Jeffrey Hammond

Jeffrey Hammond asked for clarification on the shipping schedule for the $735 million E-Pod order, specifically if it would all ship in 2027, and sought an update on the percentage of Regal Rexnord's business categorized within secular growth verticals. He also inquired about the resolution timeline for the rare earth magnet dynamic, including how much of the 2025 headwind could be recovered.

Answer

CEO Louis Pinkham stated that there is no firm E-Pod shipping schedule, but expectations are to begin in early 2027, extending into 2028, with a possibility of some pull into 2026, over a 15-18 month period. He reaffirmed that 40%-50% of markets served are secular, expanding with data center opportunities. Regarding rare earth magnets, Mr. Pinkham confirmed mitigation is on track by end of 2026 through alternate sourcing and HRE-free alternatives, noting ongoing OEM validation processes, particularly in medical and defense, with expectations for recovery by year-end.

Jeffrey Hammond asked for clarity on the shipment schedule for the $735 million ePOD orders and the percentage of Regal Rexnord's business in secular growth markets. He also questioned the resolution timeline for the rare earth magnet dynamic and the expected recovery from 2025 headwinds.

Answer

CEO Lewis Pinkham stated that ePOD shipments are expected to begin in early 2027, potentially extending into 2028, with some possibility of pulling into late 2026, over a 15-18 month period. He confirmed that 40-50% of their served markets are secular, a figure expanding with data center opportunities. Mr. Pinkham also affirmed they are on track to mitigate most rare earth exposure by the end of 2026 through various sourcing strategies, noting that validation processes with OEM partners are progressing as expected without significant market share loss. CFO Rob Rehard also participated in the discussion.

Jeffrey Hammond of KeyBanc Capital Markets asked for a quantification of the rare earth magnet impact on Q2 revenue and profit, the expected impact in the second half, clarification on the doubling of 'rest of world' tariffs, and any changes to the free cash flow outlook due to recent tax law changes.

Answer

CFO Robert Rehard quantified the Q2 rare earth impact at approximately $6 million on profit, representing two-thirds of the AMC margin miss, with a full-year impact of about $5 million. CEO Louis Pinkham added the sales impact was about $10 million in the quarter. Pinkham explained the 'rest of world' tariff increase relates to manufacturing in India and Thailand, noting the company can mitigate this by shifting production. Rehard stated that while there's a modest cash tax benefit from tax law changes, it's offset by tariff-related timing, so the $700 million free cash flow guide (excluding the AR securitization) is maintained.

Jeffrey Hammond requested a breakdown of the company's $130 million tariff mitigation strategy, asking about the contribution from pricing versus other initiatives. He also sought clarification on margin movements, specifically the expected step-down in IPS margins from Q1 to Q2 and the reasons for lifting the full-year margin guide for PES.

Answer

CEO Louis Pinkham outlined the tariff mitigation plan, ranking the drivers as supply-base realignments, followed by production relocations and productivity, and finally pricing actions, while reiterating confidence in achieving EBITDA neutrality. CFO Robert Rehard explained that the Q1 to Q2 margin change in IPS is primarily due to business mix. He and Pinkham clarified that the improved PES margin outlook is a result of flowing through the strong Q1 performance, supplemented by expected cost savings and pricing improvements later in the year.

Jeffrey Hammond of KeyBanc Capital Markets questioned why the company seemed unprepared for the residential HVAC pre-buy, the discrepancy with OEM order rates, and the outlook for discrete automation.

Answer

CEO Louis Pinkham explained that the HVAC demand surge was sudden after two years of weakness and that OEMs had been discreet about their pre-buy plans. He also highlighted that the pre-buy was concentrated in smaller systems where Regal Rexnord has less exposure. For discrete automation, he noted that while short-cycle orders are weak, strong long-cycle project wins provide confidence for 2025.

Jeffrey Hammond inquired about the funnel visibility and expected order flow for the Industrial Process (IP) segment throughout the year, given its lumpy nature and strong backlog. He also asked for clarification on the 40% organic growth in Connect and Control Technologies (CCT) orders, specifically if there were any one-time factors, and confirmed the Q1 guidance's treatment of amortization before the SPX Flow acquisition close.

Answer

CEO Luca Savi stated that the IP funnel was slightly down year-over-year but stable quarter-over-quarter (Q4 vs Q3), with growth in the Middle East and Asia Pacific, noting positive future investment sentiment from Saudi Aramco. CFO Emmanuel Caprais added that 2026 orders are expected to show low to mid-single-digit growth across all end markets. Regarding CCT orders, Luca Savi clarified that the strong 40% organic growth was broad-based across connectors, controls, aftermarket, and kSARIA, with only a minor price adjustment from Boeing contract renegotiation as a one-time item. Emmanuel Caprais confirmed that the Q1 guidance does not include changes to intangible amortization accounting, which will be adjusted after the SPX Flow acquisition closes, but it does include dilution from the December equity raise.

Jeffrey Hammond asked for an update on the Industrial Process (IP) segment's funnel and order flow visibility for the year, and then inquired about the drivers behind Connect & Control Technologies' (CCT) 40% organic order growth, including any one-time factors, and sought clarification on the Q1 guidance regarding intangible amortization.

Answer

CEO Luca Savi noted the IP funnel was slightly down year-over-year but stable quarter-over-quarter, with growth in the Middle East and Asia Pacific, and positive outlook from Saudi Aramco. CFO Emmanuel Caprais added expectations for low to mid-single-digit growth in 2026 orders across all end markets. For CCT, Mr. Savi explained broad-based growth across connectors, controls, aftermarket, and kSARIA, with only a minor price adjustment from the Boeing contract renegotiation as a one-time item. Mr. Caprais clarified that Q1 EPS guidance excludes changes to intangible amortization, which will be adjusted post-SPX FLOW acquisition, but includes dilution from the December equity raise.

Jeff Hammond inquired about the specific breakdown of the $0.20 EPS guidance raise, focusing on contributions from profitability, acquisitions, and tax. He also asked about the market outlook for 2026, identifying improving/exciting markets versus less certain ones.

Answer

Emmanuel Caprais, CFO, explained that the $0.20 EPS guidance raise included a >$0.10 benefit from Q3 performance, less than $0.10 from higher Q4 revenue and improved margins across businesses, and approximately $0.01 from a positive tax rate impact. Luca Savi, CEO and President, stated that ITT enters 2026 with a strong backlog from IP project wins and CCT Defense awards. He expects Aero & Defense to be a tailwind, automotive outperformance to drive Motion Technologies growth, and Svanehøj and Casoria acquisitions to deliver growth fueled by strong 2025 orders.

Jeff Hammond asked for a detailed breakdown of the $0.20 EPS guidance raise, specifically quantifying the contributions from improved profitability, acquisitions, and a lower tax rate, given that top-line and margins appeared to be changing modestly. He also sought insights into ITT's market excitement for 2026, identifying improving or inflecting markets versus those with less certainty.

Answer

CFO Emmanuel Caprais explained that the $0.20 EPS raise was driven by Q3 outperformance, expected Q4 benefits from higher revenue and improved margins across businesses, lower corporate costs, and a $0.01 positive tax rate impact. CEO Luca Savi highlighted a strong backlog for 2026 from IP project wins and CCT Defense awards, anticipating tailwinds in aerospace and defense, continued outperformance in automotive, and growth contributions from Svanehøj and Casoria acquisitions.

Jeffrey Hammond asked about the expected organic growth cadence for the second half of the year and how much of the current order strength provides visibility into 2026. He also requested more detail on the M&A pipeline, particularly what ITT considers an 'acquisition of size.'

Answer

CFO Emmanuel Caprais clarified that current project orders provide visibility into 2026, with Q3 and Q4 organic growth expected in the low-to-mid single digits. CEO Luca Savi defined an 'acquisition of size' as a company with revenues between $200 million and $400 million, noting this is the range for the bulk of opportunities in ITT's current M&A funnel.

Jeffrey Hammond of KeyBanc Capital Markets sought details on the mitigation strategy for the new tariff exposure and the outlook for M&A amidst macro uncertainty.

Answer

CEO Luca Savi explained the $50-$60 million tariff impact would be fully offset through a combination of sourcing changes and targeted price increases on non-USMCA compliant products, resulting in no net impact to EPS guidance. He also affirmed that despite macro uncertainty requiring more granular diligence, the M&A pipeline remains active and the company is focused on cultivating long-term strategic acquisitions.

