Deane Dray

Deane Dray from RBC Capital Markets inquired about the factors contributing to Flowserve's lower organic revenue growth in Q4 2025 and the conservative 2026 guidance, specifically asking about project timing, percentage of completion revenue, and anticipated impacts on first-half 2026 performance. He also asked about the potential opportunity in Venezuela, given Flowserve's historical presence and installed base.

Answer

CFO Amy Schwetz explained that Q4 revenue headwinds were due to customer and material delays on engineered projects, which are expected to abate in H1 2026. She noted a lower 76% backlog conversion for 2026, attributing it to strong aftermarket converting quickly versus longer-tenure nuclear projects, and highlighted accelerated 80/20 efforts impacting H1 growth. President and CEO Scott Rowe detailed Flowserve's historical $80 million annual revenue in Venezuela and its large installed base, stating the company is prepared to restart operations if and when investment resumes, though it's not in the 2026 forecast.

Deane Dray inquired about the light organic revenue growth in Q4 2025 and the 2026 guide, specifically asking for context on project timing, percentage of completion revenue, and anticipated impacts in the first half of 2026. He also asked about the potential opportunity in Venezuela, given Flowserve's historical presence and installed base.

Answer

CFO Amy Schwetz explained that Q4 revenue headwinds were due to customer delays and material timing on engineered projects, which are expected to abate in H1 2026. She noted a lower backlog conversion rate for 2026 (76%) due to a mix shift towards faster-converting aftermarket and longer-tenure nuclear projects, with revenue growth accelerating in H2. President and CEO Scott Rowe confirmed Venezuela was a significant market historically, with a large installed base and one operational QRC, but it is not included in 2026 forecasts.

Deane Dray congratulated Flowserve on the legacy asbestos divestiture, seeking clarification on the payment amount (less than $200 million) and its cash flow implications. He also asked about other factors contributing to the outstanding free cash flow this quarter, beyond the deal termination windfall, specifically regarding working capital improvements, and what this means for the full-year free cash flow target.

Answer

Amy Schwetz, CFO, confirmed the transaction involved a $199 million cash allocation in Q4, simplifying the capital structure and reducing volatility, with an anticipated annual cash flow benefit of $15 million to $20 million. She stated that Flowserve is now targeting 100% or better free cash flow conversion for the year, driven by margin expansion and significant focus on working capital management, with the 80/20 program and small divestitures contributing to inventory simplification. Scott Rowe, President and CEO, reiterated that while progress has been made, there is still substantial room for improvement in working capital.

Deane Dray congratulated Flowserve on the asbestos liability divestment, seeking clarification on the payment amount and its cash flow implications. He also asked for further details on the outstanding free cash flow performance, beyond the deal termination windfall, specifically regarding working capital improvements and the outlook for full-year free cash flow.

Answer

Amy Schwetz, Flowserve's CFO, confirmed the asbestos divestment will provide $15 million to $20 million in annual cash flow benefits, with a $199 million cash allocation in Q4, simplifying the capital structure and reducing volatility. For free cash flow, Ms. Schwetz stated a target of 100% conversion or better, attributing improvements to margin expansion and working capital focus, with 80/20 initiatives aiding inventory reduction. Scott Rowe, Flowserve's President and CEO, reiterated that while progress has been made in working capital, more improvements are expected.

Deane Dray from RBC Capital Markets asked about the strategic implications following the termination of the Chart Industries merger, questioning whether Flowserve's stated growth ambitions would lead to a search for another large deal or a renewed focus on the core business.

Answer

President & CEO R. Scott Rowe stated that while the outcome was disappointing, the company remained disciplined and secured a $266 million termination fee and a multi-year supply agreement with Chart. He affirmed that Flowserve will not shy away from future M&A and that the company proved it can manage strategic activities while delivering strong operational results. SVP & CFO Amy Schwetz reiterated that the M&A filter remains focused on diversification, decarbonization, and digitization, and that the company would consider large transactions if the value creation is compelling, all while maintaining a healthy balance sheet.

Deane Dray inquired about the implications of the terminated merger with Chart Industries, asking if Flowserve's growth ambitions have changed and how the company plans to proceed with its M&A strategy.

Answer

President & CEO R. Scott Rowe stated that while the outcome was disappointing, the decision to terminate was a disciplined one that protected shareholder value, yielding a $266 million termination fee. He affirmed that Flowserve will not shy away from future M&A. SVP & CFO Amy Schwetz reiterated that the company's M&A filter remains unchanged, focusing on diversification, decarbonization, and digitization, and that the business is mature enough to pursue strategic opportunities without disrupting organic operations.

Deane Dray of RBC Capital Markets asked about the implications of the terminated merger with Chart Industries on Flowserve's growth ambitions. He questioned whether the company would continue to pursue large-scale M&A or refocus entirely on the core business.

Answer

President & CEO R. Scott Rowe expressed disappointment in the outcome but pride in the team's disciplined approach, which resulted in a $266 million termination fee and a new supply agreement with Chart. He stated that Flowserve will not shy away from future M&A. SVP & CFO Amy Schwetz elaborated that the company's M&A filter remains unchanged, focusing on diversification, decarbonization, and digitization, while maintaining a healthy balance sheet. She emphasized that the process demonstrated Flowserve's ability to handle strategic activities without disrupting organic business performance.

Deane Dray requested insights into the nuances of Flowserve's pricing power, comparing the aftermarket to original equipment and considering customer demand elasticity. He also asked for an update on the Mogas acquisition, including integration progress and its expected contribution.

Answer

President and CEO Robert Rowe explained that aftermarket pricing is stickier due to the high cost of downtime for customers, making speed and availability more critical than price. For the Mogas acquisition, Rowe reported that integration is ahead of schedule and the business is already accretive to FCD's gross margins, despite lighter-than-expected Q1 project bookings. CFO Amy Schwetz added that accelerating Mogas synergies is a key factor in the company's expected second-half earnings growth.

Deane Dray asked for the basis of management's confidence in achieving a book-to-bill ratio above 1.0 for 2025 and inquired about the company's preparedness for potential geopolitical risks, such as new tariffs.

Answer

President and CEO Scott Rowe cited a healthy and elevated project funnel, particularly in the power sector, strong aftermarket momentum, and robust January order rates as the basis for confidence. He highlighted decarbonization and electrification as key macro drivers. On tariffs, Rowe expressed high confidence in the company's ability to manage them, leveraging past experience, supply chain visibility, and its significant U.S. manufacturing footprint to mitigate potential impacts.

Deane Dray of RBC Capital Markets sought confirmation that the $0.07 discrete charge was related to the routine annual asbestos liability true-up, asked about structural improvements in free cash flow, and questioned the balance between maintaining the >$1B bookings streak and project selectivity.

Answer

CFO Amy Schwetz confirmed the charge was for the annual, undiscounted long-term liability assessment and attributed improved cash flow to better inventory management. CEO Scott Rowe stated the company remains "incredibly selective" on projects to secure proper margins and aftermarket rights, viewing the bookings level as a result of deliberate strategy, not a streak to be maintained at all costs.

Deane Dray inquired about the expected impact of inflation and growth investments on nVent's 2026 guidance, specifically how new capacity coming online might affect typical margin progression. He also asked for an update on customer receptivity and current standing of the recently launched standardized modular liquid cooling platforms.

Answer

Gary Corona, Chief Financial Officer, explained that higher inflation is expected in 2026 due to labor, metals, and tariffs, which will be offset by strong productivity and pricing. He noted continued investments for growth, particularly in data centers. Beth Wozniak, Chair and Chief Executive Officer, added that rapid ramping and training of new personnel for new capacity introduce some inefficiencies, which are expected to improve with scale.

Deane Dray from RBC Capital Markets inquired about the expected impact of inflation and growth investments on nVent's 2026 guidance, specifically asking for context on how new capacity coming online affects typical margin progression. He also asked about customer receptivity to the new standardized modular liquid cooling platforms launched at Supercomputing and their current market standing.

Answer

CFO Gary Corona detailed that 2026 inflation, including $80 million in tariffs, labor, and metals, will be offset by strong productivity and pricing, while investments support top-line growth. CEO Beth Wozniak added that initial inefficiencies from rapidly ramping new capacity will improve with scale. Regarding new products, Ms. Wozniak noted very strong customer reception for the scalable and modular liquid cooling platforms, with launches expected through Q1 and Q2 2026, contributing to growth.

Deane Dray from RBC Capital Markets inquired about the conversion timeline and duration of nVent's backlog, which has grown fourfold year-over-year. He also asked for perspective on hyperscalers developing their own liquid cooling systems and how nVent's partnership model fits into this trend.

Answer

CEO Beth Wozniak explained that the backlog growth is driven by the data solutions business and the Tracte and EPG acquisitions, with visibility extending through 2026 and beyond. Regarding liquid cooling, she stated that nVent partners with many hyperscalers, often providing specific components like CDUs or manifolds, and noted that these customers often do not want to manufacture the solutions themselves, making partnerships key.

Deane Dray inquired about the performance and outlook for the Data Solutions business and asked for details on the financial contribution and potential synergies from the recent Avail and Trachte acquisitions.

Answer

An unnamed executive detailed that the Data Solutions business is expected to grow strong double-digits, with a strengthening back half and broad-based demand. CEO Beth Wozniak explained that the Avail acquisition builds on the Trachte platform, creating synergies in manufacturing and expanding into new applications like data centers. CFO Gary Corona confirmed Avail's $0.05 EPS contribution for 2025, noting it's accretive in the first year.

Deane Dray questioned the potential impact of new AI chip developments on the demand for liquid cooling, customer feedback on the topic, and the status of nVent's liquid cooling capacity expansion and utilization rates.

Answer

Chair and CEO Beth Wozniak stated that liquid cooling remains critical for energy efficiency regardless of AI chip generation, and customer CapEx commitments remain strong. She confirmed that nVent was providing liquid cooling even before the latest GPU chips. Wozniak also noted that the company is continuing its capacity expansion, including building out lab and testing capabilities, to meet growing demand and support a strong pipeline of new product launches in 2025.

Deane Dray asked for a more specific growth rate for the data center vertical and questioned how nVent addresses its brand visibility challenges in the space. He also followed up on the 4x liquid cooling capacity expansion, asking about its expected longevity and the mix between manufacturing and testing labs.

Answer

CFO Sara Zawoyski highlighted the full-year Data Solutions forecast of over $575 million, implying >20% YoY growth. CEO Beth Wozniak stated the nVent brand is well-known among hyperscale designers and their strategy is focused on rapid innovation. She clarified the 4x manufacturing capacity expansion should suffice for the next couple of years, while lab capabilities will more than double into 2025.

Deane Dray inquired about the magnitude of inflation pressures and sought clarification on whether current price increases are expected to fully offset these pressures. He also asked for an update on assumptions regarding residential lot development and construction activity.

Answer

Melissa Rasmussen, CFO, stated that Mueller Water Products expects to be price-cost positive for the full year. She quantified inflation, noting that while typically low single-digit, tariffs have more than doubled it, resulting in an approximately 3% impact from tariffs incorporated into guidance. Paul McAndrew, President and COO, confirmed no change in residential construction assumptions, still anticipating a high single-digit slowdown, but noted potential for increased activity if interest rates decline.

Deane Dray (RBC Capital Markets) asked Melissa Rasmussen to quantify the current inflation pressures faced by Mueller Water Products and to confirm if the recently announced price increases are expected to fully offset these cost pressures for the full year. He also inquired about any updated assumptions or changes in Mueller Water Products' outlook regarding residential construction and lot development activity for the upcoming period.

Answer

Melissa Rasmussen (CFO) confirmed that Mueller Water Products expects to be 'price positive, price cost positive' for the full year, noting that while typical inflation is low single-digit, tariffs have more than doubled this, incorporating an approximately 3% impact from tariffs in their guidance. Paul McAndrew (President and COO) stated there was no change in their assumption, still anticipating a high single-digit slowdown in residential construction, aligning with external reports, but noted potential for increased activity if interest rates lower.

Deane Dray from RBC Capital Markets asked for clarification on the magnitude and realization of the February price increases. He also inquired about any evidence of pre-buying or demand pull-forward by customers ahead of these increases and sought an update on the status of backlog normalization.

Answer

President & COO Paul McAndrew explained that recent pricing actions were targeted at specialty valve and Krausz products to offset specific tariffs, separate from the annual February increase. He stated that the company monitors buying behavior closely and has not seen any meaningful pre-buy activity. Both McAndrew and CEO Marietta Zakas confirmed that the short-cycle business backlog has largely normalized, while the backlog for longer-term project business remains healthy and at typical levels.

Deane Dray asked for clarification on whether Mueller saw any pre-buy activity from distributors ahead of tariff implementations and requested an update on the new foundry's operational status and any related impairment charges.

Answer

Paul McAndrew, President and COO, stated that while the company is analyzing order patterns closely, no significant pre-buy activity has stood out. He confirmed the new foundry is fully operational and the old one is no longer producing. Melissa Rasmussen, CFO, added that an $800,000 impairment charge related to the legacy foundry was recorded in the quarter, with potential for additional costs as decommissioning continues.

