Jeffrey Sprague

Jeffrey Sprague of Vertical Research Partners asked for details on the Curtiss Instruments acquisition, including its margin profile, synergy potential, and recent growth. He also sought clarification on the softness in Q4 international orders.

Answer

Chairman and CEO Jennifer Parmentier explained that while Curtiss's margins are initially dilutive, there is a clear path to accretion via the Win Strategy and synergies, which are expected within three years, similar in scale to the Lord and Meggitt deals. She noted Curtis has historically grown at a mid-to-high single-digit rate. Regarding international orders, Parmentier clarified that Q3 had benefited from strong, non-repeating long-cycle orders, and that Q4 order dollars were sequentially flat with Q3.

Jeffrey Sprague of Vertical Research Partners inquired about the specific verticals driving industrial long-cycle order strength and the expected sales conversion timeline for these orders. He also asked for the projected organic revenue pattern for the industrial segments in Q3 and Q4.

Answer

CEO Jenny Parmentier identified that the long-cycle strength comes from aerospace and defense components within industrial businesses, as well as HVAC and semiconductor markets, with a sales conversion cycle extending into fiscal 2026. She and CFO Todd Leombruno provided Q4 industrial organic growth guidance of 2.5% for North America and 5% for International, noting this assumes a recovery is pushed out by one quarter.

Jeffrey Sprague requested the Q1 growth breakdown for the three other aerospace sub-segments (Commercial OE, Commercial MRO, Defense OE). He also asked about managing the factory handoff if slowing OE production shifts demand to the aftermarket, and sought confirmation on the implied sequential trend for North American industrial.

Answer

CEO Jenny Parmentier provided the Q1 growth figures: Commercial OE at 3%, Commercial MRO at 32%, and Defense OE slightly negative. She expressed confidence in managing production flexibility due to a diverse customer base. CFO Todd Leombruno confirmed that the full-year guide implies normal sequential performance for North American industrial off the lower Q1 base, after accounting for the divestiture.

Jeffrey Sprague questioned the strategy of not making significant footprint changes to mitigate a $375 million tariff impact, asking about permanent versus temporary solutions. He also asked for the relative contribution of pricing versus other actions and if the $375 million figure is purely tariffs.

Answer

Executive Jennifer Parmentier clarified that Parker is constantly evaluating its footprint, but its 'local-for-local' model already provides global capacity to leverage. She emphasized that mitigation is a collection of actions, including dual sourcing, supplier negotiations, Win Strategy cost-outs, and pricing, and would not say pricing is a smaller piece. Executive Todd Leombruno confirmed the $375 million figure is solely the mathematical tariff cost, with no other inflation included.

Jeffrey Sprague sought to understand the Sensia accounting, specifically why there was an impairment charge upon dissolution and why there isn't a clearer earnings benefit from dismantling overhead, and also inquired about the corporate expense run rate.

Answer

Christian Rothe, SVP and CFO, explained that the impairment charge for Sensia resulted from recognizing the balance sheet value upon dissolution. He clarified that the dissolution involves a complex transfer of P&L, assets, and employees between Rockwell and SLB, with minor transactional costs. He reiterated that the future state is expected to be somewhat beneficial to overall company and Lifecycle Services margins. Rothe confirmed that the $100 million corporate expense is a good baseline, with the reduction driven by the removal of asbestos/environmental costs and the winding down of fiscal 2025 implementation costs for cost reduction activities.

Jeffrey Sprague sought clarification on the Sensia accounting, specifically why an impairment charge was necessary if both companies are simply taking back their original contributions, and why there isn't a clearer earnings benefit from dismantling overhead. He also questioned the low corporate expense of around $100 million, asking if this reflects the impact of cost actions or changes in allocation, and if it represents a good baseline going forward.

Answer

Christian Rothe, SVP and CFO of Rockwell Automation, explained that the impairment charge for Sensia was due to the balance sheet value of the joint venture when it was established, which needed to be recognized upon dissolution. He noted that while there are complex financial movements, the dissolution is expected to be somewhat beneficial to overall company and Lifecycle Services margins. Regarding corporate expense, Rothe confirmed that $100 million is a good baseline, driven by the removal of asbestos and environmental costs, and the shift of implementation costs for cost reduction and margin expansion activities into the segments.

Jeffrey Sprague of Vertical Research Partners questioned the calculation of the reported $2 billion+ Q1 order figure, asked for the reason behind the increased corporate expense guidance, and sought clarity on why Asia-Pacific is expected to be weaker than EMEA for the full year.

Answer

CFO Christian Rothe confirmed the $2 billion+ order number is a reported figure and explained the corporate expense guidance was raised slightly to account for execution costs related to the margin expansion initiatives. CEO Blake Moret clarified that EMEA is expected to see a recovery in its machine builder business off a low base, while China is expected to face ongoing mild deflation, making Asia-Pacific the weaker region for the year.

Jeffrey Sprague inquired about the drivers behind the third-quarter order timing benefit and sought initial thoughts on end market trends for 2026, specifically in the healthcare and water businesses.

Answer

CFO Antonella Franzen explained that the order timing benefit was customer-driven due to a blackout period for system cutover activities, shifting Q4 orders to Q3. CEO Lori Koch added that healthcare and water are expected to align with medium-term targets of 5% organic growth, while a normalization of the construction market from a 4% full-year decline could provide a significant lift in 2026.

Jeffrey Sprague inquired about the end market trends, specifically the timing benefit mentioned in the earnings report, and sought initial thoughts on the pluses and minuses for 2026, particularly for the healthcare and water businesses, given the Q4 exit rates.

Answer

Antonella Franzen, Chief Financial Officer, explained that the timing benefit was customer-driven due to a blackout period for system cutover activities, causing orders to accelerate into Q3 from Q4. Lori Koch, CEO, stated that healthcare and water are expected to align with medium-term targets of 5% organic growth, while the diversified side, impacted by construction market softness, could see a lift if shelter markets normalize.

Jeffrey Sprague of Vertical Research Partners asked for implications of the AFFF portion of the New Jersey PFAS settlement on other cases and questioned the drivers of growth in Healthcare and Water, including the status of inventory destocking.

Answer

CEO Lori Koch and an executive explained the AFFF settlement portion aligns with their prior 3-7% estimate for DuPont's share, setting a potential precedent. Lori Koch also confirmed that both Healthcare and Water saw strong growth as they lap prior destocking, with performance driven by secular trends and share gains.

Jeffrey Sprague of Vertical Research Partners asked for implications of the low AFFF portion in the New Jersey PFAS settlement and questioned the drivers of strong growth in Healthcare & Water, including channel inventory status.

Answer

CEO Lori Koch and other executives explained the AFFF settlement portion aligns with their prior 3-7% liability estimate for DuPont and highlighted the favorable 25-year payment term. Koch attributed Healthcare & Water growth to lapping destocking, strong end-market trends, and confirmed they are not seeing pressure from reimbursement uncertainty.

Jeffrey Sprague inquired about the tariff mitigation strategy for the future Electronics company, focusing on the status of product exemptions and the specifics of supply chain optimization efforts.

Answer

Jon Kemp, CEO-elect of the future Electronics company (Qnity), explained that product exemptions are a minor part of their strategy, with the majority of mitigation coming from supply chain and sourcing adjustments. He noted that most materials for their China operations are already sourced from non-U.S. locations. CEO Lori Koch added that the primary tariff exposure is on intermediate products moved within DuPont's network, not finished goods exported from the U.S. to China, which allows for internal supply chain flexibility.

Jeffrey Sprague sought confirmation on the November 1st spin-off date for the Electronics business and asked for an update on the associated separation costs, dissynergies, and potential stranded costs.

Answer

CFO Antonella Franzen confirmed the November 1st timeline is firm. She updated that total separation costs would be slightly less than the previously guided $700 million, and dissynergies are now expected to be closer to $40 million, down from $60 million. She also stated that stranded costs are not expected to be material.

Jeffrey Sprague questioned the comfort level with 100% cash conversion despite lower amortization, seeking more color on the target-rich environment for free cash flow and its unfolding over the next year or two, particularly regarding EMEA and APAC margins for 2026.

Answer

CFO Marc Vandiepenbeeck explained that while lower amortization helps, the company sees opportunities in working capital management, especially in inventory management, where the business system will provide clarity for continuous improvement. CEO Joakim Weidemanis added that inventory management hasn't been a past focus and is a significant opportunity. Joakim also stated that EMEA and APAC margin improvements are due to a combination of factors, including better pricing discipline, focused efforts, and business system deployment, not just revenue recovery.