Jeffrey Hammond sought clarification on the impact of temporary intangible amortization on 2025 EPS guidance and asked about the underlying incremental margins for the IP and CCT segments in Q4 and the outlook for 2025.

Answer

CFO Emmanuel Caprais clarified that the temporary intangible amortization was ~$0.17 in 2024 and is guided to be ~$0.16 in 2025, offering no significant net benefit from amortization roll-off. He highlighted strong underlying Q4 incremental margins for IP at 64% (excluding acquisitions) and noted that for 2025, Motion Technologies' margin is expected to reach 20%, with strong incrementals also continuing in IP and CCT.

Jeff Hammond questioned how Zurn Elkay Water Solutions' organic opportunities in adjacencies could lead to inorganic opportunities, drawing a parallel to the company's acquisition of Elkay (LK).

Answer

Todd Adams, Chairman and CEO, explained that the strategic planning process involves a dual path: identifying internal organic growth priorities that may lead to M&A cultivation. He noted that expanding the view on the addressable market creates more M&A optionality, allowing the company to vet categories and potentially acquire businesses that align with their expertise and go-to-market strategy.

Jeff Hammond asked for details on the pricing impact in Q4 2025 and what is embedded in Q1 2026 guidance, and whether the announced pricing for 2026 is a normal course adjustment or higher due to tariffs or copper inflation. He also questioned how organic adjacency opportunities can lead to inorganic M&A opportunities, referencing the LK acquisition as an example.

Answer

Chairman and CEO Todd Adams clarified that 2026 price increases are back-to-normal course. CFO David Pauli specified Q4 2025 pricing was about five points, with 2026 seeing similar levels early on before lapping prior increases. Todd Adams explained that strategic planning identifies adjacencies, creating dual paths for organic development or M&A cultivation, a process similar to the LK acquisition, which expands the addressable market.

Jeffrey Hammond from KeyBanc Capital Markets asked for the specific price realization in Q2 and inquired how current Dodge construction start data is progressing relative to earlier expectations for 2026 growth.

Answer

President, CEO & Chairman Todd Adams stated that year-over-year price realization was approximately two points in the quarter. He also noted that Dodge start data remains 'clearly still positive' and hasn't changed meaningfully, which, combined with the company's own share gains, supports a positive outlook for growth in 2026.

Jeffrey Hammond asked if the ramp-down of China sourcing was accelerated, where the supply chain was shifting besides Southeast Asia, and for details on the $45M-$55M tariff cost calculation, which seemed low relative to announced price hikes.

Answer

Todd Adams, Chairman and CEO, confirmed an acceleration in sourcing to the U.S. and Mexico, in addition to Southeast Asia. David Pauli, CFO, and Todd Adams clarified the tariff cost is a bottom-up calculation based on specific HTS codes. They explained that a significant portion of imports from China, such as steel and aluminum products, are subject to much lower tariff rates than the 145% headline number, resulting in the $45M-$55M impact.

Jeffrey Hammond of KeyBanc Capital Markets Inc. asked for clarification on the 2025 vertical growth assumptions, particularly for the institutional market, and requested details on the company's current and historical China exposure and near-term strategies to mitigate potential tariffs beyond pricing.

Answer

CEO Todd Adams explained that the institutional growth outlook is an aggregate figure based on prior construction starts, with improving 2025 starts potentially boosting 2026 growth. Regarding tariffs, Adams detailed the company's supply chain evolution, stating China exposure has been reduced from a peak of 70-75% to less than 25% currently, with a target of under 10% by 2026. He emphasized that they have built flexibility to shift sourcing between China, Southeast Asia, and North America, allowing for a measured, strategic response rather than a reactive one.

Jeff Hammond asked for a breakdown of transformation buckets, specifically which areas performed ahead of expectations and where opportunities remain, noting potential underperformance in sourcing due to lower volume and footprint.

Answer

CEO John Stauch stated that transformation goals were met on a dollar and margin basis, but underperformed on volume leverage for operational efficiencies, which remains an opportunity. He noted overperformance in sourcing and pricing. CFO Nick Brazis added that the $70 million transformation is net of investments, with robust sourcing and operational efficiency pipelines for 2026, along with organizational excellence opportunities. He emphasized a differentiated investment approach across businesses.

Jeff Hammond asked about Pentair's transformation buckets from the last analyst deck, specifically which areas performed ahead of expectations and where opportunities still remain, particularly regarding sourcing and footprint optimization.

Answer

CEO John Stauch stated that Pentair hit its transformation goals on a dollar and margin basis, but underperformed on volume leverage from operational efficiencies, which remains an opportunity. He noted overperformance in sourcing and pricing. CFO Nick Brazis added that the $70 million in 2026 transformation savings is net of investments, with robust pipelines in sourcing, operational efficiency, and organizational excellence, and a differentiated investment strategy across businesses.

Jeff Hammond inquired about the 2026 Pool pricing, noting it's projected at 6-7% compared to a normal 4%, and asked what this contemplates for incremental tariffs and if similar above-normal price increases are expected from other businesses due to carryover tariff impacts.

Answer

CFO Bob Fishman explained that Pool's roughly 6% price increase for 2026 captured all known information at the end of the Pool season, acknowledging that the full amount isn't always netted due to dealer incentives. He stated that other businesses are evaluating pricing similarly for January 1, based on known information, and would adjust if disruptive events occur.

Jeff Hammond noted that Pool's 2026 pricing appears to be around 6.5% or 6-7%, higher than the normal 4%, and asked what this contemplates for incremental tariffs. He also inquired if similar above-normal price increases, potentially due to carryover tariff impact, should be expected from other Pentair businesses.

Answer

CFO Bob Fishman explained that Pool, which sets its prices first, implemented approximately 6% price increases based on known information at the time, acknowledging that the full amount is not always netted due to dealer incentives. He stated that other businesses would evaluate their pricing similarly, considering known factors by January 1st, and would adjust prices accordingly if any disruptive events, such as further tariffs, occur between now and year-end.

Jeffrey Hammond of KeyBanc Capital Markets Inc. sought to confirm the pool volume outlook, asking for a clear view on new construction versus remodel trends and the current state of channel inventories. He also asked about the strategy for future pricing actions in response to potential new tariffs.

Answer

President and CEO John L. Stauch characterized the pool volume environment as modestly more challenging than initially hoped but generally in line with expectations. He affirmed that channel inventories are at normal historical levels, with good visibility into sell-through. Regarding future tariffs, he stated Pentair would react as needed, treating them as commodity inflation and working with channel partners to recover the impact within the year.

Jeffrey Hammond asked about the current percentage of cost of goods sold sourced from China compared to three years ago and inquired about potential future restructuring actions to mitigate demand destruction.

Answer

CEO John Stauch stated that products sourced from China represent just under $100 million in costs, down from approximately 2.5 times that amount 3-4 years ago, a result of transformation initiatives. He noted that while they are evaluating future actions, any major supply chain or factory repositioning would likely yield benefits in 2026 and beyond. CFO Bob Fishman added that the transformation project funnel provides flexibility to accelerate if needed.

Jeffrey Hammond asked for the expected distribution of the guided 125 basis points of margin expansion across the three business segments. He also sought to understand the drivers of continued weakness in residential Water Solutions and the fundamental outlook for the commercial foodservice (Ice) business.

Answer

President and CEO John Stauch projected that the Pool segment would contribute around 100 basis points of ROS expansion, with Flow and Water Solutions contributing roughly equally to the remainder. He explained that residential Water Solutions is impacted by higher interest rates affecting rural home construction and consumer financing for water softeners. For commercial Ice, the primary headwind was a tough comparison to a large China project in the prior year, with the core North American market performing well.

Jeffrey Hammond of KeyBanc Capital Markets Inc. questioned how the costs associated with discontinued 80/20 sales would be addressed and asked about the timing of the Pool early buy and any signs of recovery in new pool construction.

Answer

President and CEO John Stauch stated the goal is to eliminate addressable costs from discontinued 'Quad 4' products, with savings appearing in transformation results. He described the current Pool early buy as 'completely normal' and said it was too premature to call a recovery in new pool builds, with more clarity expected on the Q4 call.

Jeff Hammond asked about Commercial Unitary orders, trends, and the outlook for 2026. He also inquired about Trane's CapEx guidance (1-2% of sales), capacity ramping in the Applied business, future capacity expansion needs, and the ability to ramp labor for the service business.

