Joe O'Dea

Joe O'Dea asked about the building blocks for the residential cycle to return to 9 million units from the current 6.5 million, considering factors like early replacements in 2020-2024 and repair-versus-replace trends. He also inquired about Carrier's competitive advantage in CDUs (Chiller Distribution Units), whether sales are typically system-based, and the margin profile of CDUs.

Answer

David Gitlin, Chairman and CEO, Carrier Global Corporation, explained that a return to 9 million residential units depends on macro fundamentals: interest rates (30-year mortgages starting with 5 or less), consumer confidence, and a pickup in new home construction (single-family) and existing home sales. He noted that an uptick in repair last year is not a long-term trend, as economics generally favor replacement. Low existing home sales also impacted replacement. He added that refrigerant changes initially lead to more repair but eventually drive replacement as old refrigerants become expensive. Regarding CDUs, he stated there's no margin drag. Carrier opted for organic production, introducing 1MW/1.3MW CDUs last year with successful wins and plans for 3MW and 5MW units later this year. He attributed wins to customer relationships and BMS interaction across the entire cooling cycle.

Joe O'Dea asked for specifics on Johnson Controls' capacity expansion, differentiating between chillers and air handlers, and its global versus Americas scope. He also inquired about the current fixed cost impact of these investments and how that is expected to improve over the next twelve months, particularly as a tailwind from utilization.

Answer

CEO Joakim Weidemanis confirmed capacity investments across chillers, air handling units, and the CDU business. He stated that the fixed costs associated with these investments have been in the run rate for over a year. CFO Marc Vandiepenbeeck clarified that these investments create leverage opportunities as volume increases, and CEO Joakim Weidemanis added that ongoing lean work will further enhance capacity utilization without incurring additional fixed costs.

Joe O'Dea asked for specifics on Johnson Controls' capacity expansion, inquiring if it was specific to chillers or included air handlers, its global versus Americas distribution, and the current fixed cost impact, along with expected improvements over the next twelve months.

Answer

CEO Joakim Weidemanis confirmed capacity investments across chillers, air handling units, and space made for the CDU business. He stated that the fixed costs associated with these investments have been in the run rate for over a year. CFO Marc Vandiepenbeeck added that this creates a leverage opportunity as volume increases, with Joakim Weidemanis noting that ongoing Lean work further expands capacity without adding fixed costs.

Joe O'Dea asked about the progress of the company's restructuring program, including the expected cost and savings impact in 2025. He also inquired about the evaluation of pricing in the backlog and the ability to be compensated for value delivered.

Answer

CFO Marc Vandiepenbeeck said restructuring expectations are unchanged, with early benefits in the second half of 2025 but the majority of savings realized in fiscal 2026. He explained that pricing power comes from selling full, outcome-based solutions, and contracts typically include change-order processes to recover costs and margins from factors like tariffs.

Joe O'Dea from Wells Fargo asked for an explanation of the price mix trends in HCS over the past few quarters, noting a step-down from Q2 to Q3 and Q4, and what factors contributed to this. He also inquired about Lennox's strategies to help dealers position for replacement over repair, including messaging, marketing support, and a comparison of entry-level system costs today versus five years ago, highlighting the compelling economics of replacement.

Answer

CFO Michael Quenzer attributed the HCS price mix step-down in Q4 to a larger decline in condenser sales, which typically have a higher mix lift, leading to a greater proportion of lower-mix furnace and parts sales. CEO Alok Maskara explained that contractors are naturally inclined towards replacement due to higher margins and deferral of repairs. Lennox supports dealers with financing, training, sales collateral, and promotions. He noted that manufacturer-to-channel prices have risen since pre-COVID, and channel-to-consumer prices even more, partly due to labor costs. He emphasized that repairs are hard to finance, while new systems offer potential monthly utility bill savings due to increased efficiency.

Joe O'Dea requested elaboration on the price mix trends in the Home Comfort Solutions (HCS) segment over the past few quarters, noting a step-down from Q2 to Q3 and Q4 being below Q2 levels, and asked what factors contributed to this. He also inquired about Lennox's strategies to help dealers position themselves for selling replacements over repairs, including the messaging, marketing support, and a comparison of entry-level system costs today versus five years ago to highlight the compelling economics of replacement.

