Damian Karas

Damian Karras asked about the projected profitability of nuclear awards, considering historical industry competitiveness during mega growth cycles that led to slim OE margins. He also inquired about the asbestos transaction's impact on Flowserve's cost of financing and the company's plans for its newfound balance sheet flexibility.

Answer

Scott Rowe, Flowserve's President and CEO, explained the multi-year lifecycle of new nuclear reactors, emphasizing high barriers to entry due to extensive engineering and quality requirements, which makes it difficult for new suppliers. He stressed the importance of performance, delivery, and capacity. Amy Schwetz, Flowserve's CFO, added that the asbestos divestment is credit enhancing but not significantly impactful on financing costs. She highlighted increased capital allocation opportunities, including opportunistic share repurchases and M&A for growth, guided by strict value creation criteria.

Damian Karas asked about the profitability of nuclear awards, drawing parallels to past competitive mega growth cycles in oil and gas where OE margins were slim. He sought insight into how Flowserve projects nuclear award margins relative to its other projects and its pricing strategy as nuclear capacity builds. He also inquired about the asbestos transaction's impact on the cost of financing and plans for the newfound balance sheet flexibility.

Answer

Scott Rowe, President and CEO, explained that nuclear projects have a multi-year lead time (4-5 years before shipping), with the initial years focused on engineering and quality, creating high barriers to entry for new suppliers. He expressed confidence in Flowserve's ability to retain and grow this work due to decades-long relationships and expertise. Amy Schwetz, CFO, added that Flowserve is actively adding nuclear expertise and focusing on cost structure to maintain competitiveness and strong margins. Regarding the asbestos transaction, Ms. Schwetz noted it is credit-enhancing but not significantly impactful on financing costs. She highlighted increased capital allocation opportunities, including opportunistic share repurchases and strategic M&A, with MOGAS integration serving as a successful example of value creation.

Damian Karas asked about the key remaining levers to drive FPD segment margins above 20% and questioned if the Q2 step-down in nuclear bookings to $60 million was merely timing or indicative of a slowdown.

Answer

SVP & CFO Amy Schwetz identified continued aftermarket capture and the early-stage 80/20 program as key levers for FPD margin expansion. President & CEO R. Scott Rowe added differentiated technology in new products as a third lever. Regarding nuclear bookings, Mr. Rowe confirmed the fluctuation was due to the lumpy nature of large project timing and that the nuclear project funnel is at its highest level ever. He also highlighted the company's first commercial award for a small modular reactor (SMR).

Damian Karas of UBS Group AG asked about the key remaining levers to push the FPD segment's operating margin above 20%. He also inquired if the Q2 nuclear bookings of $60 million, a step-down from prior quarters, was merely a matter of timing.

Answer

SVP & CFO Amy Schwetz identified continued aftermarket capture and the early-stage 80/20 program as key levers for FPD margin expansion. President & CEO R. Scott Rowe added a third lever: differentiated technology, including new pumps for hydrogen and LNG that will command premium margins. Regarding nuclear bookings, R. Scott Rowe confirmed the lower figure was due to the lumpy nature of large projects and not a market slowdown, noting the nuclear project funnel is at an all-time high. He also highlighted a significant win for a small modular nuclear reactor (SMR) project.

Damian Karas from UBS Group AG asked about the key remaining levers for driving FPD segment margins even higher, beyond the 20% level achieved. He also questioned if the Q2 nuclear bookings of $60 million, a step-down from previous quarters, indicated a slowdown or was merely a matter of timing.

Answer

SVP & CFO Amy Schwetz credited the FPD margin success to aftermarket capture and the early-stage benefits of the 80/20 program, which still has significant runway. President & CEO R. Scott Rowe added that differentiated technology, such as new hydrogen and cryogenic pumps, represents a third lever for premium margin growth. Regarding nuclear bookings, Rowe explained that the orders are inherently lumpy and the $60 million figure was due to project timing, not a market slowdown. He highlighted that the nuclear project funnel is at its highest-ever level and noted the company secured its first commercial award for a small modular reactor (SMR).

Damian Karas of UBS asked about the swing factors contributing to the wide range of outcomes implied by the full-year guidance and inquired about the drivers of the notable booking strength in the water end market.

Answer

CFO Amy Schwetz explained the Q4 guidance range is primarily driven by revenue uncertainty; reaching the high end would require strong book-to-ship performance or pulling forward POC revenue. CEO Scott Rowe attributed the strong water bookings to projects in flood control and industrial wastewater in North America, as well as a desalination project in the Middle East.

Damian Karas asked if ITT is experiencing any project deferrals in its Industrial Process (IP) segment, similar to what some peers have reported, despite ITT's strong organic growth. He also sought a framework for Connect and Control Technologies (CCT) margins in 2026, considering deal amortization and mix items across various end markets.