Deane Dray from RBC Capital Markets asked about the financial implications of the old foundry closure, including any remaining outsourcing and potential remediation liabilities. He also questioned how a potential shift in government spending priorities might affect water infrastructure investment.

Answer

President and COO Paul McAndrew confirmed that service brass outsourcing has been eliminated and that a $3.3 million charge was taken for asset write-downs, with any future decommissioning costs to be expensed as incurred. CEO Marietta Zakas addressed the spending outlook, expressing confidence in the resilience of municipal water investment due to bipartisan support for the infrastructure bill and the critical nature of addressing aging systems and health risks.

Deane Dray asked about the potential impact of the U.S. election on infrastructure stimulus spending, such as the IIJA, and inquired about risk mitigation strategies for the company's Krausz facility in Israel amid regional conflict.

Answer

CEO Marietta Zakas stated that the infrastructure bill has bipartisan support and is expected to continue, with current delays attributed to regulatory processes for domestic sourcing requirements (BABA). She noted that the 2025 outlook assumes minimal impact from these funds. President and COO Paul McAndrew added that while the Krausz repair products are a small portion of sales, the company has enhanced production flexibility and strengthened its supply chain to de-risk operations.

Deane Dray sought clarification on the 250 basis points headwind, how it spreads across the quarters, and the implications of the $1.4 billion goodwill impairment, particularly if other Test and Measurement businesses are vulnerable.

Answer

Neill Reynolds, CFO, explained that the operating expense run rate is now approximately $175 million per quarter, leading to about $700 million for 2025, with a modest increase expected for 2026, which accounts for the 250 basis points headwind. Regarding the impairment, he stated it was primarily related to EA (Elektro-Automatik) due to reduced EV subsidies and industry forecasts, not indicative of issues in other Test and Measurement businesses. Tami Newcombe, President and CEO, added that EA's technology remains best-in-class and is being redirected to other energy storage applications.

Deane Dray sought clarification on the 250 basis points headwind, specifically how it is spread across the quarters. He also asked about the implications of the $1.4 billion goodwill impairment related to the EA, Elektro-Automatik business and whether other Test and Measurement businesses are vulnerable, given the recent acquisition.

Answer

Neil Reynolds (CFO) explained that the operating expense run rate increased from $170 million to $175 million per quarter, translating to approximately $700 million annually for 2025, including corporate stand-up costs, with only a modest increase expected for 2026. Regarding the impairment, Neil Reynolds clarified it was primarily related to EA due to reduced EV subsidies and a reevaluation of forecasts, not indicative of broader issues in Test and Measurement. Tami Newcombe (President and CEO) added that EA's technology remains best-in-class and is being redirected to other energy storage applications.

Deane Dray asked about Carrier's expectations for the upcoming cooling season, given low residential channel inventories, and how the company is prepared for potential stock-outs or channel inefficiencies. He also inquired about the implications of NVIDIA's recent comments on chiller demand, specifically regarding the mix between water and air chillers and configuration economics.

Answer

David Gitlin (Chairman and CEO) emphasized Carrier's operational agility, stating they are positioned to support increased demand if weather is a positive factor, despite Q1 being expected down 20-25%. He noted they plan for a typical seasonal ramp but off a lower base. Regarding NVIDIA, he confirmed close collaboration on climate-optimized designs, stating data centers will require a combination of liquid and traditional cooling. Both Blackwell and Vera Rubin chips have similar thermal profiles requiring the same heat dissipation, with customer preference and water access influencing the water vs. air-cooled chiller mix.

Deane Dray inquired about Carrier's expectations for the upcoming cooling season, considering potential pent-up demand in the residential sector and historically low channel inventories, asking about the possibility of stock-outs or channel inefficiencies and Carrier's preparedness. He also asked about the implications of NVIDIA's recent comments on chiller demand, specifically regarding the mix between water and air chillers and configuration economics.

Answer

David Gitlin, Chairman and CEO, Carrier Global Corporation, emphasized Carrier's focus on operational agility and readiness for the cooling season. He noted that while Q1 is projected to be down 20-25%, if positive weather drives demand with low channel inventory, Carrier is operationally positioned to support it, planning consistently with recent six-month trends. Regarding NVIDIA, he stated that Carrier works closely with them on climate-optimized reference designs, confirming that data centers will require a combination of liquid and traditional cooling. He explained that both Blackwell and Vera Rubin chips have similar thermal profiles, requiring similar heat dissipation, and Carrier is working on both cooling types, with recent wins on the air-cooled side, depending on customer water access.

Deane Dray asked about the mindset of independent dealers in aggressively destocking to eight-year lows and the risk of inventory shortages if normal seasonal demand returns in the spring. He also inquired about demand trends in applied verticals beyond data centers and any impacts from government slowdowns or project delays.

Answer

CEO David Gitlin stated that independent distributors are being clear-eyed about balancing inventory levels. He acknowledged the potential for a strong influx of orders in the spring but emphasized Carrier's current conservative forecasting. Mr. Gitlin noted that the government shutdown primarily impacted the light commercial business, which is expected to be down about 15% in Q4. He highlighted data centers as a global strength, with industrial production and mega projects also strong. Education (K-12) is generally weak, and Carrier is focusing on modifications and upgrades in dense urban areas.

Deane Dray of Royal Bank of Canada asked about the mindset of independent dealers in aggressively destocking to eight-year lows and the risk of inventory shortages with normal seasonal demand in the spring. He also inquired about demand trends in non-data center applied verticals and any impact from government slowdowns or project delays.

Answer

CEO David Gitlin acknowledged the short-cycle nature of the business and the need for improved forecasting models. He stated that distributors are being clear-eyed about balanced inventory levels for the new year, aiming to avoid further destocking headwinds. He noted that the only direct impact from a government slowdown was in the light commercial business, which is weaker than expected for Q4 due to limited lending and SBA loan holds. He highlighted data centers, industrial production, and mods/upgrades as strong verticals, with education generally weak.

Deane Dray of RBC Capital Markets requested a spotlight on the non-data center commercial HVAC business, asking for performance details across different verticals. He also asked for an update on the services business performance and full-year expectations.

Answer

Chairman & CEO David Gitlin identified K-12 education as a softer vertical, while noting strength in mega-projects, healthcare, and specific retail and warehouse applications. For services, he reported 13% growth in the quarter and 10% year-to-date, reaffirming the goal of double-digit growth for the fifth consecutive year, supported by an increasing number of connected chillers and transport refrigeration subscriptions.

Deane Dray of RBC Capital Markets asked for an explanation of the free cash flow dynamics in the quarter, which appeared stronger than typical seasonality. He also inquired about the plan for the services business for the remainder of the year.

Answer

CFO Patrick Goris clarified that Q1 free cash flow of $420 million was stronger than seasonally typical, driven by higher net income and a lower-than-expected working capital build. CEO David Gitlin reiterated the 'double-digit forever' growth mantra for services, highlighting progress in chiller attachment rates (now over 60%) and a growing focus on mods and upgrades as key initiatives for the year.

Deane Dray requested details on the Quantum Leap data center initiative, including its 2024 revenue contribution, 2025 growth outlook, and partnership progress. He also asked about the anticipated foreign exchange headwind for the upcoming year.

Answer

CEO David Gitlin revealed that data center sales were approximately $500 million in 2024 and are expected to double to $1 billion in 2025. He positioned Quantum Leap as a key differentiator, offering a one-stop shop for integrated cooling solutions. CFO Patrick Goris quantified the 2025 FX headwind at about $200 million on sales and $0.05 on EPS, noting that transactional exposures are hedged.

Deane Dray from RBC Capital Markets asked for elaboration on the data center business, specifically the assumptions behind the 5-10x aftermarket multiplier and the degree of equipment customization for hyperscalers. He also inquired about the AFFF settlement, asking under what circumstances Carrier could collect more than the $615 million settlement amount.

Answer

David Gitlin, Chairman and CEO, explained the data center aftermarket opportunity is transformational, involving on-site technicians, real-time monitoring, and 'power by the hour' type agreements, justifying the high multiplier. He noted equipment is over 80% common with standard chillers but includes bespoke modifications for hyperscaler needs. Regarding AFFF, Gitlin stated that Carrier has insurance coverage exceeding $2.5 billion, so the ability to collect more exists and will depend on future navigation with plaintiffs, but emphasized the primary goal was to put the issue behind them.

Deane Dray asked for color on Fluke's performance, including sell-in and sell-out trends, short-cycle demand, and traction from new products. He also inquired about price contribution, price-cost dynamics, and the impact of tariffs.

Answer

Olumide Soroye, President and CEO, highlighted strong Fluke performance with consistent POS trends, encouraging improvements in EMEA and LATAM, and steady APAC. He noted continued order growth, a book-to-bill above 1 for the year, and improving channel inventory outside the U.S. Mark Okerstrom, CFO, stated price contributed about 2% to growth in Q4, with volume at 1%, and expressed confidence in gross margin scenarios going forward.

Deane Dray asked for color on Fluke's performance, including sell-in/sell-out trends and traction from new products, and followed up on the contribution of price to revenue growth and the impact of tariffs.

Answer

Olumide Soroye, President and CEO, highlighted Fluke's strong performance, consistent POS trends, order growth, and a book-to-bill ratio above 1 for the year, attributing success to new product innovation and targeted commercial investments. Mark Okerstrom, CFO, stated that price contributed about 2% to Q4 revenue, with 2026 expectations broadly in line, and noted that tariffs net of countermeasures are not expected to be meaningful to the bottom line in 2026.

Deane Dray asked for insights into Fortive's capital allocation strategy, specifically regarding the substantial share buyback in Q3, the decision-making process, and the current stance on M&A following the spin-off moratorium. He also sought color on Fluke's performance in the quarter, including sell-in versus sell-through dynamics and channel inventory levels.

Answer

Olumide Soroye, Fortive's President and CEO, expressed satisfaction with the $1 billion share repurchase in Q3, attributing it to strong free cash flow, Rallian dividend proceeds, and attractive share valuation. He reiterated that share repurchases are a key capital allocation option and that M&A will focus on smaller, accretive bolt-on acquisitions, not transformational deals, with the value creation formula not requiring M&A. Regarding Fluke, Mr. Soroye highlighted its return to growth, strong underlying metrics like order growth and POS in North America, improving channel inventory, and accelerated product innovation and commercial execution in high-growth markets.

Deane Dray asked about Fortive's capital allocation strategy, specifically the rationale behind the sizable Q3 share buyback and the current priorities for M&A following the spin-off moratorium.

Answer

President and CEO Olumide Soroye stated the $1 billion share repurchase reflected strong free cash flow, Rallian dividend proceeds, and attractive share valuation. He emphasized share repurchases remain a key capital allocation option. For M&A, the focus is on smaller, accretive bolt-on acquisitions that accelerate growth for existing businesses, not transformational deals, and M&A is not required for the 3-year shareholder value creation formula. Dray also inquired about Fluke's Q3 performance, including short-cycle demand, sell-in vs. sell-through, and channel inventory. Soroye expressed satisfaction with Fluke's return to growth, citing strong order growth, robust POS in North America, improving channel inventory outside North America, and accelerating product innovation and commercial execution.

Deane Dray of RBC Capital Markets asked for an update on the status of stranded costs following the spin-off and inquired about the monthly sales cadence within the quarter, specifically the factors behind the weakness in June and the subsequent recovery in July.

Answer

CFO Mark Okerstrom confirmed they are on track with prior guidance on stranded costs, with about half eliminated and the remainder to be addressed over the next year. CEO Olumide Soroye reiterated that the June weakness was concentrated in three specific areas: deferred short-cycle orders at Fluke due to tariff uncertainty, paused healthcare capital equipment purchases, and delayed government procurement. He stressed these were deferrals, not lost deals.

Deane Dray of RBC Capital Markets asked for an update on stranded costs following the spin-off and for more detail on the monthly sales cadence that saw a weak June followed by a stronger July.

Answer

CFO Mark Okerstrom confirmed they are on track with stranded cost removal plans. CEO Olumide Soroye reiterated that the June weakness was concentrated in three specific areas: deferred short-cycle Fluke orders, delayed healthcare capital equipment purchases, and paused government procurement, all of which were deferrals, not lost business.

Deane Dray asked if Fortive was implementing any new cost-cutting measures in the Precision Technologies segment to manage headwinds, given the upcoming spin-off. He also requested details on the size and focus of the company's growth investments.

Answer

President and CEO James Lico responded that the company had already initiated $20 million in proactive restructuring at the start of the year. He emphasized that the primary levers for PT are now pricing actions and tariff mitigation. Lico characterized the growth investments as being focused on the New Fortive segments (Healthcare and IOS), totaling around $10+ million, primarily for R&D.

Deane Dray of RBC Capital Markets praised the company's net working capital performance and asked how this metric would break down between the future New Fortive and Ralliant companies. He followed up by asking about the expected free cash flow conversion for each entity post-spin.

Answer

SVP and CFO Charles McLaughlin estimated that excluding software, working capital is around 9%, which would be the expected level for Ralliant, still a very strong figure. He projected free cash flow conversion for Ralliant would be in the 95% to 100% range. President and CEO James Lico added that both businesses will have very strong free cash flow post-separation.