Answer

Michael Quenzer, CFO, attributed the Q4 step-down in HCS price mix primarily to a larger decline in condenser sales, which typically carry a higher mix lift, resulting in a greater proportion of furnace, parts, and accessories sales. Alok Maskara, CEO, explained that contractors are naturally inclined towards replacement due to higher margins and the understanding that repairs defer replacement. Lennox supports dealers with financing, training, sales collateral, and promotions/rebates. He noted that manufacturer-to-contractor prices have increased since pre-COVID, and channel-to-consumer prices have risen even more due to higher labor costs and fewer quotes. Alok Maskara reiterated that repairs are deferred replacements, and new systems offer potential monthly utility savings due to increased efficiency, as highlighted by Michael Quenzer.

Joe O'Dea asked for the company's perspective on what residential industry volume normalization would look like for 2026, considering factors like existing home sales and interest rates. He also inquired about how the industry would approach pricing in 2026, given past inflation and regulatory changes, and if a typical pricing algorithm would still apply.

Answer

CEO Alok Maskara stated that while 2025 volumes are abnormally low due to destocking, a 'normal' year for 2026 would be closer to 9-10 million units for the industry, with more details to come in January. He praised the industry's pricing discipline in 2025 and expects pricing in 2026 to continue offsetting inflation, similar to past trends, with some carryover benefit from tariff-related pricing and A2L-related mix. He also noted Lennox's strategy to walk away from low-margin residential new construction business.

Joe O'Dea asked for Lennox's perspective on industry volume normalization for residential units, considering historical ranges and current low levels, and how factors like housing turnover and interest rates might shape 2026 industry volumes. He also questioned the industry's pricing approach for 2026, specifically if the historical algorithm of mid-single-digit list price increases and 1-2% realization can be sustained given recent price hikes and inflation.

Answer

CEO Alok Maskara stated that Lennox aims to outperform the industry and believes 2025's low volumes are abnormal due to destocking. He anticipates a 'normal' industry year in 2026 to be closer to 9-10 million units. On pricing, he praised the industry's discipline in 2025 for A2L and tariff offsets and expects similar actions in 2026 to offset inflation, with carryover benefits from tariffs and A2L mix. He noted Lennox has exited some low-margin residential new construction business.

Joe O'Dea sought more details on the service margin expansion in the fourth quarter, considering the mix of modernization (lower margin) and repair (higher margin) and specific achievements in modernization margins. He also asked about the go-forward benefits of transactional service center effects and the evolution and size of the China stimulus program.

Answer

Judy Marks, Chair, CEO, and President of Otis Worldwide Corporation, explained that modernization margins are growing due to industrialization and specialized teams, approaching the 10% medium-term target and surpassing new equipment margins, highlighting China's significant mod revenue growth. Christina Mendez, Executive Vice President and CFO of Otis Worldwide Corporation, attributed the 100 basis points service margin expansion to repair acceleration, ramping modernization margins, and a one-time $14 million gain from service center sales, clarifying that the latter was a one-time effect but benefits retention. Judy Marks also detailed the China stimulus program, which started mid-2024, covering 80,000 units in 2024 and 120,000 in 2025, expecting it to continue at similar levels in 2026.

Joe O'Dea from Wells Fargo asked for more details on Otis's fourth-quarter service margin expansion, specifically how the 100 basis points year-over-year growth was achieved given the mix of lower-margin modernization and higher-margin repair, and the specific drivers for margin expansion in modernization. He also inquired about the China stimulus program's growth, size, and outlook for 2026.

Answer

Judy Marks, Chair, CEO, and President of Otis Worldwide Corporation, explained that modernization margins are growing due to industrialization, scale benefits, and specialized operations, approaching the 10% target, with China's modernization revenue doubling in Q4. Cristina Méndez, Executive Vice President and CFO of Otis Worldwide Corporation, detailed that repair (highest margin) accelerated, modernization margins increased by 50 basis points quarter-over-quarter, and a one-time $14 million gain from service center asset sales contributed to the 100 basis points expansion. Excluding this, margins expanded 40 basis points. Judy Marks clarified the China stimulus program started mid-2024 with 80,000 units, ramped to 120,000 in 2025, and is expected to continue at a comparable level in 2026.