Answer

Luca Savi, CEO and President, confirmed that ITT is not seeing material project deferrals in IP, noting a positive sequential increase in the funnel of active, funded projects. Emmanuel Caprais, CFO, outlined CCT's 2026 margin outlook, expecting benefits from aerospace recovery (especially widebody) and compounded by pricing, with good progress in Boeing negotiations. He highlighted operational opportunities in sourcing and manufacturing, including investments in sites like Orchard Park and efforts to improve machining efficiencies. The end of temporary amortization from Casoria is expected to add over $0.10 to CCT's margins next year.

Damian Karas inquired whether ITT is experiencing any deferrals in the Industrial Process (IP) project space, similar to what some industry peers have reported. He also sought a framework for Connect and Control Technologies (CCT) margins in 2026, considering the impact of deal amortization and various mix items across OE, aftermarket, aerospace, defense, and energy.

Answer

CEO Luca Savi confirmed that ITT is not seeing material deferrals in IP projects, highlighting a positive sequential increase in the funnel of active, funded projects. CFO Emmanuel Caprais outlined CCT's 2026 margin drivers, including benefits from aerospace recovery (especially widebody), expected price increases (ongoing Boeing negotiations), operational improvements (sourcing, manufacturing efficiencies), and over $0.10 in earnings accretion from the end of Casoria's temporary amortization.

Damian Karas requested an update on ITT's pricing actions and its latest assessment of tariff exposure for the year. He also asked if the M&A environment for the Industrial Process space is becoming more active and sought thoughts on current deal pricing.

Answer

CEO Luca Savi stated that the estimated 2025 tariff impact has been halved to $25 million and is being fully mitigated by pricing and productivity, resulting in zero net income impact. Regarding M&A, Savi confirmed that the 'flow' area within Industrial Process is a key focus with many opportunities in a fragmented market, and ITT is actively cultivating its funnel for further acquisitions.

Damian Karas of UBS Group AG inquired about pricing dynamics in the Motion Technologies (MT) segment and the drivers behind the significant strength at the recently acquired Svanehøj business.

Answer

CEO Luca Savi and CFO Emmanuel Caprais clarified that the tariff impact on MT is minimal and that the segment's price-cost equation remains positive. Savi attributed Svanehøj's exceptional performance, including a 2.0x book-to-bill, to a combination of a strong marine market transitioning to green energy and market share gains driven by product quality and operational excellence.

Damian Karas requested a breakdown of the Motion Technologies (MT) guidance, including assumptions for auto production and Friction's outperformance, and asked for an update on the high-performance brake business.

Answer

CEO Luca Savi outlined that the 2025 forecast assumes a decline in global auto production to 89 million vehicles, which the Friction business is expected to outperform by ~400 basis points. He confirmed the high-performance brake project is on track for 2025 launches, with a more sizable profitability impact expected in 2026-2027. CFO Emmanuel Caprais added that MT's margin is targeted to reach 20% in 2025, driven by productivity and favorable pricing.

Damian Karas asked for an update on the high-performance brake pads business and aftermarket expansion plans, and also inquired about the drivers of strength in the connectors business.

Answer

CEO Luca Savi reported that the new high-performance pad facility is complete, with operations starting in Q1 2025 on already-won platforms. He stated that aftermarket expansion is currently focused on Europe, as global OE opportunities remain the priority. For connectors, Savi attributed the strength to a multi-year success story, highlighting localization in China, strong industrial market performance, and share gains in defense driven by product expansion and speed to market.

Damian Karas inquired whether SiteOne Landscape Supply Inc. had observed any changes in competitor behavior due to the current demand softness. He also posed a hypothetical question about the company's capacity to fully serve the market if housing and demand were to recover sooner than expected, despite ongoing store closures and footprint optimization efforts.

Answer

Chairman and CEO Doug Black acknowledged that competitive markets naturally intensify when demand is softer, particularly for larger customers and commercial business, but noted no unusual changes beyond what has been observed in the past couple of years. He affirmed that SiteOne would be able to fully serve a strong market with its current network, citing ample capacity and the ability to scale associates and distribution centers, emphasizing that network optimization would not hinder service in a stronger market.

Damian Karas asked if SiteOne Landscape Supply Inc. has observed any changes in competitor behavior due to the current demand softness and whether the company could fully serve the market if housing demand recovered sooner, despite ongoing footprint optimization.

Answer

Doug Black, Chairman and CEO, stated that while competitive markets naturally intensify during softer periods, particularly for larger customers and commercial business, SiteOne Landscape Supply Inc. has not seen anything unusual. He affirmed that the company would be fully capable of serving a stronger market with its current network and ample capacity, as network optimization would not hinder service but rather accelerate SG&A leverage.

Damian Karas of UBS Group asked management to identify the key commercial initiatives driving market share gains. He also inquired about the impact of U.S. immigration trends on their customers' labor availability and how SiteOne is preparing for potential labor scarcity.