Deane Dray of RBC Capital Markets requested details on the planned proactive restructuring, including its payback and scope, and asked for clarification on why calibration customers would defer purchases that seem tied to regulatory needs.

Answer

SVP and CFO Charles McLaughlin noted the restructuring targets slower areas with a typical payback of about one year. President and CEO James Lico clarified that while regulatory-driven calibration purchases continue, customers, particularly in government sectors, are deferring discretionary replacements of older equipment due to budget uncertainty.

Deane Dray asked about the potential disconnect or lag effect between the recent PMI above 50 and IDEX's demand outlook, specifically for its bellwether businesses, order rates, and any signs of inflection. He also welcomed Sean Gillen and inquired about his initial focus and priorities as the new CFO.

Answer

Eric Ashleman (President and CEO) noted that while the PMI was positive, IDEX's rapid replenishment businesses haven't shown an inflection in demand, remaining steady through January. He highlighted IDEX's ability to quickly capitalize on any future growth without significant resource additions. Sean Gillen (CFO) expressed enthusiasm for IDEX's strong franchise, 80/20 focus, and financial characteristics, stating his focus will be on continuing existing strategies and contributing to M&A strategy and execution.

Deane Dray asked about the perceived disconnect or lag between the recent PMI exceeding 50 and IDEX's current demand outlook, seeking granular details on day rates, order size, and blanket orders. He also welcomed Sean Gillen, the new CFO, inquiring about his initial observations, priorities, and focus areas for IDEX as a high-quality compounder.

Answer

Eric Ashleman, President and CEO of IDEX, acknowledged the positive PMI but noted that IDEX's rapid replenishment businesses had not yet seen an inflection in demand, even through January, which was affected by weather. He emphasized IDEX's readiness to capitalize quickly on any return to growth without significant resource additions. Sean Gillen, CFO of IDEX, expressed his appreciation for IDEX's strong franchise, highlighting its 80/20 foundation and robust financial characteristics. He plans to continue existing strategies, contribute to M&A strategy and execution for IDEX 3.0, and leverage his expertise to drive further progress.

Deane Dray with RBC Capital Markets inquired about the current tone of business, specifically asking for insights into order hesitation, day rates, order size, and bellwether businesses. He also asked about the presence of any blanket orders and the impact of government shutdowns on the fire business.

Answer

Eric Ashleman, President and CEO of IDEX Corporation, described two realities: dynamic growth in focus areas like data centers and water, and a stable but fragmented broad economy. He noted that bellwether businesses, primarily in FMT, show stable day rates but at a slightly lower level than Q1, with decision processes for large orders being elongated rather than canceled. Ashleman clarified that government funding disruptions impacting the fire business were more of a European and Far East issue, not significantly affecting the U.S. market.

Deane Dray with RBC Capital Markets inquired about IDEX's current tone of business, including insights into order hesitation, day rates, order size, bellwether businesses, and the impact of government funding disruptions on the fire business, particularly in Europe and the Far East.

Answer

Eric Ashleman, President and CEO of IDEX Corporation, explained that high-growth areas like data centers and water maintain positive energy, while the broader economy remains fragmented and stable but at a slightly lower level than Q1 2025, with no clear inflection. He noted elongated decision processes for large orders and stable rapid fulfillment from bellwether businesses (Gast, Warren Rupp, Viking, Bandit). Ashleman clarified that government funding impacts on the fire business are primarily in Europe and the Far East, not significantly affecting North America.

Asked for specific details on the monthly order rate volatility, the contribution of the Mott acquisition to the guidance cut, and an update on the life sciences market.

Answer

The company detailed the order pattern from April to July, noting a sharp dip in late June followed by a recovery. They clarified the guidance cut was driven by both mix issues in the MSS platform and delayed order conversion at Mott. They also confirmed that the life sciences business is recovering slowly, as previously anticipated.

Deane Dray of RBC Capital Markets asked for more color on the reported strength in the municipal water market and inquired about the M&A environment, specifically regarding valuation multiples and seller behavior amid uncertainty.

Answer

CEO Eric Ashleman attributed the municipal water strength to its defensive nature, driven by factors like climate events and multi-year infrastructure funding, where IDEX is positioned early with specification engineers. On M&A, he noted that while uncertainty tends to slow transaction timing, valuation expectations for quality assets remain sticky. He stated IDEX's focus remains on integrating recent deals and pursuing bolt-ons for its growth platforms.

Asked about the current 'tone of business' from short-cycle customers amid policy uncertainty, the significance of the return of blanket orders, and the level of growth investment planned for 2025 compared to 2024.

Answer

The company described the industrial sentiment as 'uncertain optimism,' with more discussions about future projects but no immediate increase in activity. The return of blanket orders is considered highly significant as they represent long-term, secular growth in key markets like space and pharma, with specific 2025 ship dates. Growth investments are now largely self-funded through efficiencies from the new scaled platform structure, rather than being a distinct bridge item.

Deane Dray of RBC Capital Markets inquired about the current 'tone of business' and customer sentiment in short-cycle industrial markets, given the shift from election to policy uncertainty. He also asked if the return of blanket orders should be viewed as a positive signal of customer confidence.

Answer

CEO Eric Ashleman characterized the current climate as one of 'uncertain optimism,' where industrial customers are stable and discussing future projects but are awaiting policy clarity before increasing production. He strongly affirmed that the return of blanket orders, especially in HST for applications like space and data centers, is a significant positive indicator. He described these orders as long-term annuity streams tied to evolving technologies, making them less vulnerable to short-term economic volatility. CFO Abhishek Khandelwal reinforced this by noting the orders have specific 2025 delivery schedules, providing clear revenue visibility.

Deane Dray of RBC Capital Markets inquired about the current 'tone of business' from short-cycle bellwether businesses and whether the return of blanket orders signals improving customer sentiment. He also asked for the specific amount of growth investments embedded in the 2025 guidance compared to 2024.

Answer

CEO Eric Ashleman described the industrial tone as 'stable' but with 'uncertain optimism,' noting customers are discussing future projects but have not yet increased production rates. He highlighted that the recent blanket orders in HST are a significant positive, as they are tied to long-term secular growth trends in areas like space and are less dependent on short-term economic shifts. Regarding growth investments, Ashleman explained they are now largely self-funded through productivity and resource leverage from the new platform structure, so they do not appear as a distinct bridge item as in the past.

Deane Dray of RBC Capital Markets inquired about the current business tone and day-rates, asking for color on the quarter's progression and whether project delays were escalating. He also asked for an update on the Intelligent Water portfolio's critical mass, capabilities, and growth strategy, particularly in stormwater management.

Answer

CEO Eric Ashleman confirmed that day-rates have been stable since Q2, with no project cancellations, and noted that quoting activity is picking up. He highlighted the Intelligent Water platform's focus on being 'collection experts' to help municipalities secure funding, citing the Subterra acquisition as a key addition to their capabilities. CFO Abhi Khandelwal added that within the FMT segment, pumps and water businesses grew at a high single-digit rate.

Deane Dray of RBC Capital Markets inquired about the current business tone, specifically day-rates and project activity, and asked for an update on the growth strategy and capabilities of the Intelligent Water portfolio.

Answer

CEO Eric Ashleman stated that day-rates have been stable since Q2, with project delays not escalating to cancellations and quoting activity picking up. He highlighted the Intelligent Water platform's focus on being 'collection experts' to help municipalities secure funding, noting the recent Subterra acquisition enhances these capabilities. CFO Abhi Khandelwal added that within the FMT segment, the core industrial franchise saw high single-digit growth.

Deane Dray asked about Veralto's expectations for the water sector macro, specifically municipal CapEx and demand trends comparing municipal customers to industrial, commercial, power, electrical, and semiconductor sectors. He also inquired about any supply or pricing pinches related to DRAM.

Answer

CEO Jennifer Honeycutt stated that Veralto sees steady demand across both municipal and industrial water markets, noting the company is relatively insulated from CapEx fluctuations due to 60% recurring revenue and its integral position in customer processes. She highlighted strong growth in industrial markets supporting data centers, semiconductors, mining, and power, alongside continued government funding for municipal projects. CFO Sameer Ralhan added that Veralto's exposure to DRAM is very small and not expected to be material.

Deane Dray asked about Veralto's expectations for municipal CapEx and demand trends across municipal versus industrial/commercial/power/electrical/semiconductor end markets in the water sector. He also inquired about any supply or pricing pinches related to DRAM across Veralto's businesses.

Answer

Jennifer Honeycutt, President and CEO, explained that Veralto sees steady demand in water quality across both municipal and industrial markets, noting insulation from CapEx fluctuations due to 60% recurring revenue. She highlighted strong growth in industrials supporting data centers, semiconductors, mining, and power. Sameer Ralhan, SVP and CFO, added that Veralto's exposure to DRAM is very small and not expected to be material.

Deane Dray of RBC Capital Markets inquired about Veralto's progress in offsetting tariff impacts through pricing adjustments and any observed ripple effects from potential government shutdowns on the water quality segment. Dray also asked for an update on China's demand pace, noting softness reported by peers.

Answer

Sameer Ralhan, SVP and CFO, stated that strategic pricing actions and supply chain changes have positioned Veralto well to offset tariff headwinds, despite ongoing volatility. Jennifer Honeycutt, President and CEO, confirmed no material impact from government shutdowns on the critical water quality business. Regarding China, Ms. Honeycutt noted performance was as expected, with no meaningful sequential changes in total sales from Q2 to Q3, highlighting strong execution in a mature market.

Deane Dray asked about Veralto's progress in catching up on pricing related to tariffs, any ripple effects from a potential government shutdown on the water quality business, and the pace of demand in China.

Answer

Sameer Ralhan (SVP and CFO) confirmed that strategic pricing actions and supply chain changes have effectively offset tariff headwinds. Jennifer Honeycutt (President and CEO) stated no material impact from the government environment on critical needs businesses. Regarding China, Jennifer Honeycutt noted performance was as expected, with no meaningful sequential changes in total sales from Q2 to Q3, despite an easier Q3 comparison.

Deane Dray inquired about the nature of investments in the recently acquired TraceGains business and the company's go-to-market strategy for the growing data center vertical.

Answer

President and CEO Jennifer Honeycutt explained that TraceGains investments focus on commercial headcount and R&D to fuel its over 20% growth. For data centers, she highlighted the direct sales approach of their Chemtreat business, which provides essential water treatment solutions for cooling systems.

Deane Dray followed up on tariffs, asking about price elasticity for consumables versus equipment and whether the company uses surcharges. He also asked for observations on the EPA's recent PFOS announcement.

Answer

President and CEO Jennifer Honeycutt explained that their pricing approach is surgical and varies by product and region, utilizing both surcharges and permanent increases. She emphasized that the essential nature of their products provides pricing power. Regarding PFOS, she stated that while Varalto is excited about the long-term opportunity, it is not in the current forecast, so any changes to EPA regulations have no immediate impact on their financials.

Deane Dray asked about the nature of year-end growth investments, their impact on sequential margins, and the strategy behind the minority investment in Axine Water Technologies, questioning if it represents an M&A-as-R&D approach.

Answer

President and CEO Jennifer Honeycutt confirmed the investments followed the 'Danaher playbook' of reinvesting from a position of strength. SVP and CFO Sameer Ralhan detailed that the sequential margin decline was due to the TraceGains acquisition, a higher mix of equipment sales, and intentional R&D and commercial investments. Regarding Axine, Honeycutt described it as one of several capital allocation tools, stating their team constantly scouts for partnership and acquisition opportunities.

Deane Dray asked a hypothetical question about Veralto's role in tracing a food contamination event and requested details on the company's disciplined acquisition criteria, particularly the financial hurdles like ROIC.

Answer

President and CEO Jennifer Honeycutt explained that Veralto is well-positioned for traceability, with TraceGains tracking ingredient sourcing and the marking and coding business providing lot codes for product identification and recall. SVP and CFO Sameer Ralhan detailed the M&A financial hurdles, stating that a small bolt-on is expected to achieve ROIC above the cost of capital by year 3, while a technology platform like TraceGains has a target of year 5 or 6.

Deane Dray asked for an update on tariffs, mitigation activities, and their impact. He also inquired about the latest developments in China, specifically the 'green shoots' mentioned earlier, and the opportunities in test and measurement, power generation, data centers, and AI infrastructure.

Answer

Ram Krishnan, EVP and COO, Emerson, noted positive news on China tariffs (AIPA, fentanyl), a slight headwind from Mexico tariffs, and a meaningful but early-to-quantify impact from India developments. He stated that the $130 million tariff built into the plan is seeing relief, which will be a net positive. Lal Karsanbhai, President and CEO, Emerson, highlighted good activity in test and measurement (high double digits, including semiconductor and portfolio business) and power generation (data center buildout, AI infrastructure, new capacity, nuclear, behind-the-meter work). However, he expressed overall concern for a low single-digit negative year in China.

Deane Dray asked for an update on tariffs and any mitigation activities, seeking color on the overall impact. In a follow-up, he inquired about the latest developments and opportunities in China, specifically referencing 'green shoots' mentioned by management despite the region's ongoing softness.

