Joseph Ritchie

Joseph Ritchie sought to clarify the tariff impact by analyzing the change in segment margin guidance for Electrical Americas and Vehicle. He also asked how easy it will be to implement necessary pricing to cover tariffs, considering distribution channels and projects already in the backlog.

Answer

CFO Olivier Leonetti reiterated that the full-year EPS guide is unchanged at the midpoint, implying that tariffs are neutral on a dollar basis for the year. President and COO Paulo Sternadt added that pricing actions will be taken as needed, including for business already in the backlog. He acknowledged a slight lag in price realization in Q2, which explains some margin timing, but stated the company is committed to fully compensating for tariff costs during the fiscal year and recovering margins structurally over the long term.

Joseph Ritchie of Goldman Sachs Group, Inc. asked what drove the significant margin outperformance in Electrical Americas in 2024 compared to initial guidance, and what the margins in the current backlog look like versus a year ago.

Answer

Paulo Sternadt, President & COO, attributed the 2024 margin beat to superior operational execution across the business and supply chain, exceeding internal expectations. He confirmed that the margins embedded in the current backlog are largely in line with the strong margins being reported today.

Joseph Ritchie from Goldman Sachs asked if Eaton expects to achieve price increases across its portfolio in 2025, even as inflation moderates. He also sought to understand the linkage between the 60% growth in the project negotiation pipeline and the forecast for record project starts in 2025.

Answer

Chairman and CEO Craig Arnold confirmed that Eaton expects to realize price increases in 2025, consistent with historical patterns, though not at the extraordinary levels seen during the high-inflation period. He noted price is embedded in the end market growth assumptions. Regarding the pipeline, he explained that many of the projects currently under negotiation will become starts in 2025, contributing to the expected increase in construction activity.

Joseph Ritchie of Goldman Sachs questioned the Q1 fiscal 2026 guidance, noting a significant sequential EPS step-down, and asked for a bridge from Q4 2025. He also inquired about emerging positive signs in industrial short-cycle businesses and the extent of self-help opportunities for the upcoming year.

Answer

Chairman & CEO Jennifer Parmentier clarified that the Q1 guide represents a year-over-year increase and a record Q1 margin, despite minimal sales growth. EVP & CFO Todd Leombruno added that Q1 is seasonally impacted by stock compensation costs. Parmentier then detailed the outlook for industrial markets, highlighting positive distributor sentiment but also ongoing challenges in transportation and agriculture. Leombruno mentioned that slightly higher restructuring is planned as part of the company's self-help initiatives.

Joseph Ritchie of Goldman Sachs questioned the Q1 FY26 EPS guidance, noting a significant sequential step-down from Q4 FY25, and asked for details on the margin bridge. He also inquired about signs of recovery in short-cycle industrial businesses and the company's self-help initiatives for the year.

Answer

Chairman and CEO Jennifer Parmentier stated the Q1 guide represents a record for the quarter with 40 bps of margin expansion and a $0.05 YoY EPS increase on low sales growth. EVP & CFO Todd Leombruno added that Q1 is impacted by stock compensation costs. Regarding industrial recovery, Parmentier noted positive distributor sentiment and ongoing retooling activity but pointed to challenges in transportation and a slow recovery in agriculture. Leombruno mentioned that restructuring spend is forecasted to be slightly higher in FY26 to address specific end markets.

Joseph Ritchie from Goldman Sachs asked about any discernible changes in business trends since the start of the new calendar year and questioned the sustainability of industrial margin expansion in the current weak demand environment.

Answer

CEO Jenny Parmentier stated there were no new notable trends to report and expressed strong confidence in the company's ability to continue expanding margins through its Win Strategy, regardless of top-line pressures. CFO Todd Leombruno confirmed that the second-half guidance includes further margin expansion, although it is moderated by currency and revenue headwinds.

Joseph Ritchie asked for more detail on the in-plant and industrial equipment project delays, noting a disconnect with strong overall order rates. He also inquired if the bidding pipeline for these projects consists more of new construction or maintenance-type work.