Jeffrey Sprague of Vertical Research Partners inquired about the most significant opportunities for free cash flow improvement and whether the new 100%+ conversion target should be seen as a temporary catch-up or a sustainable new level.

Answer

CFO Marc Vandiepenbeeck credited the strong performance to improved accounts receivable management and stated that lean transformation initiatives will create future opportunities by reducing CapEx and inventory needs. CEO Joakim Weideminis added that initiatives to cut lead times and improve billing accuracy also boost cash flow, giving him confidence that the strong conversion levels can be maintained.

Jeffrey Sprague asked about several non-operating items, questioning why Corporate expense is flat despite stranded costs, the driver for the 12% tax rate, and whether the share count guidance implies a simple pay-as-you-go buyback plan.

Answer

CFO Marc Vandiepenbeeck confirmed the share count guidance assumes a standard 100% free cash flow return to shareholders and does not include deployment of divestiture proceeds. He explained that Corporate expense is flat due to cost-saving efforts offsetting IT investments and stranded costs. He clarified the tax rate is increasing to 12% from 11% on a continuing operations basis, but warned of significant pressure in FY26.

Jeffrey Sprague sought more details on the Boyd acquisition deal assumptions, specifically whether the projected 25% adjusted EBITDA margin is their organic margin or includes synergies. He also asked if the earnings algorithm should focus on investment for growth rather than cost-related synergies, given Boyd's private equity background and high demand.

Answer

CEO Paulo Ruiz confirmed that the 25% margin is Boyd's current organic margin. He stated that the deal meets Eaton's discipline criteria, delivering 200-300 basis points over the cost of capital and being accretive in year two, even without factoring in synergies. He noted that cost synergies, particularly from leveraging Eaton's purchasing power, are the quickest and easiest to implement, and sales synergies are also a great opportunity. He emphasized that the business case works on Boyd's own merits due to its rapid growth, with the multiple dropping to high single digits after synergies.

Jeffrey Sprague sought further clarification on the Boyd acquisition deal assumptions, specifically whether the projected 25% margin is organic or includes synergies, and if the earnings algorithm should prioritize investment for growth over cost-related synergies.

Answer

Paulo Ruiz, Chief Executive Officer, confirmed that the 25% margin is Boyd's current organic margin. He emphasized that the deal's financial discipline ensures it delivers 200-300 basis points over the cost of capital and is accretive in year two, even without factoring in synergies. Ruiz noted that while synergies were not essential for the business case, they exist, particularly on the cost side through Eaton's purchasing power, and also through sales opportunities. He added that the multiple after synergies would be in the high single digits.

Jeffrey Sprague of Vertical Research Partners asked for more detail on the growth drivers in Electrical Americas beyond data centers and inquired about the stronger-than-expected performance of the recently acquired Fiberbond business.

Answer

CEO Paulo Ruiz clarified that growth was also present in utilities and recovering short-cycle businesses, with machinery OEM orders up nearly 30%. Regarding Fiberbond, he noted its strong execution and new business wins. He specified that the reported 17% backlog growth for Americas was organic, with Fiberbond adding an additional $1.2 billion in backlog.

Jeffrey Sprague asked for the gross dollar impact of tariffs and the mix of mitigation strategies, such as price versus cost actions. He also inquired about the timeline for executing organic initiatives and potential bolt-on acquisitions to strengthen the Electrical Global segment.

Answer

President and COO Paulo Sternadt declined to disclose a specific tariff number due to the dynamic environment but assured that the impact would be fully recovered on a dollar-for-dollar basis through cost management, supply chain actions, and pricing. For the Electrical Global segment, Sternadt outlined a multi-faceted improvement strategy focusing on operational execution, organic growth through investments like the new facility in Dubai, and leveraging its strong JV strategy in Asia. He noted the company is open to deals but does not depend on them.

Jeffrey Sprague of Vertical Research Partners asked what portion of the mega projects number is now attributable to data centers and inquired about the strategy to improve margins in the Electrical Global segment.

Answer

Craig Arnold, Chairman & CEO, and Yan Jin, an executive, confirmed that data centers now account for approximately 17% of the mega project value. Regarding Electrical Global margins, Paulo Sternadt, President & COO, cited benefits from restructuring, productivity from higher volumes, and portfolio enhancements. Craig Arnold added that a recovery in the higher-margin MOEM segment in Europe would also provide a natural margin lift.

Jeffrey Sprague from Vertical Research Partners questioned Eaton's capital deployment strategy, specifically asking if the company sees a need to acquire assets in the data center liquid cooling space. He also asked for more detail on the incremental $500 million in CapEx, inquiring if it was still focused on transformers and switchgear or broadening to other areas.

Answer

Chairman and CEO Craig Arnold explained that while cooling is a hot topic, Eaton has tremendous organic growth opportunities in data centers without needing an adjacency like cooling. He stated the focus is on organic growth and execution, though the M&A pipeline is good. On CapEx, Arnold confirmed the incremental investment (now totaling $1.5 billion) is largely directed at high-growth areas like data centers and transformers, driven by customer demand and multiyear agreements, viewing underinvestment as the greater risk.

Jeffrey Sprague sought clarification on Fortive's margin trajectory, specifically asking about one-time benefits in Q3 and whether they ran through corporate, and how these benefits would be used for Q4 growth, also inquiring about Q4 segment-level margins.

Answer

CFO Mark Okerstrom explained that Q3's one-timers included increased capitalization rates at software companies (lowering R&D) and incentive compensation adjustments, impacting both segments and corporate. He stated that OpEx is expected to increase in Q4 as these one-timers do not repeat and investments in growth initiatives are made, while maintaining a strong overall margin profile. He confirmed that segment-level margins for Q4 would be broadly in line with Q3 on a year-over-year basis, with corporate costs showing expansion.

Jeff Sprague sought a clearer understanding of Fortive's margin trajectory, asking for more details on the 'one-timers' in Q3, such as changes in capitalization policy and their impact on corporate costs, and whether the Q3 benefit would be used for Q4 growth spending. He also inquired if the implied Q4 segment-level margins were expected to be flat year-over-year.

Answer

Mark Okerstrom, Fortive's CFO, explained that Q3's one-timers included increased capitalization rates at software companies (reducing R&D, amortized later) and adjustments to incentive compensation. These impacts were spread across segments and corporate. He anticipates overall OpEx to increase in Q4 as these one-timers don't repeat and investments are made in strategic growth initiatives, while maintaining a strong margin profile. Mr. Okerstrom confirmed that the implied Q4 segment-level margins are broadly 'in the zone' for flat year-over-year performance, with corporate costs showing expansion and iOS gross margin pressure largely offset below the gross margin line.

Jeffrey Sprague of Vertical Research Partners requested further clarification on guidance inputs, specifically the implied sales trajectory for the Intelligent Operating Solutions (iOS) segment and the source of margin pressure in Q3. He also asked for the expected full-year tax rate to help with financial modeling.

Answer

CFO Mark Okerstrom indicated that the iOS segment's performance would generally follow the pattern of the total company, with a pickup in core growth in Q3. He attributed the expected Q3 margin pressure primarily to tariff impacts, which would then reverse in Q4 as countermeasures take full effect. He guided the full-year adjusted tax rate to be in the 14% to 16% range.

Jeffrey Sprague of Vertical Research Partners requested more specific inputs for the full-year guidance, including the sales outlook for the Intelligent Operating Solutions (iOS) segment and the source of Q3 margin pressure.

Answer

CFO Mark Okerstrom indicated that iOS sales would follow the company's overall seasonal pattern and that Q3 margins would be slightly impacted by tariffs before rebounding in Q4. He also provided an expected full-year adjusted tax rate in the 14% to 16% range.

Jeffrey Sprague requested clarification on the tariff impact, asking if the guided figure was annualized, how much would be offset in 2025, whether U.S. exports to China were a cost or demand issue, and if the guidance assumes suspended tariffs resume in July.

Answer

Executive Elena Rosman and CEO James Lico clarified the ~$200 million tariff impact is for 2025, with about 80% expected to be mitigated within the year. Lico explained the impact from U.S. exports to China should be viewed as a tariff cost, not demand destruction. He confirmed the guidance conservatively assumes all announced tariffs will be in effect for the remainder of the year.

Jeffrey Sprague of Vertical Research Partners requested clarification on the exact number of selling days impacting Q1 and which businesses were most affected. He also asked for China's full-year and Q4 2024 performance and sought color on the drivers behind the flat adjusted operating profit (AOP) guidance for Q1.