Joe O'Dea inquired about Otis's ongoing efforts in maintenance, specifically focusing on retention and recapture strategies, and the expected timeline for these initiatives to drive an increase in revenue growth. He also asked for more details on the improved outlook for new equipment in the Americas, including insights into recent demand drivers in infrastructure and residential verticals, and whether these projects were previously in the pipeline.

Answer

Judy Marks, Chair, CEO, and President, Otis Worldwide Corporation, stated that while 2024's retention was unsatisfactory, significant investments in service excellence are underway, with sequential improvement expected, though returning to a 94% retention rate will be a long journey. She noted the portfolio is approaching 2.5 million units and recapture rates are pleasing. For Americas new equipment, Ms. Marks attributed the positive outlook to increased demand in residential, infrastructure, and data center segments across all geographies, coupled with improved execution at job sites. She highlighted five consecutive quarters of orders growth in the Americas, indicating future revenue strength due to the typical 18-month lag.

Joe O'Dea from Wells Fargo inquired about Otis's ongoing efforts to improve maintenance retention and recapture rates, seeking insights into the timeline for achieving higher revenue growth in this segment. He also asked for more details on the Americas' new equipment outlook, specifically regarding recent demand drivers in infrastructure and residential verticals.

Answer

Judy Marks, Chair, CEO, and President, highlighted strategic investments in service excellence to boost customer retention, acknowledging it's a long-term journey to rebuild trust and reach the 94% retention target. She noted sequential improvements and continued portfolio growth, approaching 2.5 million units, which enhances repair opportunities. Cristina Méndez, EVP and CFO, added that maintenance growth remains stable at 3% year-to-date, driven by 4% portfolio growth and 3% price, with efforts focused on mitigating mix and churn headwinds. For Americas new equipment, Judy Marks expressed optimism due to strong demand in residential, infrastructure, and data center segments, coupled with improved new equipment execution at job sites. She emphasized five consecutive quarters of orders growth in the Americas, providing strong line of sight for future revenue.

Joe O'Dea asked for an update on the company's USMCA compliance path and how much of the incremental Q4 pricing, currently in process, is expected to flow through the P&L during the quarter.

Answer

Chris Nelson, President and CEO, confirmed significant progress on USMCA compliance, seeing no structural roadblocks to reaching industry averages. Pat Hallinan, EVP and CFO, added that many Q4 pricing discussions are complete, with actions underway and the balance expected by early November, implying flow-through for most of two of the three months of the quarter.

Joe O'Dea asked for an update on USMCA compliance progress and the expected duration for the incremental Q4 2025 price increase to flow through the P&L.

Answer

President and CEO Chris Nelson reported significant progress on USMCA compliance, with no structural roadblocks to reaching average industrial levels in the medium term. EVP and CFO Pat Hallinan noted that Q4 pricing discussions are largely complete, with actions underway, expecting the incremental price to flow through for most of November and December.

Joe O'Dea from Wells Fargo asked about behind-the-meter infrastructure investments, specifically for data centers, and their content implications for both utility and electrical segments compared to front-of-the-meter investments. He also inquired about the grid automation segment's CAGR relative to targets and the broader value or synergy that the meters and AMI business brings to the portfolio despite underperforming growth targets.

Answer

Gerben Bakker (Chairman, President and CEO, Hubbell Incorporated) explained that data center investment directly impacts the electrical side with products like grounding systems, connectors, and PCX business, with ongoing NPD for higher amperages. He noted that utilities primarily serve data centers, leading to significant investment in grid interconnection and generation, benefiting Hubbell's utility segment. Bill Sperry (EVP and CFO, Hubbell Incorporated) added that direct data center exposure is behind-the-meter, while front-of-the-meter growth also benefits the utility segment. Bakker acknowledged that the financial performance of meters and AMI (Aclara) has been below expectations but emphasized its strategic value in grid modernization, with half of grid automation revenues now coming from non-Aclara products that are growing strongly and contributing to the overall portfolio.

Joe O'Dea asked about the impact of behind-the-meter infrastructure investments, particularly in data centers, on Hubbell's content opportunity across both utility and electrical segments. He also questioned the grid automation's CAGR relative to targets and the broader synergy value of the meters and AMI business within the portfolio.