Answer

Executive Jennifer Parmentier explained that the guidance for in-plant and industrial equipment was lowered because the anticipated industrial recovery continues to be delayed. She stressed that quoting activity remains strong with few cancellations; projects are being postponed, not cancelled. She added that the activity is a mix of both retrofitting and upgrades in existing plants as well as new construction projects.

Joseph Ritchie asked about the medium-term margin expansion opportunity beyond the current year's guidance and requested an update on the data center business, including trends and new product rollouts like liquid cooling.

Answer

CEO Joakim Weidemanis expressed excitement about the potential for margin improvement, stating he sees no reason JCI can't reach peer profitability levels over time. He confirmed that demand in the data center vertical remains very healthy, driven by JCI's differentiated York Chiller platform and deep customer engineering partnerships.

Joseph Ritchie asked what drove the significant outperformance in Global Products margins compared to prior guidance. He also sought to quantify any tariff-related order pull-forward in Q1 and confirm if the flat second-half margin outlook was due to conservatism.

Answer

CFO Marc Vandiepenbeeck attributed the strong Global Products margin to higher-than-expected unit growth, strong commercial execution, and benefits from the accelerating data center vertical. He confirmed the second-half margin outlook includes conservatism around tariffs and estimated that about one-third of the quarter's strong order growth was pulled forward from Q2.

Joseph Ritchie focused on the strong Global Products margins, asking if any one-time items contributed to the Q4 performance and what the pro forma margin was for 2024 to establish a baseline for 2025.

Answer

CFO Marc Vandiepenbeeck confirmed there were no one-off benefits in the Q4 margin, attributing the record performance to structural operational efficiencies achieved over the past year. He guided that the business is now set to perform at this higher level, with seasonality causing some fluctuation between the first and second halves of the year.

Joseph Ritchie asked if the supply chain actions taken to mitigate tariffs are structural, questioned the company's capacity to handle a sharp demand recovery, and inquired about any future changes to guidance reporting.

Answer

President and CEO Sanjay Chowbey confirmed that most supply chain moves are structural and intended to make the company stronger, though some could be revisited if tariffs were fully reversed. He expressed confidence in the company's capacity to handle a market recovery, given the prolonged slowdown and cost actions taken. CFO Pat Watson deferred the question on future guidance format to the next earnings call.

Joseph Ritchie asked if Metal Cutting's market share gains in Europe are sustainable and inquired about the potential business implications of the recent U.S. election, particularly regarding tariffs.

Answer

CEO Sanjay Chowbey expressed confidence in sustaining above-market growth in Europe by supporting customers through mix changes. Regarding the election, he stated it is too early to tell but noted Kennametal's global manufacturing footprint helps mitigate direct tariff impacts. CFO Pat Watson added that the main effect would be indirect, through changes in consumer confidence and industrial production.

Joseph Ritchie questioned the seemingly low $0.05 EPS contribution from the Avail acquisition, calculating a low implied margin. He also asked about the drivers of the raised guidance, particularly the mix of volume versus incremental pricing from tariffs.

Answer

CFO Gary Corona clarified that the $0.05 EPS impact from Avail is net of interest expense and that the gross contribution and margins are higher than calculated. CEO Beth Wozniak explained that while there will be more price due to tariffs, there's also uncertainty in volume for industrial and commercial resi. Gary Corona added that the guidance raise reflects the Avail acquisition, strength in Data Solutions and Power Utilities, and a lower share count, balanced against softness in commercial resi.

Joseph Ritchie inquired about nVent's 2025 organic growth outlook, specifically the drivers for the expected acceleration after a slow Q1, the embedded pricing assumptions, and the M&A strategy in relation to the company's core technology platforms.

Answer

Chair and CEO Beth Wozniak explained that growth acceleration is supported by growing backlogs in data solutions and power utilities, improving order funnels for industrial projects, and an expected improvement in commercial/residential markets. She noted that 2025 organic growth will be volume-weighted but include positive pricing. Regarding M&A, Wozniak clarified that the strategy focuses on acquiring great products in high-growth verticals like infrastructure, which may or may not align directly with the organically-focused technology platforms shown.