Answer

CEO Doug Black attributed market share gains to several initiatives, including digital engagement through siteone.com, enhanced sales force productivity, growth in private label brands, and penetration into adjacent product lines like synthetic turf and erosion control. On the topic of labor, Black stated that while they monitor the situation, their customers generally have the labor required to complete their work, and the primary constraint on the market today is demand, not labor availability.

Damian Karas followed up on the tariff impact, specifically regarding products sourced from Mexico, and asked how the gross margin outlook is affected by stabilizing commodity prices and new price increases.

Answer

Executive Vice President John Guthrie explained that SiteOne does not directly import from Mexico, so any impact comes indirectly through suppliers. Regarding gross margins, Guthrie reiterated the full-year outlook remains 'steady,' as positive pricing impacts are expected to be offset by higher freight costs. He emphasized that most of the year's performance improvement is anticipated to come from SG&A leverage rather than significant gross margin expansion.

Damian Karas of UBS asked about the potential impact of tariffs not factored into guidance, including the product sourcing mix from China and Mexico, and also questioned the business impact from the recent California wildfires.

Answer

Executive John Guthrie estimated that 10-15% of sales have a sourcing component from Mexico, China, and Canada, and stated that the market historically passes through tariff-related costs quickly. CEO Doug Black explained that the impact from California wildfires is marginal in the short term as their business there is heavily weighted to new construction, though rebuilding will be a long-term benefit.

Damian Karas requested more details on the 16 branch closures, including their geographic and product concentration and the expected financial impact in 2025. He also asked for the rationale behind including the $5 million restructuring charge in adjusted EBITDA.

Answer

CEO Doug Black explained the closures are mostly consolidations, spread across all regions and product lines, with the goal of retaining most sales while lowering costs. He noted Pioneer's integration involves its own consolidations. EVP & CFO John Guthrie stated the charge was kept in adjusted EBITDA because it related to the base business rather than recent acquisitions, adhering to their strict adjustment guidelines.

Damian Karas asked about the potential impact of a U.S. government shutdown on Crane's operations and financial performance, particularly if it were to extend into the future.

Answer

Rich Maue, Executive Vice President and Chief Financial Officer, stated that the government shutdown is not currently impacting Crane, with no signals regarding bill payments or other operational aspects. He indicated no anticipated impact even into the first quarter.

Damian Karas asked for more color on Crane Company's fourth-quarter margin expectations, noting a projected step down from the strength seen in the first three quarters and incremental margins below the company's aspirational targets. He also inquired about any anticipated impact from a potential U.S. government shutdown.

Answer

Rich Maue, EVP and CFO, explained that the primary driver for the Q4 margin expectation is year-over-year headwinds in the commercial aftermarket, which were less pronounced in Q3. Other factors include initial provisioning orders and claim recovery benefiting Q3, an unfavorable mix from continued OE build rates, and typical Q4 seasonality with lower production hours in Aerospace & Electronics. He confirmed no current impact from a potential U.S. government shutdown, with no signals of issues with bill payments or any impacts on the horizon even into Q1.

Damian Karas sought clarification on the PSI acquisition, asking if value creation would come from operational changes rather than synergies, and how the deal facilitates future M&A. He also asked for color on second-quarter pricing strength.

Answer

EVP & COO Alejandro Alcala and CEO Max Mitchell confirmed the strategy is focused on operational execution via the Crane Business System, not traditional cost synergies. Alcala explained that A&E's new segment structure mirrors PFT's, enabling easier integration of future acquisitions. EVP & CFO Rich Maue stated that pricing actions successfully offset tariff impacts and are expected to continue doing so.

Damian Karas inquired about the updated guidance, specifically the contribution from price, and whether the strong backlog growth is primarily for deliveries in 2026 and beyond. He also asked about specific growth drivers for Crane within the new defense package.

Answer

EVP and CFO Rich Maue stated that price is expected to contribute about 3% overall, weighted more heavily toward the Process Flow Technologies (PFT) segment. He confirmed the strong backlog, particularly in defense, includes multiyear orders that provide confidence into 2026. Chairman, President and CEO Max Mitchell added that key defense themes driving growth include munitions replenishment, aging military upgrades, and electrification.

Damian Karas asked for an update on the Process Flow nuclear business, including activity from recent capacity additions and new tech company projects. He also inquired about current aerospace contract negotiations and any potential risks to the 2025 growth outlook.

Answer

CEO Max Mitchell described the nuclear business as stable with exciting long-term potential, noting the team is investing for growth and considering M&A. On aerospace, he confirmed that contract negotiations are ongoing as usual and expressed high confidence in the 2025 outlook, stating the primary risks are external shocks like war or another pandemic, not internal or market-specific issues.

Damian Karas inquired about the large project funnel, ongoing customer conversations, and the likelihood of project awards in Q4 or later. He also sought clarification on the reasons behind the pull-forward demand observed in Q3, specifically if tariffs or price optimization played a role.