Answer

Dave Regnery, Chair and CEO, stated that Unitary was slightly positive in 2025 and is currently modeled as flattish for 2026, depending on vertical growth rates. He detailed capacity in three areas: four-wall (chiller capacity up 4x in 2-3 years), supply chain (working with partners), and service (over 7,500 global technicians). Chris Kuehn, Executive Vice President and CFO, added that M&A also brings capacity and Trane remains CapEx light.

Jeff Hammond asked about the trends and 2026 outlook for commercial unitary orders. He also inquired about Trane's CapEx guidance (1-2% of sales), capacity ramping in the Applied business, and the ability to scale labor for the service business.

Answer

Dave Regnery stated that unitary orders were slightly positive in 2025 and are currently modeled as flattish for 2026, depending on vertical growth rates. He detailed capacity in factories (chiller capacity up 4x in 2-3 years), supply chain, and service (over 7,500 global technicians). Chris Kuehn added that M&A also contributes to capacity expansion.

Jeff Hammond asked for a detailed breakdown of the 15% growth projected for the Building Climate Solutions (BCS) segment, including contributions from price, volumes, and M&A. He also inquired about the current market observations for the commercial unitary business. Additionally, he questioned how the repair/replace dynamic is incorporated into the forecast, specifically whether consumer tightness persists or if the issue was primarily related to canister shortages.

Answer

Michael Quenzer, CFO, outlined that BCS growth includes a high single-digit contribution from acquisitions (like Duro Dyne), mid-single-digit volume growth driven by market recovery and share gains, and low single-digit price/mix. Alok Maskara, CEO, noted that the light commercial HVAC industry has seen 17 consecutive months of decline but expects better comparisons and is observing good uptake in quotations and backlog. Regarding repair/replace, Alok Maskara views it as deferred replacement, stating that dealer confidence, previously impacted by new product transitions and canister shortages, is improving. The forecast assumes the repair vs. replace activity stabilizes at 2025 levels, neither worsening nor improving.

Jeff Hammond from KeyBanc Capital Markets requested a detailed breakdown of the 15% growth projected for Lennox's Building Climate Solutions (BCS) segment, including contributions from price, volumes, and M&A, and insights into current trends in the commercial unitary business. He also inquired about how the repair/replace dynamic is factored into the forecast, specifically whether consumer tightness persists or if the issue was primarily related to canister shortages.

Answer

CFO Michael Quenzer outlined that BCS growth includes high single-digit M&A contribution, mid-single-digit volume growth from market recovery and share gains, and low single-digit price/mix. CEO Alok Maskara noted 17 consecutive months of commercial industry decline but sees improving comps, quotations, and backlog. Regarding repair/replace, Alok Maskara views it as deferred replacement, stating that dealer confidence is improving, and the forecast assumes the heightened repair vs. replace activity seen in 2025 will stabilize rather than worsen or improve.

Jeff Hammond asked if the industry was starting to consider price elasticity more and potentially taking a breather from pricing actions, given consumer tightening and past price increases. He also inquired about quantifying the 2026 tailwinds from the commercial plant achieving full efficiency and the resolution of R454B transition noise.

Answer

CEO Alok Maskara noted that OEM-to-channel prices increased 40% over 4-5 years, while channel-to-consumer prices rose 100-200%, expecting price adjustments to occur more between consumers and contractors. He mentioned $10 million in productivity from the new Saltillo plant, which will continue into next year, balancing absorption impacts. He expects 2026 to see more 'normal' productivity ($20-$30 million) compared to recent years, highlighting the absence of startup inefficiencies and transfer costs seen in H1 2025. CFO Michael Quenzer added that the new plant also helps drive efficiencies at the Stuttgart factory.

Jeff Hammond questioned if the industry might take a breather from pricing actions, given the significant price increases over the past five years and current consumer tightening, shift to value, and repair-versus-replace trends. He also asked for quantification of the 2026 tailwinds from the commercial plant reaching full efficiency and the R-454B transition.

Answer

CEO Alok Maskara noted that while OEM prices to channels rose 40% in 4-5 years, channel-to-consumer prices rose 100%-200%. He expects price adjustments to occur more between consumers and contractors (consumers getting more quotes), rather than OEMs taking a breather from pricing to offset inflation. He reiterated $10 million in productivity from the new Saltillo plant in 2025, which continues into 2026, along with labor arbitrage benefits and avoided startup inefficiencies. CFO Michael Quenzer added that the new plant also relieves pressure on the Stuttgart factory.

Jeffrey Hammond of KeyBanc Capital Markets inquired about the significant price-cost gap in Q2, specifically asking about A2L manufacturing costs, the timing of tariff impacts, and the volume and price/mix assumptions for the second half of the year.

Answer

CEO Alok Maskara explained that A2L conversion costs and pricing were in line with expectations, with margin benefits driven by factory productivity and headcount reductions. CFO Michael Quenzer noted that tariffs are expected to increase slightly in the second half but are factored into the guide, which assumes HCS volumes down ~8% and BCS volumes down ~4% with continued strong price/mix.

Jeffrey Hammond questioned why the destocking impact shifted from Q1 to Q2 and inquired if the Q1 tariff impact was higher than peers' due to Mexico-related issues that might improve.

Answer

CEO Alok Maskara explained that residential destocking was not significant in Q1 because Lennox still had R-410A inventory to sell, pushing the expected impact into Q2. CFO Michael Quenzer added that the Q1 tariff impact seemed higher due to LIFO accounting, which expenses costs as incurred, and was primarily from tariffs on copper, aluminum, and steel coming through Mexico.

Jeffrey Hammond asked about Lennox's production mix in Mexico versus the industry average, progress on improving distribution margins, and the current sales mix from parts and accessories.

Answer

CEO Alok Maskara estimated about 20% of Lennox's output is from Mexico, slightly below the industry average. He noted that recent record HCS margins reflect progress on the distribution initiative, though it remains a long-term journey. He stated that parts and accessories still constitute about 20% of sales, well below an entitlement he believes is twice that level.

Jeffrey Hammond of KeyBanc Capital Markets Inc. asked for the underlying unit growth outlook for the residential and commercial markets heading into 2025. He also inquired about Lennox's mix in the education vertical and whether there are signs of a slowdown in that market.

Answer

CEO Alok Maskara projected the residential end market to be flat to slightly up, while the commercial market is expected to grow in the low single digits. He noted that Lennox's exposure to the education market is less than some competitors but sees it as a growth opportunity and is not currently observing any slowdown in that vertical.

Jeff Hammond from KeyBanc Capital Markets requested additional insights into the recent performance of the home center channel, specifically whether the improvement was driven by inventory adjustments, price increases, or underlying demand. He also inquired about the reasons for the projected increase in capital expenditures for 2026 and the nature of the growth capital plans.

Answer

President and CEO Mark Sheahan and CFO David Lowe suggested the home center channel's uptick might be due to channel inventory activity rather than increased foot traffic or demand, following several challenging years. They clarified that the 2026 CapEx increase primarily stems from a $50 million investment in a new corporate headquarters, with plans to sell the current campus to offset costs.

Jeff Hammond asked for more color on the home center channel's performance, specifically whether the recent uptick was due to inventory adjustments, anticipation of price increases, or an actual improvement in underlying demand. He also inquired about the pickup in capital expenditures for 2026, asking for details on the growth capital plans driving this increase.

Answer

President and CEO Mark Sheahan and CFO David Lowe noted that foot traffic in the home center channel remained light, suggesting the uptick might be due to channel activity or inventory adjustments rather than a significant demand increase, though it was a positive bounce after several challenging years. Regarding CapEx, David Lowe explained that the increase is primarily driven by the planned $50 million construction of a new corporate headquarters building in 2026, in addition to maintenance CapEx. Mark Sheahan added that the sale of the current campus would offset this, but is not yet factored into the disclosed numbers.

Jeffrey Hammond of KeyBanc Capital Markets asked for the key drivers supporting the company's confidence in an improved second-half performance and inquired about the broader capital allocation strategy, including M&A and buybacks.

Answer

President and CEO Mark Sheahan cited the upcoming price increase, steady order rates, and easier comps as reasons for confidence in meeting full-year guidance. CFO & Treasurer David Lowe described the capital allocation strategy as an 'and' model, prioritizing organic investment, followed by a disciplined but active M&A pipeline and opportunistic share repurchases.