Joseph Ritchie inquired about the current productivity and margins of the rapidly scaling liquid cooling business. He also asked for the 2025 organic growth outlook, noting that core business growth appears muted outside of Data Solutions, and asked which areas might see an inflection.

Answer

CEO Beth Wozniak stated that liquid cooling margins are in line with the Enclosures segment and are expected to improve with scale. For 2025, she pointed to an expected recovery in the soft Commercial/Residential and Industrial verticals, plus continued strength in Power Utilities. CFO Sara Zawoyski added that the Enclosures segment is already delivering strong underlying productivity, which is helping to fund these new investments.

Joseph Ritchie of Goldman Sachs asked if the updated EBITDA guidance could be met almost entirely by completed M&A, implying minimal contribution from the base business. He also posed a hypothetical question about whether guidance could revert to original levels if tariffs were resolved.

Answer

CFO Vik Kini acknowledged the contribution from M&A but pointed to the unique dilutive impact of the zero-margin tariff pricing as a key factor in the overall EBITDA composition. CEO Vicente Reynal responded to the hypothetical, agreeing that if tariffs were removed, there could be accelerated growth, but stated the company would re-evaluate its position if and when that happens, reiterating the current guide is based on a prudent view of the environment.

Joseph Ritchie asked for an elaboration on what "site readiness" means and expressed concern about the book-to-bill ratio potentially dropping significantly in Q4, asking for expectations.

Answer

Chairman and CEO Vicente Reynal explained that "site readiness" covers a wide range of issues, including permits, labor availability, and logistical coordination with other parts of a larger project. Regarding book-to-bill, he reiterated their full-year expectation is for it to be approximately 1.0x, with the second half typically below 1.0x, implying Q4 will follow this established pattern.

Joseph Ritchie of The Goldman Sachs Group, Inc. asked for a segment breakdown of the tariff impact and the go-to-market strategy for the new VIDAR motor.

Answer

CEO Luca Savi and CFO Emmanuel Caprais explained that the tariff impact is concentrated in the Industrial Process (IP) and Connect & Control Technologies (CCT) segments, where they have the most pricing power. Savi clarified that the VIDAR motor is being launched as a completely separate business with its own dedicated sales force under ITT Ventures, distinct from the existing pump business, to ensure focused execution.

Joseph Ritchie inquired about the earnings cadence for the 2025 guidance, particularly the expected softness in Q1, and asked about the opportunity for price renegotiations within the Connect & Control Technologies (CCT) segment.

Answer

CFO Emmanuel Caprais explained that Q1 2025 EPS is expected to be flat year-over-year, primarily due to the Wolverine divestiture impact (~$0.06 of EPS), lower auto demand, and temporary intangible amortization, with growth expected to ramp up through the year. CEO Luca Savi confirmed that pricing is a positive lever for CCT, with ongoing major contract renegotiations showing positive signs for 2025.

Joseph Ritchie requested more detail on the market share gain stories in the Rail and Aerospace & Defense businesses and asked for an outlook on Motion Technologies (MT) margins for 2025, considering the abatement of FX headwinds.

Answer

CEO Luca Savi explained that Rail (KONI) share gains are driven by superior on-time delivery, quality, and local engineering in China. In Defense, gains come from close engineering collaboration and speed in delivering customized solutions. CFO Emmanuel Caprais clarified the Q3 FX impact on MT was a one-off and expects margins to improve sequentially in Q4 and grow in 2025, reaffirming the commitment to the 20% long-term target by 2026.

Joseph Ritchie from Goldman Sachs inquired about the 454B refrigerant transition, asking how much of the Q1 residential strength was due to channel stocking and the current state of distributor inventory levels. He also asked for an update on the data center business, including the new Quantum Leap and liquid cooling products.

Answer

CEO David Gitlin acknowledged that distributor inventory levels are slightly elevated, which is a factor in the more cautious second-half outlook for the residential business. On data centers, he expressed excitement about the new organic liquid cooling CDU and the Quantum Leap system, noting that while sales are not yet significant, customer interest and proposal activity are high, representing a potential 'game changer'.