Answer

CEO Bill Burns stated that the demand trajectory remained consistent with prior outlooks, with customers generally moving forward with planned projects but hesitant to accelerate future ones due to macro uncertainty and trade policy ramifications. He clarified that the Q3 orders were more about customers needing products earlier to meet peak demand, particularly in strong retail and e-commerce sectors, rather than a significant pull-in driven by tariffs or price optimization. He emphasized that the overall demand environment for the year is playing out as expected.

Damian Karas asked about the large project funnel, customer conversations, and expectations for Q4 large project activity, including the likelihood of awards. He also sought clarification on the reasons behind the pull-forward demand observed in Q3, specifically if tariffs or price optimization played a role.

Answer

CEO Bill Burns stated that demand trajectory remained consistent, with customers generally moving forward with planned projects but hesitant to accelerate future ones due to macro uncertainty and trade policy. He clarified that the Q3 orders were more about timing than a pull-in, as customers needed products earlier to meet peak demand, especially in strong retail and e-commerce segments. CFO Nathan Winters added that the Q4 guide assumes year-end spend similar to last year, with some pipeline needing conversion.

Damian Karas inquired about the Elo acquisition, focusing on its historical business cyclicality compared to Zebra, its market share, and competitive positioning. He also asked whether the positive outlook on recent U.S. tax legislation was based on internal analysis or direct customer feedback and funnel activity.

Answer

CEO Bill Burns stated that Elo's demand cycle is more balanced throughout the year, unlike Zebra's typical year-end spending surge, which he views as a positive. He described Elo's market as fragmented but noted its leadership in North America. CFO Nathan Winters added that the potential benefit from tax legislation is currently an internal assessment, as it's too early to hear direct customer feedback on capital allocation changes.

Damian Karas asked if the observed demand strength could be related to customers or distributors pulling forward orders to get ahead of price increases, and he inquired about the current state of channel inventories.

Answer

CEO William Burns stated they have not seen any pull-forward behavior from customers or partners. CFO Nathan Winters added that Zebra's pricing policy for distributors neutralizes any benefit from stocking up ahead of price hikes. Management feels good about the current channel inventory levels.

Damian Karas asked for the reasons behind the limited visibility on large deployments in 2025 and what assumptions are baked into Q4 guidance. He also requested an update on the performance of the machine vision business.

Answer

CEO William Burns stated that the Q4 guide is well-supported by the current pipeline. He attributed limited 2025 visibility to macro uncertainties causing customer caution. Regarding machine vision, he acknowledged a decline due to manufacturing weakness but noted stabilization in semiconductors and expressed long-term confidence driven by diversification and AI investments.

Damian Karas with UBS sought further details on the year-over-year increase in cameras and sensors, including driving factors and Q4 trends, and requested Teledyne's perspective on the macro outlook and potential growth for 2026.

Answer

Executive Chairman Robert Mehrabian attributed the 3.4% growth in DALSA/e2v to easier comparisons, with cameras up 11% and sensors up 5%, noting stabilization due to aggressive cost-cutting. He expressed a positive macro outlook for 2026, driven by strong defense spending in Europe and the Far East, and commercial recovery in machine vision and test & measurement.

Damian Karas sought further details on the year-over-year increase in cameras and sensors, asking about the driving factors and whether these trends are continuing into Q4. He also requested Executive Chairman Robert Mehrabian's perspective on the macro outlook and a preliminary ballpark estimate for 2026 growth.

Answer

Executive Chairman Robert Mehrabian explained that cameras were up about 11% and sensors about 5%, leading to an overall 3.4% increase, partly due to easier comparisons and stabilization of DALSA E2V businesses after cost reductions. He expressed positivity about defense businesses due to geopolitical issues and increased European spending, highlighting strong positions in loitering munitions and nano drones. He also noted recovery in machine vision and test & measurement, and long-term opportunities in power generation, concluding that 2026 should be a good year.

Damian Karas questioned why the strong book-to-bill in the Digital Imaging segment wasn't translating to a more significant sales forecast for the second half. He also asked for the drivers behind the strong margin performance in the Aerospace and Defense segment.

Answer

Executive Chairman Robert Mehrabian explained that while the FLIR business is performing well, the DALSA E2V business has been down, and its order pickup is from a lower base. He and CEO George Bobb attributed the strong Aerospace and Defense margins to excellent execution in legacy businesses and steady margin improvement in recent acquisitions like MicroPack and KeyOptik, consistent with Teledyne's operational playbook.

Damian Karas questioned why the strong book-to-bill in Digital Imaging wasn't translating to a more significant sales growth forecast for the second half. He also asked for the drivers behind the strong margin performance in the Aerospace and Defense segment.

Answer

Executive Chairman Robert Mehrabian explained that Digital Imaging's performance is mixed, with strong growth at Teledyne FLIR offsetting stabilization efforts and restructuring costs at the DALSA e2v businesses. President & CEO George Bobb added that Aerospace and Defense margins were strong in legacy businesses, while margins at recently acquired companies are being actively improved, which is a standard part of Teledyne's integration playbook.