Answer

Ram Krishnan, Chief Operating Officer, noted positive news regarding China (AIPA, fentanyl tariffs reduced) but also a headwind from new Mexican tariffs. He mentioned that developments with India also have a meaningful impact, and while not fully quantified, the overall tariff situation is expected to be a net positive against the $130 million built into the plan. Lal Karsanbhai, President and CEO, identified green shoots in China within the Test and Measurement space (broad portfolio, Semiconductor where allowed, high double-digit growth) and power generation (data center buildout, AI infrastructure, new capacity, nuclear, behind-the-meter). However, he expressed overall concern that China would still be in a low single-digit negative world by year-end due to challenges in the Chemical sector.

Deane Dray asked for clarification on the software renewal accounting dynamic, its impact on the 2026 guide, and whether the $0.15 benefit in the 2025 EPS bridge was related. He also inquired about the free cash flow impact and the dynamics driving the better-than-expected Test & Measurement orders.

Answer

CFO Michael Baughman clarified that the software renewal is a timing dynamic of multi-year contracts, not an accounting change, confirming no impact on free cash flow and an expected reversal in 2027-2028. President and CEO Lal Karsanbhai highlighted significant momentum in Test & Measurement across Semiconductors, Aerospace & Defense, and the broad-based portfolio business, expressing confidence in the 2026 guide.

Deane Dray asked for clarification on the software renewal accounting dynamic, its impact on the 2026 guidance and 2025 EPS bridge, and whether it affects free cash flow. He also inquired about the momentum and dynamics of the Test and Measurement business, including specific verticals and market share gains.

Answer

Michael Baughman (EVP and CFO) clarified that the software renewal dynamic is a timing issue with multi-year term license contracts, not an accounting change, affecting GAAP revenue but not free cash flow, and is expected to reverse in 2027-2028. Lal Karsanbhai (President and CEO) confirmed significant momentum in Test and Measurement, particularly in Semiconductors, Aerospace and Defense, and the broad-based portfolio business, supporting confidence in the 2026 guidance.

Deane Dray of RBC Capital Markets asked about the commercial status of the Ovation AI Virtual Advisor and requested clarification on the impact of the 'One Big Beautiful Bill' mentioned in the company's 10-Q filing.

Answer

President & CEO Lal Karsanbhai confirmed that the Ovation AI Virtual Advisor has been launched and is integrated with Ovation 4.0, citing Entergy as an early adopter. EVP & CFO Mike Baughman explained the bill's provisions are modestly helpful to Emerson's tax outlook and that the accelerated depreciation reference was for Emerson's own CapEx, which is not a meaningful impact.

Deane Dray of RBC Capital Markets questioned the decision to retain the Safety & Productivity business after a strategic review. He also asked for the specific data points and leading indicators behind the noted softness in China, factory automation, and construction markets.

Answer

CEO Surendralal Karsanbhai stated that after a thorough review, retaining the business was determined to create the best value for shareholders, citing its alignment with reshoring and U.S. manufacturing trends. For market softness, he specified that China's weakness is in bulk chemicals, while factory automation is impacted by automotive spending declines in China and Germany, which is reflected in daily orders and funnel activity.

Deane Dray of RBC Capital Markets asked for commentary on business performance in January and for an update on expectations for how upcoming mega projects will benefit the company.

Answer

President and CEO Lal Karsanbhai declined to comment on intra-quarter performance but reiterated confidence in the full-year guidance. COO Ram Krishnan highlighted that Emerson is well-positioned to capitalize on its project funnel, particularly in LNG and power, but also across a diversified set of industries including chemicals, life sciences, and metals & mining, referencing the $11.5 billion funnel.

Deane Dray inquired whether Emerson was seeing any customer project delays or push-outs and asked for the specific assumptions behind the expected second-half recovery in China, beyond just easier comparisons.

Answer

Chief Operating Officer Ram Krishnan confirmed that Emerson did not see any project delays from customers, noting the capital cycle remains strong in energy, power, and LNG. Regarding China, he mentioned that while the power segment is strong, the recovery hinges on discrete and chemical markets, with some green shoots seen in chemicals and an anticipated discrete recovery in the second half of 2025.

Deane Dray inquired about the data center order mix, specifically the percentage of hyperscale versus colocation and enterprise, and whether Eaton was still being asked to enter into 5-year supply agreements. He also asked about Eaton's position on the 800-volt DC transition.

Answer

CEO Paulo Ruiz stated that Eaton now has a much more balanced mix of data center customers, including all hyperscalers and key multi-tenants, and declined to provide a specific breakdown. He noted a significant shift in 2025 orders, with 50% coming from cloud-based data centers and 50% from AI, which is beneficial due to higher dollar-per-megawatt content with AI loads. For 2025 revenues, 70% were cloud-based and 30% AI. Paulo Ruiz clarified that the dynamic of 5-year supply agreements is no longer prevalent, with current orders typically delivered within 12-18 months. Regarding the 800-volt DC transition, he confirmed Eaton is leading the technology with Resilient Power, working with authorities to define codes, and partnering with chip manufacturers and hyperscalers on new designs.

Deane Dray asked about the data center order mix, specifically the proportion of hyperscale versus colo and enterprise, whether Eaton is still engaging in five-year supply agreements, and the company's stance on the 800V DC transition.

Answer

CEO Paulo Ruiz stated that Eaton now has a much more balanced mix of data center customers, including all hyperscalers and key multi-tenants, moving away from reliance on just a couple of hyperscalers. He noted that 2025 orders were 50/50 cloud-based versus AI, a shift from 70% cloud and 30% AI in 2025 revenues, which is beneficial as AI loads increase content per megawatt. Ruiz clarified that the dynamic of five-year supply agreements is no longer prevalent, with orders typically delivered within 12-18 months. On 800V DC, he confirmed Eaton is leading the technology with Resilient Power, working with authorities to create codes, and partnering with chip manufacturers and hyperscalers on new designs.

Deane Dray inquired about Boyd's capacity investments needed to support the projected 70% growth for 2026, considering its 16 plants, and if there's a specific backlog limit Eaton aims to maintain. In a follow-up, he asked for an update on mega projects, including the number of projects and Eaton's win rates.

Answer

CEO Paulo Ruiz confirmed that Boyd's capacity plan is well underway, with two large facilities (one in Asia, one in North America) ramping up, equipment in place, and long-lead items ordered for 2026 and 2027. He expressed confidence in Boyd's ability to ramp, noting that Q4 exit rates already align with next year's revenue numbers. Regarding mega projects, Paulo Ruiz reported record announcements in Q3, reaching $239 billion (up 18% year-over-year and almost 50% sequentially), with nearly half being data centers. He highlighted a $2.6 trillion backlog, up 29% from last year, and Eaton's win rate of around 40% on bids, translating to approximately $2 billion in orders and an active negotiation pipeline of $4 billion. CFO Olivier Leonetti added that hyperscaler CapEx announcements for 2025 and 2026 further triangulate the strong demand.

Deane Dray inquired about Boyd's capacity needs to support its projected 70% growth in 2026, asking about current capacity additions and any backlog targets. He also requested an update on mega project announcements, including the number of projects and Eaton's win rates.

Answer

Paulo Ruiz, Chief Executive Officer, confirmed that Boyd is actively ramping two large facilities in Asia and North America, with equipment ordered, hiring underway, and long-lead capital goods secured, ensuring capacity for 2026 and 2027. He noted that Eaton could further accelerate investments if needed. Regarding mega projects, Ruiz reported that Q3 announcements reached $239 billion (up 18% year-over-year, nearly 50% sequentially), with half being data centers and the other half diversified. He highlighted a significant runway, with average monthly announcements of $65 billion versus $100 billion in starts for the first nine months, and a $2.6 trillion backlog. Eaton won approximately $2 billion in orders, is negotiating another $4 billion, and maintains a strong 40% win rate. Olivier Leonetti, Executive Vice President and Chief Financial Officer, added that hyperscaler CapEx growth further supports these trends.

Deane Dray of RBC Capital Markets requested a product breakdown for the new capacity coming online and asked how this might normalize the extended backlogs, particularly for transformers.

Answer

CEO Paulo Ruiz specified that the new capacity includes transformers, switchgear, and utility equipment like voltage regulators. He explained that while lead times for smaller transformers are improving, the overall backlog is not expected to materially decrease in the near term due to the strength of incoming orders and demand for differentiated solutions.

Deane Dray asked about the implications of the industry's data center construction backlog increasing from 7 to 9 years, including opportunities for Eaton to increase its share of wallet. He also inquired about barriers to entry in the data center market as new competitors emerge.

Answer

President and COO Paulo Sternadt explained the extended backlog drives demand for modular solutions like Fiber Bond to accelerate deployment and improve capital efficiency. He noted it opens doors for broader solution discussions where Eaton's comprehensive portfolio is an advantage. As a barrier to entry, Sternadt highlighted the increasing need for deep collaboration with chip manufacturers like NVIDIA on future designs, a dialogue that is difficult for new entrants to establish, in addition to being on approved vendor lists.

Deane Dray from RBC Capital Markets asked about Eaton's preparations for potential tariffs and inquired about the key indicators and supply agreement structures related to the data center build-out.

Answer

Paulo Sternadt, President & COO, stated that Eaton is prepared for tariffs with a playbook of commercial actions and is insulated by its 'in-region, for-region' production strategy. For data centers, he confirmed that supply agreements have sizable cancellation penalties and no cancellations have occurred. Craig Arnold, Chairman & CEO, added that the primary constraints remain power, site, and labor availability, not market demand.

Deane Dray inquired about the contribution of new products to price increases in the Pool segment and whether there was any impact from early buy programs. He also asked for clarification on how Pentair was able to offset the China tariff impact, as indicated by a zero impact on slide 18, and details on supply chain adjustments.

Answer

CEO John Stauch confirmed that early buy order intake was in line with previous years and reflected in the 2026 guide, and new product introductions contribute across all businesses, though their impact is less visible without volume tailwinds. CFO Bob Fishman clarified that the chart on tariffs shows incremental impact, and CFO Nick Brazis added that earlier China headwinds mitigated in the second half of the year, resulting in a flat year-over-year impact.

Deane Dray asked about the contribution of new products to the pool segment's price increase and whether early buy programs played a role. He also sought clarification on how Pentair managed to offset the impact of China tariffs, particularly regarding supply chain adjustments.

Answer

CEO John Stauch confirmed that early buy orders were in line with previous years and reflected in the 2026 guide, and new product introductions contribute to all businesses, though harder to quantify without volume tailwinds. CFO Bob Fishman clarified that the $70 million tariff impact was for 2025, with an incremental $30 million expected in 2026. CFO Nick Brazis added that earlier China tariff headwinds mitigated in the back half of the year, resulting in flat year-over-year impact from China.

Deane Dray asked for context on the transformation savings, specifically the buckets (e.g., SG&A) and the remaining potential. He also inquired about the Pool segment's early buy season, noting it wasn't mentioned and whether it was included in assumptions.

Answer

CFO Bob Fishman detailed that transformation savings, initially sourcing-focused, are now balanced across four pillars: value-based pricing, sourcing (make vs. buy, 80/20 lens), productivity (automation, lean, labor/overhead), and organizational excellence (G&A targets). CEO John Stauch confirmed that early buys are always present in Pool, describing the current season as normal, with typical Q4 and Q1 revenue distribution.

Deane Dray followed up on the transformation initiatives, asking for context on the sources of savings (e.g., SG&A) and the remaining potential. He also sought clarification on the Pool segment's early buy season, specifically if it was still needed and included in current assumptions.

Answer

CFO Bob Fishman detailed the transformation journey, highlighting consistent savings and a shift from primarily sourcing in early years to a balanced approach across four pillars: value-based pricing, sourcing (including make vs. buy and 80/20 lens), productivity (factory automation, lean, operational footprint, labor/overhead targets), and organizational excellence (G&A targets). He indicated more details would be shared at Investor Day. CEO John Stauch confirmed that early buys are a normal, annual occurrence in the Pool segment, with no abnormal efforts, and that a typical early buy season is expected for Q4, with revenue split between Q4 and Q1.

Deane Dray of RBC Capital Markets followed up on the KBI services divestiture, asking if it would result in any loss of aftermarket product pull-through. He also inquired about other potential divestitures and sought observations on the company's record free cash flow performance.

Answer

President and CEO John L. Stauch expressed confidence that there would be no loss of product pull-through, as relationships with distribution for the Everpure and Manitowoc brands have strengthened. He noted no other major divestitures are pending. EVP and CFO Bob P. Fishman attributed the record free cash flow to strong earnings and a continued focus on working capital improvements, specifically DSO and inventory management.

Deane Dray questioned the strategy behind prepositioning inventory and capping customer orders ahead of tariffs, and asked if Pentair is seeing any signs of demand destruction or project pushouts.

Answer

CEO John Stauch clarified that capping customer orders is a strategic lesson from past disruptions, aimed at preventing channel over-buying and shadow inventory. He stated that while they are monitoring closely, they have not yet seen material evidence of demand destruction or project cancellations, noting many large projects are local-for-local and unaffected by the specific tariffs.