Jeffrey Hammond of KeyBanc Capital Markets questioned the confidence behind maintaining the full-year guidance despite a flat first half and asked for an update on the company's capital allocation strategy, given recent M&A and buyback activity.

Answer

CEO Mark Sheahan cited easier second-half comparisons, the upcoming price increase, and steady order rates as the basis for confidence in the guidance. CFO & Treasurer David Lowe described Graco's capital allocation as an 'and, not an or' model, prioritizing internal investment, followed by strategic M&A and opportunistic share repurchases, particularly when market sentiment towards cyclical stocks is low.

Jeffrey Hammond from KeyBanc Capital Markets asked about Graco's major sourcing countries beyond China and potential exposure to retaliatory tariffs. He also inquired about trends in the professional paint channel and underlying customer sentiment.

Answer

Executive Mark Sheahan identified China as the top sourcing country outside the U.S. but stated that the impact of a broad 10% U.S. import tariff would be 'very minimal.' Executive David Lowe added that due to Graco's 80%+ U.S. manufacturing footprint, the main tariff concern is demand impact, not COGS. Sheahan clarified that the North American pro paint channel was actually up nicely, with weakness concentrated in the home center channel, and expressed confidence in Graco's position for a housing recovery.

Jeffrey Hammond from KeyBanc Capital Markets asked about the Contractor segment, including the timing of new product launches versus last year and feedback from the field on the paint business. He also questioned if powder coatings business shifted from Q4 to Q1 and asked about the duration of acquisition-related step-up charges.

Answer

Executive Vice President Mark Sheahan noted that new products launched later in 2024, creating an easier Q1 2025 comp, and described the paint market as 'stable to potentially improving.' He clarified there was no meaningful shift in powder coatings projects; the Q4 decline was due to a very tough comparison. CFO David Lowe added the powder backlog is slightly above normal. Executive Christopher Knutson stated the acquisition step-up charges will be complete after Q1 2025.

Jeffrey Hammond of KeyBanc Capital Markets asked for any 'green shoots' or signs of market improvement, sought technical clarification on the new segment structure, and inquired about the M&A pipeline following recent deals.

Answer

Executive Mark Sheahan noted that while caution persists, the normalization of backlogs suggests a potential bottoming out. Executive David Lowe added anecdotal encouragement from recent EMEA order activity. Regarding the structure, Christopher Knutson and Mark Sheahan clarified that the new Industrial segment will combine the legacy Industrial, Powder, and Lubrication divisions with parts of Process, while a new Expansion Markets segment will house the remaining businesses. On M&A, Sheahan mentioned a healthy pipeline of ~100 companies and a more favorable market, with the new Expansion Markets group tasked to explore new areas.

Jeff Hammond inquired about the sustainability of ADS's exceptional outgrowth into the second half of the year. He also asked for insights into the expected first-half to second-half margin step-down due to seasonality, considering the improved price-cost dynamics compared to the previous year. Additionally, he asked about any good or bad comp dynamics related to storm activity, given a lighter hurricane season this year.

Answer

Scott Cottrill (EVP, CFO, and Secretary) reiterated that the second-half outlook is primarily demand-driven, with stable price-cost and a 30-40% decremental margin approach. Scott Barbour (CEO and President) noted that winter weather significantly impacts construction activity in the northern U.S., which is factored into the cautious outlook. He also mentioned that favorable weather in Q2 likely provided some benefit, contrasting with potentially disruptive hurricane activity in prior periods.

Jeff Hammond asked about the sustainability of ADS's strong outgrowth into the second half of the year. He also inquired about how to think about the first-half to second-half margin step-down due to seasonality, considering the improved price-cost dynamics. Additionally, he asked about any good or bad comparative dynamics related to storm activity (hurricanes) from last year versus this year.

Answer

CFO Scott Cottrill reiterated that the second-half outlook is demand-driven and cautious, with price-cost stable and no unusual manufacturing, transportation, or SG&A trends, applying a 30-40% decremental margin approach. CEO Scott Barbour discussed the impact of winter on construction activity in the northern U.S. and noted that good weather in Q2 benefited performance, contrasting with last year's traditional winter.

Jeffrey Hammond asked about the longer-term project pipeline, specifically residential development trends and any signs of project delays, and also inquired about the M&A environment and the company's stance on share buybacks.

Answer

CEO Scott Barbour stated that the pace of quotes and orders is consistent and has improved over last year, though not radically, and they have not seen a meaningful change in project cancellations. Regarding capital allocation, an executive reiterated that reinvesting in the business is the top priority, followed by M&A. Share buybacks are continually evaluated as a use for excess cash after funding internal growth and considering the macroeconomic backdrop.

Jeff Hammond asked for clarification on Gates Industrial's margin bridge, specifically if the company is outperforming on internal execution and material savings despite lacking volume support, and if the long-term margin target is being pushed out. He also inquired if there was a shift in capital allocation strategy, with a greater emphasis on bolt-on M&A compared to previous buyback-focused commentary.

Answer

CEO Ivo Jurek affirmed that the company is delivering on its midterm targets through strong execution and internal initiatives, even without macro-level volume support, emphasizing that any future volume inflection would be incremental to current performance. Regarding capital allocation, Mr. Jurek stated that while the stock is considered inexpensive and buybacks will continue with the new $300 million authorization, the company's strong free cash flow generation and declining net leverage (trending below 2x) enable the use of all three capital deployment levers, including a more aggressive lean towards bolt-on M&A.

Jeff Hammond sought clarification on the company's margin bridge and long-term targets, suggesting that the message about next year being a transition year might be confusing, and posited that Gates has outperformed on internal execution and material savings despite lacking volume support. He also noted a perceived shift in capital allocation strategy, moving from a primary focus on stock buybacks to potentially more bolt-on M&A.

Answer

CEO Ivo Jurek affirmed Hammond's assessment, stating that the company is delivering on its midterm targets without macro support, highlighting strong execution in a negative PMI environment. He reiterated that any future volume inflection would be incremental to the described margin improvements. Regarding capital allocation, Jurek acknowledged the stock's inexpensive valuation and the board's $300 million share repurchase authorization, confirming continued buybacks. However, he also stated that with the balance sheet trending below the two-times leverage target, the company is increasingly open to utilizing all three capital deployment levers, including more aggressive pursuit of bolt-on M&A.

Jeffrey Hammond of KeyBanc Capital Markets questioned what factors beyond the agriculture market bottoming are signaling an industrial recovery. He also asked about the company's plans for share buybacks in the second half and its confidence in achieving free cash flow targets.

Answer

CEO Ivo Jurek pointed to stabilizing PMIs and a positive print in industrial replacement as encouraging signs, though off-road and on-road markets remain weak. CFO Brooks Mallard reiterated a balanced capital allocation strategy, committing to debt paydown while viewing share buybacks as a good use of capital. He expressed high confidence in hitting the 90% free cash flow conversion target through effective working capital management.

Jeffrey Hammond from KeyBanc Capital Markets sought more color on the signs of an industrial recovery beyond agriculture bottoming. He also asked about the company's plans for share buybacks and its confidence in hitting free cash flow conversion targets.

Answer

CEO Ivo Jurek noted that the industrial replacement market showed positive growth in Q2 for the first time since Q1 2023 and that PMIs are stabilizing. CFO Brooks Mallard described a balanced capital allocation approach between debt paydown (to get gross debt below $2B) and share buybacks, as the stock is considered undervalued. He also expressed confidence in the 90% free cash flow conversion target, citing improved working capital management.

Jeffrey Hammond of KeyBanc Capital Markets questioned what factors beyond the agriculture market bottoming are indicating an industrial recovery. He also asked about the company's plans for share buybacks in the second half and its confidence in achieving its free cash flow conversion targets.

Answer

CEO Ivo Jurek pointed to stabilizing PMIs and a positive print in industrial replacement for the first time since Q1 2023 as signs of improvement, while noting continued headwinds in construction and on-road. CFO Brooks Mallard stated that Gates will maintain a balanced capital allocation approach, paying down debt in Q3 while keeping buybacks as an option. He affirmed confidence in hitting the 90% free cash flow conversion target through disciplined working capital management.

Jeffrey Hammond of KeyBanc Capital Markets sought more detail on the industrial recovery beyond agriculture, and also asked about the company's plans for share buybacks and its confidence in achieving free cash flow targets.