Answer

Executive Elena Rosman specified a 2-day impact, equating to about $8 million, primarily affecting consumables in healthcare and services businesses. President and CEO James Lico stated China was down high-single-digits for 2024 and is expected to be down mid-single-digits in 2025, with a tougher Q1 comp. Regarding Q1 AOP, Lico explained that margin expansion at New Fortive (IOS/AHS) would be offset by pressure at PT due to lower volumes, noting the tough comp against strong margin expansion in Q1 2024.

Jeffrey Sprague of Vertical Research Partners asked about the share repurchase plan, the progress of the Precision Technologies (PT) spin-off, and whether other strategic alternatives were being considered. He also requested the price contribution to growth for the quarter.

Answer

SVP and CFO Charles McLaughlin explained that share repurchases are aligned with 75% of free cash flow and that Q3's shortfall would be made up in Q4. President and CEO James Lico confirmed the spin-off is on track for Q4 2025 and that the company evaluates all inbound interest but would not comment on specifics. McLaughlin stated that price contributed 3% to growth.

Jeffrey Sprague inquired about Watsco's inventory levels, the target for year-end, and the company's focus on improving inventory turns and their impact on cash flow.

Answer

Albert Nahmad (Chairman and CEO, Watsco Inc) stated the goal is to significantly improve inventory turns from the current 3.6-3.7, which will increase cash flow and productivity. Aaron J. Nahmad (President, Watsco Inc) noted substantial progress in Q3 towards a $500 million inventory reduction target by year-end, expecting inventories to be near historical levels relative to the company's size, and highlighted the long-term focus on improving inventory management with OEMs and technology.

Jeffrey Sprague asked about Watsco's inventory levels, specifically where the company expects to end the year and how close to normal inventories might be as the focus shifts to 2026.

Answer

Barry Logan (Senior VP, Watsco Inc) stated they are targeting $500 million in inventory reductions by year-end, having achieved $350 million in Q3, and expect to improve on that target, aiming for inventories to be 'near historical levels versus the size of our company.' Albert Nahmad (Chairman and CEO, Watsco Inc) emphasized increasing inventory turns from the current 3.6-3.7 to significantly better levels, which boosts cash flow and productivity. Aaron J. Nahmad (President, Watsco Inc) added that they are focused on both short-term reductions and long-term improvements in inventory turns through technology and OEM cooperation to enhance return on invested capital and cash flow.

Jeffrey Sprague inquired about the collaboration with OEMs on recent price increases, whether there was any negative demand response, and if the price hikes were structured as surcharges or permanent base price changes.

Answer

Executive Paul Johnston stated that there has been no significant customer pushback on pricing, as tariffs have made increases expected. He confirmed that Watsco's technology allows for instantaneous implementation and that, with one exception, all manufacturers have issued price increases, not surcharges.

Jeffrey Sprague asked for management's final verdict on the extent of industry pre-buying, given that Watsco's and its dealers' inventories appear normal. He also inquired about the current mix of 410A versus A2L in inventory and the expected timing of price increases related to tariffs.

Answer

Executive Rick Gomez stated that any pre-buy was likely minor, around 2-3% of annual systems, and not a fundamental market-altering event. Executive Paul Johnston confirmed that Q4 inventory was overwhelmingly 410A, with A2L purchasing pushed to 2025. He also noted that price increases on products from China are definite due to tariffs, while the impact of potential Mexico tariffs remains unknown.

Jeffrey Sprague asked for more color on Otis's service pricing trends, particularly highlighting geographic differences between China and the rest of the world, and how new business is being booked. He also requested a similar geographic breakdown for new equipment pricing and sought clarification on the remaining pre-2025 backlog and its potential tariff impact.

Answer

Judy Marks, Chair, CEO, and President, Otis Worldwide Corporation, reported that like-for-like service pricing increased by 3 points in Q3, with Americas up mid-single digits, EMEA and Asia Pacific up low-single digits, and China's service portfolio growing in the teens for the 16th consecutive quarter. She noted China's modernization orders were up over 150%, leading in the residential bond program. For new equipment, Ms. Marks stated pricing was up low-single digits outside China, while China saw a roughly 10% decline in Q3. She confirmed some pre-2025 backlog remains in the U.S., implying a tariff impact in 2026, though less than 2025. She emphasized that cost-out initiatives, productivity, and the China transformation are helping achieve price-cost neutrality, and China's new equipment market is showing sequential improvement.

Jeffrey Sprague, Founder and Managing Partner at Vertical Research, requested further details on Otis's service pricing trends, including geographic variations between China and other regions, and current new business booking rates. He also asked for a similar geographic breakdown for new equipment pricing and clarification on the remaining pre-2025 backlog and its tariff implications.

Answer

Judy Marks, Chair, CEO, and President, reported a 3-point increase in like-for-like service pricing in Q3, with Americas up mid-single digits, EMEA low-single digits, and Asia Pacific low-single digits. She highlighted China's 16th consecutive quarter of double-digit service portfolio growth, with modernization orders up over 150%. For new equipment pricing, Judy Marks noted low-single digit increases outside China, while China experienced a roughly 10% decline in Q3. She explained that cost-out productivity, commodity tailwinds, and the China transformation program helped achieve near price-cost neutrality. Cristina Méndez, EVP and CFO, clarified that some pre-2025 backlog in the U.S. still exists, indicating potential tariff impacts in 2026, though less than in 2025.

Jeffrey Sprague of Vertical Research Partners questioned why Otis's organic service revenue growth of 4% merely matched its portfolio growth, a deviation from the historical trend where revenue growth outpaced the portfolio. He specifically asked about the impact of customer churn, retention, and business mix on this dynamic.

Answer

Chair, President & CEO Judith Marks explained that the 4% service growth was supported by a 3% increase in like-for-like pricing. She clarified that the result was influenced by a "mix and churn effect," as portfolio growth is stronger in less mature markets like China with lower revenue contribution. Marks highlighted that repair sales accelerated to 6% growth in Q2 (from 1% in Q1) and are expected to strengthen further, while modernization revenue growth is projected to reach 10% for the full year.

Jeffrey Sprague of Vertical Research Partners questioned the dynamics of Otis's service growth, noting that organic revenue growth was equal to portfolio growth, a deviation from historical outperformance. He specifically asked about the impact of churn and mix.

Answer

Chair, President & CEO Judith Marks explained that while like-for-like pricing was up 3%, the parity between revenue and portfolio growth was due to a mix and churn effect, particularly from faster growth in lower-priced markets like China. She highlighted that repair sales accelerated to 6% growth and the modernization backlog remains strong, expressing confidence in a second-half revenue ramp-up.

Jeffrey Sprague of Vertical Research Partners asked for clarification on the projected tariff impact, questioning if the guided amount was a gross figure or net of mitigation efforts, and inquired about the company's ability to reprice its existing backlog.

Answer

CFO Cristina Mendez clarified that the tariff impact is a net figure, accounting for mitigation efforts. She detailed that of a potential $100 million annual impact, Otis expects to mitigate half, with the other half addressed through commercial actions. Chair, CEO and President Judy Marks added that the impact was minimal in Q1 and is being managed on a job-by-job basis. While discussions with customers about repricing the backlog are ongoing, it is too early to include potential gains in the guidance.

Jeffrey Sprague asked about the service conversion rate in China, which appears lower than the rest of the world, and inquired about the recent decline in the overall portfolio retention rate. He also asked for the 2025 price outlook for New Equipment in China.

Answer

Executive Judith Marks explained that China's conversion rate is being improved by consolidating brands and leveraging Otis ONE technology for stickiness. On retention, she noted the slight dip reflects a strategic focus on portfolio quality and profitability, with some churn being involuntary. Executive Cristina Mendez added that for China New Equipment, price and cost are expected to be roughly neutral in 2025.

Jeffrey Sprague asked if the successful modernization (mod) margin playbook from the rest of the world applies to China. He also questioned the long-term sustainability of China's New Equipment market size, suggesting it might need to decline further given overbuilding and demographic trends.

Answer

Chair, CEO and President Judith Marks confirmed that modernization margins in China are attractive, similar to New Equipment margins in the region, and that she is optimistic about its growth. She acknowledged the New Equipment market could decline further but at a much slower rate than seen recently, which would lead to sequential improvement in Otis's overall New Equipment growth in 2025.

Jeffrey Sprague from Vertical Research inquired about the 2026 utility segment growth outlook, questioning if the strong Q4 2025 exit rate could imply double-digit growth and if Q3 expectations shifted to Q4. He also asked for details on September-October order strength, confidence in telecom and meters growth for 2026, and the sustainability of the tax rate.

Answer

Bill Sperry (EVP and CFO, Hubbell Incorporated) acknowledged the potential for a strong 2026 but advised prudence, noting Q4's easy comparisons. Gerben Bakker (Chairman, President and CEO, Hubbell Incorporated) added that a conservative approach would be taken. Sperry explained that telecom and meters growth would be off lower levels, with September-October order strength being broad-based across T&D. Sperry clarified the lower 2025 tax rate was project-driven and not sustainable into 2026.