Joseph Ritchie asked for an update on the Americas Commercial HVAC capacity additions and their potential to accelerate backlog conversion, and also inquired about the expected margin improvement for Viessmann in 2025.

Answer

CEO David Gitlin reported significant progress on capacity, stating that new and expanded facilities will allow Carrier to more than double its North American commercial HVAC output, which had been a key constraint. Regarding Viessmann, he projected EBITDA margins would expand from the low-teens to the mid-teens in 2025, driven by an increase in the cost synergy run-rate from $75 million to $150 million.

Joseph Ritchie of Goldman Sachs asked for the specific residential HVAC growth percentage in Q3 and the growth assumption embedded in the Q4 forecast. He also questioned the 2025 dynamics of the refrigerant transition, expressing concern that 410A inventory could slow the uptake of new R-454B units and asking about the net realized price for the new units.

Answer

Patrick Goris, CFO, stated that residential HVAC grew 11% in Q3 and is expected to be up 20-30% in Q4, emphasizing this is against a very weak prior-year comparable, not a major pre-buy. David Gitlin, CEO, added that they expect significant 410A sales in Q1 2025 but do not see a material pull-forward from 2025 into 2024. He reiterated confidence that the 10% base price increase for R-454B units will stick, given the higher underlying costs of the new systems.

Joseph Ritchie sought to understand the residential HVAC strength in Q1, asking to parse out how much growth came from the new 454B refrigerant products versus older 410A inventory. He also asked about price elasticity in the market, given that both the refrigerant transition and new tariffs are driving up costs, and whether there has been any customer pushback.

Answer

CEO David Regnery estimated that close to 80% of what Trane sold in Q1 was the new 454B product, though he acknowledged some inventory may still be in the channel. CFO Christopher Kuehn reaffirmed the full-year residential growth outlook of mid-single digits, implying low-single-digit growth for the rest of the year. Regarding pricing, Kuehn stated the actions are surgical, not broad-based, and the primary focus is on reducing the tariff cost first. He noted they haven't seen a significant impact from elasticity concerns so far.

Joseph Ritchie of Goldman Sachs Group Inc. asked about the growth trajectory of the data center business and whether the Commercial HVAC backlog remains elevated and long-cycle in nature. He also inquired about the company's potential exposure to and strategy for dealing with any future tariffs.

Answer

CEO Dave Regnery stated that data centers have been and will continue to be a strong vertical, but emphasized that Trane's strength is broad-based across 13 other verticals. He confirmed the backlog remains highly elevated at $6.75 billion, giving strong visibility into 2025, especially after adjusting for FX and other items. Regarding tariffs, Regnery highlighted their 'in region for region' manufacturing strategy as a mitigant and expressed confidence in their operating system's ability to react quickly to cost changes to remain margin neutral over time.

Joe Ritchie from Goldman Sachs asked for commentary on mega project activity, such as semiconductor and EV plants, and inquired about the residential HVAC business, specifically the mix of 410A versus new R-454B products expected in 2025.

Answer

CEO Dave Regnery described the mega project landscape as dynamic, with some delays and cancellations (e.g., EV battery plants) but also new projects emerging. He stressed Trane's continued success in this space due to its global direct sales force. On the residential refrigerant transition, Regnery estimated that with about three months of inventory in the channel, the mix in 2025 would likely be in the 75-80% range for the new refrigerant products, with the commercial unitary transition being even higher at over 90%.

Joseph Ritchie of The Goldman Sachs Group, Inc. sought to quantify the 'high single-digit' price increase already implemented with retail partners. He also asked about the company's confidence in its ability to secure the necessary additional pricing to offset the full tariff impact throughout the year.

Answer

COO Chris Nelson confirmed the initial price increase was a high single-digit average and is now live. Regarding the second increase, he expressed confidence, noting the necessity given the tariff magnitude and emphasizing Stanley Black & Decker's advantaged position due to its significant North American manufacturing footprint, which facilitates collaborative solutions with retail partners.

Joseph Ritchie asked for an update on the timeline for the $300-$400 million project pipeline, the outlook for incremental margins in the second half of the year, and clarification on the Q2 free cash flow forecast.