Answer

CEO Ivo Jurek noted that while off-road and on-road markets remain headwinds, industrial replacement saw positive growth and PMIs are stabilizing. CFO Brooks Mallard stated that Gates will maintain a balanced capital allocation approach, including debt paydown and share repurchases, as the stock is considered undervalued. He affirmed confidence in the 90% free cash flow conversion target for the year.

Jeffrey Hammond of KeyBanc Capital Markets sought more detail on the industrial recovery beyond agriculture, and asked about the outlook for share buybacks and confidence in achieving free cash flow conversion targets.

Answer

CEO Ivo Jurek noted that while industrial replacement saw positive growth, off-road construction and on-road markets remain headwinds. CFO Brooks Mallard stated that the company maintains a balanced capital allocation approach, with debt paydown being a priority, but share buybacks remain a good option as the stock is considered undervalued. He expressed high confidence in hitting the 90% free cash flow conversion target due to improved working capital management.

Jeffrey Hammond sought clarification on the moving parts within the unchanged core growth guidance, specifically asking about the magnitude of announced price increases, the impact of foreign exchange, and the implied offset from lower volumes. He also asked for a quantification of the company's manufacturing base in Mexico and what can be done to increase USMCA compliance.

Answer

CFO L. Mallard explained that the $40 million in pricing to offset tariffs effectively comes out of the volume assumption in the core growth guide, reflecting weaker OEM demand. He noted the FX headwind is now about 100 bps less than initially forecast. Regarding Mexico, Mallard stated that the company has flexibility to leverage its U.S. footprint to offset tariffs and improve USMCA compliance, which is a key part of the operational mitigation plan. CEO Ivo Jurek added that the company has a full product footprint in Mexico, mirroring its U.S. capabilities, with the exception of mobility products.

Jeffrey Hammond from KeyBanc Capital Markets asked for an explanation of the high drop-through rate from the foreign exchange impact on revenue to EBITDA. He also inquired about current inventory levels in the Automotive and Industrial replacement channels.

Answer

CFO L. Mallard confirmed the high drop-through rate is due to a combination of translational and transactional FX impacts from 2024 that are not modeled to repeat in 2025. CEO Ivo Jurek addressed inventories, stating that levels in the Automotive replacement channel are not out of line and the business is performing well. For Industrial replacement, he believes destocking is very near the bottom and expects performance to improve progressively through 2025.

Jeffrey Hammond of KeyBanc Capital Markets Inc. asked about the near-term strategies being used to manage decremental margins ahead of the 2025-2026 restructuring savings, and questioned the drivers behind Gates' outperformance in China compared to its peers.

Answer

CEO Ivo Jurek explained that the company is mitigating margin pressure through its enterprise initiatives, including 80/20 execution, material cost reductions, and factory productivity, which have successfully expanded gross margins despite soft demand. Regarding China, he credited the local team's execution of a 'region-for-region' strategy and their focus on expanding market share in industrial applications, noting they expect mid-single-digit growth for the full year in the region.

Jeff Hammond followed up on the data center market, specifically asking if the $500 million capacity target for next year includes longer-dated orders and what the new capacity expansion would entail (e.g., new plants, expansions).

Answer

President and CEO Aaron Jagdfeld clarified that the $300 million backlog is mostly for 2026 shipping, and $500 million is a capacity target, not fully subscribed. Hyperscaler conversations are primarily for 2027 and beyond. Capacity expansion aims to double output for 2027/2028 through new facilities (negotiations underway), equipment orders, and M&A to accelerate capabilities. He stressed Generac's strong financial position and commitment to aggressively invest in the C&I business to potentially double it in three to five years.

Jeff Hammond followed up on the data center market, seeking clarification on whether the $500 million capacity target for next year includes longer-dated orders and details on the nature of the new capacity expansion, such as new plants or facility expansions.

Answer

President and CEO Aaron Jagdfeld clarified that the $300 million backlog is mostly for 2026 shipments, while $500 million is a capacity target. He noted that hyperscaler discussions are primarily for 2027 and beyond, with incremental 2026 orders being opportunistic. The capacity expansion aims to double output for 2027/2028 through new facilities in Wisconsin and other U.S. locations, equipment orders, and M&A to accelerate growth and capture additional value streams, leveraging Generac's strong financial position.

Jeffrey Hammond asked about the atypical Q1 to Q2 sales cadence, inquiring about any pull-forward of sales ahead of price increases and how home consultation (IHC) trends are performing post-storms.

Answer

CFO York Ragen quantified a modest sales pull-forward of approximately $20 million in Q1. President and CEO Aaron P. Jagdfeld added that IHCs remain strong in regions with recent outages like the Southeast, but noted that California, being a less mature market, showed a lower IHC-to-outage ratio than expected, while regions with fewer outages saw lower IHCs.

Jeffrey Hammond asked for feedback from contractors regarding the three major storms, specifically on the trend in home consultations (IHCs) and the subsequent 'afterglow' effect compared to past storm events.

Answer

CEO Aaron P. Jagdfeld explained that the storms were regionally concentrated, inundating dealers in those areas and causing a temporary compression in close rates. He noted that project lead times mean activations from these events are just beginning to ramp up in Q1 2025. He contrasted this with quieter regions and emphasized the importance of the 9,200-strong dealer network in capturing this localized demand and establishing a new, higher baseline for the category.

Jeffrey Hammond of KeyBanc Capital Markets inquired about Generac's new clean energy products, asking what differentiates the PowerCell 2 system, what initial feedback has been, and for an update on product launch timing.

Answer

President and CEO Aaron P. Jagdfeld highlighted that the PowerCell 2 is a ground-up redesign focused on resiliency, offering market-leading capacity and power output. He stressed the key differentiator is the broader 'personal microgrid' ecosystem centered on the ecobee Smart Home Energy Hub, which optimizes energy assets for savings and resiliency. He noted a slight delay for PowerCell 2, now shipping in early Q1 2025, with the microinverter still on track for the second half of 2025.

Jeff Hammond asked how Hayward is contemplating the fourth quarter comparison, given the quiet hurricane season in 2025 versus the storm-benefited Q4 2024. He also sought an update on the aftermarket's resilience, the repair-versus-replace dynamic, new pool construction trends, and any signs of improvement in the upgrade and remodel segments.

Answer

Kevin Holleran, President and CEO, confirmed a Q4 headwind due to the non-repeat of hurricane-related demand from 2024, but noted strong early buy program participation. Eifion Jones, Senior VP and CFO, added that North American early buy is expected to be a modest positive, offset by European early buy timing, resulting in slightly down volume year-over-year for Q4. Mr. Holleran stated the aftermarket remains resilient, with the guide contemplating only a modest mix shift. New construction permits moderated but are for higher-value pools. He noted anecdotal pent-up demand for remodels and that parts sales, while up high single digits year-to-date, did not show widespread deferral of equipment replacement.

Jeff Hammond asked how Hayward is contemplating the Q4 2025 comparison, given the significant benefit from storm-related repair work in Q4 2024 and a quiet hurricane season this year. He also inquired about the aftermarket's resilience, the repair-versus-replace dynamic, and any signs of improvement in upgrade and remodel segments.

Answer

Kevin Holleran, President and CEO, acknowledged that Q4 2024 saw high-teens growth aided by Hurricanes Helene and Milton, which is not expected to repeat and is factored into current guidance. He noted good participation in the early buy program. Eifion Jones, Senior VP and CFO, added that North American early buy shipments in Q4 would see modest improvement, partially offset by European early buy timing shifts. Mr. Holleran confirmed the aftermarket's resilience, with the guide contemplating only a slight mix shift. He mentioned moderated new construction permits but higher value pools being built, and pent-up demand for remodels, with data not indicating widespread deferral of equipment replacement.

Jeffrey Hammond asked about the balance between sell-in versus sell-through and the state of channel inventories. He also requested an update on the remodel/upgrade market and whether Hayward was observing a "repair versus replace" dynamic for equipment.

Answer

President and CEO Kevin Holleran stated that channel inventory days-on-hand are well-positioned for Q3 and the upcoming early buy season. He confirmed that the remodel market remains tempered due to its discretionary nature but will likely improve with the housing market. Holleran also acknowledged a "repair versus replace" trend, noting that parts sales as a percentage of revenue have increased meaningfully year-over-year, suggesting some customers are opting to repair equipment rather than replace it entirely.