Deane Dray questioned whether the low single-digit growth forecast for the Pool segment represents a new normalized rate or if significant headwinds like interest rates persist. He also asked for comments on press reports about a large food and beverage water treatment asset being marketed for sale.

Answer

President and CEO John Stauch stated emphatically that current pool market levels are not normalized, highlighting that new pool builds remain down 23% from 2019 levels, which suggests significant long-term recovery potential. Regarding the M&A rumor, he declined to comment on specific market speculation, reiterating that Pentair's strategy remains focused on bolt-on acquisitions.

Deane Dray of RBC Capital Markets inquired about the progress and potential impact of Pentair's value-based pricing initiatives and asked for context on customer CapEx spending delays.

Answer

President and CEO John Stauch explained that value-based pricing is in its early stages but has great future potential, with progress being further along in the Pool segment. He noted that the CapEx delays are primarily in the Flow business, related to larger projects from beverage customers, and expects them to be delayed by several quarters rather than canceled.

Deane Dray requested a comprehensive overview of AMETEK's end market performance, including process businesses, aerospace & defense, power, and automation & engineered solutions, along with specific regional dynamics across the U.S., Europe, and Asia (including China). He also asked about the expected conversion rate of AMETEK's record backlog into sales for 2026, referencing typical historical and recent expansion rates.

Answer

Chairman and CEO David Zapico detailed that process businesses saw mid-teens overall sales growth in Q4 2025 (low single digits organically), with low single-digit organic growth expected for 2026. Aerospace & Defense had low double-digit growth in Q4 2025 (overall and organic), with high single-digit organic growth expected for 2026. Power businesses grew mid-single digits (overall and organic) in Q4 2025, with mid-single-digit organic growth expected for 2026. Automation and Engineered Solutions also delivered low double-digit overall and organic sales growth in Q4 2025, with mid-single-digit organic growth expected for 2026. Geographically, the U.S. and international sales were up mid-single digits, with Europe up low single digits and Asia up 10% (China up low double digits). Mr. Zapico indicated that backlog conversion for 2026 would be in the 30%-50% range, similar to historical patterns, and expressed optimism about order pipelines.

Deane Dray requested an overview of AMETEK's end markets and key platforms, including regional dynamics, and asked about the expected conversion rate of the record backlog for 2026.

Answer

Chairman and CEO David Zapico detailed Q4 2025 performance: process businesses were up mid-teens% (low single-digit organic), aerospace and defense saw low double-digit growth, power businesses were up mid-single digits, and automation and engineering solutions delivered low double-digit growth. Geographically, the U.S. and international sales were up mid-single digits, with Asia up 10% (China up low double digits). Mr. Zapico indicated that backlog conversion for 2026 is expected to be in the 30%-50% range, similar to historical patterns, with strong order pipelines.

Deane Dray from RBC Capital Markets inquired about AMETEK's performance across key platforms and regions, specifically highlighting the strong quarter for Paragon, and later asked about the impact of tariffs on China sales.

Answer

Chairman and CEO David Zapico detailed performance by segment: Process sales were up low teens (acquisitions), organic sales slightly down; A&D organic sales increased low double digits; Power and Industrial sales were up mid-single digits, benefiting from grid modernization and AI data center demand; Automation and Engineered Solutions saw high single-digit organic growth, led by Paragon Medical. Geographically, U.S. sales were up mid-single digits, Europe up low double digits, and Asia down mid-single digits due to China, which was impacted by tariff renegotiations causing delays.

Deane Dray of RBC Capital Markets inquired about AMETEK's end-market and regional performance, the impact of the fluid global trade environment, and the monthly sales and order cadence during the quarter.

Answer

Chairman and CEO David Zapico provided a detailed tour, noting strength in Aerospace & Defense and Power, with guidance raised for both. He stated the company is "very confident" in its ability to mitigate tariff impacts through pricing, supply chain adjustments, and localization. Zapico confirmed a typical quarterly cadence, with June being the strongest month for orders year-to-date and July starting strong.

Deane Dray requested a breakdown of end-market performance by geography and vertical, and asked about any signs of demand destruction. He also asked for the size of China sourcing to help frame the tariff headwind.

Answer

CEO David Zapico detailed geographic performance, noting U.S. growth was offset by modest international declines, with China sales down about 10%. He estimated a $100 million annual direct tariff impact, which the company expects to mitigate. Zapico specified that about 4% of total sales are direct U.S.-to-China exports facing retaliatory tariffs, causing potential short-term shipping delays.

Deane Dray requested a walkthrough of performance by end market and geography, with a specific focus on China, and asked whether prolonged destocking indicates lower demand versus a simple inventory correction.

Answer

Chairman and CEO David Zapico detailed end market performance, noting strength in Aerospace & Defense and weakness in Process and Power & Industrial organic sales. Geographically, he highlighted strong growth in Europe and Asia, with China up 10% due to market share gains. Zapico expressed confidence that the current headwinds are a destocking issue, not a fundamental demand problem, citing robust new business activity and project pipelines.

Deane Dray asked about the competitive dynamics impacting pricing, specifically the encouraging trend of steel prices being up year-over-year and the factors behind it, versus the ongoing pressure on PVC prices due to new capacity. He inquired when the company expects to achieve a normalized year-over-year price. Additionally, Dray asked if Atkore has been able to quantify the capacity increase, on a percentage basis, in conduit or other electrical products resulting from shifting manufacturing resources to its core electrical business.

Answer

President and CEO Bill Waltz explained that strong overall demand and retreating imports created a favorable market for steel conduit, allowing for growth in price and margin. For PVC, spread compression is expected, and pinpointing when it will stop is difficult. CFO John Deitzer added that copper volatility makes price-versus-cost predictions challenging. Bill Waltz clarified that the capacity shift primarily benefits metal conduit, as mechanical products are metal-based. He noted that the 80/20 initiative is effectively helping S&I margins by focusing on key products and customers, while freeing up sufficient capacity to meet market demand for electrical products, particularly with growth in data centers and overall markets.

Deane Dray asked about the competitive dynamics impacting pricing, specifically the encouraging year-over-year increase in steel conduit prices (driven by volume or competitive changes?) and the ongoing pressure on PVC prices (due to new capacity). He also sought to understand when Atkore expects to achieve a normalized year-over-year price. Additionally, he inquired about the capacity increase, on a percentage basis, in conduit or other electrical products resulting from shifting manufacturing resources to the core electrical segment.

Answer

President and CEO Bill Waltz attributed the steel conduit price increase to strong overall demand and reduced imports, leading to good market conditions for growth, price, and margin. For PVC, he noted continued imports and expected spread compression, but couldn't pinpoint when price normalization would occur. Regarding capacity shifts, Bill Waltz explained that the 80/20 initiative, by focusing mechanical tube production on key customers and products, is freeing up capacity for electrical products, specifically metal conduits, to meet expected long-term growth from data centers and overall markets. CFO John Deitzer added that copper volatility makes predicting price-cost dynamics difficult, but the team is working to improve cost structure and react to volatility.

Deane Dray asked if Atkore intends to operate the business with a greater focus on cash generation, noting reduced CapEx and inquiring about the possibility of suspending the dividend. He also questioned the nature of activist engagement and board alignment regarding the strategic review.

Answer

President and CEO Bill Waltz affirmed that Atkore is not changing its operational approach or considering suspending dividends. He clarified that reduced CapEx reflects the fruition of prior investments and a return to historical spending levels, enabling continued strong cash flow. He also confirmed total cooperation and alignment with activist investors, stating that the formal strategic review was a collective decision by the board to explore all options for maximizing shareholder value, including planned board refreshment.

Deane Dray of RBC Capital Markets inquired about the on-the-ground impact of tariffs on steel and PVC conduit imports, the current state of demand visibility and backlogs, and any pricing surprises during the quarter.

Answer

President and CEO Bill Waltz confirmed that while imports were flat to slightly up for the fiscal year-to-date, they saw a significant double-digit decline in the most recent quarter for both steel and PVC conduit, suggesting tariffs are having an effect. He noted that demand visibility remains short, with a backlog of about two weeks, and distributor inventories are average to slightly low. Waltz stated that pricing was largely in line with expectations, with metal and PVC conduit performing slightly better than anticipated, though he highlighted the new 50% aluminum tariff as an unrecouped cost pressure.

Deane Dray of RBC Capital Markets requested clarification on the size of the net tariff benefit in the FY25 guide, an update on Mexican steel conduit imports, and the specific competitive changes that prompted the HDPE asset impairment.

Answer

President and CEO William Waltz suggested the tariff benefit could be estimated as offsetting a 2-3% reduction in volume assumptions. CFO John Deitzer stated there hasn't been a significant change in Mexican import flow, but the 25% tariff is a new headwind. Regarding the impairment, Waltz clarified the 'competing technology' was not a new conduit product but the administration's plan to open broadband funding to satellite internet, reducing the addressable market for terrestrial fiber deployment.

Deane Dray of RBC Capital Markets asked for a breakdown of the prospective guidance cut between PVC and steel conduit. He also inquired about new PVC competitors and whether imported products are meeting quality and safety specifications.

Answer

CFO John Deitzer quantified the guidance reduction, stating the price/cost headwind is now $100 million worse than the prior outlook, with approximately $75 million from PVC and $25 million from steel. An executive, likely COO John Pregenzer, described the current PVC market as the most disruptive he's seen due to new entrants from Latin America, China, and domestic players. CEO William Waltz addressed quality concerns, stating that some imported products fail to meet required specifications, citing an example where an importer's product passed an impact test only 1 out of 10 times, far below the standard.

Deane Dray from RBC Capital Markets asked for an estimate of the new PVC capacity coming online from competitors, sought clarification on whether the revised EBITDA guidance includes a cushion for further dynamics, and inquired about the current percentage of steel imports from Mexico.

Answer

CEO Bill Waltz estimated that new domestic PVC capacity from one competitor could be around 10%, with total new capacity including imports potentially reaching 15%. He stressed the new guidance was set to be realistic and avoid future downward revisions. CFO John Deitzer clarified the FY25 adjusted EBITDA range is $475M to $525M, calling it a 'balanced' forecast. On steel, Waltz stated that imports from Mexico are around 20% of the market, with total steel imports being slightly under 25%.

Deane Dray observed that slide 9 showed all segments with green organic growth and upward-pointing margin arrows, asking if the 2026 planning process was different this year, such as a bottom-up aggregation or if any trimming/boosting was applied. He also inquired directionally about the percentage of 2026 revenues currently in backlog and how this compares to normal times.

Answer

CEO Richard Tobin explained that the positive outlook reflects the absence of identified headwinds that impacted previous years, such as cycling down long-cycle businesses or specific market duress. Regarding backlog, he noted that while he couldn't provide a total percentage, the refrigeration business is 'sold out for Q1' and booking into Q2, which is not a normal state, as backlog usually bleeds in Q4 and rebuilds in Q1.

Deane Dray observed the uniformly positive outlook on slide nine (all green organic growth, all margin arrows up) and asked if the 2026 planning process differed, specifically if it was a bottom-up aggregation or if any trimming/boosting was applied. He also inquired directionally about how much of 2026 revenues are currently in backlog compared to normal times.

Answer

CEO Richard Tobin explained that the positive outlook reflects the absence of identified headwinds that were present in previous years (e.g., long-cycle businesses cycling down, specific market duress, European revenue exits). Regarding backlog, he couldn't provide a total percentage but noted that businesses like refrigeration (which grew heavily in Q4) are sold out for Q1, which is not a normal state, suggesting a strong backlog position entering the year. He expects to know more about backlog consumption versus build in the next 60 days.

Deane Dray of RBC Capital Markets asked about the size of Dover's data center business, its strategy to capture this growth, and how project selectivity is influencing margins in the Pumps & Process Solutions segment.

Answer

President and CEO Richard Tobin declined to size the data center business but affirmed Dover's leadership position in connectors and heat exchangers for this market, noting that capacity is being added ahead of demand. He explained that strong pump margins are a result of the company's ongoing strategy to exit lower-return business lines and geographies, which is a core part of its portfolio management and value creation model.

Deane Dray asked for details on the two recent bolt-on acquisitions, including how they originated and where they fit in the portfolio. He also inquired if recent market volatility has changed the competitive dynamics or outlook for the data center liquid cooling business.

Answer

Executive Richard Tobin explained that both acquisitions were proprietary deals. One is a cryogenic product line for the pumps business, and the other is a product line expansion for the Maag plastics and polymers business. Regarding data centers, he stated he is not overly worried, as Dover is a small part of the total TAM and feels comfortable with the 2025 forecast given the projects already underway.

Deane Dray asked for color on the biopharma recovery and destocking cycle, and questioned if Dover has aspirations to build a broader 'source to shelf' platform in its imaging business, similar to a competitor.

Answer

CEO Richard Tobin noted that Dover's biopharma consumables business is leading the recovery as its products are used in existing systems, aligning with broader market trends. Regarding imaging, he stated that Dover already has a significant track-and-trace platform, primarily focused on the pharmaceutical market, and is already active in that space.

Deane Dray asked for an update on the sales process for Productivity Solution and Services (PSS) and Warehouse and Workflow Solutions (WWS), following the more specific portfolio cleanup announcements.