Damian Karas questioned why the strong book-to-bill ratio in Digital Imaging isn't leading to a more significant sales growth forecast for the second half. He also asked about the drivers behind the strong margin performance in the Aerospace and Defense segment.

Answer

Executive Chairman Robert Mehrabian clarified that in Digital Imaging, strong performance at Teledyne FLIR is offsetting weakness in the DALSA E2V business, which is now stabilizing. Regarding margins, he and CEO George Bobb noted that while recent acquisitions initially lower segment margins, the legacy businesses are performing well, and they are actively improving margins in the newly acquired companies as part of their standard playbook.

Damian Karas from UBS sought clarification on whether the 1% GDP-related guidance reduction was due to an observed slowdown or a precautionary measure, and asked about any pricing or supply chain actions taken to counter expected tariff costs.

Answer

Executive Chairman Robert Mehrabian clarified that the guidance adjustment was a conservative 'guess' to de-risk the outlook amid uncertainty, rather than a reaction to a current, sharp downturn, pointing to positive book-to-bill ratios. He confirmed that Teledyne is actively pursuing tariff exemptions, supply chain adjustments, and will implement price increases where necessary, drawing on its experience from the 2021-2022 period.

Damian Karas asked about recent order trends and book-to-bill ratios across the business segments and inquired about management's perspective on potential policy implications from the new administration, including tariffs and government efficiency initiatives.

Answer

Executive Chairman Robert Mehrabian reported a positive overall book-to-bill of 1.04 for Q4, with particular strength in the Instruments segment (1.12). He noted the machine vision recovery is slow but ongoing. On policy, Mehrabian stated that potential tariffs would be manageable and less impactful than prior supply chain issues. He added that Teledyne's focus on purchase orders, unmanned platforms, and standard products positions it favorably to navigate government efficiency efforts.

Damian Karas inquired about the expected timeline for channel inventory destocking to normalize, specifically whether it would be sooner or extend through the first half of next year, and if contractors were carrying more inventory than previously suspected. He also asked about the Building Climate Solutions (BCS) segment's emergency replacement market share for 2025 and achievable targets for 2026.

Answer

CEO Alok Maskara noted that contractors were carrying a few weeks of inventory, partly due to past COVID-related supply chain concerns, and are now destocking as lead times improve. He estimated destocking would likely conclude by Q2 of next year. CFO Michael Quenzer expressed satisfaction with emergency replacement growth in BCS, reporting nearly 100% growth from a small base (5% of BCS revenue) and seeing multi-year growth potential as inventory is now fully deployed.

Damian Karas inquired about the expected timeline for channel inventory normalization, whether destocking extends into the first half of next year, and if contractors held more inventory than previously suspected. He also asked about the 2025 emergency replacement market share for the BCS segment and achievable goals for 2026.

Answer

CEO Alok Maskara indicated that contractors had been carrying a few weeks of extra inventory due to past supply chain issues, now destocking due to improved lead times and weak summer sales. He anticipates destocking to conclude by Q2 next year. CFO Michael Quenzer highlighted significant growth in BCS emergency replacement (nearly 100% on a small base), representing about 5% of BCS revenue, with multi-year growth potential.

Damian Karas of UBS Group inquired about the new Ariston partnership for water heaters, seeking details on early dealer feedback and the expected timeline for revenue contribution. He also asked about the current outlook on residential market share.

Answer

CEO Alok Maskara reported very positive dealer feedback on the Ariston JV, noting that 50% of their dealers already sell water heaters. He expects a product launch in Q1 of the following year, with meaningful growth starting in 2027, accelerating in 2029 with new regulations. Regarding market share, Maskara stated it's too early to be certain but expects to give back some of last year's gains, partly due to R-454B canister shortages.

Damian Karas inquired how Lennox's pricing actions align with competitors and asked about the reason for the lower corporate expense in Q1 and the outlook for that line item.

Answer

CEO Alok Maskara stated that based on market intelligence, competitor pricing actions have been in a 'fairly tight range' with Lennox's. CFO Michael Quenzer explained that the Q1 step-down in corporate expense was due to the timing of expenses and allocations, and for the full year, it is still expected to be flat to slightly down compared to 2024.

Damian Karas asked about the wide range in the 2025 free cash flow guidance and whether the pause in IRA funding posed a risk to long-term heat pump goals.

Answer

CFO Michael Quenzer explained the free cash flow guidance implies an 85% conversion rate, below the 90% target, due to inventory reinvestment and higher CapEx, with a return to 90%+ expected in 2026. CEO Alok Maskara stated the IRA pause is not a material concern, as it was not a significant driver in 2023-2024 and the key tax credit component remains active.

Damian Karas sought details on the Flow segment, specifically regarding price variation across residential, commercial, and industrial sub-segments, and the drivers behind the 10% growth in industrial solutions. He also asked for confirmation on whether there was any sequential decrease in Pool segment pricing.