Jeffrey Hammond asked for an outlook on the Rest of World segment's margins for Q4 and 2025, as well as any signs of demand stabilization. He also requested an early view on the 2025 market, including potential hurricane-related impacts.

Answer

CFO Eifion Jones projected a step-up in Rest of World margins in Q4, with a long-term goal of over 40% driven by operational improvements. CEO Kevin Holleran stated that while the aftermarket remains resilient, new construction is weak and requires further interest rate cuts to stimulate demand. Regarding hurricanes, Holleran noted the company is prioritizing disaster relief orders and expects demand to occur in waves, from initial water treatment to later equipment replacement.

Jeff Hammond asked for clarification on the U.S. residential water heater market outlook, noting a more cautious tone despite unchanged industry shipment assumptions. He also inquired about the progress of market share recapture and the implications of tariff headwinds and steel pricing for 2026 pricing actions.

Answer

Stephen Shafer, CEO, clarified that the industry outlook for U.S. residential water heaters was revised from flat to flat-to-slightly-down, primarily due to pressure from new home construction completions. He confirmed that market share recapture was playing out as expected in Q3 due to level-loading production. Charles Lauber, CFO, noted that tariff pressure was a timing issue, impacting Q4 North America margins, but the full-year 5% outlook remained. He reserved commentary on 2026 pricing actions until the next quarter, but stated they are comfortable with the current price-cost relationship.

Jeff Hammond of KeyBanc Capital Markets sought clarification on A. O. Smith's outlook for the U.S. residential water heater market, noting a more cautious tone despite unchanged industry shipment assumptions. Hammond also asked about the progress of market share recapture in residential water heaters and the expected impact of additional tariff headwinds on North America margins and future pricing actions for 2026.

Answer

Stephen Shafer, Chief Executive Officer, explained that the outlook for the U.S. residential water heater market was revised from flat to flat to slightly down, primarily due to pressure from new home construction completions. Shafer confirmed that the company's market share recapture efforts in Q3 were playing out as expected due to production level-loading. Charles Lauber, Chief Financial Officer, clarified that tariff pressure was mainly a Q3 to Q4 timing issue, potentially impacting North America margins by 20 basis points in Q4, but the full-year 5% cost of goods sold impact estimate remains unchanged. Lauber reserved commentary on 2026 pricing until the next quarter.

Jeffrey Hammond of KeyBanc Capital Markets sought clarification on the market share commentary, asking if competitors took a more aggressive pre-buy stance. He also asked for comments on the broader competitive landscape, including new entrants and potential shifts in distributor sourcing.

Answer

CEO Stephen Shafer confirmed the assumption that competitors likely fulfilled more pre-buy demand, leading to A. O. Smith's relative share performance in H1 vs. H2. He addressed new entrants by emphasizing the high barriers to success in the market, which require a full product portfolio, immediate availability through channel partners, and the ability to navigate a complex regulatory landscape.

Jeffrey Hammond of KeyBanc Capital Markets Inc. asked about the potential for demand destruction from tariff-related price increases, whether these price hikes would expand margins or just cover costs, and for a breakdown of the estimated 6% to 8% impact on cost of goods sold.

Answer

CFO Chuck Lauber stated that the 2025 assumption is for pricing to be EPS-neutral, covering costs, with a potential margin headwind in Q2 before pricing is fully implemented. He noted that the stable replacement nature of the water heater business (80-85%) mitigates demand destruction risk. Lauber clarified that the 6-8% tariff impact is separate from steel cost assumptions and is primarily driven by imports from China, with tankless products being the largest component.

Jeffrey Hammond asked President and COO Steve Schafer for his early observations on opportunities for change and value creation at A.O. Smith. He also inquired about the company's manufacturing footprint relative to peers in the context of potential Mexico/Canada tariffs and the reason for a projected $10 million increase in corporate expenses.

Answer

President and COO Steve Schafer identified three key opportunity areas: expanding the A.O. Smith operating system to drive waste elimination, leveraging IT investments for greater value, and continuing to refine the business portfolio. CEO Kevin Wheeler stated that A.O. Smith is well-positioned for potential tariffs due to its flexible manufacturing footprint, including two large U.S. plants and a unique Canadian facility. CFO Chuck Lauber explained the corporate expense increase is primarily due to lower interest income and incentive compensation returning to target levels.

Jeffrey Hammond inquired about the durability of the March price increase amid steel deflation and questioned the long-term strategic fit of the underperforming China business in the company's portfolio.

Answer

CEO Kevin Wheeler affirmed the price increase was executed as planned and that the market remains competitive but stable. Regarding China, he reiterated a strong long-term commitment, viewing it as a core market alongside the U.S. and India, despite the current "tough patch." He emphasized that the long-term demographics and economic potential justify their continued investment and presence.

Jeff Hammond questioned the pricing outlook for the next year, specifically asking about price lists from equipment manufacturers and other categories, and the level of customer fatigue with above-average price increases. He also inquired about the target for POOL360 adoption percentage in a couple of years and the pushback or feedback from customers reticent to adopt.

Answer

President and CEO Peter Arvan noted that equipment price increases are above most other suppliers, and customer fatigue is addressed through innovation and new products. Regarding POOL360, Mr. Arvan highlighted a broad range in adoption rates, indicating significant room for improvement. He believes the company could reach 25-30% adoption, with pushback primarily related to education and ensuring the tools are valuable and best-in-class for customer productivity.

Jeffrey Hammond of KeyBanc Capital Markets inquired about order momentum across Nordson's business segments, particularly in Advanced Technology Solutions (ATS) and Medical, and asked for clarification on the sequential decline in backlog.

Answer

EVP & CFO Daniel Hopgood explained the backlog decline was a function of strong Q3 shipments and that underlying order intake remains stable. President & CEO Sundaram Nagarajan provided a segment overview, noting steady orders in Industrial Precision Solutions (IPS) except for polymer processing, a return to growth in Medical and Fluid Solutions (MFS) as destocking normalizes, and continued strong momentum in ATS, which he described as being at the beginning of a multi-year growth cycle.

Jeffrey Hammond sought confirmation on the full-year outlook, expecting sales at the low end of guidance but EPS near the midpoint, and asked about the drivers offsetting weaker sales. He also questioned the margin dynamics in the medical segment, specifically the dilution from Atrion and the status of destocking.

Answer

CFO Daniel Hopgood confirmed the sales and EPS outlook, pointing to strong operational and cost management as demonstrated in Q1. CEO Sundaram Nagarajan added that strong decremental performance in ATS and IPS, along with solid core MFS performance excluding the Atrion mix, provides confidence. Regarding medical margins, they explained the dilution was from Atrion's lower margin profile, while core business decrementals were in line with expectations. Nagarajan also noted the MFS organic decline was half from destocking and half from a now-complete strategic program repositioning.

Jeffrey Hammond inquired if the backlog normalization is complete and which businesses were most affected. He also asked about the drivers of weakness in polymer processing and the status of the destocking trend in the interventional solutions business.

Answer

CEO Sundaram Nagarajan noted that backlog normalization has primarily impacted large system businesses like plastic processing and industrial coatings. He attributed polymer processing weakness to tough comps and reduced investments in recycling and virgin polymer. CFO Daniel Hopgood described the interventional destocking as being in the 'middle innings,' with an expected resolution in another quarter or two, while highlighting a strong long-term project pipeline.

Jeffrey Hammond of KeyBanc Capital Markets inquired about the self-storage mix, noting the surprising resilience in new construction versus the R3 channel. He also asked about the second-half outlook given the Q2 beat without a guidance change, and questioned the stability of the backlog and pipeline in light of industry data suggesting a development slowdown.

Answer

EVP & CFO Anselm Wong explained that customers are currently prioritizing the completion of existing new construction projects, delaying a full shift to R3, though the R3 pipeline is building. Regarding guidance, Wong cited market uncertainty around interest rates as a reason for caution. CEO Ramey Jackson and CFO Anselm Wong attributed the stable backlog to market share gains and an increasing mix of R3 projects in the pipeline, offsetting broader market softness.

Jeffrey Hammond asked about the self-storage business mix, noting the surprising resilience in new construction versus the R3 channel, and inquired about the second-half outlook given the Q2 beat. He later followed up on the disconnect between Janus's stable backlog and negative industry development data, asking if this was due to market share gains or a stronger R3 pipeline.

