Jacob Levinson

Jacob Levinson asked about the impact of trade uncertainty on CPG customer CapEx spending and the current state of the water market in China.

Answer

President and CEO Jennifer Honeycutt stated that CPG demand remains stable, with customers focused on retooling existing lines rather than building new ones. Regarding China, she confirmed the water market is "bouncing along the bottom" due to tough comps and a maturing market, with no recovery factored into second-half guidance.

Jacob Levinson of Melius Research LLC asked about the impact of tariffs on the economics of private label versus branded products and the key drivers behind Zoro's recent strong performance.

Answer

CEO D.G. Macpherson explained that the economic impact of tariffs on private label products is highly SKU-dependent and it's too early to determine a broad trend. For Zoro, he attributed its success to improved customer acquisition and a higher repeat business rate, which is up 200 basis points year-over-year. He noted that this strategy, which leverages logic from MonotaRO, is driving significant operating leverage as the business grows.

Jacob Levinson asked about Grainger's ability to flex its sourcing in response to tariff headwinds versus simply raising prices. He also questioned how the economics of the private label offering change with the current tariffs.

Answer

Chairman and CEO D.G. Macpherson explained that while Grainger has worked on building a resilient supply chain, some categories are exclusively sourced from China, making immediate shifts difficult. He noted that tariff impacts are evaluated on a case-by-case basis, as the economics between private label and national brands can shift dramatically depending on their respective countries of origin, potentially making a private brand offering unviable in some scenarios.

Jacob Levinson requested specific examples of step-changes in AI capabilities at Grainger and asked about the productivity gains in new distribution centers (DCs) compared to legacy facilities.

Answer

CEO D.G. Macpherson highlighted two examples: a proprietary machine learning model that significantly improved DC stocking and service levels, and the use of generative AI to enhance customer chat responses. Regarding DCs, he explained that while new automation provides significant productivity gains for small parts picking (up to 4x), overall building productivity improvement is more modest as other areas still rely on manual processes like forklifts.

Jacob Levinson asked how Grainger balances investment spending on demand generation with margin preservation in a sluggish macro environment, and also questioned the company's capital allocation plans given its large cash balance and low leverage.

Answer

Chairman and CEO D.G. Macpherson explained that the key to funding long-term demand-generating investments is driving consistent productivity in core operations. SVP and CFO Dee Merriwether added that the cash balance was elevated by a recent bond offering for future debt repayment and that the capital allocation strategy remains unchanged, with excess cash likely to be returned to shareholders via share repurchases.

Jacob Levinson of Melius Research LLC asked about the specific process or incentive changes driving both revenue growth and cost reduction, leading to margin improvement. He also inquired about the implications for Cognex's machine vision business from new foldable product form factors expected from a large electronics customer.

Answer

CEO Matt Moschner attributed the performance to an intense focus on funding growth initiatives while simultaneously driving cost efficiencies across the entire organization. CFO Dennis Fehr added that it reflects a programmatic approach by the leadership team. Regarding electronics, Moschner explained that such projects have long engagement cycles, and current growth is from adding more value via acquisitions like Moritex and supporting customers' geographic manufacturing shifts.

Jacob Levinson of Melius Research asked about the company's capital allocation strategy, specifically how it is balancing opportunistic share buybacks against the need to preserve cash given the uncertain economic outlook.

Answer

CFO Dennis Fehr explained that capital allocation is supported by strong free cash flow generation. While the primary goal of buybacks is to offset dilution, after repurchasing $150 million over the last two quarters, the pace will likely be 'more reduced' in Q2. He clarified that rather than building a 'rainy day fund,' the priority is preserving capital for potential M&A, which is an important part of their strategy.

Jacob Levinson asked whether the broader public consciousness of AI has increased competition for acquiring niche machine learning technology assets, similar to those Cognex has acquired in the past.

Answer

CEO Robert Willett stated that while many AI startups are now 'for sale,' they often haven't achieved their business plans, leading to more realistic valuations and creating an opportunity for Cognex. He emphasized that success in industrial machine vision requires not just great technology but also deep domain and application expertise, which is Cognex's core strength and a significant differentiator when evaluating potential acquisitions.

Jacob Levinson asked for an update on the Logistics business, specifically how the customer base has diversified beyond large e-commerce players. He also inquired about the Semiconductor market, asking what has changed to make it a notable growth driver for Cognex again.

Answer

CEO Robert Willett stated the Logistics market has bottomed and is now seeing broad-based growth from large e-commerce players, smaller 'base logistics' customers, and share gains in the parcel and post segment. Regarding SEMI, he explained that while it's a mature market, customers continue to rely on Cognex for difficult, 'specced-in' applications, with growth now driven by the market cycle and new opportunities for advanced deep learning technology.