Answer

CFO Bob Fishman expressed satisfaction with Flow's performance, noting price read-out across all sub-segments and strong growth in commercial (diversified customer base) and industrial (food & beverage, sustainable gas, easier compares). CEO John Stauch stated that Pool's price increases were held, with no challenges, and were timed with known information. Bob Fishman reiterated that Pool pricing read out about 5% for the year, with Q3 comparing against a large prior-year price increase.

Damian Karas delved into the Flow segment, asking about price variation across its residential, commercial, and industrial sub-segments, and what drove the 10% increase in industrial solutions. He also asked for confirmation that Pool pricing had held up without sequential decreases.

Answer

CFO Bob Fishman expressed satisfaction with Flow's performance, noting price realization across all three businesses. He attributed commercial growth to an expanded customer base and industrial growth to improved operational performance in food & beverage and sustainable gas, along with standardized offerings. He also mentioned stabilization and growth in the residential business. CEO John Stauch clarified that Pool pricing is assessed year-over-year, confirming that price increases were held without challenges, and no incremental increases were implemented for potential China tariffs. Bob Fishman added that Pool pricing read out at about 5% for the year, with Q3's price comparison bumping against a large increase from the prior year.

Damian Karas of UBS asked about the outlook for free cash flow in the fourth quarter, noting the strong year-to-date performance and high conversion rate.

Answer

CFO Bob Fishman responded that the company expects a 'pretty typical Q4' for free cash flow, acknowledging that seasonality plays a role in the fourth and first quarters, with Q2 typically being the strongest quarter for cash generation.

Damian Karas asked about the fiscal 2026 outlook for the barcoding and mobility solutions business, particularly regarding large project activity, and inquired about the potential impact of Zebra's acquisition of Elo on ScanSource's business.

Answer

CFO Steve Jones responded that while mobility and barcode was a strong growth area in Q4, macro uncertainty makes the timing of large deal rollouts a "wait and see" situation. CEO Mike Bauer commented on the Zebra/Elo deal, stating that while supplier consolidation is not typically beneficial, he is optimistic it could create new converged solutions for the retail channel, which would be a positive for ScanSource and its partners.

Damian Karas of UBS Group AG asked for clarification on the unchanged Security and Authentication Technologies (SAT) segment guidance, which implied a second-half slowdown despite a strong Q2, and requested more details on the new 'Fortress' authentication product.

Answer

President & CEO Aaron Saak explained that the full-year SAT guidance remains firm because strong Q2 performance was driven by the pull-forward of international currency shipments from the second half, representing a timing shift rather than a change in outlook. He described Fortress as a new materials-based technology from the De La Rue acquisition that allows product authentication and tracing via a smartphone app, noting a recent major customer win and a strong pipeline in markets like consumer goods.

Damian Karas asked about the key integration priorities for the newly acquired De La Rue business. He also questioned the expected sales progression for the CPI segment throughout the year, noting the implied ramp-up in the second half. In a follow-up, he asked for an update on OpSec synergy realization and the underlying organic growth expectations for both OpSec and De La Rue.

Answer

President and CEO Aaron Saak outlined a two-pronged integration strategy: commercial focus on winning customers and operational execution on synergies via the Crane Business System (CBS). He confirmed CPI's Q2 sales would be roughly flat sequentially, followed by a ramp to the $220-$230 million range per quarter in the second half. Saak also noted that the De La Rue closing will help accelerate OpSec synergies and that the combined Authentication business is expected to grow at a mid-single-digit rate.

Damian Karas asked for clarification on why the Security and Authentication segment's full-year core sales growth came in below the previously raised guidance and inquired about potential tariff impacts on the 2025 outlook.

Answer

CFO Christina Cristiano explained the slight miss was due to the timing of some international shipments pushing into Q1 2025 and softness in U.S. currency volume and mix. CEO Aaron Saak addressed tariffs, stating that the 2025 guidance does not include any impact, but the company sees no material risk on the horizon due to proactive supply chain diversification, minimal commercial business in China, and optimism regarding U.S.-Mexico trade discussions.

Damian Karas asked for elaboration on 2025 margins holding steady despite mix headwinds, the financial impact of the Tru Tag acquisition, the potential upside from the new $10 bill featuring micro-optics, and clarification on the magnitude of the free cash flow guidance change.

Answer

President and CEO Aaron Saak clarified that total NXT adjusted operating margins are expected in the 26-28% range for 2025, with productivity offsetting headwinds. He noted Tru Tag is not financially material but is strategically important. For the $10 bill, he used public data on the cost difference between a $1 and $100 bill to frame the potential value uplift from new security features. Executive Christina Cristiano explained the free cash flow change is due to collection timing on a few large international projects shipping late in Q4.

Damian Karas of UBS Group asked for clarification on the D&M guidance increase, the drivers of strong HVAC margins, pricing actions related to tariffs, the integration progress of recent acquisitions, and the reason for slightly lowering the top end of HVAC sales guidance.

