Julian Mitchell

Julian Mitchell inquired about the development of remaining performance obligations or backlog growth and sought clarification on how the wide range for Q1 organic sales growth is expected to play out across the two segments.

Answer

Executive Vice President and CFO David Jackola reported that the backlog exiting 2025 and entering 2026 is healthy, up across both segments, and at good margins. For Q1, the Safety Services segment is expected to see mid-to-upper single-digit growth in service and low-to-mid growth in projects. The Specialty Services segment is anticipated to achieve double-digit revenue growth in Q1 2026, benefiting from a comparison against a weaker Q1 2025.

Julian Mitchell inquired about the development of remaining performance obligations or backlog growth and sought clarification on the wide range of Q1 organic sales growth, specifically how the two segments are expected to grow.

Answer

Executive Vice President and CFO David Jackola confirmed that the backlog exiting 2025 into 2026 is healthy, up across both segments and various end markets, and at good margins. For Q1, he expects the Safety Services segment to see mid-to-upper single-digit growth in service and low-to-mid single-digit growth in projects, while the Specialty Services segment is projected for double-digit revenue growth due to a favorable comparison against a down Q1 2025.

Julian Mitchell from Barclays asked about the expected M&A contribution to revenue for the upcoming year, based on announced and closed deals, and the profitability profile of these newer acquisitions. He also inquired if the mid-to-high teens incremental EBITDA margin delivered year-to-date represents a sustainable run rate for the future, considering the current end market mix.

Answer

EVP and CFO David Jackola provided a guideline that approximately $1 of purchase price typically generates about $1 (or slightly less) in revenue over a 12-month period, and confirmed that new acquisitions are expected to be accretive to the company's average margin. Regarding operating leverage, Mr. Jackola advised modeling a 'somewhat higher incremental' EBITDA margin for future periods.

Julian Mitchell asked about the expected M&A contribution to revenue for 2026, based on announced and closed deals, and the profitability profile of these newer acquisitions. He also inquired about the incremental EBITDA margin as a good run rate for the year ahead.

Answer

David Jackola, EVP and CFO, indicated that approximately $1 of purchase price translates to about $1 (or slightly less) in revenue over a 12-month period for acquisitions, and these deals are expected to be accretive to the fleet average from a margin perspective. Regarding incremental EBITDA margin, Mr. Jackola advised modeling a 'somewhat higher incremental' going into 2026 and beyond.

Julian Mitchell of Barclays Investment Bank inquired about the organic growth outlook for the Safety business, progress in the Elevator market, and the financial profile of recent acquisitions.

Answer

EVP & CFO David Jackola confirmed a consistent mid-single-digit organic growth outlook for Safety Services. President and CEO Russ Becker noted the elevator business is performing as expected and recent acquisitions are accretive, at or above the company's average margin profile. David Jackola added that M&A is expected to contribute over $200 million in revenue for the full year.

Julian Mitchell asked for clarification on Ingersoll Rand's expected seasonality for organic revenue growth and EPS growth throughout 2026, particularly for the first quarter.

Answer

CFO Vik Kini explained that Q1 organic revenue is expected to be flat to slightly down, followed by low single-digit growth for Q2-Q4, aligning with normal seasonality. He also stated that EPS growth is projected to be relatively even on a quarterly basis and across the first and second halves of the year. Kini further elaborated on EBITDA margins, anticipating first-half pressure from tariffs and commercial investments, with expansion in the second half due to pricing and productivity.

Julian Mitchell asked for clarification on the seasonality of the 2026 guidance, specifically if the 1% organic revenue growth is expected to be even throughout the year, and if Q1 EPS growth is projected to be around the mid-single-digit range mentioned for both halves. He also inquired about the full-year EBITDA margins being flattish, with a potential small decline in H1 due to price-cost, and the scale of price-cost headwinds.

Answer

CFO Vik Kini stated that Q1 organic revenue is expected to be roughly flat to slightly down, with comparable low single-digit organic growth for Q2, Q3, and Q4, reflecting normal seasonality without a meaningful market recovery. He confirmed that EPS growth is expected to be relatively even on a quarterly basis and across the first and second halves. Regarding EBITDA margins, Vik Kini noted expected headwinds in H1 2026 due to annualizing tariffs, with price-cost expected to be neutral in H1 and positive for the full year, leading to margin expansion in H2 from pricing actions, productivity, and internal controllable actions.

Julian Mitchell asked for clarification on the sales and EBITDA phasing in the second half and whether organic sales growth would be similar for both segments.

Answer

CFO Vikram Kini confirmed that the second-half phasing is consistent with prior years, with Q4 expected to be the high watermark for margins. He guided for second-half organic volume to be down low-single digits, an improvement from the first half, with pricing around 3.5-4%. He anticipates slightly positive organic sales growth in Q3, improving further in Q4, with a similar trend across both segments.

Julian Mitchell of Barclays inquired about the expected quarterly progression of organic sales for 2025 and the implied exit rate. He also asked about the effect of tariffs on EBITDA margins and the margin trend for the remainder of the year.

Answer

CFO Vik Kini detailed that organic growth is expected to be down 3-4% in the first half and up 3-4% in the second half as comps ease. He stated that full-year EBITDA margins are guided to be relatively flat, as one-for-one pricing actions to offset the $150 million tariff cost will be dilutive to the margin rate but neutral to margin dollars.

Julian Mitchell asked about the drivers for the Q4 order miss, the outlook for Q1 orders, the EBITDA margin cadence for the PST segment in 2025, and overall satisfaction with the ILC Dover acquisition.

Answer

CEO Vicente Reynal attributed the Q4 order softness primarily to the timing of large projects in China, noting that excluding China, organic orders were up. He expressed satisfaction with ILC Dover's performance, especially its double-digit growth in Life Sciences. CFO Vik Kini added that PST margins should return to the 30% range in 2025, with sequential improvement expected.

Julian Mitchell asked for more detail on current demand trends, specifically if project pushouts have broadened beyond China. He also inquired about the margin outlook for Q4 and whether to expect a normalization of incrementals in 2025 after an exceptional year.

Answer

Chairman and CEO Vicente Reynal stated that he does not see a broad negative inflection in other regions and that the guidance change is mainly due to shipment timing. CFO Vik Kini handled the margin question, expecting both segments to remain around a 30% EBITDA margin in Q4. He does not foresee a "give back" of margins in 2025 but rather a more normal margin expansion with continued investment.

Julian Mitchell sought clarification on the phasing of 2026 EBITDA, particularly the impact of ERP and footprint headwinds in Q1 and Q2, and whether organic growth was expected in Q2. He also inquired about the dollar revenue base, product performance, backlog, and growth expectations for the data center business, which grew 4x in 2025.

Answer

CFO Brooks Mallard explained that the first half of 2026 would see about 100 basis points of net headwind from ERP and footprint optimization, with Q1 being more impacted. He anticipated organic core growth each quarter after Q1. CEO Ivo Jurek projected data center business to grow multiples of 2025 in 2026, driven by liquid cooling adoption across hoses, couplings, fittings, and water pumps, with Q4 orders growing significantly.

Julian Mitchell inquired about the phasing of the year, specifically the first quarter's contribution to annual EBITDA, expectations for organic growth in Q2, and the anticipated share of EBITDA for the first half of the year, considering ERP and footprint headwinds.

Answer

CFO Brooks Mallard explained a net headwind of approximately 100 basis points in the first half due to ERP implementation and footprint optimization. He anticipates organic core growth each quarter after Q1, with the first half representing a high 40s share of the year's EBITDA. CEO Ivo Jurek added that the data center business is expected to grow multiples of 2025 in 2026, driven by liquid cooling adoption and strong penetration across hoses, couplings, fittings, and water pumps, with Q4 orders growing nearly 700% year-over-year.

Julian Mitchell asked for clarification on Gates Industrial's Q4 2025 outlook, specifically regarding the revenue guide's embedded seasonality and any firming of the industrial environment, as well as the expected EBITDA rate for Q4 and any contributing factors like enterprise initiatives or mix. He also inquired about the updated cash conversion guidance, the impact of higher cash restructuring, and the anticipated improvement in conversion for the next year.

Answer

CEO Ivo Jurek stated that the Q4 revenue forecast applies normalized seasonality to the Q3 exit rate, without baking in further recoveries or customer pre-positioning for 2026, but noted an optimistic outlook for 2026 in certain segments. CFO Brooks Mallard explained that Q4 EBITDA benefits from material cost initiatives, offset by tariff dilution and normal seasonality, with no significant structural changes. Jurek emphasized the company's strong execution, delivering 18% EPS growth and record margins in a muted environment. Mallard clarified that the lowered 2025 free cash flow conversion outlook is due to increased restructuring cash outlays and higher CapEx, and indicated that while 2026 might see some small headwinds from restructuring cash, it would likely be less than 2025.

Julian Mitchell sought clarification on Gates Industrial's Q4 2025 outlook, specifically regarding revenue seasonality and the expected EBITDA rate, inquiring if any enterprise initiatives or mix changes were contributing to a flat-to-up sequential performance. He also asked about the reduced cash conversion guidance due to higher cash restructuring and the expected improvement in conversion for 2026.

Answer

CEO Ivo Jurek confirmed that the Q4 2025 revenue guidance reflects normalized seasonality based on Q3 exit rates, without baking in further recoveries, and noted that customers are not prepositioning for 2026. CFO Brooks Mallard stated that Q4 EBITDA benefits from ongoing material cost initiatives, partially offset by tariff dilution and normal seasonality, with no structural differences expected. He also mentioned that the reduced 2025 free cash flow conversion guidance is due to increased restructuring cash outlays and higher CapEx, and that 2026 conversion will be updated with formal guidance, though some small headwinds related to restructuring cash out are anticipated.

Julian Mitchell from Barclays Investment Bank sought confirmation on the high-30s operating leverage guided for the second half and its sustainability into 2026. He also asked about recent demand cadence and any changes to the full-year outlook for key end markets.

Answer

CFO Brooks Mallard confirmed that a high-30s to 40% operating leverage is the right expectation for H2 and a good baseline for 2026, driven by enterprise initiatives and favorable mix. CEO Ivo Jurek noted that while most end markets are performing as expected, the On-Highway outlook has worsened. He emphasized the company's focus on self-help growth drivers like personal mobility and the rapidly expanding data center liquid cooling market.

Julian Mitchell from Barclays Investment Bank asked if the high-30s operating leverage guided for the second half is a reasonable expectation for 2026. He also inquired about recent demand cadence and any changes to the full-year outlook for key end markets.

Answer

CFO Brooks Mallard confirmed that a high-30s to 40% operating leverage is a good placeholder for 2026, supported by core growth and enterprise initiatives. CEO Ivo Jurek noted that the end-market outlook is largely unchanged, with On-Highway being incrementally weaker. He emphasized that growth is being driven by self-help initiatives like market penetration in personal mobility and the 'feeding frenzy' of opportunities in the data center liquid cooling market.

Julian Mitchell of Barclays Investment Bank asked for confirmation on the implied high-30s operating leverage for the second half and its suitability as a placeholder for 2026. He also inquired about recent demand cadence and the outlook for key end markets.

Answer

CFO Brooks Mallard confirmed that a high-30s to 40% leverage is accurate for the back half and a good assumption for 2026. CEO Ivo Jurek stated that end market performance is largely as expected, with On-Highway being weaker, but emphasized that the company is focused on self-help initiatives like personal mobility and data center liquid cooling to drive above-market growth.

Julian Mitchell from Barclays Investment Bank asked for confirmation of the high-30s operating leverage implied in the second-half guidance and its viability for 2026. He also inquired about recent demand trends and any changes to the end-market outlook.

Answer

CFO Brooks Mallard confirmed that a high-30s to 40% operating leverage is accurate for H2 2025 and a good placeholder for 2026. CEO Ivo Jurek added that while most end markets are performing as expected, the On-Highway market has weakened. He highlighted that the company's growth is driven by self-help initiatives like personal mobility penetration and the rapidly expanding data center liquid cooling market.

Julian Mitchell from Barclays Investment Bank asked for confirmation of the high-30s operating leverage implied in the second-half guidance and its viability for 2026, and also inquired about recent demand trends and any changes to the end-market outlook.