Jeffrey Sprague asked about the 2026 utility guide, specifically interrogating the Q3 versus Q4 utility performance and its implications for 2026 growth, considering normal seasonality and the September-October order strength. He also inquired about the confidence in growth for telecom and meters, and the sustainability of the current tax rate into 2026.

Answer

Bill Sperry, EVP and CFO, acknowledged the potential for a very strong 2026 but emphasized prudence in planning, noting Q4 has easier comparisons and that sequential flatness in grid automation will turn into year-over-year flatness. Gerben Bakker, Chairman, President, and CEO, added that the September-October order strength was the expected inflection, perhaps a little delayed due to tariff and price increases. Sperry clarified that the tax rate is project-driven by an international acquisition restructuring and is anticipated to normalize next year.

Asked about the sustainability of growth in electrical distribution, the drivers for Aclara's expected Q4 growth, and the financial impact of tariffs versus pricing actions.

Answer

Management confirmed that mid-single-digit growth in electrical distribution reflects underlying demand and will improve on easier comps. Aclara's growth is expected to be low-to-mid-single-digit from its new, lower base. The company is managing tariffs effectively with price increases, getting slightly ahead on a price-cost basis in Q2 and expecting to remain covered in the second half.

Jeffrey Sprague asked for clarification on the full-year guidance, questioning if the $0.50 tariff sensitivity applies to both the high and low ends of the range. He also requested more detail on Q2 margin expectations and inquired about utility customer budget dynamics between price and volume.

Answer

EVP & CFO Bill Sperry and CEO Gerben Bakker confirmed the $0.50 sensitivity is a potential scenario, not a formal guidance change, and that the company's target is to neutralize the impact. Sperry provided Q2 color, noting a typical high-single-digit sequential sales lift but a ~$20 million cost headwind from LIFO accounting. Bakker added that while utilities face budget tensions, the overall trend of rising capital plans is a net positive for Hubbell, which is positioned to capture spending regardless of shifts between hardening and expansion.

Jeffrey Sprague of Vertical Research Partners questioned Hubbell's visibility into channel inventory destocking, focusing on the distinction between IOUs and munis, and inquired about the company's cost of goods sold (COGS) exposure to potential tariffs from Mexico, Canada, and China.

Answer

CEO Gerben Bakker explained that visibility is better with investor-owned utilities (IOUs), where destocking is more pronounced, but signs point to a return to growth. CFO Bill Sperry noted that Chinese tariff exposure is minimal after divestitures and reshoring. Regarding Mexico, Sperry acknowledged it is Hubbell's second-largest source after the U.S. and that the company is prepared to react with pricing and productivity measures to neutralize any tariff effects. Executive Daniel Innamorato added that the company has not quantified the exact percentage of COGS from Mexico.

Jeffrey Sprague inquired about the utility channel inventory destocking, asking for more visibility on the timeline and the distinction between investor-owned utilities (IOUs) and municipals. He also asked about the company's COGS exposure to potential tariffs from China, Mexico, and Canada.

Answer

CEO Gerben Bakker explained that visibility is highest with IOUs, where destocking is most pronounced but now starting to mute, signaling a gradual return to growth. CFO William Sperry added that the municipal and co-op markets actually grew, isolating the destocking issue to IOUs. Regarding tariffs, Sperry noted that Chinese exposure is now minimal. For Mexico and Canada, he described the situation as fluid but confirmed Hubbell is preparing pricing and productivity plans to neutralize any impact. Executive Daniel Innamorato confirmed Mexico is the #2 source of COGS after the U.S.

Jeffrey Sprague of Vertical Research Partners asked for clarification on the Utility Solutions segment's organic growth, the revenue contribution from the Systems Control acquisition, and the impact of recent storms on channel inventory.

Answer

CFO William Sperry confirmed Sprague's revenue estimate for Systems Control was accurate and that price contributed about one point to enterprise growth. CEO Gerben Bakker added that the recent hurricanes are helping to clear out excess channel inventory in affected regions.

Jeffrey Sprague of Vertical Research Partners inquired about Carrier's consolidated inventory levels, which were up sequentially, and the ongoing efforts to clear channel inventory in the residential segment. He also asked for color on sell-through progression and the repair versus replace dynamic, along with consumer health and price elasticity.

Answer

CFO Patrick Goris explained that consolidated inventories were up about $500 million, with $400 million in the CSA resi segment due to sudden volume decline and purposeful increases for components replacement. He expects inventory to reduce by year-end, balancing production with labor adjustments. CEO David Gitlin added that field inventories are targeted to be down 30% year-over-year by year-end, reaching 2018 levels. Movement was down about 30% in October, expected mid-20% for November/December, with easier comps ahead. David Gitlin noted difficulty in dimensionalizing the repair vs. replace trend, despite strong parts sales driven by company initiatives.

Jeffrey Sprague asked about Carrier's consolidated inventories, the progress of channel inventory destocking, sell-through rates, and the dynamic between repair versus replace decisions, along with consumer health and price elasticity.

Answer

CFO Patrick Goris explained that consolidated inventories were up about $500 million, with $400 million in the CSA residential segment, primarily due to a sudden volume decline and purposeful increases for components. He expects inventory levels to reduce by year-end. CEO David Gitlin added that field inventories are projected to be down 30% year-over-year by year-end, reaching 2018 levels. Movement was down about 30% in October and expected mid-20% for November and December. Regarding repair versus replace, Mr. Gitlin noted parts sales are up due to initiatives, but distribution partners don't see an outsized growth in discrete part sales, though he believes it's likely happening to some extent.

Jeffrey Sprague of Vertical Research Partners inquired about the European business, questioning the lowered margin guidance despite signs of improvement. He sought details on Viessmann synergy capture, product mix impacts, and the overall price capture beyond tariff-related adjustments for the quarter and full year.

Answer

Chairman & CEO David Gitlin explained that while the European business was flattish as expected, unfavorable mix (weaker German sales where margins are higher, and a decline in high-margin boilers) impacted the outlook. He affirmed confidence in achieving or exceeding the $200 million cost synergy target. SVP & CFO Patrick Goris added that total price capture for the company was about two points in Q2 and is expected to be the same for the full year, excluding mix-up benefits.

Jeffrey Sprague of Vertical Research Partners asked about the drivers for the significant increase in heat pump subsidy applications in Germany. He also requested examples of incremental actions Carrier took to mitigate tariff costs, distinguishing between internal productivity and external sourcing changes.

Answer

CEO David Gitlin attributed the surge in German subsidy applications to potential pent-up demand and uncertainty ahead of the election, noting the new government's continued support is encouraging. Regarding tariffs, he explained that mitigation was achieved through a combination of working with the supply chain via dual sourcing, optimizing the manufacturing footprint, internal productivity, and G&A cost controls.

Jeffrey Sprague inquired about the specifics of the Q4 North American residential HVAC performance, particularly the magnitude of the pre-buy ahead of the 2025 refrigerant transition, the drivers for the full-year high single-digit growth forecast, and the strategy for share repurchases.

Answer

CEO David Gitlin characterized the pre-buy of older 410A units as modest, around $75 million to $100 million, emphasizing that strong underlying demand drove most of the growth. He detailed the 2025 high single-digit growth outlook as a combination of flat to slightly down volume, low single-digit base price increases, and a significant high single-digit benefit from the product mix-up to new, higher-priced 454B units. CFO Patrick Goris added that share repurchases will proceed through regular open-market activity.

Jeffrey Sprague of Vertical Research Partners inquired about the bottoming process for the Viessmann business, asking for Carrier's view on the revenue trajectory into 2025. He also questioned the company's statement about not expecting a 410A pre-buy, given that one appears to be happening in real-time, and asked about the capacity to meet that demand.

Answer

David Gitlin, Chairman and CEO, responded that while they are not ready to call a bottom for Viessmann, encouraging signs like a 10% order increase in September and even stronger trends in October suggest a corner may have been turned, aided by subsidy payments starting in Germany. Regarding the pre-buy, Gitlin clarified they have the capacity and are building inventory based on distributor forecasts for 2025's Q1 demand. He emphasized that strong end-consumer movement suggests this is a 'predelivery' for underlying demand, not a material pull-forward from 2025 sales.

Jeff Sprague inquired about the discipline in pricing for acquisitions, asking for an average multiple paid and a forward multiple considering synergies.