Answer

CFO Mark Carano explained the D&M guidance raise was due to project pull-forwards from 2026 and that strong Q2 HVAC margins were driven by favorable project execution and mix. He confirmed pricing actions were taken to offset tariffs. President & CEO Gene Lowe described the integration of KTS and Sigma & Omega as 'very positive,' highlighting technology and channel synergies. Carano clarified the HVAC guidance was tweaked due to lower-than-expected tariff-related surcharges.

Damian Karas followed up on data centers, seeking to confirm the implied growth rate for 2025 and asking if there have been any changes to the project funnel. He also asked for elaboration on the longer-dated projects in the Detection & Measurement segment and the outlook for its short-cycle versus project-based business.

Answer

CEO Eugene Lowe confirmed that the data center demand funnel remains healthy and steady, with no negative changes observed. Executive Paul Clegg clarified that acquisition revenue from Ingénia and KTS should be considered when calculating underlying growth rates. Regarding D&M, Eugene Lowe explained that longer lead times are due to larger, multi-year transportation and military projects. CFO Mark Carano added that the guidance assumes a flattish run-rate business, though they are optimistic about the U.S. market.

In a follow-up, Damian Karas of UBS inquired about any operational impacts from recent hurricanes and the potential for related rebuild activity. He also asked about the opportunity for SPX given the renewed interest in nuclear power generation.

Answer

An unnamed executive confirmed no direct impact on facilities from recent hurricanes and noted it was too early to see meaningful replacement activity. CEO Eugene Lowe addressed the nuclear topic, stating it's a net benefit for their process cooling business. He noted that while small modular reactors are a longer-term opportunity, the immediate activity is in servicing existing plants to increase power output to support grid demand from data centers. He confirmed SPX is well-positioned if new nuclear projects are commissioned.

Damian Karas of UBS Group AG inquired about the drivers behind the improvement in broader factory automation, particularly in packaging and consumer electronics, asking if it stemmed from new customers or an improving underlying market. He also asked for early feedback on the OneVision AI platform and its potential broader release timeline.

Answer

CEO Matt Moschner detailed that consumer electronics growth is from increasing share of wallet and supporting geographic shifts. He noted packaging growth is broad-based, driven by both healthcare and FMCG, and is seeing positive impact from the sales channel transformation. Regarding OneVision, Moschner confirmed positive early feedback and stated the company is taking a methodical, phased rollout approach to ensure customer and sales channel readiness.

Damian Karas of UBS asked for an update on the consumer electronics market, including customer trends and the impact of supply chain shifts to India, and requested more detail on the company's exposure to and mitigation of US-China tariffs.

Answer

CEO Robert Willett confirmed a modest growth outlook for consumer electronics, driven by the replacement of human inspectors and new form factors. He noted that geographic shifts to regions like India represent an opportunity as new facilities are built with higher levels of automation. CFO Dennis Fehr explained that Cognex has 'very minimal' direct supply chain exposure to China and can leverage its flexible Southeast Asian manufacturing network to substantially mitigate the direct cost impact of tariffs.

Damian Karas asked about the outlook for the Automotive end market, questioning how much lower customer spending could go in 2025, and inquired about the potential for product form factor changes to drive growth in Consumer Electronics.

Answer

CEO Robert Willett explained that while the Automotive market will remain weak in 2025, he does not expect a decline on the same order as 2024's 14% drop, which was heavily impacted by a ~$50 million shortfall in EV battery projects. For Consumer Electronics, Willett stated it was too early to call the year but noted that new AI technologies like transformer models are well-suited for the sector's rapid scaling needs, and he would provide more color on the next earnings call.

Damian Karas requested a global overview of regional business trends and asked about the impact of new AI tools on pricing dynamics and their potential to drive a new customer investment cycle, particularly in Consumer Electronics.

Answer

CEO Robert Willett provided a regional breakdown, noting weak but stable conditions in the Americas and Europe (helped by Logistics), a slightly better market in Japan, and a complex situation in China. Regarding AI, he explained that the new tools make sophisticated vision technology more accessible and easier to deploy, broadening Cognex's market to less technical customers and serving more applications cost-effectively, rather than directly changing pricing models.

Damian Karas of UBS Group AG inquired about the pricing outlook for the remainder of the year, considering tariffs and inflation. He also asked for an estimate of how much Q2 volume headwinds were due to transient issues like weather versus underlying demand.

Answer

EVP Paul Johnston stated that equipment pricing is likely set for the year but noted that tariffs on copper are impacting non-equipment products. President A.J. Nahmad emphasized that while OEM costs are stable, Watsco's selling price is continuously optimized via technology. Management declined to quantify the impact of transient issues, with A.J. Nahmad calling it the 'noisiest year in HVAC ever' and stressing a focus on execution.

Damian Karas asked for color on the performance of non-equipment sales, which appeared stagnant. He also questioned management's confidence in returning to a 27% or higher gross margin and whether the influx of new customers would impact profitability.