Answer

Vimal Kapur, Chairman and CEO, indicated significant interest in both businesses, with expectations to sign deals in Q2, followed by customary regulatory approvals. He explained that these divestitures simplify Honeywell into three core end markets (process, buildings, industrial) and narrow Industrial Automation to sensing and measurement, providing a platform for future organic and inorganic growth. Deane Dray then inquired about pockets of weakness observed in Europe and China, asking for specifics on what is being seen at the margin. Vimal Kapur clarified that the weakness is specific to the Industrial Automation business in China and Europe, where exposures in certain end markets are under pressure, but noted that other Honeywell segments like Building Automation are not experiencing similar pressures in those regions.

Deane Dray asked for an update on the sales process for Productivity Solutions and Services (PSS) and Warehouse and Workflow Solutions, including the timeline and strategic rationale. He also inquired about specific pockets of weakness observed in Europe and China by geography.

Answer

CEO Vimal Kapur expects deals for PSS and Warehouse and Workflow Solutions to be signed in Q2, with customary regulatory approvals. He explained the strategic rationale as simplifying Honeywell into three core end markets (process, buildings, industrial) and narrowing industrial automation to sensing and measurement. Regarding regional weakness, Vimal Kapur clarified that it is specific to the industrial automation business in Europe and China, particularly in short-cycle segments, while other Honeywell businesses in those regions are not experiencing similar pressure.

Deane Dray asked for an update on the strategic alternatives process for Productivity Solutions and Services (PSS) and Warehouse Automation, including potential timing. He also inquired about the growth opportunity in the sensor business, particularly healthcare sensors, within Industrial Automation.

Answer

Vimal Kapur, Chairman and Chief Executive Officer, stated that the strategic review process is underway, and a more definitive path forward will be provided in the Q1 2026 earnings call. He highlighted that the sensor business is a key part of the Industrial Automation portfolio, positioned in aerospace, medical devices, and industrial verticals, with strong performance in 2025 expected to continue into 2026.

Deane Dray from RBC Capital Markets asked for an explanation on why the free cash flow guidance was maintained while the EPS guide was raised. He also inquired about any specific price-cost dynamics to highlight for the second half of the year.

Answer

SVP & CFO Mike Stepniak explained that while there's a tailwind from stronger collections and sales, inventory levels worsened slightly due to aerospace dynamics, resulting in a net neutral impact on the full-year cash flow outlook. He noted the company is focused on reaching 90%+ conversion in 2026. For H2 price-cost, he stated that overall price realization is now expected to be better (2-3%), which will offset costs in short-cycle businesses, while Aerospace continues to work through the lag in its OE contracts.

Deane Dray of RBC Capital Markets questioned why free cash flow guidance was maintained while the EPS guide was raised, asking about any specific puts and takes. He also asked for highlights on the price-cost dynamic for the second half of the year.

Answer

SVP & CFO Mike Stepniak explained that while collections and sales are a tailwind for cash flow, this was offset by higher inventory levels, particularly in Aerospace, resulting in a similar net outlook. On price-cost, he noted that price realization is now expected to be 2-3% for the year, which will offset costs in short-cycle businesses, while Aerospace continues to manage the timing lag on its OE contracts.

Deane Dray requested more specifics on the leverage targets and credit ratings for the separated companies, particularly for Automation and Advanced Materials. He also asked whether any potential impact from new tariffs was included in the 2025 financial guidance.

Answer

Incoming CFO Mike Stepniak clarified that Advanced Materials is targeted for a 'very high below-investment-grade' rating, while Automation and Aerospace will be investment grade, though he did not provide specific leverage targets. He also confirmed that the 2025 guidance does not include any impact from potential new tariffs, noting that impacts from China and Canada are not material and the situation with Mexico is being assessed but is considered manageable.

Deane Dray from RBC Capital Markets asked for an update on the plan announced a year ago to divest roughly 10% of revenues, questioning if the PPE business was part of this scope and seeking the timeline for other potential divestitures.

Answer

CEO Vimal Kapur confirmed that both the PPE business and portions of the Advanced Materials business were part of the initial 10% scope. He explained the Advanced Materials plan evolved into a full spin-off to create greater shareholder value. He stated that while the major near-term portfolio actions are directionally complete, active portfolio management is a continuous process and declined to provide a specific timeline for future actions, noting they would be driven by market opportunities.

Deane Dray from RBC Capital Markets commended Lennox on containing decrementals in Q4 and asked if this was a managed target or an outcome of timely SG&A actions. He also highlighted the strong free cash flow despite increased inventory and inquired if there were any one-time factors or accelerated receivables contributing to this standout performance.

Answer

CFO Michael Quenzer explained that managing decrementals involves ensuring a positive price-cost equation and taking timely cost actions (SG&A, headcount reductions) when end markets deteriorate, viewing these as temporary. He expects strong incrementals (35%) when volumes return. CEO Alok Maskara added that they leverage a strategic planning process with pre-defined cost items to align costs with revenue. Regarding free cash flow, Alok Maskara credited Michael Quenzer for centralizing AP/AR teams, consolidating accounting, and driving process improvements in collections and payments, stating there were no one-time factors.

Deane Dray commended Lennox for effectively containing decrementals in Q4, noting it was well below the 25% benchmark, and asked if this was a managed outcome or a result of other factors, particularly the timely reduction in SG&A. He also inquired about the strong free cash flow performance in the quarter, despite higher inventory levels, asking if there were any one-time factors or if receivables were pulled forward.

Answer

Michael Quenzer, CFO, explained that the company actively managed the price-cost equation to ensure it was positive and implemented cost actions in both HCS and BCS during the second half of 2025 to mitigate temporary decrementals. He stated that the organization has been restructured to achieve strong incrementals of 35% when volumes recover. Alok Maskara, CEO, added that Lennox leverages a strategic planning process with pre-identified cost items to pull when markets decline. Regarding free cash flow, Alok Maskara credited Michael Quenzer for centralizing AP/AR teams, consolidating accounting, and driving disciplined processes for collections and payments, indicating that these were process improvements rather than one-time events.

Deane Dray asked for an explanation of the magnitude of the free cash flow guidance cut, its implication for conversion rates, and if it's solely due to destocking and higher finished goods. He also inquired about the specific efficiencies expected from the new factory in 2026, now that it's fully operational.

Answer

CEO Alok Maskara confirmed the free cash flow guidance cut of $150 million is entirely due to finished goods inventory, expected to recover by Q2 next year. He explained 2026 efficiencies from the new Saltillo plant include avoiding startup inefficiencies from H1 2025, eliminating transfer costs (especially Q1 2025 hits to BCS margin), and benefiting from labor arbitrage compared to Stuttgart. CFO Michael Quenzer added that the new plant also reduces pressure on the Stuttgart factory.

Deane Dray asked for clarification on the magnitude of the free cash flow guidance cut, specifically if it was entirely due to destocking and higher finished goods, or if other factors were at play. He also inquired about the specific efficiencies expected from the new Saltillo factory in 2026, now that it is fully operational.

Answer

CEO Alok Maskara confirmed the $150 million free cash flow cut was entirely due to finished goods inventory, expected to be recovered by Q2 next year. He noted that depreciation has been lower than CapEx due to increased business investment. Alok Maskara highlighted the absence of startup inefficiencies and transfer costs experienced in H1 2025, as well as labor arbitrage benefits from manufacturing in Saltillo versus Stuttgart. CFO Michael Quenzer added that it also relieves pressure on the Stuttgart factory, driving efficiencies there.

Deane Dray from RBC Capital Markets requested a progress report on the commercial emergency replacement initiative and asked for insights into future opportunities to expand the product and service portfolio, particularly regarding JVs versus M&A.

Answer

CEO Alok Maskara reported that the emergency replacement initiative has expanded from pilot markets to about five or six markets, with plans to stock commercial products in residential stores soon. For portfolio expansion, he stated that JVs (like Samsung and Ariston) are used for technology platforms they lack, while M&A is being actively evaluated for parts, supplies, technology, and distribution footprint expansion to better utilize their 250 stores.

Deane Dray sought clarification on whether the recent price increases were permanent or temporary surcharges and asked about the expected timing and magnitude of the lift from the emergency replacement initiative.

Answer

CEO Alok Maskara characterized the first price increase as more permanent and the second as more of a transitional surcharge that could be adjusted with the tariff environment. Regarding emergency replacement, CFO Michael Quenzer stated it's a seasonal product and expects to see growth in Q2 and Q3, though CEO Alok Maskara noted it remains a small part of the overall business but will be a multi-year tailwind.

Deane Dray asked for details on the competitor stockouts in Q4 and Lennox's tactical response. He also sought color on the comment that the "best deals in 2024 were those that you did not do."

Answer

CEO Alok Maskara explained that while a competitor misstep was expected, the specific one was a surprise. Lennox capitalized by using its high fill rates to gain share, focusing on customers with long-term potential. Regarding M&A, he confirmed Lennox passed on opportunities in data centers and other areas that did not meet its disciplined ROIC framework, crediting a conservative approach.

Deane Dray of RBC Capital Markets asked for details on the plan to build share in the commercial emergency replacement market, including the working capital implications. He also questioned how the company's industry-leading ROIC influences investment decisions and whether it's viewed as a target or an outcome.

Answer

CEO Alok Maskara explained the emergency replacement strategy involves boosting manufacturing capacity and field inventory, but expects the working capital impact to be manageable by redeploying capital from raw materials to finished goods. CFO Michael Quenzer described the 47% ROIC as an outcome of a disciplined organic investment approach, stating that new investments (CapEx and M&A) are evaluated against the cost of capital, not a specific ROIC target.

Deane Dray of RBC Capital Markets inquired about the nature of upfront licensing fees for electric pumps, seeking clarification on their recurrence and impact on the 2026 outlook. He also asked for an update on geographic market conditions and recent order trends for 2026.

Answer

President and CEO Mark Sheahan and VP, Controller, and Chief Accounting Officer Chris Knutson clarified that the electric pump licensing fees are likely lumpy, stemming from the ETM acquisition, and are not included in the 2026 organic growth guidance. They described current geographic market conditions as steady but cautious, with recent order trends supporting a low single-digit growth outlook for 2026.

Deane Dray asked for clarification on the upfront licensing fee associated with electric pumps, inquiring if it's a one-time event or a recurring revenue stream, and sought background on its nature and lumpiness. He also asked about the geographic conditions Graco anticipates for 2026, broad changes, and recent inbound order trends.

Answer

President and CEO Mark Sheahan and CFO David Lowe explained that the electric motor technology, acquired through ETM, is now being licensed to non-competitive OEMs and motor manufacturers. They confirmed the revenue stream is likely lumpy, with upfront agreements and future royalties, and clarified that these fees are not factored into the 2026 organic outlook. They noted the technology is proven in Graco products. Regarding 2026 geographic conditions, they characterized markets as steady, without significant upward momentum, leading to a cautious but confident outlook for low single-digit growth, supported by recent order trends. They also highlighted a pickup in the home center channel, bullishness on commercial opportunities, and hopes for residential repaint due to lower mortgage rates.

Deane Dray asked about Graco's end market and regional performance, highlighting what stood out against expectations, leading indicators, and recent order rates. He also inquired about the September price increase's implementation, effectiveness, and timeline for offsetting tariffs.

Answer

CEO Mark Sheahan noted industrial demand was not robust but had targeted opportunities, with North America showing caution due to tariffs and China being a positive surprise. He attributed contractor segment challenges to North American home affordability. CFO David Lowe mentioned flat housing starts but hope from lower 30-year interest rates. Mark Sheahan detailed low to mid-single-digit price increases implemented late Q3, with North American Pro Paint and Home Center channels set for January, expecting full tariff offset by year-end.

Deane Dray asked about the performance of Graco's end markets and regions relative to expectations, leading indicators, and the forward outlook, including recent order rates. He also inquired about the implementation, stickiness, and expected tariff offset from the second price increase announced in September.

Answer

CEO Mark Sheahan and CFO David Lowe discussed a continuation of existing themes, noting industrial demand as not robust but with targeted opportunities. They highlighted North America's caution due to tariffs, China's positive surprise, and ongoing challenges in the Contractor segment due to housing affordability. They confirmed the September price increases were low to mid-single digits, implemented late Q3, and expected to fully offset tariffs by year-end, with North American Pro Paint and Home Center channels seeing increases in January.

Deane Dray of RBC Capital Markets inquired about the specifics of the recently announced mid-year price increase and the drivers behind the strong free cash flow conversion in the quarter.

Answer

President and CEO Mark Sheahan clarified the price increase is a targeted, low single-digit adjustment to offset tariff impacts, not a surcharge. CFO & Treasurer David Lowe attributed the strong free cash flow to sustained inventory management improvements and efficiencies from the One Graco initiative, which he views as sustainable rather than a one-time event.

Deane Dray of RBC Capital Markets asked for details on the mid-year price increase announced to counter tariffs and inquired about the drivers behind the strong free cash flow conversion in the quarter.

Answer

CEO Mark Sheahan clarified that the price increase is a targeted, low-single-digit hike focused on specific geographies and markets to offset tariff pressures, not a broad surcharge. CFO & Treasurer David Lowe attributed the strong free cash flow to sustained improvements in inventory management and efficiencies from the One Graco initiative, stating the performance is not due to one-time factors.