Answer

President and CEO John Stone provided general approximations: high single-digit EBITDA multiples for mechanical portfolio expansion and higher multiples for electronics and software acquisitions, reflecting expectations for higher growth and longer-term returns. SVP and CFO Mike Wagnes directed to the press release for the ELATEC acquisition, which represents the largest deal, for specific multiple information.

Jeff Sprague asked for details on Allegion's recent acquisitions, specifically regarding their integration status (standalone vs. integrated), margin entitlement, and synergies. He also inquired about the average multiple paid for acquisitions year-to-date and the potential forward multiple after considering synergies.

Answer

President and CEO John Stone confirmed that all acquisitions are being rapidly integrated, yielding revenue and cost synergies, and providing exposure to faster-growing segments. He emphasized strategic alignment with existing geographic exposure and markets where Allegion has a strong presence. Regarding multiples, Mr. Stone indicated high single-digit EBITDA multiples for mechanical portfolio expansions and higher multiples for electronics and software acquisitions due to expected higher growth and returns. SVP and CFO Mike Wagnes added that details for Elitech, the largest acquisition, were provided in its press release.

Jeffrey Sprague of Vertical Research Partners questioned the drivers of the strong Americas margin, noting that acquisitions and tariff surcharges are typically dilutive to the margin rate, and asked if the performance was entirely due to mix. He also asked how Allegion reconciles its strong performance and spec activity with weaker macro indicators like the ABI and reports from other building products companies.

Answer

SVP & CFO Mike Wagnes attributed the Americas margin strength to a combination of favorable mix from non-residential growth, price/productivity covering inflation, and a slight tailwind from transactional FX. President & CEO John Stone explained that traditional indicators like ABI have been disrupted, while construction backlogs remain high. He highlighted strength in institutional verticals and suggested Allegion may be gaining share from smaller competitors due to superior operational performance.

Jeffrey Sprague asked about the reliability of specification activity as a leading indicator, the potential impact of tariffs on margin rates versus margin dollars, and the key drivers behind the strong Q1 margin performance in the Americas.

Answer

CEO John Stone described specifications as a useful internal gauge but not a precise quarter-to-quarter predictor of revenue. CFO Michael Wagnes confirmed the goal is to offset tariffs on a dollar basis, which could negatively impact the margin rate. Wagnes attributed the strong Americas margin to favorable mix from stronger non-residential growth, alongside ongoing productivity improvements.

Jeffrey Sprague of Vertical Research Partners asked about potential tariff risks related to the sourcing of steel and aluminum for Allegion's U.S. plants.

Answer

CEO John Stone explained that an initial review indicates a very small impact from steel and aluminum derivative tariffs. He emphasized that the non-residential business is largely sourced and produced in the United States, which mitigates significant risk from these specific tariffs.

Jeff Sprague questioned Vertiv's confidence in an EMEA market recovery by the second half of 2026, asking about the drivers for this anticipated growth and details on the restructuring efforts being undertaken to prepare for it.

Answer

Giordano Albertazzi, CEO of Vertiv, expressed increased confidence in EMEA's reacceleration by H2 2026, citing the region's significant need for AI capacity, stringent data sovereignty requirements, extremely low vacancy rates, and the demand for new technology data center designs. He noted encouraging pipelines and more vibrant customer conversations. The restructuring aims to tailor the organization for agile delivery and execution in anticipation of the AI infrastructure build-out.

Jeff Sprague questioned Vertiv's confidence in Europe's market reacceleration by the second half of 2026, given political instability, and asked about the specific drivers for this optimism, including the product pipeline and the ongoing restructuring efforts.

Answer

CEO Giordano Albertazzi expressed increased confidence in Europe's rebound, citing the critical need for AI capacity, stringent data sovereignty requirements, extremely low vacancy rates, and the necessity for new technology data center designs. He noted encouraging pipelines and a more vibrant customer conversation, along with restructuring efforts to tailor the organization for future AI infrastructure build-out.

Jeffrey Sprague of Vertical Research Partners asked for context on reports of AWS developing its own liquid cooling application and how that relates to Vertiv's business.

Answer

CEO Giordano Albertazzi characterized this as normal behavior for hyperscalers, who have strong design philosophies. He emphasized that Vertiv maintains deep relationships, often co-engineering solutions in their labs, and that this is not an anomaly but part of the collaborative process of scaling with major customers.

Jeffrey Sprague of Vertical Research Partners asked about Vertiv's ability to recover tariff-related costs and also requested context on reports of AWS developing its own liquid cooling applications.

Answer

CEO Giordano Albertazzi addressed the liquid cooling topic, stating that it is normal for hyperscalers to have strong design philosophies and that Vertiv consistently co-engineers solutions with them. He characterized this as a standard industry practice, not an anomaly, and emphasized that Vertiv is positioned to scale with its hyperscale customers.

Jeffrey Sprague from Vertical Research Partners asked for the gross financial impact of tariffs before mitigation and questioned the lack of share repurchases, asking if it signaled a focus on M&A or achieving an investment-grade rating.

Answer

CFO David Fallon declined to disclose the gross tariff impact. CEO Giordano Albertazzi addressed capital allocation, citing the importance of a strong balance sheet in uncertain times. He noted an active M&A pipeline and suggested that opportune moments for share repurchases may have coincided with company blackout periods.

Jeffrey Sprague requested details on Vertiv's 'tariff playbook,' including specific exposures, and asked if the company's dollar capture per megawatt is increasing due to trends like future-proofing and modularization.

Answer

CEO Giordano Albertazzi declined to provide specific sourcing details but affirmed that Vertiv has 'playbooks' and feels prepared to mitigate potential tariff impacts. Regarding revenue capture, he stated that the existing range of $2.75 million to $3.5 million per megawatt remains accurate, with the final figure depending on project-specific factors.

Jeffrey Sprague of Vertical Research Partners asked about the customer adoption of fully integrated thermal solutions, from outdoor chillers to the chip, and whether Vertiv can demonstrate a superior total cost of ownership (TCO) with this approach versus a best-of-breed component strategy.

Answer

CEO Giordano Albertazzi affirmed that Vertiv often sells its entire portfolio to customers and that the ability to discuss the complete solution is a significant advantage, especially with large customers. He stated that Vertiv does demonstrate a superior TCO for its integrated solutions, highlighting benefits in footprint, deployment speed, installation cost, and efficiency.

Jeff Sprague questioned why Lennox was not cutting Q4 production more severely to accelerate inventory normalization, asking if labor retention or other issues were a factor. He also asked about the current size of the 'value tier' in Lennox's portfolio and how much of the business operates at the lowest possible price point.

Answer

CEO Alok Maskara explained that the decision balances aggressive actions (over 1,000 headcount reduction) with the need to avoid crimping the ability to restart production next year, especially with the seasonal shift to furnaces in Q4, expecting normalization by Q2 next year. He clarified that while 70% of the business is the 'lowest CR,' the true 'value tier' (no bells and whistles, limited warranty) is 10% to 20% of the portfolio, and he expects it to remain in that range.

Jeff Sprague questioned if Lennox overproduced in Q3 and if more aggressive production cuts in Q4 could accelerate inventory normalization, rather than letting the hangover last into H1 2026, considering potential labor retention issues. He also asked about the current size of the value tier in Lennox's portfolio for 2025, specifically the lowest price point products.

Answer

CEO Alok Maskara explained that while production was ramped down aggressively (over 1,000 headcount reduction), further severe cuts in Q4 would hinder the ability to efficiently restart production in Q1/Q2 2026, which are heavy production months. He confirmed that the value tier (lowest price point within the lowest SEER) likely constitutes 10%-20% of the portfolio, and Lennox is prepared for this trend.

Jeffrey Sprague of Vertical Research Partners asked for clarification on the scope of the 6% cost inflation guidance and how the company manages the price/mix trade-off to avoid demand destruction. He also questioned if the canister shortage issue is now resolved.

Answer

CFO Michael Quenzer confirmed the 6% inflation applies to total costs (COGS and SG&A), separate from productivity and investments. CEO Alok Maskara explained that pricing is managed dynamically using AI-based tools to balance competitiveness, noting they withdrew a large portion of a tariff surcharge as costs moderated. He expressed hope that the canister shortage issue is resolved, thanks to increased canister availability and the rollout of units with longer, 30-foot pre-charged line sets.

Jeffrey Sprague requested clarification on the view that destocking will occur in Q2, asking if the assumption is that excessive inventory still exists in the channel that will back up demand for Lennox.

Answer

CEO Alok Maskara confirmed this view, explaining that the 30% of their sales through indirect distribution channels likely still hold R-410A inventory. He believes these distributors will try to sell through their lower-cost 410A units during the Q2 cooling season before ordering new R-454B products, potentially creating an 'air pocket' in demand for Lennox.