Answer

CFO Brooks Mallard confirmed that a high-30s to 40% operating leverage is accurate for H2 and a good placeholder for 2026. CEO Ivo Jurek added that the end-market outlook is largely unchanged, with the exception of a weaker On-Highway market. He highlighted that growth is being driven by self-help initiatives like personal mobility penetration and the rapidly expanding data center liquid cooling market.

Julian Mitchell asked for an update on end market demand trends compared to previous expectations, with a particular focus on the strong performance in personal mobility and the outlook for the automotive sector. He also inquired about how the company's automotive OE products are classified under the current tariff regime.

Answer

CEO Ivo Jurek provided a detailed end market breakdown, noting that while Q1 was slightly better than expected, the general demand environment is playing out as anticipated. He stated that the outlook for auto builds has weakened to down high single-digits, but this is offset by a robust auto replacement market driven by an aging car fleet and market share gains. Personal mobility's strong growth was a recovery from seven negative quarters, not a pre-buy. Regarding auto OE tariffs, Jurek explained it's not a major concern as OE customers often take possession of goods in Mexico, and most components are USMCA compliant, resulting in de minimis tariff exposure for that segment.

Julian Mitchell of Barclays asked for clarification on the full-year 2025 EBITDA margin guidance, noting the seemingly modest improvement after Q1 despite expectations for improving volumes. He also inquired about the phasing of efficiency savings and the company's exposure to potential tariffs.

Answer

CFO L. Mallard explained that a significant foreign exchange headwind, which is more pronounced in the first half of the year, is masking underlying margin improvement. He noted that material savings are linear throughout the year, while footprint optimization savings will be weighted toward the second half. CEO Ivo Jurek added that tariff exposure from China and Canada is minimal and that the company has the flexibility to manage potential Mexico-related tariffs through pricing and flexing its U.S. production assets.

Julian Mitchell from Barclays questioned the elevated inventory-to-sales ratio, asking if this is a new sustainable level. He also inquired about the path to achieving the full-year free cash flow conversion target and future priorities for capital allocation.

Answer

CEO Ivo Jurek stated the higher inventory is a strategic decision to both service a new customer win and to be better positioned to capture share during the next market upcycle. CFO L. Mallard noted that Q4 is seasonally strong for cash flow and they are on track to hit the 90% conversion target. For capital allocation, he mentioned debt paydown and buybacks remain priorities, though M&A becomes more attractive as the stock rerates. Jurek added that with the stock being 'cheap,' buybacks are currently a primary focus.

Julian Mitchell asked for more detail on the Q1 2026 organic growth across segments, considering the strong Q4 2025 and potential pull-forwards or comp impacts. He also inquired about the drivers of operating margin progression, specifically the split between volume leverage and the $15 million savings, and any changes in price/cost dynamics.

Answer

Anshooman Aga (CFO, Vontier) projected EFS to grow low single digits in Q1 2026, MobilityTech to be flattish due to strong prior-year comps, and Repair Solutions to be relatively flat, continuing its stabilization. He explained that Q1 2025 had the highest margins, making for a tough Q1 2026 comp. Margin improvement will come from volume leverage and the $15 million in-year savings, which ramp in Q2 and fully in the second half. Price/cost is expected to be steady, with an average price increase of around 1.3% for 2026, similar to 2025's 1%.

Julian Mitchell asked for a breakdown of the 1% organic growth expected for Q1 2026 across segments and whether there were any pull-forwards from Q4 2025. He also inquired about the drivers of operating margin expansion, from flat year-on-year in Q1 to 80 basis points for the full year, specifically asking about volume leverage, the phasing of $15 million in savings, and price-cost dynamics.

Answer

CFO Anshooman Aga outlined Q1 segment expectations: EFS in low single-digit growth, Mobility Technologies flattish due to strong prior-year comparisons, and Repair Solutions relatively flat as its turnaround continues. He noted that Q1 2025 had the highest margins for that year, and while volume leverage will contribute to 2026 margin expansion, the $15 million in-year savings will primarily ramp in Q2 and fully in the second half. Price-cost is expected to be steady through the year, with an average price increase of about 1.3% for 2026.

Julian Mitchell from Barclays Investment Bank inquired about the revenue outlook for the second half of the year, specifically for the Repair Solutions segment, and whether the Environmental and Fueling Solutions (EFS) segment would be flattish in Q4 due to a tough comparison. He also asked about the potential for margin improvement in Repair Solutions.

Answer

CFO Anshooman Aga stated that the guide for Repair Solutions is down mid-to-high single digits for the second half, noting early signs of stabilization but no clear inflection point yet. He projected mid-single-digit growth for EFS for the full year. For Repair Solutions margins, Aga explained that improvement would depend on a better sales mix with higher-priced items and a reduction in bad debt and delinquencies over time. CEO Mark Morelli added that while the long-term backdrop for repair is positive, current consumer buying behavior remains choppy.

Julian Mitchell requested more detail on the company's full-year seasonality, particularly the impact of the Matco Expo shifting from Q1 to Q2. He also asked about the underlying assumptions for price versus cost in the 2025 margin expansion guidance.

Answer

CFO Anshooman Aga provided a detailed quarterly cadence, explaining the Matco Expo shift creates a Q1 headwind but strengthens Q2, with H1 revenue expected to be just over 48% of the full year. He stated that Q1 would be the low point for revenue. For pricing, Aga confirmed Vontier expects to remain price-cost positive in 2025, targeting about a 1% price increase for the year, consistent with its track record since the spin-off.

Julian Mitchell asked about the preliminary outlook for 2025, specifically regarding organic sales growth, operating leverage expectations, and any notable below-the-line items. He also requested color on sequential margin progression by segment for Q4.

Answer

CEO Mark Morelli described a positive setup for 2025, citing market stabilization and benefits from innovation and cost initiatives. CFO Anshooman Aga confirmed the 30-35% incremental margin target should apply in 2025 and noted a $30 million revenue shift from Q1 to Q2 2025 due to the Matco Expo timing. For Q4 margins, Aga expects EFS to be flat to slightly down year-over-year, with Repair Solutions sequentially flat to slightly up.

Julian Mitchell inquired about the Mobility Technologies segment, questioning why margins declined on strong sales growth in Q1 and when they might return to growth. He also asked about the full-year sales outlook for the Repair Solutions segment and which segment faces the largest net headwind from tariffs.

Answer

SVP and CFO Anshooman Aga explained the Mobility Tech Q1 margin dip was due to a one-time settlement and that the company still expects approximately 100 basis points of margin expansion for the full year, starting in Q2. Aga also revised the Repair Solutions outlook to a mid-single-digit decline for the year, noting this weakness is offset by strength elsewhere. President and CEO Mark Morelli added that while the Repair segment has the most tariff exposure, the impact is manageable due to significant, proactive supply chain diversification away from China.

Julian Mitchell questioned the large working capital cash inflow in 2025, particularly the deferred revenue inflows in Q4, asking if specific large orders disproportionately contributed to this. He also asked if deferred revenue balances were swelling due to very large orders or were proportionate to the aggregate volume.

Answer

CFO Craig Chamberlin clarified that the working capital outcome for 2026 is expected to be positive, just less positive year-over-year. He explained that deferred revenue depends on the type and mix of orders, with efforts to secure down payments and progress payments. He noted that while the mix could influence Q4's increase, it wasn't marginally different from historical trends.

Julian Mitchell asked about the cash composition of the backlog, specifically if the large Q4 orders disproportionately generated deferred revenue inflows, and questioned if working capital is likely to be a source of cash in 2026 due to deferred revenue, despite guidance for a small use of cash.

Answer

CFO Craig Chamberlin clarified that the guidance for working capital in 2026 implies a positive outcome, just less positive year-over-year. He noted that deferred revenue balances depend on the type and mix of orders, and while Vertiv pushes for down and progress payments, the Q4 mix wasn't marginally different historically. CEO Giordano Albertazzi added that the mix of orders influences deferred revenue.

Julian Mitchell asked for color on nVent's $2.3 billion backlog recognition profile, including recent book-to-bill trends and the orders-to-sales cadence, and how much of this backlog is expected to be recognized within the next twelve months. He also questioned the operating margin guidance, noting an implied 70 basis point decline year-over-year in Q1 and a modest 20 basis point increase for the full year 2026, specifically asking if organic operating margins were not seeing the expected lift due to price-cost dynamics or pricing pressures from increased capacity.

Answer

Beth Wozniak, Chair and Chief Executive Officer, stated that the portfolio transformation has led to more backlog, particularly in data centers and power utilities, with most expected to be recognized through 2026. Gary Corona, Chief Financial Officer, confirmed healthy backlog and orders, noting margin expansion is expected in 2026 with better incrementals than 2025. He explained that Q1 margins would be flattish sequentially but up year-over-year, factoring in accelerated share-based compensation, and that first-half margins would be impacted by carryover tariffs, the EPG acquisition, and growth investments.

Julian Mitchell from Barclays asked for clarification on nVent's $2.3 billion backlog recognition profile, seeking to understand the book-to-bill trend and how much of the backlog is expected to be recognized within the next twelve months. He also questioned the operating margin guidance for 2026, noting an implied Q1 decline and a modest full-year increase, and asked if organic operating margins were not getting the expected lift due to price-cost dynamics or increased capacity.

Answer

CEO Beth Wozniak explained that the portfolio transformation has resulted in a larger backlog, particularly in data centers and power utilities, with most expected to be recognized in 2026. CFO Gary Corona added that the backlog is three times larger than last year and healthy across all segments. Regarding margins, Mr. Corona stated that margin expansion and better incrementals are expected in 2026, with price and productivity offsetting inflation. He noted Q1 margins would be flattish sequentially due to accelerated share-based compensation, with improvements expected as first-half headwinds abate.

Julian Mitchell from Barclays asked for a quantification of the backlog at the end of Q2 and whether the Systems Protection segment is expected to outgrow Electrical Connections in the second half. He also inquired about the drivers of operating margin incrementals for the year and the phasing of growth investments.

Answer

CEO Beth Wozniak confirmed the backlog has grown since the start of the year, boosted by new acquisitions and data solutions orders, and that Systems Protection will grow faster than Electrical Connections. CFO Gary Corona added that the EC business will still grow healthily. He noted that margins are expected to improve in the second half as price and productivity offset tariff impacts, and that investments will continue to ramp to support accelerating growth.

Julian Mitchell questioned the confidence in the second-half organic sales acceleration and asked for clarification on the operating margin outlook for Q2 and the rest of the year, including the effect of tariffs.

Answer

CEO Beth Wozniak attributed the confidence in H2 growth to strong orders and backlog in Data Solutions and Power Utilities, plus the Trachte acquisition turning organic. CFO Gary Corona added that H2 has easier year-over-year comps. He also explained that base business margins will be down in H1 due to tariff timing and investments but are expected to be positive in H2 as pricing and productivity actions take hold. The Avail EPG acquisition will be dilutive to reported margins for the year.

Julian Mitchell asked for clarification on the 2025 operating margin guidance, particularly the expected Q1 decline and full-year trajectory, and inquired about the revenue outlook for non-infrastructure segments and the drivers of their anticipated improvement.

Answer

CFO Sara Zawoyski attributed the modest Q1 margin decline to higher corporate costs post-divestiture, growth investments, and the timing of price/cost benefits. For the full year, margins are expected to be flat to up modestly, impacted by the Trachte acquisition's mix but supported by volume drop-through. CEO Beth Wozniak added that positive Q4 orders were seen in non-infrastructure verticals, and improving project funnels support the forecast for strengthening performance beyond just easier comps.

Julian Mitchell asked about the Q4 margin outlook, the normalization of investment spending into 2025, and the timeline for reducing $15 million in stranded costs from the Thermal Management divestiture. He also inquired about the 2025 organic sales growth outlook.

Answer

CFO Sara Zawoyski attributed the sequential Q4 margin decline to normal seasonality in the EFS segment. She confirmed investments will continue into 2025, but ramp-up costs should diminish. Work is underway to reduce the $15 million in indirect costs throughout 2025. CEO Beth Wozniak added that while macro uncertainty remains, the outlook for industrial and commercial/resi verticals is more positive for 2025, supported by the company's portfolio repositioning towards infrastructure.