Deane Dray from RBC Capital Markets asked for clarification on the impact of tariffs, including whether Graco saw pre-buying from customers, the extent of its own inventory prepositioning in China, and the rationale for framing the impact as a 1-2% revenue headwind.

Answer

Executive Mark Sheahan confirmed that a recent double-digit increase in order rates likely included some customer pre-buying ahead of tariffs. He explained that Graco proactively moved inventory to a non-bonded status in China and has about three months of component and finished goods inventory to buffer the immediate impact. Sheahan clarified the 1-2% headwind is the estimated direct impact on 2024 revenue from the China business, noting mitigation efforts like qualifying new suppliers and redesigning products are underway.

Deane Dray from RBC Capital Markets asked for commentary on Graco's quarterly performance versus internal expectations, particularly for China and the semiconductor market. He also requested the latest order data and inquired about how potential tariffs could impact the company's annual price increase strategy.

Answer

Executive Vice President Mark Sheahan explained that the Process segment exceeded expectations, while the Industrial and Contractor segments underperformed due to sharp declines in Asia Pacific and sluggish year-end orders. He stated that recent order rates support the low single-digit growth guidance for 2025. Regarding tariffs, Sheahan noted they were not factored into the January price increase but are considered manageable, adding that potential tax incentives for U.S. manufacturing could be highly beneficial for Graco.

Deane Dray of RBC Capital Markets asked for a detailed tour of Graco's performance by end market and region, with a specific focus on Asia Pacific, and inquired about the strategic rationale and timing of the 'One Graco' resegmentation.

Answer

Executive Mark Sheahan confirmed that weakness in China, particularly in automotive, battery, solar, and electronics markets, accounted for over 90% of the quarterly revenue decline. He characterized North America as 'decent' and Europe as 'okay.' Executive David Lowe added that U.S. defense, solar, aerospace, and automotive sectors showed good activity. Regarding the restructuring, Mark Sheahan explained it was initiated to boost organic growth by dismantling internal silos and adopting a unified, customer-centric global approach after operating under the previous structure for over 20 years.

Dean Dray from RBC Capital Markets asked how Roper Technologies weighs absolute dislocations in asset prices versus wider moats against AI when considering M&A. He also inquired about the impact of the spike in copper prices on Neptune's order delays.

Answer

Neil Hunn, President and Chief Executive Officer, reiterated Roper's objective to find the best risk-adjusted path to long-term cash flow compounding, emphasizing investment in vertical market businesses with deep moats, especially those where AI can expand TAM. He explained that the copper spike, along with tariffs, caused a 'shock in the system' for Neptune in Q3 2025, which abated in Q4, and the focus is now on normalizing market volumes.

Dean Dray asked about Roper Technologies' M&A bias, specifically how the company weighs absolute dislocations in asset prices against the pursuit of wider moats against AI. He also inquired about the impact of the spike in copper prices on Neptune's order delays.

Answer

Neil Hunn, President and Chief Executive Officer, clarified that Roper consistently invests in vertical market, application-specific businesses with deep moats. He emphasized that in the AI world, these moats are strengthened by customer intimacy, proprietary data, and embedded high-frequency workflows, which facilitate on-stack AI implementation and monetization. Regarding Neptune, Neil Hunn stated that the shock from tariffs and copper pricing (surcharge in July) abated in Q4, and the focus is now on the normalization of market volumes post-COVID spike.

Deane Dray sought clarification on Neptune's timing delays, asking if orders were lost or merely pushed to the right, and inquired about the implications of acquiring Convoy, an unprofitable bolt-on, for DAT's end-to-end automation strategy.

Answer

Neil Hunn, President and CEO, clarified that Neptune's orders are '100% pushed to the right' due to surcharges for new copper tariffs, causing temporary disruption but no lost orders, and even a slight market share gain. Mr. Hunn described Convoy as a unique 'buy-versus-build' technology acquisition, the 'final piece' for DAT's strategy, with high conviction despite its current unprofitability. Jason Conley, EVP and CFO, added that it's a rare technology investment aimed at creating a new market.

Deane Dray sought clarification on Neptune's timing delays, asking if orders were lost or merely pushed to the right, and later inquired about the implications of Roper's investment in Convoy, a non-profitable bolt-on, for DAT's end-to-end automation strategy.

Answer

President and CEO Neil Hunn confirmed that Neptune's orders were 100% pushed to the right due to surcharges from copper tariffs, requiring re-contracting, and noted a slight market share gain for Neptune. Regarding Convoy, Mr. Hunn described it as a unique 'buy-versus-build' technology acquisition for complex algorithms, bringing talented engineers, while EVP and CFO Jason Conley added it was a rare investment to create a new market.

Deane Dray asked for more detail on the expected synergies from combining DAT and LoadLink. He also inquired about any change in the Board's thinking regarding the potential divestiture of non-software businesses, referencing a media article about Neptune.

Answer

President and CEO Neil Hunn clarified that the DAT and LoadLink combination is a medium-to-long-term play focused on managerial synergy and better handling of cross-border freight, not short-term cost savings. Regarding divestitures, he reiterated the strategy established in late 2022 to remove cyclicality from the portfolio, stating the current product businesses are high-quality, non-cyclical assets that are performing well and fit the strategy.

Deane Dray asked how a high-growth asset like Centralreach became available for acquisition, what portion of the M&A funnel has a similar growth profile, and if the deal is accretive to CRI.

Answer

President and CEO Neil Hunn explained that Roper's value proposition as a permanent, long-term owner was key to winning the competitive process. He noted that the vast majority of their M&A funnel consists of 'maturing leader' businesses with 10-25% growth. He also confirmed Centralreach is working capital negative, which is beneficial for Roper's Cash Return on Investment (CRI) model.

Deane Dray requested details on the $9 million restructuring charge, including the businesses involved and the rationale. He also asked for an update on the integration of Transact with CBORD and the key initiatives for the upcoming year.

Answer

EVP and CFO Jason Conley explained the restructuring was primarily at Deltek within the Application Software segment, characterizing it as 'good, healthy belt tightening' to allow for reinvestment in product and growth. Regarding Transact, he confirmed the $20 million in cost synergies are on track to be realized starting in Q1, the team is set, and market feedback on the combined product roadmap has been very positive, creating cross-sell tailwinds.

Deane Dray asked about the strategy behind the Transact Campus acquisition, specifically its immediate combination with the SeaBoard business and the focus on cost synergies, and inquired about the drivers of the strong free cash flow performance in the quarter.

Answer

President and CEO Neil Hunn confirmed this is a strategic evolution, focusing more on 'multi-activity' and faster-growing businesses, citing similar past combinations like Syntellis with Strata. Executive VP and CFO Jason Conley explained that Q3 is now their strongest cash flow quarter due to Frontline and the new Transact acquisition, but also highlighted 'good old-fashioned execution' and improved DSOs across many businesses as key drivers.

Deane Dray asked for specific dimensions of Gates Industrial's restructuring plans, including the number and location of plants, headcount reductions, total investment, and the expected payback cadence. He also inquired about the net impact of tariffs on pricing and any observed volume falloff due to demand destruction.

Answer

CFO Brooks Mallard explained that the restructuring involves closing multiple factories in North America and EMEA, affecting hundreds of employees, with a general payback period of one to two years. He quantified the expected one-time headwinds for H1 2026 at $30 million-$35 million, including ERP conversion costs, and noted that increased capital expenditures over the past two years are part of this investment. Regarding tariffs, Mr. Mallard stated that while the total EBITDA impact is manageable, there's a 30-40 basis point gross margin dilution in H2 2025 due to tariffs, with pricing generally covering inflation. CEO Ivo Jurek added that any volume falloff, particularly in agriculture, is seen as short-term transitory growing pains rather than destruction, with expectations for market normalization in 2026.

Deane Dray requested specific dimensions of the company's restructuring plans, including the number and location of plants affected, headcount reductions, total investment, and the expected payback cadence, particularly in relation to the margin walk on Slide 12. He also asked about the net impact of tariffs, specifically regarding pricing pass-through and any observed demand destruction.

Answer

CFO Brooks Mallard explained that the restructuring involves closing multiple factories in North America and EMEA, affecting hundreds of employees, with a general payback period of one to two years. He quantified the expected one-time costs for H1 2026, including ERP conversion, at $30-$35 million, and noted that increased capital expenditures over the past two years are part of the investment. Regarding tariffs, Mallard stated a 30-40 basis point dilution to gross margin in H2 2025, with no net EBITDA dollar impact. CEO Ivo Jurek added that tariff impacts on volume were more of "short-term transitory growing pains," particularly affecting agriculture with delayed recovery, but anticipated stabilization in auto businesses and a more stable environment in 2026.

Deane Dray of RBC Capital Markets asked if the softness in Auto OE was purely due to lower production or also reflected Gates' strategic selectivity. He also requested more detail on the drivers behind achieving cost parity in the chain-to-belt conversion market.

Answer

CEO Ivo Jurek clarified that the Auto OE softness was primarily due to production weakness, especially in Europe, and not a change in their long-standing strategy of selective participation. On chain-to-belt conversion, Jurek explained that investments in manufacturing and new sprocket technology are driving costs down from a 2.5x premium to near cost parity within 12-24 months, which should accelerate OEM adoption.

Deane Dray from RBC Capital Markets asked whether the softness in automotive OE was a result of lower production volumes or Gates' strategic selectivity in pursuing business. He also requested more detail on the progress toward cost parity in the chain-to-belt conversion initiative.

Answer

CEO Ivo Jurek clarified that the auto OE weakness stems from lower production, especially in Europe, and not from a change in their selective participation strategy. On chain-to-belt conversion, Jurek explained that significant investments in manufacturing and sprocket technology have brought them within 12-24 months of cost parity, a substantial improvement from the previous 2.5x cost premium, which is expected to accelerate OEM adoption.

Deane Dray from RBC Capital Markets asked whether the softness in auto OEM was due to strategic selectivity or lower production volumes. He also requested more detail on the progress toward cost parity in the chain-to-belt conversion initiative.

Answer

CEO Ivo Jurek clarified that the auto OEM weakness stemmed from lower production in Europe, influenced by tariffs, rather than the company's selective participation strategy. Regarding chain-to-belt conversion, he explained that technological advancements, particularly in sprockets, are expected to bring belt drives close to cost parity with chains within the next 12 to 24 months, which should accelerate adoption by OEMs.

Deane Dray from RBC Capital Markets asked whether the softness in automotive OE was due to strategic selectivity or lower production, and requested details on the cost drivers enabling chain-to-belt conversions to approach cost parity.

Answer

CEO Ivo Jurek clarified that the auto OE weakness was primarily from lower production volumes in Europe, not a change in their selective participation strategy. On chain-to-belt conversion, Jurek explained that innovations in manufacturing and sprocket technology have significantly reduced the cost premium, and they are about 12-24 months away from cost parity, which should accelerate OEM adoption.

Deane Dray from RBC Capital Markets asked whether the softness in automotive OE was due to lower production or Gates' strategic selectivity. He also inquired about the progress and cost dynamics of the chain-to-belt conversion initiative.

Answer

CEO Ivo Jurek clarified that the auto OE weakness stems from lower production volumes, particularly in Europe, and not from a change in their selective participation strategy. On the chain-to-belt conversion, Jurek explained that while a belt drive was historically 2.5x the cost of a chain, investments in new sprocket technology are bringing them toward cost parity within 12-24 months, which is expected to significantly accelerate OEM adoption.

Deane Dray inquired about inventory levels and sell-through dynamics with channel partners, asking how they might react to tariff mitigation efforts and confirming the absence of pre-buy activity. He also asked for an update on adding new channel partners and the status of the most recently added one.

Answer

CEO Ivo Jurek stated that the company has not observed any meaningful change in channel partner behavior or pre-buying through April, noting that sales-in have been in balance with, or even slightly behind, channel partners' sales-out data. Regarding channel partners, Jurek confirmed the ramp-up with the latest partner should be complete within Q2. While not in a position to announce new partners, he indicated that incremental opportunities exist and will be pursued.

Deane Dray from RBC Capital Markets requested more detail on the Personal Mobility segment's return to growth after seven quarters, asking if it represents a true turn or just an easy comparison. He also asked for clarification on other "green shoots" mentioned by management.

Answer

CEO Ivo Jurek confirmed the Personal Mobility recovery is a combination of easier comparisons and a genuine business inflection, citing broad strength in EMEA and Asia, normalizing inventories, and strong quote activity. For other green shoots, he pointed to the potential for an industrial market inflection after a long suppression, positive PMI data, strength in Asia's industrial base, and continued robust performance in the Automotive replacement business, while noting that Ag and Construction remain weak.

Deane Dray of RBC Capital Markets asked for a breakdown of the recent inventory increase between a new auto contract and strategic positioning, and also requested an update on new product contributions and data center initiatives.

Answer

CFO L. Mallard quantified the inventory build for the new auto business at $10-$15 million, with the remainder being strategic positioning for a market recovery. CEO Ivo Jurek reported that the company is on track for its 20% new product vitality index goal. On data centers, he highlighted the recent launch of the 'Data Master' cooling hose and ongoing work with partner CoolIT on an expanded portfolio of water pumps for new design-ins, primarily in North America and Asia.