Jeffrey Sprague questioned the company's inventory position, noting it appeared low relative to sales, and asked for more color on the margin trajectory given expected production absorption shifts between Q4 and Q1.

Answer

CFO Michael Quenzer confirmed that most R-410A inventory was sold in Q4, with the rest clearing in early Q1. He explained that margin trajectory will be affected by unfavorable comparisons in BCS in the first half due to the factory launch, while HCS should see tailwinds from ramping up new R-454B production. BCS productivity and absorption are expected to improve significantly in the second half.

Jeffrey Sprague of Vertical Research Partners questioned the drivers of recent market share gains, asking if it was due to a competitor's systematic problems beyond just running out of R-410A. He also asked about the potential for a significant demand 'air pocket' in early 2025 from distributor prebuys.

Answer

CEO Alok Maskara attributed share gains to both Lennox's improved execution and a current advantage from competitors' R-410A product shortages, suggesting some may have misjudged the transition timeline. Regarding the prebuy, he acknowledged the uncertainty but expects the destocking impact to be concentrated in Q1, as manufacturers like Lennox will also hold some R-410A inventory into next year.

Jeffrey Sprague from Vertical Research Partners asked about Acuity's competitive position regarding tariffs, specifically if counter actions mean pricing for tariffs no longer exposed the company in 2026, implying an embedded margin opportunity. He also questioned if any 2025 cost actions were temporary and would need to return in 2026, and addressed elevated inventory levels, including the QSC impact and normalization expectations.

Answer

Neil Ashe, Chairman, President, and CEO, Acuity, stated that the company has been conservative, mitigating tariff impact through productivity and transitions before pricing, balancing share gain with margin expansion. He confirmed that 2025 cost actions were permanent changes, not short-term, though future investments in technology will impact OpEx. Karen Holcom, SVP and CFO, Acuity, explained that elevated inventory is due to higher costs from tariffs and strategic purchases to protect against future increases, expecting levels to normalize over the year.

Jeffrey Sprague pressed for more detail on the Intelligent Spaces margin, questioning how it could be so high given QSC's expected mid-to-high teens margin profile and asking if deal accounting was a factor. He also inquired about the impact of the quarter's special charge on reported expenses and the broader tone of business regarding demand.

Answer

Neil Ashe, Chairman, President & CEO, reiterated that the strong AIS margin was due to high sales growth and operational leverage from adopting Acuity's productivity system, with no deal accounting involved. Karen Holcom, SVP & CFO, explained the $30M special charge was for brand consolidation, severance, and facility reorganization, with the cost benefits expected to materialize starting in Q4. Neil Ashe added that customers are behaving rationally and the company will plan conservatively until the market stabilizes.

Jeffrey Sprague from Vertical Research Partners sought more color on demand trends, asking if the recent weakness was concentrated in smaller projects or if larger projects were also slowing. He also questioned if Acuity could shorten the lag time for implementing price increases to better manage costs.

Answer

CEO Neil Ashe clarified that recent demand fluctuations were primarily a matter of timing, with customers pausing amid uncertainty before accelerating orders ahead of price increases, and that it was too early to assess the broader impact on demand. When asked about shortening the pricing lag, Ashe confidently stated that the company is 'doing everything in our power to do that.'

Jeffrey Sprague of Vertical Research Partners asked about the slight decline in ABL's operating margins despite gross margin expansion and sought to understand the common characteristics of the 'sophisticated customers' using both Distech and QSC.

Answer

Karen Holcom, SVP and CFO, explained that ABL's operating margin was impacted by ongoing technology investments, and she expects operating expenses to leverage better as sales grow. Neil Ashe, Chairman, President and CEO, described the sophisticated customers as technology-forward organizations that manage facilities centrally to drive productivity and consistency, citing Stanford University and Indiana University as examples.

Jeffrey Sprague of Vertical Research Partners inquired about the margin performance in the Intelligent Devices segment, specifically the sequential profit decline, and asked for details on the drivers behind the recovery in the Test and Measurement business.

Answer

EVP & CFO Mike Baughman clarified that the Intelligent Devices margin was impacted by both expected tariffs and an unexpected foreign exchange headwind on balance sheet exposures. President & CEO Lal Karsanbhai and COO Ram Krishnan added that the Test and Measurement recovery was broad-based, seeing strength across all segments and geographies, led by Asia.

Jeffrey Sprague of Vertical Research Partners asked for specifics on Emerson's cost exposure in Mexico regarding potential tariffs and for a distinction in the full-year outlook between the legacy discrete business and the newer test and measurement business.

Answer

President and CEO Lal Karsanbhai stated that Emerson is prepared for potential Mexico tariffs with planned price and surcharge actions but declined to provide specific COGS details. He clarified that the commentary on the discrete market applies to both legacy Emerson and the test and measurement businesses, noting encouraging signs in semiconductors and MRO were offset by continued weakness in factory automation and automotive.

Jeffrey Sprague asked for clarification on the AspenTech 'neutral' EPS comment regarding the assumed closing timing, questioned the phrasing around the Safety & Productivity exit, and asked if the discrete recovery timeline applies equally to legacy Emerson and Test & Measurement.

Answer

CFO Mike Baughman stated the 'neutral' comment was for the full year and did not specify timing. President and CEO Lal Karsanbhai clarified that for Safety & Productivity, all options are on the table and he would not comment further on structure. He also confirmed that legacy discrete orders turned positive in Q4 and are expected to recover alongside the Test & Measurement business.

Jeffrey Sprague of Vertical Research Partners asked about nVent's pricing strategy, specifically if it can fully offset tariff impacts with price alone or if it must rely on productivity. He also questioned the scope of the modular solutions, asking if nVent is delivering fully integrated "boxes" that include third-party products and system-level responsibility.

Answer

CFO Gary Corona explained that the updated guidance reflects enough pricing to largely offset tariffs, with price and productivity combined expected to cover inflation in the second half. CEO Beth Wozniak added that in modular solutions, nVent often integrates other OEMs' equipment and sees the potential for more integration capability over time, taking on various stages of integration flexibly.

Jeffrey Sprague asked for an update on demand and inventory in the shorter-cycle commercial and residential markets. He also sought clarification on the source of the tariff impact and requested more detail on the power utility business outlook.

Answer

CEO Beth Wozniak noted that the outlook for commercial and residential is now flattish for the year due to uncertainty, though distributor sell-out and sell-in remain positive. She clarified the largest tariff impact comes from Section 232 on steel and aluminum, followed by China tariffs and secondary impacts. She highlighted that Power Utilities is now about 20% of sales, with strong double-digit growth and a robust backlog extending into 2026 for the acquired businesses.

Jeffrey Sprague requested more detail on the low-teens order growth in Q4, asking about the prior year comparison and specific vertical drivers. He also asked to quantify the Q4 top-line headwind from channel destocking and sought clarity on the drivers for the expected return to positive pricing in 2025.

Answer

CEO Beth Wozniak noted that Q4 order growth was broad-based across verticals, not just infrastructure. She declined to quantify the destocking impact but reiterated it was larger than expected. CFO Sara Zawoyski explained that Q4 pricing was slightly negative in Enclosures but positive in EFS. She stated that the return to positive pricing in 2025 is driven by the need to offset inflation, particularly in labor, and will be combined with productivity initiatives to manage costs.

Jeffrey Sprague requested more details on the NVIDIA collaboration mentioned in the prepared remarks. He also asked about the specific drivers of the negative mix effect in the Electrical & Fastening (EFS) segment and the company's forward-looking view on pricing.

Answer

CEO Beth Wozniak indicated more details on the NVIDIA collaboration would be shared at the upcoming Supercompute conference. She also stated that the pricing environment is stable and expected to be a positive contributor in 2025. CFO Sara Zawoyski explained the EFS margin decline was due to a difficult comparison to the prior year's exceptionally positive mix, noting that the absolute return on sales remains strong at over 30%.

Jeffrey Sprague questioned the company's approach to managing risk in larger M&A deals like ILC Dover and asked for color on the nature of long-cycle projects in the MQL funnel.

Answer

CEO Vicente Reynal affirmed their enthusiasm for the ILC Dover life sciences platform, which is on track for a mid-single-digit ROIC by year three. He highlighted their disciplined M&A playbook, which includes negotiated reps and warranties backed by an insurance policy, under which a claim has been filed. He also noted that the long-cycle funnel shows momentum in water/wastewater and re-shoring projects.

Jeffrey Sprague of Vertical Research Partners asked for more detail on the tariff mitigation plan, specifically the mix between pricing and other cost or sourcing actions. He also questioned the business climate in China and any evidence of backlash against U.S. companies.