Answer

EVP & CFO Anselm Wong explained that customers are currently prioritizing the completion of existing new construction projects, though the R3 pipeline is building. He attributed the unchanged guidance to market uncertainty around interest rates. On the follow-up, CEO & Director Ramey Jackson confirmed that Janus has been taking market share over the past three quarters. Wong added that the R3 pipeline is increasing as customers look to upgrade facilities to improve occupancy in a more competitive market.

Jeffrey Hammond from KeyBanc Capital Markets Inc. inquired about the current pacing of project delays, order activity, and the pipeline's health. He also asked for clarification on the pricing outlook relative to prior guidance and the discrepancy between the 2025 tariff impact and the future annualized run-rate.

Answer

CFO Anselm Wong noted steady, small growth in both the pipeline and backlog. CEO Ramey Jackson added that project churn rates have extended to around 500 days from a pre-pandemic 300 days, but confirmed that both orders and the pipeline have been on an uptick since the start of the year. Regarding pricing, Mr. Wong explained the Q1 impact was less severe due to the timing of older, higher-priced projects bleeding off. He clarified the 2025 tariff impact is minimal due to existing inventory and mitigation efforts, whereas the larger $10-12 million future figure represents a potential impact before any new mitigation actions are considered.

Jeffrey Hammond asked for clarification on the significant guidance cut, inquiring about what changed since the last quarter's backlog review, the status of incoming order activity and cancellations, and actions to mitigate harsh decremental margins.

Answer

CEO Ramey Jackson explained that the guidance was cut because projects expected to be released after a recent interest rate cut remained on hold, as developers now anticipate further rate cuts. He noted that while REITs continue business as usual, non-institutional operators are delaying projects. Jackson also mentioned that the company is in Phase 2 of its cost adjustments and that a $6.5 million bad debt expense from a customer bankruptcy significantly impacted adjusted EBITDA in the quarter.

Jeffrey Hammond of KeyBanc Capital Markets sought a reconciliation of the direct tariff cost estimate from $60 million to $40 million, quantification of price realization, and details on synergy outperformance from recent acquisitions.

Answer

CFO Shashank Patel explained the tariff estimate changed due to a reduction in China tariffs being partially offset by new tariffs on copper and from Europe. He quantified Q2 price realization at approximately 3%, expecting it to rise to mid-single digits in the second half. CEO Robert Pagano added that acquisition synergies are ahead of schedule across the board, driven by cost focus, 80/20 initiatives, and top-line gains.

Jeffrey Hammond asked about the extent of customer pre-buying ahead of the May price increases and how the company is managing it. He also inquired about the rationale for the weaker Europe guidance and requested an update on the integration and performance of the Bradley, Josam, and I-CON acquisitions.

Answer

CEO Robert Pagano confirmed seeing a $5 million pre-buy impact in Q1 and a solid April, stating the company is controlling order input based on customer history to manage pull-forward. He attributed the weaker Europe outlook to a slowdown in new construction and greater-than-expected destocking. Regarding acquisitions, Pagano reported that all three businesses are performing well, with synergy tracking ahead of schedule.

Jeffrey Hammond inquired about the timeline for the bottoming of the European heat pump destocking and U.S. inventory adjustments, and also asked for early insights into potential demand inflections for 2025.

Answer

CEO Robert Pagano stated that European heat pump destocking is expected to continue through at least Q1 of the next year. He noted that U.S. wholesale destocking is now largely complete, but softness in multi-family construction began to appear in Q3. For 2025, he pointed to the stability of the repair/replace business, which is 60% of sales, and a general pause in new construction pending resolutions of economic and political uncertainties.

Jeffrey Hammond from KeyBanc Capital Markets asked for a breakdown of the tariff impact by business segment and for an update on the Food Processing segment, including order rates, backlog growth, and the M&A pipeline.

Answer

CCO Steve Spittle clarified the tariff impact breakdown: approximately 60-65% in Commercial Foodservice, 20-25% in Residential, and 10-15% in Food Processing. CFO Bryan Mittelman and CEO Timothy FitzGerald noted that Food Processing order trends have been improving, the book-to-bill is above one, and the M&A pipeline remains active and strategic, as evidenced by the recent Frigo Mechanica acquisition.

Jeffrey Hammond from KeyBanc Capital Markets requested a breakdown of the net tariff impact by segment and sought more color on the Food Processing segment's improving trends, order rates, and M&A pipeline.

Answer

CCO Steve Spittle provided the tariff impact breakdown: Commercial Foodservice (60-65%), Residential (20-25%), and Food Processing (10-15%). CFO Bryan Mittelman confirmed that Food Processing has a book-to-bill above one and a growing backlog. CEO Timothy FitzGerald highlighted the active M&A pipeline for Food Processing as a key rationale for its planned spin-off.

Jeffrey Hammond inquired about the rationale for the accelerated share buyback and asked about the impact of tariffs, specifically seeking details on share gain opportunities and the strategy for the China-sourced grill business.

Answer

Executive Timothy FitzGerald explained the buyback was driven by a belief that the stock is undervalued, coupled with strong cash flow and a deleveraged balance sheet. He also noted M&A has been focused on Food Processing, freeing up capital. Regarding tariffs, FitzGerald stated Middleby is confident in offsetting the costs and sees it as a competitive advantage due to its U.S. manufacturing footprint in categories like light-duty cooking and induction. For the grill business, he highlighted that premium outdoor products are made in the U.S., and they have action plans to navigate tariffs for other sourced products.

Jeffrey Hammond asked about the anticipated leverage profiles for the two companies post-spin and inquired about the addition of Ed Garden to the Board, including the terms of the cooperation agreement and his influence on the strategic plan.

Answer

Executive Timothy FitzGerald indicated that the Food Processing business will likely carry less leverage post-spin to facilitate its M&A strategy. He described Ed Garden's appointment as part of an ongoing board refreshment process, noting the cooperation agreement has standard terms and that discussions have been constructive and aligned with the company's strategic direction.

Jeffrey Hammond asked for clarity on whether store opening delays are due to permitting issues or broader uncertainty, inquired about opportunities for working capital improvement, and questioned the company's plans for its convertible note maturing next year.

Answer

Executive Timothy FitzGerald attributed project delays to a combination of factors, including permitting, traffic uncertainty, and interest rates. CFO Bryan Mittelman identified inventory reduction as a key working capital focus, with an opportunity of over $100 million. Regarding the convertible note, he outlined several options including using the credit facility, cash on hand, or accessing other debt markets, stating they are not in a hurry to refinance the low-rate debt.

Jeffrey Hammond from KeyBanc Capital Markets asked if order growth was previously constrained by capacity and if new capacity could drive further acceleration. He also inquired about plans for additional data center capacity.

Answer

CEO Paulo Ruiz stated that strong order growth is expected to continue, supported by a robust negotiation pipeline. He highlighted that for the acquired Fiberbond business, Eaton had already planned for expansion investments due to high demand. He reiterated that capacity additions will continue through next year, plateauing in 2026.

Jeffrey Hammond of KeyBanc Capital Markets inquired about which end markets are showing favorable inflection, the impact of new go-to-market strategies, the rationale behind the Custom Fluid Power (CFP) divestiture, and future plans for portfolio optimization and manufacturing capacity.

Answer

President, CEO, & CFO Sean Bagan highlighted recovery in the health and wellness and European agriculture markets, with an expected acceleration across all businesses in the second half. He explained the CFP divestiture was a strategic move to improve margin profile and focus on core products, using proceeds for debt reduction. Bagan stated that while the portfolio is under continuous review, no other divestitures are imminent. The primary plan for manufacturing capacity is to grow into the existing footprint, leveraging expected revenue growth.

Jeffrey Hammond asked how much of the $15 million tariff headwind Helios expects to cover with price increases and how much could be mitigated in 2026. He also questioned if the CEO's portfolio assessment could lead to divestitures.

Answer

CEO Sean Bagan stated the company intends to cover the dollar impact of tariffs through a combination of price increases, leveraging its global manufacturing footprint, and pursuing volume growth. Regarding the portfolio, Bagan confirmed they are open to all options, including divestitures, but are focused on debt reduction before considering any significant M&A, which is unlikely until next year.

Jeffrey Hammond from KeyBanc Capital Markets asked for an update on system solution wins, whether lost revenue from the hurricane would be recovered in early 2025, and which end markets are showing the earliest signs of stabilization.