Julian Mitchell asked about the margin outlook and improvement trajectory for the AMC and IPS segments, particularly in light of Q4 and Q1 year-on-year declines, and sought assumptions on price-cost dynamics given commodity price movements. He also questioned the delta in the free cash flow guidance, which decreased from a previously alluded $900 million to $650 million, despite similar revenue and EBITDA outlooks.

Answer

CFO Rob Rehard explained that AMC margins faced pressure in Q4 due to product and channel mix (e.g., slowdown in distributor sales, stronger project growth with lower margin profiles) and rare earth magnet availability, expecting a 40 basis point improvement for the year. He reiterated the expectation of being price-cost dollar neutral by mid-year and margin neutral by year-end. For free cash flow, Mr. Rehard attributed the reduction to a $50-$100 million investment in the data center business and a more measured approach to working capital benefits due to current supply chain uncertainties.

Julian Mitchell inquired about the margin improvement trajectory for the AMC and IPS segments throughout the year, including assumptions on price-cost dynamics, and sought clarification on the delta in the 2026 free cash flow guidance compared to earlier expectations.

Answer

CFO Rob Rehard explained that AMC margins faced pressure in Q4 due to product and channel mix, and rare earth magnet availability, but are expected to improve by about 40 basis points for the year. He noted price-cost would be dollar neutral by mid-year and margin neutral by year-end. Mr. Rehard attributed the free cash flow guidance reduction from $900 million to $650 million primarily to a $50-$100 million investment in the data center business and a more measured approach to working capital assumptions due to supply chain uncertainties. CEO Lewis Pinkham also participated in the discussion.

Julian Mitchell of Barclays Investment Bank sought details on the AMC division, asking about the production status of the plant affected by rare earth issues, visibility into medical end-market inventories, and demand trends in the automation business. He also questioned the broader lag in converting strong orders into revenue.

Answer

CEO Louis Pinkham confirmed the affected plant is back up but not yet at full volume, with a full catch-up on shipments expected by Q4. He described medical inventory visibility as decent, expecting a balance by year-end. Pinkham highlighted growing momentum in automation, with backlog up 12% year-over-year. Regarding the order-to-revenue lag, he explained that Regal Rexnord is becoming more of a longer-cycle business, with growth in IPS and AMC tied to larger projects that take more time to convert to sales.

Julian Mitchell asked about the key drivers for the anticipated EBITDA margin expansion in the second half of the year and how tariffs might affect that progression. He also questioned the level of conservatism in the second-half revenue guidance for the Power Efficiency Solutions (PES) segment, given its strong Q1 performance.

Answer

CFO Robert Rehard explained that the second-half margin step-up is primarily driven by the AMC segment, citing favorable mix from the recovery in higher-margin discrete automation, along with volume growth and synergy benefits. Regarding tariffs, he noted costs will be capitalized, creating a lag, but the company remains confident in achieving EBITDA neutrality for the year. CEO Louis Pinkham addressed the PES outlook, stating that despite a strong Q1, the company remains cautious due to macroeconomic uncertainties like consumer confidence and housing weakness, leading to a more measured forecast for the second half.

Julian Mitchell from Barclays asked for more detail on the sales and earnings seasonality for the PES segment in 2025 and inquired about the expected first-half versus second-half split for consolidated earnings.

Answer

CFO Rob Rehard explained that PES sales in Q1 are impacted by the A2L transition and non-U.S. weakness, but should improve sequentially through the year. He noted that consolidated earnings will also improve sequentially, with a stronger second half driven by lower interest expense, accruing synergies, and significant margin improvement from a better sales mix in the AMC segment.

Julian Mitchell of Barclays asked about the composition of the expected 2025 EBITDA margin expansion and sought clarification on the reported residential HVAC sales growth in Q3.

Answer

CFO Rob Rehard confirmed an expected 200 basis point margin improvement from year-end 2024 to year-end 2025, driven by synergies and volume. CEO Louis Pinkham clarified that the 10% residential HVAC sales growth was a sequential increase from Q2, not year-over-year, and noted that this year's pre-buy could soften demand in 2025.

Julian Mitchell asked about the segment cost growth, its main focus points, and the amount of reinvestment contemplated, specifically regarding the step-up in stand-up costs and segment costs.

Answer

Tami Newcombe, President and CEO, reiterated confidence in the Investor Day targets (3-5% revenue growth, low to mid-20s adjusted EBITDA) and highlighted capital allocation for organic growth in innovation, manufacturing, and commercial areas. Neill Reynolds, CFO, clarified that the investment is primarily directed towards Sensors and Safety Systems, targeting higher growth rates in utilities and defense, with 50-100 basis points of reinvestment incorporated into the 2026 margin guidance.

Julian Mitchell asked about the segment cost growth, how it's expected to play out, and the main focus points for these costs. He also inquired about the amount of reinvestment contemplated, specifically regarding the step-up in stand-up costs and segment costs, and the rationale behind the timing of this information.

Answer

Tami Newcombe (President and CEO) reaffirmed confidence in Investor Day targets (3-5% revenue growth, low to mid-20s adjusted EBITDA) and highlighted organic growth investments in innovation, manufacturing, and commercial areas. She noted Sensors and Safety Systems would be at the higher end of growth and EBITDA margins, while Test and Measurement would be at the lower end. Neil Reynolds (CFO) clarified that the investment is primarily directed towards Sensors and Safety Systems, targeting higher growth rates in utilities and defense, with 50-100 basis points of reinvestment incorporated into the 2026 guidance.

Julian Mitchell of Barclays asked for clarity on the Test and Measurement segment's top-line outlook for the second half of 2025 and the path to achieving its medium-term EBITDA margin targets, including the impact of the new cost savings program.

Answer

President and CEO Tami Newcombe confirmed expectations for gradual sequential improvement in Test and Measurement, consistent with typical 48/52 first-half/second-half seasonality. CFO Neill Reynolds added that margin improvement will be driven by volume, tariff mitigation efforts, and the new cost savings program, but was cautious about providing a specific Q4 margin forecast. Tami Newcombe also reiterated confidence in the segment's long-term adjusted EBITDA margin target of mid-teens to low-20s percent.

Julian Mitchell from Barclays asked for details on Q2 margin drivers across segments, including mix impacts and price/cost dynamics, particularly concerning memory chips. He also inquired about the Logix volume cycle recovery and the persistence of strong growth in hybrid industries.

Answer

CFO Christian Rothe outlined expectations for slight sequential sales improvement and modest margin expansion for Intelligent Devices and Software & Control in Q2, noting that Lifecycle Services' strong Q1 performance is targeted to be maintained. He mentioned merit increases as a Q2 factor and confirmed memory chip inflation is a single-digit million dollar impact. Chairman and CEO Blake Moret added that Logix continues strong growth driven by new products and data center adoption, with full-year unit volumes expected to return to pre-pandemic levels. He also highlighted double-digit growth in food and beverage and strong interest in autonomous mobile robots in hybrid industries.

Julian Mitchell inquired about the margin drivers across segments for the second quarter, specifically asking about mix impacts and the effect of price/cost dynamics, including memory chips. He also sought clarification on the Logix volume cycle recovery and the persistence of exceptional growth in hybrid industries.

Answer

Christian Rothe (CFO, Rockwell Automation) explained that Q2 would see slight sequential sales improvement across segments and modest margin expansion for Intelligent Devices and Software & Control, with Lifecycle Services aiming to maintain its Q1 margin. He noted that merit increases would be a factor in Q2 and that inflationary costs, including memory chips, are being managed with single-digit million dollar impacts. Blake Moret (Chairman and CEO, Rockwell Automation) added that Logix continues to benefit from strong demand and new product introductions, expecting full-year units to return to pre-pandemic levels. He also confirmed continued benefits from hybrid industries like food and beverage, life sciences, and home and personal care, driven by differentiated production logistics offerings.

Julian Mitchell asked for clarification on the top-line guidance for fiscal 2026, specifically how the mid-single-digit growth at the midpoint, starting with high single-digit year-on-year in Q1, accounts for seasonality and tough comps in the second half. He also questioned the expected year-on-year pricing impact through fiscal 2026 and the rationale behind the consistent 110 basis points of margin expansion despite differing volume growth assumptions between fiscal 2025 and 2026.

Answer

Blake Moret, Chairman and CEO of Rockwell Automation, outlined expectations for mid-single-digit growth in discrete and hybrid industries, and low single-digit growth for process. Christian Rothe, SVP and CFO, explained that the guide implies sequential revenue improvement after Q1, with year-over-year growth rates declining later in the year due to difficult comps. He specified that fiscal 2026 pricing includes one point of underlying price and one point of tariff-based price, emphasizing a balanced approach. Rothe also noted that the margin expansion is driven by continued progress on cost reduction and margin expansion, with no significant hike in investment spend.

Julian Mitchell questioned the top-line guidance for fiscal 2026, specifically regarding its construction around normal seasonality versus tough comps, and the expected year-on-year pricing impact throughout the year.

Answer

Blake Moret, Chairman and CEO, outlined expectations for mid-single-digit growth in discrete and hybrid industries, and low single-digit growth for process, with specific mentions of semiconductor (flattish) and warehouse e-commerce (up around 10%). Christian Rothe, SVP and CFO, clarified that the guide implies high single-digit year-over-year growth in Q1, with sequential revenue improvement throughout the year, but declining year-over-year growth rates due to tougher comps. Rothe also stated that fiscal 2026 pricing includes one point of underlying price and one point of tariff-based price, aiming for EPS neutrality on tariffs.

Julian Mitchell of Barclays sought to reconcile commentary on sales pull-forwards with project delays and a seemingly weaker end-market outlook. He also asked about the puts and takes for operating margins over the next year and the viability of the 35% incremental margin target.

Answer

CEO Blake Moret clarified that potential pull-forwards were on the product side, while delays affected the project business, resulting in a balanced demand picture. CFO Christian Rothe reaffirmed the 35% incremental margin target, explaining that current compensation levels are now normalized and the new investment plan's incremental spend is mostly CapEx, which is managed to not impede progress toward margin goals.

Julian Mitchell from Barclays Investment Bank asked for help reconciling the 2-3% sales pull-forward with ongoing project delays and a seemingly more negative market outlook slide, and inquired about the operating margin puts and takes for the next year.

Answer

CEO Blake Moret clarified that potential pull-forwards were concentrated on the product side, while project delays affected longer-cycle businesses. CFO Christian Roethe addressed margins, reaffirming the 35% incremental margin target and explaining that total compensation is now at a normalized level, which should not create a major headwind or tailwind next year. Moret added that the new investment spend is controllable and mostly CapEx, ensuring it won't impede progress toward margin targets.

Julian Mitchell of Barclays sought confirmation on the Q3 financial outlook, including sales, margins, and EPS, and asked about the recovery pace in the PLC market. He also questioned the expected operating leverage as revenue recovers.

Answer

CFO Christian Rothe provided a ballpark Q3 EPS estimate of around $2.60, which would be slightly down year-over-year, but did not confirm a specific margin number. CEO Blake Moret stated that the Logix (PLC) business is performing well with more room to run, as shipment units have not yet returned to pre-COVID levels. On operating leverage, Rothe reiterated the company's 35% incremental margin target over the cycle, while Moret emphasized a prudent approach to cost management as growth returns.

Julian Mitchell of Barclays PLC requested historical context for the Q1 book-to-bill ratio and sought to understand the performance divergence between the Intelligent Devices and Software & Control segments, particularly regarding destocking and leverage.

Answer

CEO Blake Moret noted there isn't a reliable historical correlation for Q1 orders but confirmed Q1 performance was better than expected. He explained that Intelligent Devices' performance was impacted by its broader SKU set and higher exposure to the challenged automotive market, while Logix (in Software & Control) benefited from machine builder inventory normalization. CFO Christian Rothe added that Intelligent Devices also has a seasonally low first quarter for its configure-to-order business.

Julian Mitchell questioned the strategy to return to mid-to-high single-digit growth without significant reinvestment and asked for clarification on the Q1 margin guidance and implied quarterly ramp.