Answer

Executive Paul Johnston noted that while commodity-related sales were slow, parts sales for installations and repairs saw a double-digit increase. Executive Albert Nahmad reiterated the company's aspiration for a 30% gross margin. Executive Barry S. Logan added that some business units are already near 30% and that technology and recovering from a vendor issue should help margins improve.

Zach Walljasper, on behalf of Damian Karas from UBS Group, asked for clarification on the drivers of the revised EBITDA guidance, specifically the impact of FX versus operations. He also inquired about the company's pricing strategy in light of commodity costs and tariffs.

Answer

CFO Brooks Mallard explained that the $15 million midpoint raise in EBITDA guidance was primarily due to a more favorable foreign exchange outlook for the second half of the year. On pricing, he noted that actions were delayed due to tariff volatility but will result in a sequential increase from Q2 to Q3. He reiterated the goal to remain dollar-neutral on tariffs, adjusting pricing as needed based on the final tariff impact.

Damian Karas of UBS asked for elaboration on management's view that the business is 'nearing a trough' and requested more details on the footprint optimization plan, including facility specifics and confidence in maintaining market share.

Answer

CFO L. Mallard explained that after many quarters of negative PMI, the company is positioning its inventory and labor to be ready for an eventual market inflection, which they expect to see in mobility sooner than in general industrial markets. Regarding the footprint plan, he noted it is primarily impacting the Fluid Power segment and emphasized that the goal is to optimize, not reduce, operational capacity to ensure they can serve customers effectively during a recovery.

Damian Karas from UBS Group inquired about North America water heater volume performance in Q2 compared to the prior year, the expected pre-buy headwind in Q3, and the reasons for underperformance in the China water heater business relative to industry peers.

Answer

CFO Charles Lauber explained that company volumes didn't track the flat industry due to their production smoothing strategy, and he provided a framework for the expected full-year shipment cadence. CEO Stephen Shafer addressed the China business, noting that while the brand remains premium, challenges include low consumer confidence, improved local competition, and a channel shift to online sales.

Damian Karas from UBS asked for an update on the execution of announced price increases, how the competitive landscape is reacting, and the status of the Mexico facility ramp-up, particularly in light of tariff impacts on the tankless market.

Answer

President and COO Stephen Shafer confirmed that price increase announcements have been made and communicated to customers. He acknowledged the market dynamics are different from past inflationary cycles but emphasized working closely with customers as the situation evolves. Shafer also stated they are actively accelerating the ramp-up of their Juarez, Mexico facility to transition tankless production from China, driven by the economic case presented by tariffs. CFO Chuck Lauber reiterated this move was always planned but is now being expedited.

Damian Karas questioned if there was a drop-off in North American water heater shipments in December, given that prior data showed improvement. He also asked for confirmation of positive pricing in Q4 and commentary on the competitive pricing environment.

Answer

CEO Kevin Wheeler explained that Q4 2024 volumes were compared against a very strong second half of 2023, when customers were building inventory due to extended lead times. In contrast, lead times normalized in the back half of 2024, leading wholesalers to adjust order rates downward, creating a timing-related volume decline. Wheeler confirmed the company realized positive pricing across all categories in 2024 as planned, while noting that situational discounting is a normal part of the market.

Damian Karas asked for a breakdown of performance between premium and mid-tier segments in China and inquired how much of the 17% sales decline was driven by volume versus price/mix.

Answer

CFO Charles Lauber stated that while the entire China market is down, they feel they have protected their share in the premium segment. CEO Kevin Wheeler added they remain selective with promotions to protect brand value. Lauber confirmed that the sales decline was "substantially all volume," with only minor pressure on mix.

Damian Karas of UBS inquired about customer CapEx budget discussions for the year and the company's exposure to potential tariffs from China, Mexico, and Canada.

Answer

CEO Rick Cohen noted increased customer interest across multiple categories, including manufacturers and international clients, driven by labor concerns. CFO Carol Hibbard stated that the impact from China tariffs is immaterial and that contracts typically allow for passing through such costs. Cohen added that most products are made in the U.S., with some assembly in Mexico, and that contracts are structured to pass along government taxes and regulations.

Damian Karas asked if the improving macroeconomic outlook has advanced customer conversations and inquired about the potential timing for winning further opportunities with Walmex beyond the initial two sites.

Answer

CFO Carol Hibbard responded that the system's strong ROI remains compelling regardless of the macro environment. On Walmex, she stated the immediate focus is on executing the first two deployments, but acknowledged that significant expansion opportunities exist given Walmex's large footprint, though no timeline was provided.

Damian Karas asked for quantification of the headwind from Water Quality product line exits in Q3 and inquired if updated EPA regulations for lead and copper in drinking water could be a meaningful business driver.

Answer

SVP and CFO Sameer Ralhan quantified the headwind from product line exits at approximately 70 basis points for the Water Quality segment. President and CEO Jennifer Honeycutt stated that Veralto is already well-positioned with existing technologies for lead and copper detection and does not expect the new regulations to be a significant sales driver, though there may be a marginal increase in testing frequency.