Answer

Sean Bagan, Interim President, CEO, and CFO, confirmed continued progress on system wins, noting a new Electronics subsystem win will be announced shortly. He explained that the $10 million in lost hurricane revenue is unlikely to be caught up in a single quarter due to capacity constraints and high distributor inventory, but will return as market conditions improve. Bagan identified the marine and powersports space as a market that could be among the first to recover, driven by potential interest rate cuts and low comps.

Jeffrey Hammond of KeyBanc Capital Markets inquired about the specific transactional foreign exchange headwind in the Sealing Technologies segment, the nature of the nuclear order timing, incremental margins in Advanced Surface Technologies (AST) for the second half, and the drivers for the improved growth outlook in the Sealing segment.

Answer

EVP & CFO Joe Bruderek clarified the nuclear order timing was due to a strong prior-year comparison and shifts between Q1 and Q3 of this year. He quantified the transactional FX headwind as $1.9 million in Sealing and $2.8 million in AST, primarily from the weakening U.S. dollar against the Taiwanese dollar. He noted that AST margins would be in the mid-22% range without FX and that leverage should improve as growth investments mature. President & CEO Eric Vaillancourt attributed the improved Sealing outlook to new OEM commercial truck wins, significant new space program contracts, and continued strength in general industrial markets.

Jeffrey Hammond asked for quantification of the "minimal and manageable" impact from tariffs, any related pricing actions, and whether Enpro's unique positioning could lead to market share gains. He also inquired about any changes in sentiment towards specific end markets compared to 90 days prior.

Answer

President and CEO Eric Vaillancourt explained that tariff exposure is minimal as most production is 'in region for region,' with the main exposure being bearings from China, for which they have secured alternative sources. He noted the supply chain's agility and stated he feels 'equally good' about all markets, with commercial vehicle weakness being in line with expectations. EVP and CFO Joe Bruderek added that the current guidance range accounts for a variety of potential economic outcomes in the second half of the year. Eric Vaillancourt concluded that the company's focus on developing agile leaders allows it to thrive and find opportunities in uncertain environments.

Jeffrey Hammond from KeyBanc Capital Markets inquired about the drivers for the 2025 growth forecast in the Advanced Surface Technologies (AST) segment, its expected sequential performance, and the potential impact of tariffs on the business.

Answer

President and CEO Eric Vaillancourt, along with executive James Gentile, clarified that AST's growth is primarily driven by outperformance in leading-edge applications and market share gains, not a broad market recovery. They anticipate a choppy first half for AST with a stronger second half. Vaillancourt added that potential tariff impacts are considered immaterial, as most sourcing is in-region or customer-directed, and the company has pricing and surcharge mechanisms ready to offset any exposure.

Jeffrey Hammond of KeyBanc Capital Markets Inc. inquired about the semiconductor market's recovery timeline, the potential for a 2025 inflection, the size and growth prospects of the nuclear business, and the progress of the AMI acquisition integration and the broader M&A pipeline.

Answer

CEO Eric Vaillancourt described the semiconductor market as "choppy" with a slow rebound, noting customer caution and destocking. He stated the nuclear business is about 7% of sales and provides steady, profitable growth but will not be a primary driver of double-digit growth for Enpro. Regarding M&A, Vaillancourt called the AMI acquisition a "home run" and confirmed the company has a robust pipeline but will remain disciplined. Executive James Gentile added that M&A activity has picked up and the company is actively looking at opportunities.

Jeff Hammond of KeyBanc Capital Markets asked for early integration thoughts on the Avail EPG acquisition, including potential throughput improvements and the fungibility of its capacity between utility and data center demand. He also inquired where the greatest near-term need for capacity expansion lies.

Answer

CEO Beth Wozniak noted that while Avail EPG's core business was utility-focused, the data center opportunity is growing significantly. She confirmed opportunities to apply nVent's integration playbook and that there is flexibility in applying resources across the combined Avail and Tracte footprint. She stated capacity expansion is needed for both liquid cooling and the newly acquired businesses to support overall infrastructure growth.

Jeffrey Hammond asked about the competitive landscape in the liquid cooling business, including win rates and pricing, and inquired about any early traction from the NVIDIA collaboration. He also questioned the actionability of the M&A pipeline and the assumptions for share buybacks.

Answer

CEO Beth Wozniak stated that nVent continues to grow content with existing liquid cooling customers while adding new ones, with the NVIDIA partnership being a positive factor for certain clients. She highlighted a strong 2025 new product pipeline to expand applications. On capital allocation, Wozniak described the M&A pipeline as robust but noted timing is uncontrollable. CFO Sara Zawoyski added that the 2025 outlook includes roughly $200 million in share buybacks and that the company's leverage is below 1x, providing ample capacity for deployment.

Jeffrey Hammond asked about the role of share buybacks in capital allocation post-divestiture, the drivers behind the strong utility growth, and whether the mid-single-digit order growth was broad-based.

Answer

CEO Beth Wozniak reiterated that growth is the top priority for capital but confirmed buybacks remain an option, especially if M&A timing is uncertain. She stated the utility growth was a genuine reacceleration after first-half challenges and confirmed that the quarter's order growth was broad-based across both the Enclosures and EFS segments.

Jeffrey Hammond of KeyBanc Capital Markets sought clarification on whether 'flattish sales' in July referred to parts or the total business. He also asked about the long-term goal for inventory turns, which are currently below pre-COVID levels.

Answer

CEO Albert Nahmad and EVP Paul Johnston confirmed the 'flattish' comment applied to overall sales. Regarding inventory, Nahmad stated his long-term goal is to achieve five turns, up from the current 3-3.5x. He introduced 'Dream Plan 2,' which targets $10 billion in revenue, 30% gross profit, and five inventory turns.

Jeffrey Hammond asked about consumer behavior, specifically any signs of a shift to 'repair versus replace' or a trade-down to lower-priced products. He also probed Watsco's strategy of not aggressively stocking 410A inventory.

Answer

Executive Paul Johnston noted that motor sales were up 7%, a positive sign, but it was too early to declare a definitive 'repair versus replace' trend. Executive Barry S. Logan added that energy efficiency mix actually improved and that Watsco's product variety provides a competitive advantage if consumers do trade down. The team confirmed their strategy was to avoid the long-term obsolescence risk of 410A for short-term Q1 gains.

Jeffrey Hammond asked for a breakdown of the strong Q4 unit growth, questioning the influence of easy comps, lapping supplier issues, and potential pre-buying of 410A systems by contractors. He also inquired about the M&A environment and pipeline.

Answer

Executive Rick Gomez explained that the growth was not just due to easy comps, as 2-year stack growth was up 12%, and saw no evidence of significant contractor pre-buying. Executive Barry S. Logan added that while there was some recovery from a supplier issue, the primary driver was new customer growth. Regarding M&A, Logan noted the environment is more 'business as usual' with a strong pipeline of family-owned businesses.

Jeffrey Hammond asked about the expected pricing for new A2L products and OEM readiness for the transition. He also inquired about the current M&A environment and the influence of private equity.

Answer

Executive Paul Johnston confirmed OEMs are ready for the A2L transition, with pricing expected to be in the 8-10% range. He noted the transition will drive sales of complete systems, not just components. CFO Rick Gomez and President Aaron Nahmad addressed M&A, stating that while private equity activity has subdued, Watsco's focus is on finding cultural fits with entrepreneurs. They highlighted that Watsco's technology platform is now a key differentiator and a central part of M&A discussions.

Jeffrey Hammond questioned why Hillenbrand is taking a more targeted approach to surcharge pricing instead of implementing broader price actions like other industrial companies. He asked for a comparison of the current environment to the COVID period regarding supply chain pressures and pricing power. He also followed up on the $15 million tariff impact, asking what portion could be mitigated over the next year.

Answer

CEO Kim Ryan explained that the current environment differs from the COVID era due to lower demand, which constrains pricing power, particularly in the MTS segment. During COVID, extremely high demand and backlogs enabled more significant price increases. She contrasted this with the APS segment, where long-term contracts allow for building in future cost contingencies. She also highlighted that the company's 'in region, for region' supply chain strategy has already reduced direct tariff exposure. CFO Bob VanHimbergen added that the annualized tariff impact is likely in the mid-$20 million range and that he expects most of it to be mitigated within the next year through various actions.