Answer

CEO Blake Moret stated that key investments in R&D and customer-facing resources were preserved, enabling a return to target growth without a sharp spending increase. CFO Christian Rothe confirmed the Q1 'low-to-mid-teens' margin outlook was at the segment level and acknowledged margins must ramp sequentially to hit the full-year target.

Julian Mitchell sought clarification on Carrier's full-year guidance for the CSA residential business, including market pricing trends, industry discipline on pricing, and the expected volume share gain or outperformance relative to the projected double-digit market decline. He also inquired about the CSE RLC market outlook and the interplay between heat pump and boiler sales.

Answer

David Gitlin, Chairman and CEO, Carrier Global Corporation, explained that the forecast assumes flat industry conditions for 2026, with no improvement in interest rates, consumer confidence, or home sales. He projected H1 2026 industry units to be down 20-25% year-over-year, with H2 units flat to H2 2025, leading to a full-year industry decline of 10-15%. Carrier's sales are expected to be down high single digits, benefiting from the absence of H2 2025 destocking, with a low single-digit price benefit. For CSE RLC, he noted the European industry is expected to be down mid- to high-single digits, but Carrier guided to flat due to double-digit heat pump growth, low- to mid-single-digit boiler declines, double-digit aftermarket growth, and growth initiatives. He highlighted continued challenges in Germany due to heating law uncertainty.

Julian Mitchell inquired about the full-year guidance for Carrier's CSA residential business, focusing on market pricing, industry discipline, and expected volume outperformance relative to the projected double-digit market decline. He also asked about the CSE RLC market dynamics, specifically heat pump growth versus boiler headwinds.

Answer

David Gitlin (Chairman and CEO) explained that the forecast assumes macro conditions remain consistent with late 2025, projecting industry units down 10-15% for the full year (20-25% down in H1, flat in H2). Carrier's sales are expected down high single digits, benefiting from the absence of H2 2025 destocking, with low single-digit price realization. For CSE, the European industry is predicted to be down mid- to high-single digits, but Carrier guided to flat sales due to mix-up (double-digit heat pump growth, low-to-mid-single-digit boiler decline), aftermarket growth, and revenue synergies, despite weakness in Germany.

Julian Mitchell sought deeper understanding of Carrier's initial thoughts on 2026 EPS, particularly the outlook for CSA residential in terms of sell-out and movement dynamics. He also asked about demand in non-data center verticals within CSA commercial HVAC, including light commercial and applied businesses.

Answer

CFO Patrick Goris clarified that a $0.20 adjusted EPS benefit is expected from restructuring, tax, and share repurchases, independent of organic growth. For internal planning, Carrier assumes low single-digit organic growth, with CSA residential volume potentially flat to slightly up and Europe RLC flat. CEO David Gitlin reported that non-data center commercial HVAC sales were up in the low teens, with the applied business up 60%. He noted a mixed bag across verticals, with strength in mega projects and healthcare, surprising growth in commercial real estate, and weakness in higher education and K-12. Mr. Goris added that non-data center orders in CSA commercial were up year-over-year in Q3.

Julian Mitchell of Barclays sought deeper insight into Carrier's initial thoughts on 2026, particularly regarding the CSA residential business outlook, including sell-out/movement dynamics and the recoupling of sell-in. He also inquired about demand trends in non-data center verticals within CSA commercial HVAC, covering both light commercial and applied businesses.

Answer

CFO Patrick Goris outlined a $0.20 adjusted EPS benefit for 2026 from restructuring, tax, and share repurchases, assuming low single-digit organic growth. He projected CSA resi to be flat to slightly up in volume and Europe's RLC market to be flat, noting historical lows. CEO David Gitlin detailed that non-data center commercial HVAC sales were up in the low teens, with applied business up 60%. He noted mixed demand across verticals, with strength in mega projects and healthcare, but weakness in higher education and K-12.

Julian Mitchell of Barclays Investment Bank asked for details on the second-half assumptions for U.S. Residential and Light Commercial, including sell-in versus sell-out trends. He also questioned the implied Q4 guidance, noting the smaller-than-normal sequential EPS decline and asking about any specific segment drivers or mix tailwinds.

Answer

Chairman & CEO David Gitlin stated that for U.S. Residential, while price and mix were as expected, Q2 volume was weaker. The second-half forecast now assumes volume down 20-25%, leading to a net sales decline of about 10%. SVP & CFO Patrick Goris explained that Q4 is expected to have the highest organic growth of the year, with easier comps in Europe and Asia, and will see more benefits from cost actions, contributing to the strong year-over-year EPS growth.

Julian Mitchell from Barclays asked for more detail on the Climate Solutions Americas (CSA) segment, focusing on the performance drivers for residential and light commercial and the margin outlook for the remainder of the year.

Answer

CEO David Gitlin explained that residential sales were stronger than expected, leading to a guidance increase, while light commercial was weaker, prompting a guidance decrease. CFO Patrick Goris detailed the CSA margin cadence, expecting a Q2 peak near 25% before moderating due to tariff headwinds and lower residential volumes in the second half, targeting 22.5% for the full year.

Julian Mitchell requested a breakdown of the expected organic sales growth cadence throughout 2025 and asked for insights into the Americas light commercial business, particularly regarding the education vertical as federal funding wanes.

Answer

CFO Patrick Goris outlined a growth acceleration, from flat-to-low-single-digits in Q1 to high-single-digits in Q2 and Q3, before moderating in Q4. CEO David Gitlin addressed the light commercial market, forecasting low-to-mid-single-digit growth for the year, driven by the refrigerant transition mix-up. He noted that while ESR funding is ending, it is being replaced by state-level bond funding, and K-12 orders remained strong, up 20% in the prior year.

Julian Mitchell from Barclays sought clarification on the EPS guidance bridge, specifically the $0.10 difference between the previous 'core' EPS estimate and the new 'continuing ops' guide. He also asked about the change in guided operational tailwinds and requested details on the core assumptions for Q4, including organic growth and operating margins.

Answer

Patrick Goris, CFO, explained that the $0.10 EPS difference is due to discontinued operations accounting rules, which reallocate previously shared corporate costs to continuing operations and alter how net interest expense is treated. He clarified that the core operational performance improvement for the retained businesses remains unchanged from the prior guide. For Q4, Goris projected mid-single-digit organic growth, with HVAC near +10% and Refrigeration down mid-single digits. He expects Q4 adjusted operating margin to be up about 300 bps year-over-year.

Julian Mitchell asked for insights into the first quarter's EPS phasing relative to historical patterns and whether organic sales growth is expected to remain consistently in the 2%-3% full-year range each quarter. He also questioned the nature of AHS segment margin pressures in Q4, specifically if they were localized or indicative of a multi-year reinvestment need.

Answer

Mark Okerstrom, CFO, indicated that reported revenue and Adjusted EBITDA are expected to broadly follow historical quarterly distribution, noting a 300 basis point FX tailwind in Q1 and a solid start to January. Olumide Soroye, President and CEO, clarified that AHS margin pressures in Q4 were localized strategic investments for top-line growth acceleration, not a multi-year trend, and the general path for the segment is margin improvement.

Julian Mitchell inquired about the expected Q1 EPS phasing relative to historical patterns and whether organic sales growth is anticipated to remain within the 2-3% full-year range each quarter. He also asked about the nature of margin pressures and reinvestments in the AHS segment.

Answer

Mark Okerstrom, CFO, indicated that reported revenue and adjusted EBITDA are expected to broadly follow historical quarterly trends, with a 300 basis point FX tailwind in Q1, and noted a solid start to January. Olumide Soroye, President and CEO, clarified that AHS margin pressures in Q4 were localized strategic investments for top-line growth, not a multi-year need, and the general trend for the segment should be margin improvement.

Julian Mitchell asked for clarification on demand trends within the Advanced Healthcare Solutions (AHS) segment, differentiating between equipment and consumables, and assessing how healthcare policy and funding changes have impacted customer demand. He also sought Fortive's perspective on the tax rate outlook, including the Q4 single-digit rate and the normal run rate for the next year or two, considering Pillar Two proposals.

Answer

Olumide Soroye, Fortive's President and CEO, detailed that AHS software products continue to perform strongly. For capital equipment, he noted sequential improvement in North America demand from Q2 to Q3, driven by increased certainty around legislative conditions and the funding of previously deferred orders. Consumables also showed sequential improvement and solid growth in major markets. Mark Okerstrom, Fortive's CFO, confirmed that a mid-teens tax rate is a reasonable framework through 2026, acknowledging that Pillar Two proposals could lead to a higher rate if the U.S. is not excluded.

Julian Mitchell sought clarification on demand trends within the Advanced Healthcare Solutions (AHS) segment, differentiating between equipment and consumables, and assessing the impact of policy and funding changes on customer demand, as well as the outlook for the tax rate.

Answer

President and CEO Olumide Soroye noted strong performance in AHS software. He observed sequential improvement in North American demand for healthcare capital equipment, driven by increased certainty around legislative conditions, with a quickening trend in September and October. Consumables also showed sequential improvement. CFO Mark Okerstrom indicated that a mid-teens adjusted effective tax rate is a good framework for modeling through 2026, acknowledging potential upward drift due to Pillar Two proposals if the U.S. is not excluded.

Julian Mitchell of Barclays Investment Bank asked for clarification on the second-half earnings cadence and the outlook for the government and healthcare markets that led to the Q2 revenue shortfall.

Answer

CFO Mark Okerstrom confirmed the Q3-to-Q4 earnings ramp, citing seasonality, tariff countermeasures, and lower interest expense. CEO Olumide Soroye explained the Q2 shortfalls were temporary deferrals, not cancellations, due to government budget timing at Gordian and precautionary holds on hospital equipment spending ahead of policy changes.

Julian Mitchell of Barclays Investment Bank asked for clarification on the earnings per share (EPS) phasing for the second half of 2025, questioning the drivers behind the significant sequential increase expected in the fourth quarter. He also sought an outlook on the specific end markets that experienced weakness late in Q2, namely government spending at Gordian and capital expenditures in healthcare.

Answer

CFO Mark Okerstrom confirmed the directional EPS framework, attributing the Q4 uplift to normal seasonality, the full effect of tariff countermeasures, favorable foreign exchange rates, lower interest expenses, and the impact of share repurchases. CEO Olumide Soroye added that the Q2 end-market issues were temporary, describing the government spending pressure as a timing issue and the healthcare slowdown as a precautionary deferral of essential equipment purchases. He affirmed that the full-year guidance accounts for various recovery timelines in these areas.

Julian Mitchell sought clarification on the Q2 guidance, asking if it implied a low single-digit sequential revenue increase and flat margins due to tariff headwinds. He also questioned if the margin decline in the Healthcare business was due to a temporary or year-long reinvestment cycle.

Answer

Executive Elena Rosman confirmed the Q2 outlook assumes low single-digit core growth for New Fortive and an improved but still declining mid-single-digit rate for Precision Technologies. She affirmed that margins would be sequentially diluted by tariffs, with an estimated $0.06 impact in Q2. Regarding Healthcare, Rosman and CEO James Lico explained the Q1 margin pressure was from temporary factors like transactional FX and fewer days, and they expect margins to ramp sequentially through the year.

Julian Mitchell of Barclays asked for details on the Precision Technologies (PT) organic sales guidance, seeking to understand the drivers of the expected improvement throughout 2025, including comps, selling days, and end-market recovery. He also questioned the timing of order-to-sales conversion and the potential impact of tariffs.

Answer

President and CEO James Lico explained the PT cadence would improve from a mid-single-digit decline in Q1 to growth in the second half, driven by easier comps in China, modest market improvement, increased production capacity, and new product introductions. Regarding tariffs, Lico stated that countermeasures for the 10% China tariff are already embedded in the guide and that the company's prudent plan for China's mid-single-digit decline for the year accounts for related economic uncertainty.

Julian Mitchell of Barclays asked about the near-term dynamics in the Intelligent Operating Solutions (IOS) segment, including the drivers of its Q3 slowdown, and sought clarity on the initial 2025 outlook for segment growth, margins, and the corporate tax rate.

Answer

President and CEO James Lico attributed the IOS slowdown to spending hesitation from government-related calibration customers and channel partner reluctance on new programs. SVP and CFO Charles McLaughlin projected a 2025 tax rate of 13-15% and noted that mid-single-digit growth should yield about 75 basis points of margin expansion. Lico added that all segments are expected to grow in 2025, with a gradual recovery in Precision Technologies.