Answer

Gerben Bakker, Chairman, President, and CEO, explained that data center investment directly impacts the electrical side (Burndy, grounding systems, PCX business) and indirectly benefits the utility side through power provision and grid interconnections. Bill Sperry, EVP and CFO, noted that explicit data center exposure refers to behind-the-meter, while in-front-of-meter growth goes to utility customers. Bakker acknowledged that grid automation's financial performance was below expectations but highlighted its strategic contribution to grid modernization, with half its revenue now from non-Aclara products growing at the high end of the portfolio.

Asked for details on the growth trajectory for the Grid Infrastructure business in the second half, given strong orders. Also inquired about the M&A pipeline and the likelihood of capital deployment activity.

Answer

Management expects continued strength in transmission and substation (mid/high teens growth) and accelerating growth in distribution due to easier comps. This, combined with Aclara returning to growth in Q4, drives the strong second-half outlook. On M&A, they just closed a small bolt-on acquisition, the pipeline is active, and their focus remains on high-growth areas like T&D and data centers, balanced with share repurchases.

Joe O'Dea noted the International segment's first quarter of volume growth after four declines and asked for more details on the quarter's performance and any momentum.

Answer

President and CEO John Stone expressed satisfaction with the International team's performance, acknowledging that while end markets remain largely flat organically, some segments were at historical lows. He highlighted the strong performance of Allegion's electronics businesses and the continued momentum from the ELATEC acquisition in the electronics space.

Joe O'Dea asked about Allegion's conversations with building owners and architects regarding macro uncertainty, seeking insight into sidelined activity and the factors needed to bring it back. He also questioned the International segment's volume growth, noting it was the first positive quarter after four declines, and asked for more details on this momentum.

Answer

President and CEO John Stone indicated that channel checks show non-residential project activity is healthy, with some private finance returning. He identified a more favorable interest rate environment as a key factor to bring more private finance off the sidelines. For the International segment, Mr. Stone expressed satisfaction with the team's performance, noting that while the end-market view remains flattish, electronics businesses are performing well, and the Elitech acquisition continues to add momentum.

Joe O'Dea from Wells Fargo asked for color on QSC's margins in Q4, comparing them to legacy AIS margins, and the timeline for QSC to align with legacy margins, including its margin expansion opportunity in 2026. He also inquired about specific cost actions taken, the dynamic supply chain advantage, and the current percentage of sourcing from China versus previously. Finally, he sought clarification on the Q3 pull-forward impact on 2026.

Answer

Karen Holcom, SVP and CFO, Acuity, noted strong performance across AIS, including QSC, with QSC benefiting from adopting Acuity's operating system. She expects QSC margins to continue expanding over time, with a focus on growth for AIS. Neil Ashe, Chairman, President, and CEO, Acuity, detailed cost actions, including moving the majority of tariff-impacted material sourcing away from China and accelerating productivity efforts and organizational restructuring in ABL. Mr. Ashe clarified that the Q3 pull-forward was largely isolated to the back half of the year, with normalized operations expected.

Joe O'Dea of Wells Fargo asked for details on the composition of the 8% aerospace organic growth forecast for FY26, focusing on margin mix between OE and aftermarket, and inquired about Meggitt synergy contributions. He also asked about the gating factor for converting distributor quoting activity into firm orders.

Answer

Chairman and CEO Jennifer Parmentier reiterated the growth breakdown (OEM high-single, MRO low-double) and stated confidence in continued margin expansion. EVP & CFO Todd Leombruno added that $50 million in Meggitt synergies remain and will be realized through the year. Regarding distributors, Parmentier identified uncertainty around tariffs and interest rates as the primary factors delaying purchasing decisions, but noted distributors remain bullish.

Joe O'Dea asked for context on the positive inflection in below-ground fueling and sought clarification on the $25 million restructuring carryover for 2025, asking if more actions were planned.

Answer

CEO Richard Tobin explained the fueling recovery is driven by improved labor availability and easing inflation. He clarified the $25 million in restructuring is from 2024 actions, and that additional restructuring costs are expected in 2025 to achieve synergy targets from recent acquisitions, particularly in Clean Energy.