Answer

CEO Vicente Reynal clarified that the plan involves a mix of list price actions and surcharges to fully offset the tariff cost, noting that potential cost savings from supply chain actions are not yet included in the guide. Regarding China, he described the environment as stable, with the company being viewed as a local player and no negative retaliatory actions observed. He also highlighted strong growth in the broader Asia Pacific region.

Jeffrey Sprague questioned the company's commitment to the ILC Dover Aerospace & Defense business, asking if they would deploy more capital there, and sought clarification on the 2025 M&A revenue target.

Answer

CEO Vicente Reynal described the Aerospace & Defense business as an "optionality" and confirmed there is currently nothing in the M&A funnel for that space. He also affirmed that the target to acquire 400-500 basis points of annualized revenue in 2025 is incremental to the guidance and excludes any wraparound effects from 2024 deals.

Jeffrey Sprague asked about the reality of "election uncertainty" as a cause for project delays and whether the delays are skewed to the U.S. He also requested an update on the performance of the service business.

Answer

Chairman and CEO Vicente Reynal responded that while election uncertainty is mentioned more often, it's not the primary reason for delays. He confirmed the project delays are global, citing examples from Saudi Arabia driven by site readiness and EPC capacity. On the service business, he stated it's performing well with good momentum, and the focus on recurring revenue is working globally.

Jeffrey Sprague from Vertical Research Partners asked for details on the integration plan and synergy expectations for the Ferro Technologies acquisition, and also inquired about the performance of the Paragon Medical business.

Answer

Chairman and CEO David Zapico explained that Ferro is expected to add a couple of pennies to 2025 EPS. He outlined a plan to double Ferro's EBITDA margin to 30% within three years, drawing a parallel to the successful Zygote acquisition. Regarding Paragon, Zapico stated it had an "excellent quarter" with robust orders, and its EBITDA margins are now in line with the AMETEK average, with the destocking period now over.

Jeffrey Sprague sought clarification on the tariff impact, the margin profile of potentially delayed Q2 shipments, and the company's research market exposure. He also asked about price realization and its impact on the full-year organic growth outlook.

Answer

CEO David Zapico confirmed the potentially delayed shipments are high-margin products. He noted that total research exposure is about 10% of sales, with any impact from government customer delays being modest. On pricing, Zapico stated they covered inflation with a positive spread and confirmed the full-year outlook now implicitly includes more price to offset slightly lower volume.

Jeffrey Sprague from Vertical Research Partners requested an update on the Paragon business, seeking details on its year-end revenue run-rate, growth expectations for 2025, and the anticipated magnitude of margin improvement.

Answer

Executive David Zapico confirmed Paragon's revenue was approximately $420 million and expects it to grow faster than the company average in 2025, particularly in the second half. He noted that while customer destocking continues, end-market demand remains strong. Zapico anticipates substantial margin improvement over the next 12 months, well in excess of the company's overall target.

Jeffrey Sprague asked about the sales trajectory for Paragon Medical, the drivers behind strong organic orders in the Electromechanical Group (EMG) despite destocking, the margin recovery outlook for 2025, and the current price-cost spread.

Answer

Chairman and CEO David Zapico noted that strong orders were broad-based across all EMG divisions. He confirmed Paragon met Q3 expectations and is well-positioned for when destocking abates. While avoiding 2025 guidance, he acknowledged the potential for a positive margin scenario. He also stated AMETEK achieved 3 points of price in the quarter, resulting in a 100-basis-point positive spread to the P&L, and expects a return to more normal pricing patterns.

Jeffrey Sprague of Vertical Research Partners asked for more color on the components of the 'low double digit' price/mix figure for the residential business. He also questioned if the company expects to remain margin accretive on overall inflation for the remainder of the year, particularly concerning tariffs.

Answer

EVP & CFO Chris Kuehn clarified that the 'low double digit' figure was an all-in price and mix number. Regarding inflation, he reiterated that the goal for tariffs is to be margin-neutral on a dollar basis, not to use them as a profit center. While the broader goal is for price to stay ahead of all-in inflation, achieving perfect neutrality on tariffs specifically may take time.

Jeffrey Sprague asked if Trane possesses a fundamental sourcing advantage from Mexico compared to its peers, particularly in the context of tariffs. He also asked about the company's macroeconomic contingency planning, noting that the weak transport outlook could be a recessionary signal, and what levers the company would pull in a downturn.

Answer

CEO David Regnery stated that about 85% of what Trane ships from its one plant in Mexico is USMCA compliant, putting them in good shape. He reiterated they will not use tariffs as a profit center. Regarding a potential recession, Regnery explained that while they are not projecting one, the company's business operating system includes robust, detailed scenario planning for both downturns and upturns. This ensures they have a pre-defined plan and can avoid reactive, poor decisions in a crisis. He believes the transport market is at a trough and will rebound strongly.

Jeffrey Sprague of Vertical Research Partners asked for more color on the backlog's staging, specifically what portion of the $6.75 billion is expected to be delivered in 2025. He also inquired about the relative performance of the two-step distribution channel versus internal channels during the recent residential pre-buy period.

Answer

CFO Chris Kuehn confirmed that the majority of the $6.75 billion backlog, which is predominantly Commercial HVAC applied systems, will convert to revenue in 2025, with only a small amount pushing to 2026 at customer request. CEO Dave Regnery noted that the residential pre-buy of $75-$100 million occurred through their independent wholesale distributors (two-step channel) and was likely split between Q3 and Q4, with the impact expected to be felt mostly in Q1 2025.

Asked for an update on the progress of internal cost-saving initiatives, the expected financial impact of recent tax legislation (OB3), and the level of price realization achieved in the second quarter.

Answer

The company detailed the progress on its cost programs, confirming they are on track but noting some productivity is tied to volume. They also confirmed a positive cash impact from tax changes and stated that Q2 price capture was just under 3%, with a slight acceleration expected going forward.

Jeffrey Sprague of Vertical Research Partners sought more context on the HST segment's blanket orders, asking if they provide a firmer outlook for 2025 and suggest an end to channel inventory destocking. He also asked for a view on China's overall performance and the company's total price realization in the quarter.

Answer

CEO Eric Ashleman responded that while the blanket orders are a positive sign of moving from stability, the rate of inflection remains vague. He noted that customer optimism is increasing and the uniform health across HST reporting areas is important. He reiterated that China remains a small but positive contributor. CFO Abhi Khandelwal stated that price realization was 2.3% in the quarter, with a 100 basis point positive price-cost spread.

Jeff Sprague of Vertical Research Partners sought more context on the HST segment's blanket orders and whether they signal an end to channel inventory destocking, and also asked about China's performance and overall price realization.

Answer

CEO Eric Ashleman stated that while the rate of recovery is still vague, the broad-based nature of the orders is a positive signal that suggests a move away from simple stability and that inventory issues are diminishing. He reiterated that China remains a small but positive contributor. CFO Abhi Khandelwal reported that price realization was 2.3% for the quarter, achieving a 100-basis-point spread over costs.

Jeffrey Sprague asked if the PSI deal signals a broader move into sensing technologies, inquired if PFT project delays were turning into cancellations, and questioned if recent tax legislation would alter U.S. CapEx plans.

Answer

CEO Max Mitchell and EVP & COO Alejandro Alcala stated that sensing has always been an area of interest and that PSI's businesses hold strong niche positions. They confirmed PFT project issues are primarily delays, not cancellations. Mitchell noted that while the company will study the tax bill, capital allocation decisions will continue to be driven by long-term shareholder value, not short-term policy.

Jeffrey Sprague asked for clarification on management's comment about 'emerging stronger,' questioning if it was about internal discipline or gaining a competitive advantage. He also sought details on the tariff cost structure and potential demand risks in the Process Flow Technologies (PFT) segment, particularly in the chemical market.

Answer

Chairman, President and CEO Max Mitchell confirmed it was both about sharpening internal processes and seeing opportunities where competitors are making decisions that create openings for Crane. EVP and COO Alejandro Alcala clarified the tariff impact is around $60 million for the year, mostly in PFT. He noted that while the chemical market in the U.S. and Middle East is moving, they have assumed some project delays in their guidance due to uncertainty.

Jeffrey Sprague asked if Crane is seeing energy-related project delays similar to those mentioned by Honeywell, requested a quantification of the hurricane impacts, and sought color on Crane's exposure to the Boeing strike given its strong on-rate delivery performance.

Answer

CEO Max Mitchell stated that Crane is not seeing any significant project push-outs or cancellations. CFO Rich Maue quantified the storm impacts as $0.03 per share in Q3 and an estimated $0.05 to $0.10 in Q4. Regarding Boeing, Max Mitchell expressed no concern about exposure, citing prudent internal planning and proactive measures to protect and support the customer through the disruption.