Julian Mitchell inquired about Kennametal's volume trends throughout fiscal year 2026, seeking clarification on the progression from Q1 to Q3, and the full-year outlook. He also asked for insights into the interplay between customer pull-forward and underlying end-market demand. Additionally, he requested the company's perspective on volume demand in the General Engineering and Transportation markets, considering recent industry data.

Answer

CEO Sanjay Chowbey clarified that the full-year volume projection has improved significantly, from -2.5% in August to +1.5% currently. He explained that after adjusting for the $13 million buy-ahead in Q2, Q2 volumes would be flat, and Q3 volumes would be +1%, showing a sequential improvement from Q1's -1%. For Transportation, Sanjay Chowbey noted slight improvements in EMEA and Asia Pacific (per IHS data), with Americas remaining flat, leading to an overall market shift from minus one to flat. In General Engineering, he highlighted tangible improvements in the Americas, while EMEA and APAC remained flattish, acknowledging the recent ISM PMI report above 50 but emphasizing the need for sustained order translation.

Julian Mitchell inquired about Kennametal's volume trends throughout the fiscal year, seeking clarification on the interplay between customer pull-forward and underlying end-market demand. He also asked for perspectives on the General Engineering and Transportation markets.

Answer

CEO Sanjay Chowbey highlighted an improvement in the full-year volume outlook, noting that adjusting for a $13 million buy-ahead in Q2, Q2 volumes would be flat and Q3 would show positive growth. For Transportation, he mentioned slight improvements in EMEA and Asia Pacific, with Americas remaining flat. In General Engineering, Americas showed tangible improvement, while EMEA and APAC remained flattish, with the recent PMI report being a positive sign that needs to translate into orders.

Julian Mitchell from Barclays asked for details on the fiscal 2026 earnings seasonality and top-line assumptions. He also probed the FY26 operating margin guidance, specifically the impact from tariffs, and asked why the current restructuring program is expected to deliver more sustainable margin expansion than previous efforts.

Answer

CFO Patrick Watson outlined a normal seasonality, with 40% of EPS in the first half and 60% in the second, noting that tariff impacts are covered from Q1 onward but will cause some margin compression. President and CEO Sanjay Chowbey expressed confidence in the current restructuring's sustainability due to its structural nature, with benefits being masked by current low volumes. Mr. Watson later clarified that operating margin would be modestly down year-over-year, but up when excluding FY25 one-time benefits.

Julian Mitchell from Barclays Investment Bank requested clarification on the fiscal 2026 outlook, asking about the expected seasonality of earnings and the embedded impact of tariffs on operating margins. He also asked how the current restructuring program differs from previous efforts and why management is confident it will achieve sustained margin expansion.

Answer

Patrick Watson, VP & CFO, outlined a normal seasonal pattern for FY2026, with a 40/60 first-half/second-half EPS split, and noted that tariff impacts are expected to be covered after Q1, though with some margin compression. Sanjay Chowbey, President, CEO & Director, asserted his confidence that the current restructuring is sustainable because it involves structural changes to footprint, organization, and sourcing, though the benefits are currently masked by low volumes. Mr. Watson later clarified that reported operating margins would be modestly down but would be up after normalizing for FY2025 one-time items.

Julian Mitchell sought clarification on the drivers of the updated EPS guidance and inquired about the target operating leverage Kennametal aims for when sales growth eventually returns.

Answer

CFO Pat Watson confirmed the EPS guide increase reflects the Q3 outperformance, FX benefits, and a net tariff impact, while noting April demand trends were normal. President and CEO Sanjay Chowbey stated that when sales recover, the company expects operating leverage in the mid-40s, supported by ongoing cost structure improvements.

Julian Mitchell asked about the current demand environment, particularly in General Engineering, noting that Kennametal's outlook seems more cautious than peers despite some positive macro data. He also questioned the company's cost structure, pointing out that operating margins are below historical averages despite years of restructuring, and asked if a more significant overhaul is needed.

Answer

CEO Sanjay Chowbey acknowledged that order rates improved in late January but explained the lowered outlook was due to worsening conditions in Europe and softer-than-expected U.S. industrial production. Regarding the cost structure, Chowbey highlighted that the company is on track to achieve $65 million of its $100 million Investor Day cost-saving target and is using other measures like short work weeks. He stated they will continue to monitor market conditions and drive margin improvement through continuous improvement initiatives.

Julian Mitchell inquired about industrial demand trends in China and the Asia-Pacific region, and asked for color on the expected operating margin ramp in the second half of the year.

Answer

CEO Sanjay Chowbey noted that while China's construction and mining sectors are pressured, other industrial markets are stable to improving, and India remains strong. CFO Pat Watson explained that the second-half margin increase is primarily driven by a seasonal volume uptick, with Q4 typically being the strongest quarter, supplemented by ongoing operational excellence initiatives.

Julian Mitchell sought clarification on the relationship between strong systems orders growth and systems revenue, noting that despite high order growth and reduced lead times, the revenue guidance remained mid-single digits. He questioned if orders were specifically long-dated and asked about the status of 'products' not included in order numbers.

Answer

CFO Marc Vandiepenbeeck explained that the mix and timing of the backlog support the mid-single-digit revenue guide, with the second half expected to be on the higher end. He noted that while all backlog could be shippable within 12 months, conversion depends on customer acceptance and project dynamics. He also indicated that beyond the next 12 months, the company is comfortable projecting slightly better growth. (The response did not specifically address 'products' as a separate category from systems orders).

Julian Mitchell asked about the connection between Johnson Controls' high systems order growth and its systems revenue translation, particularly why the significant order increase hasn't led to a higher revenue guide for the current fiscal year, inquiring if orders are specifically long-dated. He also asked if "products" are still excluded from the order numbers on Slide 9 and for any updates on that segment.

Answer

CFO Marc Vandiepenbeeck explained that the mix and timing of the backlog, while encouraging, currently support the mid-single-digit revenue guide, with the second half expected to be on the higher end. He noted that while all backlog could be shippable within 12 months, actual revenue conversion depends on customer acceptance and project dynamics, and that capacity is not yet a constraint. He anticipated slightly better growth beyond the 12-month horizon.

Julian Mitchell asked about commercial HVAC, specifically Applied growth in the Americas, noting competitors' faster growth rates and whether the 2026 guidance implies no acceleration. He also sought clarification on the fiscal 2026 operating leverage guide, asking if it's a combination of traditional segment EBITDA operating leverage (high 20s) plus amortization reduction and stranded cost takeout.

Answer

CEO Joakim Weidemanis confidently stated that Johnson Controls is not losing share in Applied HVAC within its target verticals, citing strong backlog, orders, and pipeline. CFO Marc Vandiepenbeeck clarified that traditional segment operating leverage is 'solidly in the 30s,' and the higher 50% operating leverage for 2026 is achieved by combining this with the effects of restructuring and transformation, with the expectation that it will naturally return to a 30-plus average beyond 2027.

Julian Mitchell of Barclays asked about the muted second-half operating margin expansion, the duration of tariff headwinds, and whether the soft outlook for Fire & Security was due to JCI's specific market positioning.

Answer

CFO Marc Vandiepenbeeck cited tariff impacts and stranded costs from a divestiture as reasons for the muted margin expansion. CEO Joakim Weideminis addressed Fire & Security by acknowledging some product portfolio gaps compared to peers. While he sees opportunities to improve margins through operational excellence and service productization, he reiterated that the near-term growth and margin opportunity is higher in HVAC and Controls, and that a full portfolio review is ongoing.

Julian Mitchell questioned why the second-half margin outlook appears flat year-over-year after strong first-half growth, asking if tariffs or mix were the cause. He also asked for initial impressions on the underperforming Fire & Security portfolio.

Answer

CFO Marc Vandiepenbeeck explained the flat margin rate is due to a strategy of passing through tariff costs dollar-for-dollar without adding margin, which dampens the rate but not long-term momentum. CEO Joakim Weidemanis stated that Fire & Security are strong franchises, but he is still assessing their growth potential as part of his broader strategy review.

Julian Mitchell requested more detail on the company's perspective on tariffs, including the potential cost impact and mitigation strategies. He also asked about the pace of stranded cost reduction and the expected corporate cost exit rate for 2026.

Answer

CFO Marc Vandiepenbeeck noted that the 'manufacture in region for region' strategy helps mitigate tariff impacts and that the company has successfully managed them in the past. He stated that while some restructuring benefits will appear in the second half of 2025, the majority of stranded cost reduction will materialize in fiscal 2026.

Julian Mitchell requested details on the newly announced restructuring program, specifically the phasing of the $500 million in savings and the impact of the $400 million in costs on the 2025 margin and free cash flow guidance.

Answer

CFO Marc Vandiepenbeeck explained that the timing of the restructuring program is linked to the closing of the residential and light commercial business divestiture. He clarified that costs will precede benefits, and that roughly half of the $400 million in expected costs are already factored into the fiscal 2025 free cash flow guidance.

Julian Mitchell asked about the expected cadence of gross and operating margin performance for 2026, specifically how the 150 basis point full-year improvement translates from a flat Q1, and when year-over-year gross margin growth is anticipated.

Answer

EVP, CFO, and Chief Administrative Officer Pat Hallinan detailed that Q1 gross margin is expected around 30.5%, Q2 between 30.5% and 31%, and Q3/Q4 in the 34%-35% range. This non-linear progression is due to peak tariff expense and volume deleverage from late 2025 impacting the first half, with mitigation actions expected to neutralize these headwinds by mid-year, leading to stronger second-half expansion.

Julian Mitchell of Barclays inquired about the expected cadence of Stanley Black & Decker's gross and operating margin performance for 2026, specifically asking how the projected flat gross margin in Q1 reconciles with the full-year 150 basis point expansion, and when year-over-year gross margin improvement is anticipated to begin.

Answer

Pat Hallinan, EVP, CFO, and Chief Administrative Officer, detailed the expected gross margin cadence for 2026, projecting Q1 around 30.5%, Q2 between 30.5% and 31%, and Q3/Q4 in the 34-35% range. He attributed the lower first-half margins to peak tariff expense and volume deleverage (under absorption from H2 2025 volume declines), estimating these factors to impact Q1 and Q2 by approximately 200 basis points each. Hallinan noted that tariff mitigation and capacity resizing actions are underway to neutralize these headwinds by the second half of the year, enabling significant margin expansion.

Julian Mitchell inquired about the specific profit levers driving the expected operating profit increase in Q4 despite flat sales, and asked for details on the main gross margin drivers anticipated for 2026, given the current volume outlook.

Answer

Pat Hallinan, EVP and CFO, explained that Q4 profit expansion would come from gross margin improvement (targeting 33%) and SG&A reduction (down approximately $40 million year-over-year). For 2026, he highlighted strategic sourcing, in-plant continuous improvement, platforming, and facility decisions as key gross margin drivers, aiming for 35%+ by Q4 2026.

Julian Mitchell inquired about the specific profit levers driving the expected sequential operating profit increase in Q4 2025, particularly whether it's solely from the extra price increase. He also asked about the main gross margin drivers for 2026, given anticipated flat volumes.

Answer

EVP and CFO Pat Hallinan explained that Q4 operating profit expansion is driven by gross margin improvement (targeting around 33%) and a significant reduction in SG&A expenses (down approximately $40 million year-over-year). For 2026, key gross margin levers include strategic sourcing, in-plant continuous improvement, platforming, and facility decisions, with a target of 35%+ by Q4 2026.

Julian Mitchell from Barclays Investment Bank inquired about Stanley Black & Decker's gross margin outlook for the second half of 2025 and the key drivers for continued expansion into 2026.

Answer

EVP & CFO Patrick D. Hallinan stated that the company expects year-over-year gross margin expansion in both Q3 and Q4 2025, targeting a 33-34% range for the full year. He affirmed the commitment to the 35%+ long-term goal, noting tariffs created a 9-12 month delay. The improvement is driven by tariff mitigation actions and pricing, not volume leverage, alongside the ongoing transformation program.

