% incremental margin target. CEO Max Mitchell added that Crane's 80/20 approach is a holistic strategy focused on simplification, cost reduction, and over-serving core customers. Both he and Rich Maue suggested PFT would see more near-term benefits due to its less rigid long-term contract structure compared to A&E.

Adam Farley, on for Nathan Jones at Stifel, asked if the BlueEdge branding is accelerating bundled sales and inquired about the company's capital allocation priorities, particularly regarding the M&A funnel.

Answer

Chairman, President and CEO Kenneth Bockhorst explained that BlueEdge offers customers 'tailorable' solutions to meet them anywhere in their technology journey, facilitating cross-selling. CFO Robert Wrocklage clarified that while the cross-selling strategy isn't new, BlueEdge is a more tangible way to market it. Mr. Bockhorst reiterated that capital allocation priorities remain R&D, dividends, and disciplined M&A focused on sensors, software, and strategic technologies that plug into the BlueEdge ecosystem.