Answer

CEO Tom Logan and CFO Brian Schopfer confirmed that the majority of the large project pipeline is still expected to be awarded within calendar year 2025. Schopfer elaborated on margins, stating that while there will be margin expansion each quarter, Q3 is expected to be the strongest. He clarified his earlier comment on Q2 free cash flow, stating it would be the 'lightest' quarter of the year due to seasonal cash tax payments and working capital use, but did not forecast it would be negative.

Joseph Ritchie from Goldman Sachs asked for details on the near-term opportunity in the book-and-bill flow business, the potential implications of EDF's AI-driven data center investments, and the company's exposure to U.S. political changes regarding defense spending and tariffs.

Answer

CEO Tom Logan explained that the book-and-bill business is benefiting from increased capital spending from a profitable nuclear installed base. He noted that the EDF AI initiative reinforces the importance of uptime and upgrades for EDF's existing fleet, benefiting Mirion through its strategic supplier agreement. Regarding political risks, Logan expressed cautious optimism about stable DOE and DoD funding and stated that while about 13% of revenue has bilateral tariff exposure, the company has a strong natural hedge and is actively managing its supply chain.

Joseph Ritchie of Goldman Sachs inquired about the specifics of a significant order debooking, the company's backlog accounting process, the impact of the Sizewell-C project win, the near-term outlook for the nuclear business driven by hyperscaler demand, and the long-term growth potential of the radiopharmaceutical therapy market.

Answer

Executive Thomas Logan explained the debooking was an unusual event tied to a contractual dispute with a primary contractor on a Turkish project, which they hope to partially or fully win back. Executive Brian Schopfer affirmed their disciplined backlog criteria, requiring a firm contractual obligation. Logan detailed that near-term nuclear efforts are focused on forging strategic alliances with SMR developers to capitalize on AI-driven energy demand. He also expressed strong optimism for the radiopharmaceutical market, citing a robust drug pipeline and Mirion's unique position with its data management platform and critical measurement instruments, teasing more details for the upcoming Investor Day.

Joseph Ritchie sought to clarify if the demand contingency in the guidance is primarily focused on short-cycle businesses. He also asked for an update on the estimated onetime and stranded costs associated with the planned separations.

Answer

CFO Mike Stepniak confirmed the demand contingency is a prudent approach for the second half, particularly watching short-cycle demand in Industrial Automation and Building Automation. CEO Vimal Kapur reiterated that onetime separation costs remain in the $1.5B to $2B range and expressed high confidence in eliminating stranded costs within 18-24 months post-spin.

Joseph Ritchie questioned the rationale for the final structure, asking why the company did not consider breaking down the large Automation business even further. He also asked for more detail on the drivers behind the margin decline in the Energy and Sustainability Solutions (ESS) segment during the quarter.

Answer

CEO Vimal Kapur defended the Automation structure, citing strong common threads like a shared business model, similar strategic priorities in digitalization, and highly interdependent technology platforms like Forge. Incoming CFO Mike Stepniak attributed the ESS margin pressure primarily to a lumpy project mix, which he expects to reverse. CFO Gregory Lewis added that ESS margins can be volatile quarter-to-quarter due to the timing of large catalyst shipments.

Joseph Ritchie of The Goldman Sachs Group, Inc. asked for the root causes of project delays in the Process Solutions and UOP businesses and how they might be rectified. He also inquired about the sustainability of the strong double-digit growth in the defense business into 2025.

Answer

CEO Vimal Kapur attributed the project pushouts to lower-than-normal conversion rates on short-cycle projects, likely driven by customer uncertainty from Middle East geopolitics and the U.S. election. He contrasted this with a record $1 billion in long-cycle orders for UOP. Regarding defense, he expressed confidence that the growth momentum will continue into 2025, supported by strong order books, successful supply chain improvements, and the addition of the high-growth CAES acquisition.

Joseph Ritchie asked if Q2 organic growth is expected to be above the full-year guidance range and inquired about the drivers for margin expansion in the Imaging & ID segment.