Julian Mitchell of Barclays PLC inquired about the quarterly phasing of the $140 million net tariff headwind and how it differs from the gross headwind. He also asked how LIFO accounting and the flow of pre-tariff, low-cost inventory would impact the P&L and free cash flow phasing for the year.

Answer

An executive, likely EVP and CFO Pat Hallinan, explained that Q2 will face significant pressure from a heavy tariff expense burden due to LIFO accounting, resulting in only slightly positive pretax earnings. He noted that free cash flow will be heavily weighted to the second half, especially Q4, as pricing actions fully catch up to the cash impact of tariffs.

Julian Mitchell asked for clarity on the 2025 outlook, questioning the confidence in achieving the 35%+ gross margin target by year-end 2025 and the expected trajectory for sales and operating margins in the first half of the year.

Answer

EVP and CFO Pat Hallinan stated that while the 35% gross margin target for year-end 2025 remains the goal, its timing depends on macroeconomic headwinds. He anticipates a flat-to-down sales start to 2025, with first-half margin improvement dynamics similar to the prior year. President and CEO Don Allan reiterated the company's commitment to the transformation's objectives, including achieving over 35% gross margin and building a sustainable organic growth culture, noting more details would be shared at the upcoming Investor Day.

Julian Mitchell asked for Emerson's perspective on the Q1 order strength, specifically if it was a surprise or aligned with plans, and why the organic sales guide for the year wasn't changed, particularly regarding short-cycle pull-through into Intelligent Devices revenue growth. He also asked about the expected 40s-type operating leverage year-on-year for the second half and any associated price-cost risks.

Answer

Lal Karsanbhai, President and CEO, Emerson, stated that while the +9% orders were slightly higher than expected due to some Q2 projects pulling into Q1, the mid-single-digit trend was consistent with expectations for H1 momentum supporting H2 shipments. Mike Baughman, EVP and CFO, Emerson, acknowledged that Intelligent Devices had a softer Q1/Q2 after strong 2024/2025, but expects acceleration in H2. Ram Krishnan, EVP and COO, Emerson, expressed confidence in the expected 40s-type leverage for the second half, noting that adjusted leverage for Q1 was in the mid-30s, and Lal Karsanbhai added that H2 EBITDA margins should trend towards 28%+.

Julian Mitchell asked about Emerson's perspective on the Q1 order strength, specifically if it was a surprise or part of the plan, and why the organic sales guide for the year remained unchanged. He also questioned the apparent lack of short-cycle pull-through into Intelligent Devices revenue growth. In a follow-up, he sought clarification on the expected 40s-type operating leverage year-on-year for the second half, asking about potential risks like price-cost dynamics and confidence for the following fiscal year.

Answer

Lal Karsanbhai, President and CEO, stated that while the +9% was not entirely expected (some Q2 projects pulled into Q1), the consistent order momentum over the last four quarters aligns with expectations for first-half momentum supporting second-half shipments and the funnel's manifestation. Mike Baughman, EVP and CFO, added that Intelligent Devices, after strong performance in 2024 and 2025, has been challenged recently but expects acceleration in the second half after a softer Q2. Ram Krishnan, Chief Operating Officer, and Lal Karsanbhai confirmed confidence in the expected operating leverage for the second half, noting that when adjusted for software renewals, the leverage is in the mid-30s, and sequentially (H2 to H1), it should be in the 40s, with second-half EBITDA margins trending towards 28%+.

Julian Mitchell asked about the visibility for high single-digit growth in Test and Measurement later in 2026 despite tough comparisons, and for updates on discrete end market trends. He also questioned if the changing subsidy environment for hydrogen, clean fuels, and carbon capture (S&D) projects was causing pushouts or impacting the project funnel.

Answer

Lal Karsanbhai (President and CEO) and Ram Krishnan (EVP and COO) expressed confidence in Test and Measurement's growth, driven by aerospace & defense, semiconductor, and broad portfolio, but noted persistent weakness in automotive and packaging machine making. Lal Karsanbhai confirmed no impact on backlog from S&D projects but a significant $1.5 billion reduction in the forward funnel, offset by growth in power, LNG, aerospace & defense, and life sciences, keeping the overall funnel flat.

Julian Mitchell asked for an update on trends in Test & Measurement and discrete automation, specifically regarding visibility for high single-digit growth in Test & Measurement despite tough comps, and current end-market trends in discrete. He also inquired about the impact of changes in the subsidy environment on hydrogen, clean fuels, and carbon capture projects within the funnel or backlog.

Answer

President and CEO Lal Karsanbhai expressed confidence in Test & Measurement (aerospace & defense, semiconductor, broad-based portfolio) but noted weakness in automotive and packaging machine making impacting discrete. EVP and COO Ram Krishnan added that North America shows low-to-mid single-digit growth in core discrete, while Europe and China remain weak. Lal Karsanbhai confirmed no impact on backlog from sustainability projects, but a significant $1.5 billion reduction in S&D projects from the funnel due to changing outlook. CFO Michael Baughman added that the overall funnel remains flat due to upticks in power, LNG, aerospace & defense, and life sciences.

Julian Mitchell asked for the embedded organic sales growth assumption for Test & Measurement in the 2025 guidance and its first-half versus second-half dynamic. He also sought to confirm the 2025 synergy assumption for Test & Measurement and whether a synergy run-rate for AspenTech would be provided.

Answer

COO Ram Krishnan stated that Test & Measurement sales are guided to mid-single-digit growth for 2025, ramping in the second half, with orders expected to grow at a faster high-single-digit rate. President and CEO Lal Karsanbhai confirmed the assumption of roughly $60 million in Test & Measurement synergies for 2025 is fair, and that details on AspenTech synergies would be provided only after a definitive agreement is reached.

Julian Mitchell with Barclays inquired about the expected seasonality for 2026, asking for typical first-quarter expectations and any unusual factors. He also sought an update on Customer-Backed Innovation (CBI) progress, including the 2.4% contribution in 2025, and insights into Product Line Simplification (PLS) initiatives.

Answer

CFO Michael Larsen stated that 2026 is expected to follow typical seasonality, with a 47%-53% first-half/second-half EPS split and Q1 contributing about 23% of full-year EPS. He noted a typical sequential revenue drop from Q4 to Q1, with margins also dropping slightly in Q1 but improving year-over-year. CEO Chris O'Herlihy highlighted strong CBI momentum in 2025, achieving 2.4% contribution and a 40 basis point improvement, driven by a strong new product pipeline and increased patent filings (up 9% in 2025). He emphasized that CBI is on track for 3%+ by 2030, not requiring more spending but rather focused leadership and capability building. PLS is expected to be at a 'maintenance level' of 30-50 basis points in 2026, contributing to strategic clarity and cost savings.

Julian Mitchell inquired about the expected seasonality for 2026, asking for typical expectations for the first quarter and any unusual factors.

Answer

CFO Michael Larsen explained that 2026 is expected to unfold in line with typical seasonality, similar to 2025, with a Q1 sequential revenue drop of about $100 million from Q4, slightly lower margins, and approximately 23% of full-year EPS. He added that every quarter is projected to show meaningful year-over-year revenue growth and margin improvement. Mitchell also asked for more details on the progress of Customer-Backed Innovation (CBI) in 2026 and any thoughts on Product Line Simplification (PLS). CEO Chris O'Herlihy highlighted strong CBI momentum in 2025, reaching 2.4% contribution, and anticipated continued incremental improvement in 2026, driven by increased leadership focus and a new innovation framework. He noted that patent filings, a leading indicator for CBI, were up 9% in 2025. For PLS, he described it as a maintenance level contributor (30-50 basis points) for 2026, distinct from CBI but contributing to portfolio quality and cost savings.

Julian Mitchell of Barclays inquired about the offsets to the FX tailwind in the EPS guide that are preventing a larger increase and asked about the expected demand and price-cost cadence in the second half of the year.

Answer

Senior VP & CFO Michael Larsen stated that the company is maintaining a cautious approach due to the uncertain and volatile macro environment, which is why the full FX tailwind is not flowing through to the EPS guidance. He noted the second half implies 2-3% organic growth and over 100 basis points of margin improvement, with a typical seasonal cadence augmented by tariff-related pricing actions kicking in during Q3 and Q4.

Julian Mitchell of Barclays PLC asked for an update on the Food Equipment business, noting recent lackluster reports from large QSR customers, and inquired about ITW's confidence in spending for the rest of the year. He also asked about the segment-level and quarterly phasing of the tariff impact.

Answer

President and CEO Christopher O'Herlihy expressed high confidence in Food Equipment, citing its differentiation, a large service business, a strong institutional customer base, and a robust innovation pipeline. CFO Michael Larsen addressed tariffs, stating that ITW is reacting faster than in 2017-18 and does not expect a significant quarterly lag between cost and price. He noted the impact is broad-based but less significant in Automotive, with the goal of being EPS-neutral or better by year-end.

Julian Mitchell asked for color on the top-line cadence for 2025 and requested more detail on the plan for the Specialty Products segment, particularly its sales normalization and margin outlook.

Answer

CFO Michael Larsen detailed the expected Q1 cadence, projecting a sequential revenue decline leading to Q1 EPS being about 22% of the full-year total due to seasonality and H1 headwinds. CEO Christopher O'Herlihy stated that the Specialty Products segment is expected to grow in 2025 despite some carryover PLS impact, with the long-term goal of making it a consistent 4%+ grower.

Julian Mitchell asked about inventory levels, both at ITW and within its distribution channels, and the outlook for reducing inventory as a percentage of revenue. He also sought examples of how ITW drives market share gains via CBI within its decentralized structure.

Answer

CFO Michael Larsen stated that channel inventories have normalized and that ITW is focused on reducing its own inventory, targeting a return to pre-COVID levels of 2.5 months on hand from the current 3 months. This represents a $300-$400 million opportunity. CEO Chris O'Herlihy explained that driving CBI goes beyond spend; it involves leadership focus, capability building, and codifying best practices into a company-wide framework, similar to the successful 80/20 rollout.

Julian Mitchell asked for clarification on Hubbell's anticipated operating margin expansion for 2026, how it is expected to play out through the year, and if it is weighted to any specific segment. He also inquired if organic sales growth would be front-loaded in Q1 due to comps and if Q1 EPS would represent approximately 20% of the full year's EPS.

Answer

Joe Capozzoli, CFO, confirmed that the anticipated margin expansion level for 2026 is about right, with a normal seasonal shape peaking in Q3. He noted that Hubbell expects to invest $15 million-$20 million in restructuring, with about a third front-loaded in Q1, and a slightly higher tax rate in Q1. Mr. Capozzoli also anticipated a strong start to the year from an organic sales perspective. Gerben Bakker, Chairman, President, and CEO, cautioned against relying solely on Q1 EPS percentages due to their sensitivity.

Julian Mitchell asked for clarification on the anticipated operating margin expansion for the year, specifically if the 50 basis points estimate is correct, how it will play out seasonally, and if it's weighted to any particular segment. He also inquired about organic sales growth being front-loaded due to comps and if Q1 2026 EPS would represent about 20% of the full year's total.

Answer

Joe Capozzoli, CFO, confirmed the 50 basis points margin expansion is about right, expecting a 'seasonal head and shoulders type shape' with Q1 being lower and Q3 peaking. He mentioned $15 million-$20 million in restructuring, likely front-end loaded, and a higher Q1 tax rate. For organic sales, Capozzoli anticipates a strong start to the year. Gerben Bakker, Chairman, President, and CEO, cautioned against relying on specific EPS percentages for Q1 due to their sensitivity.

Julian Mitchell inquired about the operating margins for next year, specifically the effects of restructuring costs, higher savings, and any carryover from self-help measures, as well as the impact of the accounting change. He also asked for more detail on the muted outlook for non-residential and heavy industry within the electrical segment for next year.

Answer

Bill Sperry, EVP and CFO, stated that restructuring is a continuous investment to drive productivity, and its annual impact on margins is not expected to cause distortion. He also confirmed the accounting change would not alter margin percentages next year. Regarding the electrical segment, Sperry acknowledged a cautious outlook for non-residential and heavy industrial, noting Hubbell's reduced exposure in non-res and that the heavy industrial outlook would be firmed up by January guidance, expecting to align with general market expectations.