Deane Dray (RBC Capital Markets) asked about the potential ripple effects of a government shutdown on Xylem's federal funding, state and local projects, and the outlook for 2026. He also inquired about the current stage of Xylem's 80/20 implementation across its businesses and expectations for further portfolio divestitures or pruning in the coming quarters.

Answer

CEO Matthew Pine reported no meaningful impact from the government shutdown, citing the resilience of municipal funding and no material effect on Q4 2025 or full-year 2026. Regarding 80/20, Mr. Pine indicated that 80% of the business is in some phase of implementation, with recent additions including dewatering, analytics, and treatment. He emphasized the cultural shift towards simplification, driving improved speed, accountability, and record on-time performance. He confirmed ongoing portfolio pruning, targeting $400-$600 million, with walkaway revenue expected to be slightly over 1% in 2026, contributing to higher quality earnings.

Deane Dray from RBC Capital Markets asked about the potential ripple effects of a government shutdown on federal, state, and local funding for Xylem's projects, and its implications for 2026. He also sought an update on the overall progress of 80/20 implementation across Xylem's businesses and expectations for further portfolio divestitures.

Answer

CEO Matthew Pine stated that Xylem has not seen any meaningful impact from the government shutdown, expecting previously allocated funds to continue flowing and no material impact on Q4 or 2026. Regarding 80/20, Matthew Pine explained that 80% of the business is in some phase of implementation, with treatment, dewatering, and analytics being the most recent divisions, and confirmed ongoing portfolio pruning with walkaway revenue expected to be slightly over 1% in 2026.

Deane Dray of RBC Capital Markets asked about Xylem's M&A strategy, focusing on the recent niche acquisitions of Vacom and EnviroMix and their potential for high returns through scaling. He also sought clarification on the margin differences between legacy and new energy meter projects within the MCS segment.

Answer

CEO Matthew Pine explained that both acquisitions align with the company's focus on advanced treatment, with Vacom providing zero liquid discharge solutions and EnviroMix offering innovative non-mechanical mixing technology. CFO William Grogan emphasized they are high-return deals with significant synergy potential. Regarding MCS, Pine confirmed that new technologies in both gas and electric meters are driving better margin profiles and market leadership compared to legacy projects.

Deane Dray of RBC Capital Markets asked about the impact of tariffs, questioning if Xylem saw any customer order pull-forwards in Q1 or if the company pre-positioned its own inventory. He also sought clarity on the assumption that tariff-related price increases would not lead to a significant drop in demand.

Answer

CEO Matthew Pine stated that Xylem did not observe any significant pre-emptive ordering from customers in Q1, nor did the company build up its own inventory ahead of tariffs. Pine acknowledged that some demand decline is anticipated in the second half but expressed confidence that the strong Q1 performance and favorable FX trends would provide a sufficient buffer. CFO Bill Grogan added that the company's organic growth guidance was not raised to reflect new pricing, as it is expected to be offset by this potential demand softness.

Deane Dray of RBC Capital Markets inquired about the specifics of Xylem's restructuring plan, including its composition, geographic focus, and payback period, and also asked about the potential impact of the new administration on PFAS regulations.

Answer

CEO Matthew Pine positioned the restructuring as a strategic move to reduce complexity and enhance customer focus, consistent with the company's Investor Day commitments. CFO William Grogan detailed the financial aspects, projecting $95-$115 million in charges to achieve $130 million in net benefits over two years, with $75 million realized in 2025, primarily from SG&A reductions in Europe. Regarding PFAS, Matthew Pine stated that while the industrial rule is paused, he does not anticipate any rollback of the final municipal drinking water regulation.

Deane Dray inquired about the general business tone, project decision-making delays, and the specific impact on the Water Solutions and Services (WSS) segment. He also asked for an update on the Measurement & Control Solutions (MCS) segment's backlog and its path to normalized growth.

Answer

Executive Matthew Pine described a split market, with utilities up 10% while industrial and commercial markets were down 4% due to project pushouts. Executive William Grogan added that WSS project delays are due to elongated negotiations and macro uncertainty, not cancellations, expecting a recovery in early 2025. For MCS, Pine stated that production constraints are resolved, and the issue is now customer rescheduling of deployments, not a drop in demand. Grogan projected this adjustment period would last 1-2 more quarters, with MCS growth normalizing to high single digits.

Deane Dray asked for more detail on the process for Zoro's SKU pruning and whether a similar practice is applied to the core Grainger business.

Answer

CEO D.G. Macpherson described the Zoro SKU reduction as a low-risk financial decision to remove non-moving items that were not helping searchability. He confirmed that the core Grainger business undergoes a similar, well-established culling process on an ongoing basis, noting the difference is that Zoro had added many SKUs very quickly without knowing if they would sell.

Deane Dray of RBC Capital Markets asked for more detail on the SKU pruning process at Zoro and whether a similar practice is applied to the core Grainger business.

Answer

CEO D.G. Macpherson described the Zoro SKU reduction as a 'no risk' financial decision to remove non-moving items that were not helping website searchability. He confirmed that the core Grainger business follows a similar, well-established SKU rationalization process on an ongoing basis, noting it's a 'very well trod path' for that segment.

Deane Dray questioned the COGS mix from China, asking if it had changed over the last five years and how it differs for private label. He also asked if Grainger had engaged in any pre-sourcing or inventory building ahead of tariffs.

Answer

Chairman and CEO D.G. Macpherson confirmed that private label is more China-sourced and that the overall China exposure has decreased slightly over the years with shifts to places like Vietnam and Mexico. He stated that the company has not done significant pre-sourcing, aside from some creative inventory management for goods already in transit and ensuring service levels around Chinese New Year.

Deane Dray asked if Grainger engaged in any significant pre-buying of inventory ahead of potential tariffs. He also inquired about the company's M&A outlook for 2025 and whether recent industry deals signal a strategic shift.

Answer

CEO D.G. Macpherson stated that the company did not change its typical, modest year-end pre-buy strategy and is not in the business of making large pre-buys. He also confirmed customers are not pre-buying. On M&A, he reiterated that Grainger's strategy remains focused on organic growth, and while they always look at opportunities, they do not expect a change in their primary approach.

Deane Dray sought to unpack the data center growth, asking about the difference in opportunity between gray space and white space. He also inquired about a target for net working capital intensity and asked for clarification on the P&L impact of temporary inventory gains from tariffs.

Answer

Chairman, President & CEO John Engel explained that while white space is the larger sales contributor, gray space is growing faster at a 90% rate in Q2 as customers expand WESCO's scope. EVP & CFO David Schulz stated the goal for net working capital intensity is to return to pre-COVID levels around 19%. He confirmed inventory gains are temporary and excluded from the outlook due to their volatility, but would be realized as higher market prices are passed through.

Deane Dray of RBC Capital Markets asked about the drivers behind the exceptional data center growth, specifically the mix of products versus services, and also inquired about the margin mix issues within the EES segment.

Answer

John Engel, Chairman, President and CEO, attributed the strong data center growth to customers expanding their scope of supply with WESCO to include both IT infrastructure ('white space') and electrical systems ('gray space'), amplified by recent acquisitions and a shift to AI-driven builds. Regarding EES, both Engel and CFO David Schulz explained that margin pressure stemmed from a higher mix of large, lower-margin projects and a specific inventory provision related to the solar business.

Deane Dray requested details on the strong January sales start, including business mix and pricing, and asked about the company's preparedness for potential future tariffs.

Answer

CEO John Engel described January's 5%-plus organic sales growth as a continuation of Q4 trends with no material mix changes, strong bookings, and stable margins. Regarding tariffs, he stated WESCO has a well-developed playbook to manage them by working with suppliers to pass through price increases and protect margins, a strategy successfully used in the past.

Deane Dray asked for details on the 40% growth in the data center business, specifically the mix between products and services, and the visibility provided by the data center backlog. He also inquired about the performance of the stock and flow business during the quarter.

Answer

CEO John Engel highlighted the accelerating momentum in data center growth and its corresponding backlog inflection, noting visibility is tied to multiyear build-outs by hyperscale customers. He said a product vs. service mix breakdown would be provided in the future. He also stated that the stock and flow business performed relatively better in Q3 than in the first half of the year, with the exception of the industrial segment, which faced market sluggishness.

Deane Dray from RBC Capital Markets inquired about how the 8-10x service revenue multiplier on equipment sales varies by region or application. He also asked for the specific growth rate of the data center vertical during the quarter.

Answer

Chair & CEO Dave Regnery explained that the 8-10x service tail varies more by product type, being highest for sophisticated chillers, rather than by geography. For competitive reasons, EVP & CFO Chris Kuehn declined to provide a specific growth rate for the data center business but stressed that the strong applied bookings growth is broad-based across many verticals and not solely dependent on data centers.

Deane Dray sought to confirm that the strategy of offsetting tariffs dollar-for-dollar with price would inherently result in a margin percentage hit. He also asked for more specifics on the continued strength in the data center vertical and the company's ongoing interest in liquid cooling solutions.

Answer

CFO Christopher Kuehn confirmed that while a dollar-for-dollar price offset for tariffs could impact margin percentage on its own, the company has other levers to grow margins overall. CEO David Regnery addressed the data center question by stating they continue to be a strong, leading provider in the vertical, working closely with hyperscalers on innovations like liquid cooling and improving coefficient of performance (COP). He emphasized that their strength is broad-based across all verticals, not just data centers.

Deane Dray from RBC Capital Markets requested a postmortem on the residential refrigerant pre-buy, asking if there were any surprises in demand, timing, or competitive dynamics. He also asked if the credit tightening in China led to turning down specific customers or avoiding certain verticals.

Answer

CEO Dave Regnery described the pre-buy as modest and largely uneventful, as predicted, with the only minor surprise being that more of it may have occurred in Q3 than initially anticipated. On China, Regnery clarified that the credit tightening was not about selectivity by vertical or customer, but a new, universal policy requiring down payments upon order and before shipment. He noted the team is making good progress implementing this new way of doing business.

Deane Dray of RBC Capital Markets asked about the sustainability of the ~100% free cash flow conversion rate and whether the recent sale of the residential business provided a structural lift.

Answer

CFO Marc Vandiepenbeeck clarified that the residential sale was actually a 5-10% headwind to conversion. He attributed the sustainable improvement to fundamental process changes in billing, inventory, and CapEx deployment, which provide a solid foundation for 95%+ conversion. CEO Joakim Weideminis added that the company is still early in its inventory improvement journey, suggesting further potential.

Deane Dray asked about the decision to provide a precise full-year EPS guidance of 'approximately $3.60,' noting it signals a high degree of confidence at a time when other companies are pulling guidance.

Answer

CEO Joakim Weidemanis acknowledged it was unusual for a new CEO to raise guidance but explained the confidence comes from strong visibility into the business. This is driven by the long-cycle nature of projects, a significant recurring revenue base, a record backlog, and proactive tariff countermeasures.

Deane Dray asked about the fiscal 2025 free cash flow guidance, seeking clarity on the impact of divesting the residential business and the structural changes required to reach a 100% conversion rate.

Answer

CFO Marc Vandiepenbeeck clarified that the 100% target mentioned was for returning free cash flow to shareholders, not for the conversion rate. He explained the 85% conversion guidance for FY25 is supported by working capital improvements but faces headwinds from restructuring costs, data center CapEx, and a gap between cash and effective tax rates.

Deane Dray of RBC Capital Markets inquired about the changes in tariff assumptions that led to the updated guidance and asked if there has been any negative business impact in China as a result of trade tensions.

Answer

CEO William Brown stated the gross tariff impact was revised down from $0.60 to $0.20, mainly due to significantly lower tariff rates related to China. He noted that, contrary to concerns, the China business performed very well in the first half, growing mid-single digits due to strong execution and local stimulus, though some softening is anticipated in the second half.

Deane Dray inquired about the strategy to reinvigorate innovation beyond just adding resources, including the role of the '15% time' policy. He also asked if reducing inventory days could create a negative trade-off with service levels (OTIF).

Answer

CEO William Brown strongly endorsed the '15% time' policy as a hallmark of 3M's culture and key to innovation. He said the focus is on unleashing existing energy by removing process bottlenecks and focusing investment. Regarding inventory, Brown stated that the company will prioritize OTIF over inventory reduction, but he believes they can achieve both by eliminating waste and focusing on holding the *right* inventory, targeting 75 days and over 90% OTIF.

Deane Dray of RBC Capital Markets asked about the operational and cultural challenges of implementing the company's back-to-office policy. He also inquired if the New Product Vitality Index (NPVI) would be reinstated as a key performance metric.

Answer

CEO William Brown explained the hybrid model, with senior staff at major sites in the office three days a week, is designed to foster in-person collaboration and problem-solving, which he believes is crucial for innovation. Regarding the NPVI, Brown acknowledged its importance and noted the current low level of ~11% needs to improve. However, while he is happy to discuss it, he does not want it to be an overused metric or tied directly to compensation, viewing it as just one measure of innovation effectiveness.