Answer

Executive Richard Tobin clarified that Q2 organic growth is expected to be within the full-year range of 2-4%, not above it. He then corrected the premise of the second question, stating the largest margin expansion is anticipated in the Clean Energy & Fueling segment, driven by prior restructuring, favorable mix, and new productivity projects.

Joseph Ritchie requested more color on the Climate & Sustainability Technologies (DCST) segment, specifically on the recovery in the European heat pump market and the expected margin trajectory for the segment in 2025.

Answer

Executive Richard Tobin explained that Dover willfully underproduced in Q4 to clear channel inventory for European heat pumps, and orders are now inflecting positively from low levels. He expects the segment's margin to improve significantly after Q1, driven by the recovery in heat exchangers and strong exit margins in the refrigeration business.

Joseph Ritchie asked about potential benefits from macro factors like election certainty and interest rates on project-based businesses, and inquired about the timeline for biopharma margins to return to the 30%+ range.

Answer

CEO Richard Tobin suggested that post-election certainty could accelerate project-based business where order conversion has been slow. On margins, he noted the Pumps & Process Solutions segment hit 29% in the quarter despite headwinds, and continued growth in high-margin biopharma and thermal products should be accretive to that level.

Joseph Ritchie asked about the timing of tariff impacts versus pricing actions, the company's response to potential tariff changes, and whether there was any evidence of order pull-ahead in the non-residential segment.

Answer

CFO Michael Wagnes acknowledged a potential one-month lag in Q2 where tariff costs could precede offsetting price actions, but affirmed the full-year goal is to cover the costs on a dollar basis. CEO John Stone added that the company remains agile amid tariff volatility and is committed to its full-year guidance. Stone also clarified that a Q4 pull-ahead was specific to the residential business and they see no evidence of a similar large-scale event in non-residential.

Joseph Ritchie asked about the sequential progression of Building Climate Solutions (BCS) margins for the remainder of the year, following the significant Q1 impact from product costs and other factors.

Answer

CEO Alok Maskara stated the Q1 margin pressure was from short-term, internal manufacturing inefficiencies related to product line moves, which will wind down. CFO Michael Quenzer added that margins should improve sequentially due to a full run-rate on product mix, lapping SG&A investments from last year, and volume benefits from the emergency replacement initiative in the second half.

Joseph Ritchie questioned the perceived conservatism in the 2025 guidance, highlighting the low incremental margins implied by the price/mix and inflation bridge, and sought clarity on the sequential impact of the prebuy.

Answer

CFO Michael Quenzer defended the guidance by pointing to a prudent 3% inflation assumption and a focus on productivity, while acknowledging potential volume upside. CEO Alok Maskara stressed that significant market uncertainty around tariffs, labor, and interest rates warranted the wide guidance range. He also clarified the $125 million prebuy impact is an estimate that could extend into Q2.

Joseph Ritchie of Goldman Sachs sought to clarify Lennox's R-410A inventory strategy, asking if the plan is to carry enough to meet demand through Q1 2025. He also inquired about the pricing dynamics for R-410A products that will be sold in early 2025.

Answer

CEO Alok Maskara confirmed that as a practical matter of the transition, Lennox will have R-410A inventory to sell through in Q1. He also stated that due to supply shortages and cost inflation, the company fully expects to implement price increases on any R-410A products sold in 2025 compared to 2024 prices.

Joseph Ritchie asked about Zurn Elkay's competitive cost position relative to peers and inquired about the strategy for share buybacks following the accelerated repurchases in the first quarter.

Answer

Todd Adams, Chairman and CEO, stated they believe they are 'extraordinarily well positioned' on cost versus peers, citing their established supply chain model. David Pauli, CFO, addressed capital allocation, confirming the $77M Q1 buyback and noting that strong cash flow and low leverage provide the ability to continue repurchasing shares based on market conditions and stock price.

Joseph Ritchie asked for more color on the drivers of the expected 2025 increase in education and healthcare starts, considering past ESSER funding. He also requested an update on M&A priorities, specifically regarding adjacencies.