Jeff Sprague from Vertical Research Partners sought clarification on the timing and amount of restructuring savings and the specific impact of foreign exchange on the updated revenue guidance.

Answer

President and CEO Richard Tobin confirmed a $30 million benefit from prior restructuring actions is reflected in 2025 guidance. He projected at least another $30 million benefit in 2026 from current projects, with the potential for a larger amount pending the timing of complex factory consolidations. Tobin also confirmed the new 4-6% revenue growth forecast includes a one-point benefit from FX, based on year-to-date average rates.

Jeffrey Sprague inquired about the company's strategy to offset new tariffs, distinguishing between new actions and those already planned, and asked about any changes in customer behavior following the tariff announcements.

Answer

Richard Tobin, an executive, explained that the company is implementing pricing actions to cover tariff costs, particularly on Chinese subcomponents. He noted that the guidance reduction was a precautionary "sentiment adjustment" due to potential project delays, as order rates actually accelerated through the quarter and no negative customer behavior has been observed yet.

Jeffrey Sprague asked for clarification on the interest income guidance and whether the forecast accounts for future free cash flow generation. He also questioned the drivers behind the low single-digit growth outlook for the Imaging & Identification (DII) segment, suggesting a specific business line might be lagging.

Answer

Executive Brad Cerepak confirmed the interest income guidance is inclusive of expected cash flow but subject to volatility from rate cuts and capital deployment. Executive Richard Tobin explained the DII segment's outlook reflects its typical 2-4% annual growth, noting the struggling textile business is now de minimis. He attributed some of the low single-digit forecast to FX headwinds and emphasized looking at the business on a full-year basis.

Jeffrey Sprague asked for clarification on the 'materially higher' bookings outlook for the Climate & Sustainability segment and questioned the 2025 EPS bridge, specifically the impact of M&A versus holding cash.

Answer

CEO Richard Tobin clarified the 'materially higher' comment referred specifically to bookings for CO2 systems, which are expected to inflect positively, while the heat pump outlook has been lowered. He explained the EPS bridge's cash interest assumption is a baseline, and he expects to deploy that capital via M&A or buybacks, which would alter the final accretion.

Jeffrey Sprague of Vertical Research Partners inquired about the sources of operational cost savings, specifically the split between factory footprint and G&A, and questioned the philosophy behind 'metering' growth investments when performance is strong.

Answer

CEO William Brown detailed that the ~$500 million in productivity savings is split roughly evenly between G&A and supply chain/factory improvements. CFO Anurag Maheshwari added that G&A savings stem from IT optimization and indirect spend. Brown defended the metered investment approach as a balanced strategy to fuel long-term growth while remaining prudent in a soft macro environment, emphasizing that investments are still up significantly year-over-year.

Jeffrey Sprague of Vertical Research Partners inquired about the macroeconomic environment, specifically order trends in April following a strong March, and whether there was evidence of customer pre-buying ahead of tariffs. He also asked for more detail on the levers 3M plans to use for tariff mitigation, including the potential for price increases.

Answer

CEO William Brown responded, stating that any pre-buying in Q1 was minimal, around $10 million, primarily in China. He noted that April order momentum continued for the industrial business, similar to March levels, though it was slightly softer in other areas. Regarding tariff mitigation, Brown outlined a three-pronged strategy: 1) Sourcing and logistics actions, leveraging 3M's global factory network and capacity; 2) Discretionary cost controls; and 3) Surgical price increases. He also mentioned potential offensive opportunities to gain share in the U.S.

Jeffrey Sprague inquired about the timing and impact of new product introductions on top-line growth and requested a detailed breakdown of the components within the 2025 operational EPS growth bridge, specifically restructuring savings versus stranded costs.

Answer

CEO William Brown explained that the impact from new product introductions (NPIs) is still in its early stages, as recent launches are incremental, with more significant top-line contributions expected as the company shifts to higher-impact products. CFO Anurag Maheshwari detailed the EPS bridge, attributing growth to sales volume leverage (~$200M), lower restructuring costs (~$200M), and net productivity (~$150M), which is net of a $100M headwind from PFAS-related stranded costs.

Jeffrey Sprague of Vertical Research Partners asked if the ongoing restructuring plan was on track and how much of the 2024 margin expansion was attributable to it versus new initiatives. He also inquired about the capital deployment strategy, particularly balancing shareholder returns with upcoming liability payments.

Answer

CEO William Brown confirmed the restructuring plan is on track and that 2024 margin benefits are a mix of that plan and ongoing productivity programs, noting the newest initiatives are part of a multi-year journey. On capital deployment, Brown and CFO Anurag Maheshwari highlighted the company's strong cash flow, hefty cash balance, and attractive leverage, which provide capacity for shareholder returns like the Q3 buyback, as no large, un-provisioned liability payments are expected in the near term.

Jeffrey Sprague asked for clarification on the 'asset-light' model regarding sourcing, whether footprint changes are permanent 'no-regret' moves, and the impact of extra shipping days on different business types.

Answer

President and CEO Jennifer Honeycutt clarified that 'asset-light' refers to manufacturing flexibility, not a lack of leveraged sourcing for key commodities. SVP and CFO Sameer Ralhan confirmed that footprint changes, like the new Trojan facility, are 'no-regret' moves aligned with long-term strategy. He also specified that the extra shipping days in Q1 primarily benefited the consumables business.

Jeffrey Sprague of Vertical Research Partners questioned why only one-third of Stanley Black & Decker's products from Mexico are USMCA compliant and how quickly that could be rectified. He also asked for the rationale behind using a seemingly low 10% tariff assumption for the 'Rest of World' supply category.

Answer

COO Chris Nelson explained that achieving full USMCA compliance was not previously a cost-benefit priority, but it is now a straightforward operational project being actively pursued. EVP and CFO Pat Hallinan clarified that the 10% tariff for the 'Rest of World' category reflects the current, in-effect policy for the key Southeast Asian countries that comprise 75% of that supply.

Jeffrey Sprague questioned if confidence in the $2 billion-plus EBITDA target for 2026 was slipping given the slow start expected for 2025. He also asked for an explanation of North American tool sales underperforming its sub-categories and sought perspective on market share for the CRAFTSMAN and Stanley brands.

Answer

EVP and CFO Pat Hallinan affirmed the company is still targeting $2 billion-plus of EBITDA on a rolling four-quarter basis in the first half of 2026. COO, EVP and President, Tools & Outdoor Chris Nelson explained that while overall share is stable to slightly growing, the stronger professional market is boosting DEWALT while the weaker DIY consumer environment is impacting the CRAFTSMAN brand more significantly.

Jeffrey Sprague asked for clarification on Vontier's cost structure and tariff risks, specifically questioning the rationale for pre-buying components if exposure is low. He also sought insight into signs of a potential inflection in the vehicle wash and repair businesses, particularly regarding the project pipeline for the second half of the year.

Answer

CFO Anshooman Aga clarified that the pre-buy was a temporary measure to bridge the transition of supply chains, with direct China sourcing now reduced to a modest $50 million. CEO Mark Morelli noted that while the car wash and repair markets have stabilized and recurring revenues are growing, the company is remaining prudent and it is too early to call a definitive return to growth.

Jeffrey Sprague inquired about the relationship between Product Line Simplification (PLS) and Customer-Back Innovation (CBI), and asked about any unusual order patterns in the auto supply chain related to tariff uncertainty.

Answer

CEO Christopher O'Herlihy described PLS as an essential part of the 80/20 strategy that provides strategic clarity and enables better resource deployment for CBI. CFO Michael Larsen added that the recent 1% PLS impact is higher than the typical 0.5% due to strategic work in specific segments. Regarding tariffs, O'Herlihy said it's too early to see order pattern changes but affirmed ITW is well-positioned to react.

Jeffrey Sprague inquired about the implied sequential revenue strength for Q4, asking if exit rates from Q3 were better than the quarterly average. He also asked for a bigger-picture view on China's performance, particularly in the automotive sector, and any potential impact from China-Europe tariff disputes.

Answer

CFO Michael Larsen clarified that Q4 typically sees a 1-1.5 point sequential revenue improvement over Q3 due to seasonality, easier comps, and an extra shipping day, leading to roughly flat year-over-year revenue. CEO Chris O'Herlihy noted that ITW's China auto business is outperforming the market, expecting 8% growth vs. 1% for builds, driven by strong EV penetration. Michael Larsen added that while auto and Test & Measurement were soft, strength in Welding and Specialty Products led to a flat overall China result in Q3.