Julian Mitchell from Barclays asked about the impact of restructuring costs not repeating, higher savings, and any carryover effects on margins for next year. He also inquired if the accounting change earlier in the year would affect year-on-year margin progression. Additionally, he asked for more details on the muted outlook for non-residential and heavy industrial markets in the electrical segment for next year.

Answer

Bill Sperry (EVP and CFO, Hubbell Incorporated) stated that restructuring is a continuous investment, and they aim for it not to distort annual margins, as it drives future productivity. He also confirmed that the accounting change would not affect next year's margins. Regarding the electrical segment, Sperry acknowledged a cautious outlook for non-residential and heavy industrial, noting that Hubbell's exposure in non-residential has decreased, and while mixed, a rebound wouldn't be surprising. He expects Hubbell's view to align with general market expectations by the January guidance.

Questioned the drivers behind the limited operating margin expansion expected in the second half and the dynamics between Q3 and Q4. Also asked if the low-single-digit volume growth for the year is a sustainable placeholder for beyond 2025.

Answer

Management confirmed that second-half margin expansion will be tempered by the pass-through of tariff costs via price (which is dollar-neutral but not margin-accretive) and increased investments in Q3. They affirmed that their long-term outlook remains consistent with the mid-single-digit organic growth framework presented at their Investor Day.

Julian Mitchell questioned the confidence in the strong second-half volume growth implied by the full-year guidance, given a flattish first half. He also asked if the adjusted operating margin outlook for the year is now expected to be down slightly.

Answer

EVP & CFO Bill Sperry explained the second-half acceleration is supported by a strong order book, easier comps, and key inflection points, such as the distribution side of T&D returning to growth and telecom enclosure declines abating. Sperry also confirmed that adding significant price to offset costs without a corresponding profit dollar increase creates a slightly dilutive effect on the operating margin percentage for the full year.

Inquired about the implied operating margin expansion for 2025 and the expected performance by segment. Also asked for details on the utility meters and AMI business outlook, including the cadence of decline and recovery through 2025.

Answer

The company confirmed the margin expansion calculation is correct but noted they are also investing in the business. Electrical margin expansion will be driven by mix and efficiency initiatives, while Utility margin expansion will come from volume recovery. For the meters and AMI sub-segment, the analyst's quoted numbers (down low-double digits in Q1, down high-single for the year) are correct, but the broader Grid Automation business is still expected to grow slightly for the full year.

Julian Mitchell of Barclays PLC inquired about the expected operating margin expansion for 2025, seeking a breakdown by segment. He also asked for more detail on the growth trajectory for the utility meters and AMI business throughout 2025.

Answer

CFO Bill Sperry confirmed the margin expansion calculation and noted that while the Electrical segment benefits from mix and efficiency initiatives, the Utility segment's improvement is more volume-driven. CEO Gerben Bakker clarified that while the meters and AMI sub-segment faces declines, the broader Grid Automation business is still expected to grow slightly for the full year, with the negative trend concentrated in Q1 before improving.

Julian Mitchell sought clarification on the 2025 operating margin guidance, asking if it implied about 50 bps of expansion and for color on segment-level expectations. He also asked about the outlook for the utility meters and AMI business within the broader utility segment.

Answer

CFO William Sperry confirmed the margin expansion calculation was directionally correct but noted it accounts for increased investments. He detailed that Electrical margin gains would come from efficiency and mix, while Utility gains would be driven by volume recovery. CEO Gerben Bakker clarified that while the meters and AMI sub-segment faces declines, the overall Grid Automation business is still expected to grow slightly for the year, supported by strength in other product areas.

Julian Mitchell from Barclays PLC asked about the full-year outlook for the telecom business, the expected recovery in 2025, the growth outlook for transmission, and the timeline for resolving customer inventory issues.

Answer

CEO Gerben Bakker projected a 30% decline for telecom this year with a steady, not sharp, recovery. CFO William Sperry stated transmission growth is expected to continue at a double-digit rate. Bakker added that the inventory situation should be 'much, much improved' by year-end, with a return to growth in 2025.

Julian Mitchell focused on the organic volume guide for the year, noting that price starts strong in Q1 and fades, implying volumes start down and then bounce back. He asked for clarification on the drivers of this volume assumption and confidence in the back-half reversal. He also inquired about any signs of increased competition from cheaper-sourced products in the pool industry.

Answer

CFO Bob Fishman confirmed the volume dynamics, with decremental volume in the first half and incremental volume in the back half, driven by easier comps and investments. CEO John Stauch added that the Q1 guide aligns with historical percentages, and the lack of an assumed residential recovery means muted inventory buy-in in the back half, leading to easier comparisons. Regarding competition, John Stauch acknowledged China-based AI products in cleaners and threats to non-technologically advanced products, but stated that it doesn't influence outcomes for their advanced technological solutions.

Julian Mitchell asked for clarification on Pentair's organic volume guide for the year, noting that price starts strong in Q1 and fades, implying volumes start down and then bounce in the back half. He sought to understand the drivers behind this volume assumption, such as elasticity or comps, and the confidence in this reversal. He also inquired about any signs of increased competition in the Pool industry from cheaper-sourced products and whether the competitive landscape has changed.

Answer

CFO Bob Fishman confirmed that comps and investments drive incremental volume in the second half for flat full-year volume. CEO John Stauch added that the Q1 guide aligns with historical percentages, with muted Q1 volume due to no assumed residential recovery, leading to easier comparisons later in the year. Regarding Pool competition, CEO John Stauch noted China-based AI products in cleaners and the threat of lower-cost solutions for non-technologically advanced products, but stated this does not influence outcomes for Pentair's advanced technological solutions.

Julian Mitchell inquired about the revenue outlook for 2026, specifically the organic sales entry rate given the long-term mid-single-digit algorithm versus the Q4 low single-digit guide. He also asked about the Q4 operating margin guide, which implies less than 100 basis points of expansion year-over-year despite stronger year-to-date performance and expected Pool margin growth, questioning if this reflects conservatism, reinvestment, or price net of inflation headwinds.

Answer

CFO Bob Fishman, while not providing 2026 guidance, outlined several tailwinds including strong business performance, top-line momentum, 1-2% price carryover, slow market recoveries, and positive readouts from 80/20 focus on top customers, alongside transformation momentum. He also acknowledged potential headwinds like tariff uncertainty, high interest rates, and consumer sentiment, indicating a cautious approach to planning. Regarding Q4 operating margins, Bob Fishman expressed satisfaction with the full-year ROS expansion and the Q4 guide, which allows for strategic investments to balance top-line growth with continued ROS expansion, leading to a strong year-end.

Julian Mitchell asked about the revenue outlook for 2026, specifically the organic sales entry rate given the Q4 low single-digit organic sales guide and the long-term mid-single-digit growth algorithm. He also inquired about the Q4 operating margin guide implying less than 100 basis points of expansion, questioning if it was conservatism, reinvestment, or price net of inflation headwinds.

Answer

CFO Bob Fishman, while not giving 2026 guidance, highlighted tailwinds like business momentum, 1-2% price carryover, and market recoveries, alongside cautious headwinds like tariff uncertainty and high interest rates. He stated the strategy is to plan for lower top-line growth and lean on transformation. Regarding Q4 margins, Bob Fishman expressed satisfaction with the ROS expansion across businesses, noting it allows for strategic investment to balance top-line growth and margin expansion.

Julian Mitchell from Barclays PLC asked for an explanation of the moving parts in the full-year profit guidance, noting that the EBITDA forecast was unchanged despite a higher revenue outlook. He also requested more detail on the expected second-half acceleration in the Water Solutions segment and the recent commercial services divestiture.

Answer

President and CEO John L. Stauch clarified that the EPS guidance increase was driven by about $10 million in higher operating income and roughly 2 cents from lower interest expense due to strong cash flow. He explained the Water Solutions divestiture was a strategic exit from a lower-margin business, creating a $40 million annual revenue headwind. The segment's core sales are expected to accelerate as residential portfolio rationalization concludes and the commercial business recovers.

Julian Mitchell inquired about Pentair's full-year organic sales assumptions, specifically the relationship between price increases and volume declines, and asked for details on the phasing and segmental impact of the estimated $140 million in tariffs.

Answer

CEO John Stauch confirmed the guidance assumes that as prices rise due to tariffs, consumer volume will likely soften. He noted the $140 million tariff impact is for fiscal 2025 and will predominantly affect the second half of the year. CFO Bob Fishman added that the tariff impact is expected to be split evenly across the Flow, Water Solutions, and Pool segments.

Julian Mitchell inquired about the assumed seasonality for 2025 earnings, particularly the lighter Q1 outlook, and asked about the expected timing of tariff headwinds. He also sought details on the current state of distributor inventories in the Pool segment and the health of the new pool build market.

Answer

President and CEO John Stauch attributed the challenging Q1 outlook to tough comparisons from prior-year channel loading and the roll-off of a specific program in the Ice business, with tariff impacts expected to be minimal in Q1 and spread across the rest of the year. CFO Bob Fishman stated that Pool distributor inventories and early buy activity are at historical levels, and the company maintains a cautious outlook with low single-digit growth projected for new pools and remodels.

Julian Mitchell of Barclays requested an update on the productivity savings outlook for 2025 and inquired about the expected pace of revenue turnaround in the Water and Flow segments.

Answer

CFO Bob Fishman noted the company is on track for $100 million in transformation savings in 2024 and suggested a run-rate of roughly $80 million per year for 2025-2026. President and CEO John Stauch commented that a revenue recovery in residential-exposed businesses is likely several quarters away, pending interest rate improvements.

Julian Mitchell asked for insights into AMETEK's order trends in recent months, specifically how Q4 2025 organic orders growth compared to Q3, and sought clarification on the phasing of organic sales growth for EIG and EMG in 2026.

Answer

Chairman and CEO David Zapico noted that organic orders growth was broad-based at 7% in Q4 2025, similar to Q3, with both EIG and EMG contributing. He explained that EMG businesses typically pick up first, followed by EIG's process businesses. For 2026, Mr. Zapico anticipates EIG's organic growth could be stronger in the second half of the year, while EMG might face tougher comparisons.

Julian Mitchell asked for clarification on AMETEK's orders trends in recent months, specifically how organic orders growth in Q4 2025 (steady at 7%) compared to Q3 2025, and if there were specific market or geographical shifts. He also inquired about the phasing of organic sales growth for AMETEK in 2026, asking about expected deceleration due to tougher comps and whether EIG would exit the year growing faster than EMG.

Answer

Chairman and CEO David Zapico confirmed that organic orders growth was 7% in Q4 2025, broad-based across both EIG and EMG, and a similar pattern to Q3, with a book-to-bill of 1.02. He noted that EMG businesses picked up first, with EIG's process segment typically following later, and anticipated EIG organics could be stronger in the second half of 2026 while EMG might face tougher comps.

Julian Mitchell, an Industrial Equity Research Analyst at Barclays, asked for an update on the FARO business's organic trends, orders, and sales, and its outlook for next year, then inquired about signs of a turning point in process industry orders and any impact from a potential U.S. government shutdown.

Answer

Chairman and CEO David Zapico reported that FARO met its sales and profit commitments for the quarter, with integration progressing well and optimism for new products and channels, though it won't contribute to organic growth until owned for a year. Zapico confirmed process orders are trending up in all areas except China, with a strong pipeline, and expects a positive contribution margin when organic growth returns. He noted the U.S. government shutdown has been a "non-event" for AMETEK so far.

Julian Mitchell asked for an update on the FARO business's progress, including organic trends and outlook for next year, and later inquired about turning orders in the process industry and any government shutdown effects in the U.S.

Answer

David Zapico, Chairman and CEO, confirmed FARO met its sales and profit commitments for the quarter, noting strong integration, new product development, and channel work, despite not yet contributing to organic growth. He stated the government shutdown has been a non-event for AMETEK. Mr. Zapico reiterated that process orders are trending up in all areas except China, with a strong pipeline, and expects a powerful recovery when the business turns positive.

Julian Mitchell asked about Dover's strong margin performance and the expected mix for 2026, particularly how segments with high organic sales growth but lower EBITDA margins, like Clean Energy & Fueling (DCEF) and Climate & Sustainability Technologies (DCST), would achieve strong operating leverage, considering potential cost savings tailwinds. He also sought clarification on 2026 seasonality for EPS and sales growth.