Answer

CEO Todd Adams and CFO David Pauli clarified that ESSER funds were not used for new construction, and the projected starts are driven by underlying demand from population migration and aging infrastructure. Regarding M&A, Adams stated the focus remains on North American adjacencies that fit within their four existing product categories and leverage their current go-to-market model.

Joseph Ritchie inquired about the cancellation risk for both the firm backlog and the slot reservation agreements, particularly given potential volatility in the data center market.

Answer

CEO Scott Strazik stated that slot reservation agreements are secured with significant down payments, around 20%, and are not yet firm orders because customers are finalizing site selection and EPC contracts. He sees very little cancellation risk but acknowledged potential for timing shifts. He reinforced this by noting 2026-2028 are largely sold out and orders are now being taken for 2029 and 2030.

Joseph Ritchie from Goldman Sachs asked about the growth outlook for the Electrification equipment backlog in 2025 and the scale of the opportunity in North America.

Answer

CEO Scott Strazik described the opportunity as 'substantial,' stating he expects the $20 billion equipment backlog to grow significantly in 2025 and beyond. He highlighted that North America is a key growth market where the company is gaining share as it educates customers on its offerings, leveraging the broader GE Vernova synergy.

Joseph Ritchie asked if the current high level of gas power orders represents a new run rate and requested an update on the supply chain's ability to support this accelerated growth.

Answer

CEO Scott Strazik affirmed that 2025 order levels are expected to be at least equivalent to 2024's strong performance, solidifying the higher run rate. He reiterated the planned capacity increase to 70-80 gas turbines annually. CFO Ken Parks added that this expansion is being prudently funded by customer down payments, minimizing the capital draw on the company.

Joseph Ritchie questioned the fiscal 2025 EBITDA margin guidance of 0 to 30 basis points of expansion, comparing it to the company's previously stated long-term goal of 30 to 50 basis points. He also asked about the potential for SG&A synergies from recently completed acquisitions.

Answer

CFO Mark Witkowski clarified that the 2025 guidance reflects the challenge of gaining SG&A productivity in a softer end market. He noted that SG&A, excluding acquisitions and the 53rd week, was up only 1% in fiscal 2024. Regarding M&A, he explained that cost synergies typically take 12-18 months to realize as the focus is first on scaling the acquired businesses.

Joseph Ritchie sought to clarify the organic volume outlook for Q4, given the strong Q3 results, and asked about the expected timing for seeing a business uptick from recent storm-related activity.

Answer

CFO Mark Witkowski projected neutral to slightly positive organic volumes for the seasonally slower fourth quarter, adding that the 53rd week will contribute 6-8 points of revenue growth. CEO Steve LeClair suggested that benefits from storm recovery and rebuilds, particularly in the Carolinas, would likely begin to materialize in 2025.

Joseph Ritchie questioned the drivers of the volume reduction, asking if it was due to market weakness or a more selective project approach. He also inquired about market noise regarding pricing and whether the company is seeing new, lower-priced third-party providers.

Answer

CEO Stephen LeClair asserted that the company has not changed its project pursuit strategy and attributed the volume issues to weather and market softness, particularly the uncertainty of recovering delayed projects in the Upper Midwest. He declined to comment on a PVC lawsuit, calling claims related to Core & Main 'baseless,' and stated he was not familiar with the referenced third-party providers.

Joe Ritchie asked if new AI technology that requires less data to train models could lower the barrier to entry for competitors and increase competition in Cognex's end markets.

Answer

CEO Robert Willett acknowledged this as both an opportunity and a potential threat. He argued that publicly available AI models are not ready for industrial use without the deep domain expertise that Cognex provides. He believes Cognex is leading the industry in making vision easier to apply and that this technological shift, combined with their expanding sales force, will ultimately be a significant advantage and driver of growth for the company.

Joseph Ritchie asked about the specific margin contribution from PLS, which segments are in the earlier stages of implementing CBI, and the potential for a more aggressive share buyback.

Answer

CEO Christopher O'Herlihy estimated that PLS and other enterprise initiatives contribute roughly 50/50 to margin expansion, and identified Welding, Automotive, and Food Equipment as segments further ahead in CBI adoption. CFO Michael Larsen explained the $1.5B buyback represents estimated surplus capital and could increase if performance exceeds guidance, but the current capital structure is considered optimal.

Joseph Ritchie asked for a detailed explanation of the significant $31 million negative manufacturing cost variance in Q4 and questioned the confidence level in the 2025 guidance, particularly regarding downside risks.

Answer

CFO Philip Fracassa attributed the large variance to a tough year-over-year comparison, as the prior year included several one-time benefits like favorable supplier and warranty settlements that did not repeat. CEO Tarak Mehta addressed guidance by emphasizing the company's focus on cost control to deliver strong performance through the cycle, despite market uncertainty.

Joseph Ritchie sought clarification on the nature of the "discrete customer accrual," asking if it was essentially a bad debt expense. He also inquired about potential structural improvements to the company's logistics network to mitigate future cost volatility.

Answer

CFO Philip Fracassa confirmed the accrual was a collectibility reserve for a specific customer in the renewable energy sector, describing it as an unusual outlier given the company's strong history. President and CEO Tarak Mehta acknowledged that logistics have been volatile and that the company will examine its supply chain design long-term to reduce interregional dependency, but no immediate changes are planned. Fracassa added that while supply chains have lengthened for cost benefits, the recent spike was unexpected but should normalize.

Joseph Ritchie of Goldman Sachs sought to confirm the positive financial impacts for 2025, including the removal of one-off costs like the $8 million reorganization charge and $16 million in litigation expenses, plus the addition of $16 million in savings. He also asked about the growth outlook for the new Expansion Markets segment.

Answer

Management confirmed the figures, noting the $16 million litigation cost and $8 million reorganization charge from 2024 will not recur, while $16 million in annual savings from the reorganization are expected in 2025. Executive Vice President Mark Sheahan explained that the Expansion Markets segment's 2024 decline was due to semiconductor weakness, which is expected to firm up in 2025, while its other businesses are projected to continue their steady performance.

Joe Ritchie of Goldman Sachs asked for a more concrete full-year 2025 free cash flow target and a breakdown of expected Q4 sales performance by segment, particularly for PES.

Answer

CFO Rob Rehard provided a full-year 2025 free cash flow target of approximately $800 million. CEO Louis Pinkham projected mid-single-digit year-over-year growth for the PES segment in Q4, cautioning that double-digit growth is unlikely due to historical seasonality and weaker demand for larger HVAC units.

Joseph Ritchie of Goldman Sachs asked about the remaining runway for improving aftermarket capture rates and sought an early framework for the company's 2025 outlook.

Answer

CEO Scott Rowe indicated there is "incredible runway" for aftermarket growth, noting the current pump parts capture rate is in the 30-40% range. Regarding 2025, both Rowe and CFO Amy Schwetz framed the outlook as a continuation of progress toward the 2027 long-term targets, with a focus on margin expansion in FCD and growth in FPD. Full guidance will be provided next quarter.

Joseph Ritchie asked if Roper has the right portfolio to achieve its long-term faster growth ambitions or if divestitures might be needed, and questioned if M&A activity would pause given the current leverage of 3x.

Answer

President and CEO Neil Hunn expressed confidence in improving the organic growth of the current portfolio, citing Verathon as a past success story, and noted that new capital is being tilted towards higher-growth businesses. He firmly stated there would be no pause in M&A, highlighting over $4 billion in capacity and a very active and attractive M&A market with significant seller motivation.

Joseph Ritchie of Goldman Sachs inquired about the initiative to redesign forecasting and demand planning, asking about expected improvements and why the initial focus is on only two businesses. He also asked if the potential opportunity from this effort would be quantified by the February investor day.

Answer

CEO William Brown described the initiative as a pilot that will eventually expand across the company. He explained that poor forecast accuracy is a root cause of issues like low on-time delivery and high inventory. The pilot in two large divisions uses new analytical tools to improve the demand signal. Brown confirmed that by the February investor day, they will have results from the pilot and be able to connect the dots between forecast accuracy and its impact on delivery, cost, and inventory levels.