Answer

CEO Richard Tobin explained that DCEF would benefit from revenue growth leverage and prior period restructuring, with margin enhancement being more back-end loaded. For DCST, he noted the Q4 margin jump and potential for more volume-driven gains, while acknowledging commodity exposure (copper) might necessitate pricing actions. He confirmed that 2026 seasonality for EPS and sales growth should align with historical patterns, cautioning against overly high Q1 expectations due to biopharma mix.

Julian Mitchell asked about Dover's strong margin performance and the expected mix for 2026, particularly how segments with lower EBITDA margins but higher organic sales growth (DCEF and DCST) would achieve strong operating leverage. He also sought clarification on whether 2026 seasonality for EPS and sales growth would align with the full-year framework.

Answer

CEO Richard Tobin explained that DCEF's margin enhancement would be back-end loaded due to restructuring benefits and volume leverage. For DCST, he noted the Q4 margin jump and potential commodity exposure (copper), indicating a watch on pricing actions. He confirmed that 2026 seasonality for EPS and sales growth should be consistent with historical patterns, cautioning against overly high Q1 expectations due to biopharma mix.

Julian Mitchell from Barclays asked about the expected cadence of organic sales growth through the second half of the year and whether the Q2 book-to-bill ratio was below plan.

Answer

President and CEO Richard Tobin confirmed a general expectation for accelerating growth in the second half, driven by easier comps, particularly in lower-margin businesses. He acknowledged that Q2 bookings in refrigeration were weaker than anticipated, but stated that the overall booking trend is following its typical seasonal pattern and that July's momentum was encouraging, suggesting no broad-based weakness.

Julian Mitchell questioned the implied acceleration in organic sales growth for the full year versus Q1's performance. He also asked if the net dollar impact of tariffs was assumed to be zero and which segment faced the greatest risk.

Answer

Executive Richard Tobin attributed the expected acceleration to typical seasonality, with Q2 and Q3 being historically stronger, and noted Q2 is supported by a strong backlog. He stated that any margin dilution from tariffs would be minimal and likely overshadowed by positive intra-segment mix shifts, making mix a more significant factor for margins.

Julian Mitchell asked for a breakdown of the Clean Energy & Fueling (DCEF) segment, specifically the size of the clean energy components business. He also inquired about the mix and shipment visibility within the reshaped Engineered Products (DEP) segment, particularly in aerospace and defense.

Answer

Executive Richard Tobin stated that the clean energy components business is the largest contributor to year-over-year profit growth in the DCEF segment, driven by restructuring, growth, and acquisitions. For Engineered Products, he explained the Q4 volume decline was due to a tough shipment comparison from the prior year and confirmed the aerospace and defense business is poised to grow year-over-year with a positive margin mix benefit.

Julian Mitchell inquired about the 2025 organic growth framework, asking if it assumes less variability across segments, and questioned if the strong margin in Imaging & Identification (DII) is structural or temporary.

Answer

CEO Richard Tobin confirmed the 2025 outlook assumes less counter-cyclicality as long-cycle businesses lap tough comps. He attributed the robust DII margins to sustainable, structural improvements from cost-to-serve initiatives and business model changes, not just temporary mix.

Julian Mitchell asked for insights into Parker-Hannifin's end market trends, specifically which Q4 growth rates on slide 15 are expected to differ most from the full-year numbers, or any color on how the first half trended for those respective markets beyond Aerospace and Defense. Mitchell also requested an updated outlook for the various components of the Aerospace and Defense (A&D) market for fiscal year 2026, including commercial OEM, commercial aftermarket, defense OEM, and defense aftermarket.

Answer

Chairman and CEO Jennifer Parmentier highlighted off-highway as a market with continuously increasing forecasts, moving from negative low single-digit to positive low single-digit. She noted that other industrial markets like in-plant industrial and transportation have maintained their forecasts. For A&D, Parmentier updated the FY26 outlook, increasing commercial OEM growth to around 20% and commercial aftermarket to low double-digits, while defense OEM remains mid-single digit and defense aftermarket saw a slight adjustment to low single-digit growth.

Julian Mitchell sought to understand which of the full-year growth rates for market verticals (Slide 15) are most divergent from Q4 trends, looking for inflections or changes. He also requested an updated end market outlook for the various components of Aerospace & Defense (A&D) for FY26, particularly regarding commercial aero aftermarket growth.

Answer

Jennifer Parmentier, Chairman and CEO, highlighted off-highway as a market with continuously increasing forecasts, while other industrial markets remain consistent. For A&D, she updated expectations: commercial OEM around 20% growth, commercial aftermarket at low double-digit growth, defense OEM at mid-single digit, and defense aftermarket at low single-digit growth.

Julian Mitchell with Barclays asked about the organic sales performance and demand cadence in the Diversified Industrial North America business, noting a positive surprise in the quarter and questioning why the full-year guide doesn't embed acceleration, as well as the sequential decline in the Q2 EPS guide.

Answer

Chairman and CEO Jennifer Parmentier explained that DI North America outperformed expectations, driven by aerospace and defense, distribution, HVAC, electronics, and construction, with margin expansion from higher productivity and resilient aftermarket. She noted that Q2 DI North America is expected to be similar to Q1, with continued strength in industrial aerospace and defense, but persistent challenges in transportation and ag. Executive Vice President and CFO Todd Leombruno added that DI North America margins were increased by 70 basis points for the full year and that the Q2 EPS decline is typical for the softest top-line quarter.

Julian Mitchell of Barclays asked about the expected cadence of the industrial organic growth recovery through fiscal 2026 and whether there was any evidence of tariff-related demand pull-forward. He also questioned why the margin expansion guide is flat for the year despite accelerating volume leverage.

Answer

Chairman & CEO Jennifer Parmentier confirmed no evidence of demand pull-forward and outlined a Q1 forecast of -1.5% organic growth for Industrial North America and +0.5% for International. Regarding the margin guide, she explained that the mix within the high-margin aerospace segment is expected to remain steady throughout the year, contributing to the consistent expansion rate.

Julian Mitchell of Barclays Investment Bank inquired about the expected trajectory of Industrial organic growth through FY26 and asked if there was any evidence of demand pull-forward due to tariffs. He also questioned why the margin expansion guide was flat despite accelerating volume leverage.

Answer

Chairman and CEO Jennifer Parmentier stated there is no evidence of tariff-related pull-forward. She detailed the Q1 industrial organic growth forecast at -1.5% for North America and +0.5% for International, with a gradual recovery expected through the year. On margins, she noted the aerospace mix between OEM and aftermarket is expected to be steady throughout the year, implying no significant mix headwind to margins later in the year.

Julian Mitchell from Barclays questioned why the organic sales outlook for Industrial North America is weaker than for International, despite positive U.S. distributor sentiment. He also asked if the Q4 aerospace slowdown is concentrated in the military business due to tough comparisons.

Answer

CEO Jenny Parmentier confirmed the analyst's hypothesis that North America's weaker outlook is due to its greater weighting in challenged verticals like off-highway and transportation. CFO Todd Leombruno added that the international segment's downturn began earlier, affecting comps. Both executives clarified that the tough Q4 aerospace comp is broad-based and not specific to military.

Julian Mitchell asked about the widening gap between industrial organic orders and sales trends, seeking clarification on dynamics beyond the longer-cycle element. He also requested an update on the industrial backlog and a more detailed outlook for aerospace growth drivers in Q4.

Answer

Executive Jennifer Parmentier explained that the company's portfolio transformation towards longer-cycle business, including aerospace, has extended the time between orders and shipments. She reported the industrial backlog was $3.7 billion and the aerospace backlog was $7.3 billion. For the Q4 aerospace outlook, she projected mid-single-digit growth for commercial OEM, low-single-digit for defense OEM, and high-teens growth for both commercial and defense MRO.

Julian Mitchell asked about the Americas Commercial HVAC revenue guidance for the year ahead, specifically if a significant acceleration is expected in the second half due to strong orders. He also inquired about the confidence in U.S. Residential HVAC inventory normalization and current pricing dynamics in that market.

Answer

Chris Kuehn, Executive Vice President and CFO, and Dave Regnery, Chair and CEO, explained that strong H2 2025 bookings for Commercial HVAC, particularly Applied Solutions with a 9-month order-to-ship cycle, are expected to drive revenue growth from 7-8% in Q1 to low teens in H2 2026. Dave Regnery confirmed intentional inventory reduction in Q4 2025 for Residential HVAC, believing it is now right-sized, while Chris Kuehn noted pricing has not faded, attributing Q4 impacts to lower volume. Dave also highlighted tough Q1 2026 comps for residential.

Julian Mitchell asked about the expected acceleration in Americas Commercial HVAC revenue growth in the back half of 2026, given the strong order trends in the latter half of 2025. He also inquired about the confidence in U.S. Residential HVAC inventory normalization and the current pricing dynamics in that market.

Answer

Chris Kuehn and Dave Regnery explained that Americas Commercial HVAC revenue is expected to accelerate, with Q1 growing 7-8%, Q2 at 10%, and the second half in the low teens, driven by strong H2 2025 bookings and backlog conversion. For Residential HVAC, Dave Regnery confirmed intentional inventory reduction in Q4 2025, believing inventory is now right-sized. Chris Kuehn added that pricing has not faded, with any impact primarily due to lower volume, and noted tough Q1 2025 comps.

Julian Mitchell of Barclays Investment Bank asked for a more detailed outlook for second-half Americas organic sales growth by business unit. He also sought an update on the resolution of the residential refrigerant cylinder shortage and any observed changes in consumer demand, such as a shift to repair over replace.

Answer

EVP & CFO Chris Kuehn provided a second-half outlook, projecting consistent low-double-digit growth for Americas Commercial HVAC, with Transport down more in Q3 and Residential also seeing a larger Q3 decline due to a $150 million revenue headwind. Chair & CEO Dave Regnery added that the cylinder issue is '90% or 95%' resolved but that inventory destocking will impact the second half. He noted it was a difficult quarter to assess repair-versus-replace trends due to the supply bottleneck.

Julian Mitchell inquired about the Americas Commercial HVAC market, asking about shifts in vertical demand and concerns over light commercial weakness affecting the applied equipment business. He also asked about the specifics of price actions intended to offset tariffs, particularly in the residential market, and their potential influence on volume.

Answer

CEO David Regnery confirmed that Americas Commercial HVAC had a record-breaking quarter with broad-based strength across verticals like data centers, healthcare, and education, and a strong project pipeline. CFO Christopher Kuehn added that applied markets are expected to outperform unitary markets for the year. Regarding tariffs, Kuehn explained the company is implementing surgical price increases and surcharges to offset the estimated $250-$275 million in costs, leveraging their experience from prior inflationary periods. Regnery noted that while they didn't see a Q1 dip from the residential pre-buy, channel inventories are slightly elevated but expected to normalize.

Julian Mitchell from Barclays asked for clarity on the 2025 organic sales growth cadence, questioning why the guide is relatively steady throughout the year rather than accelerating in the second half as residential and transport markets are expected to recover. He also sought details on the price versus volume outlook for 2025, including the expected contribution from price and whether there is any customer pushback.

Answer

CFO Chris Kuehn explained that the steady Q1 guide of 6-7% organic growth reflects continued strength in Commercial HVAC, which is expected to offset headwinds from the residential prebuy and the transport market bottoming. He projected full-year 2025 pricing to contribute 1 to 1.5 points to growth, with the remainder coming from volume. Kuehn clarified that the high-single-digit price increase for the new A2L refrigerant products will be reported as volume, not price, per company policy.

Julian Mitchell from Barclays inquired about the outlook for organic operating leverage in 2025, given the strong 30% guide for 2024, and asked about the drivers behind the stronger U.S. residential HVAC performance in 2024.

Answer

CFO Chris Kuehn stated that while specific 2025 guidance will come later, the company likes its long-term algorithm of 25% or better operating leverage and will target top-quartile financial performance. CEO Dave Regnery addressed residential HVAC, noting the upgrade from a 'plus or minus low single digits' outlook was due to EPA clarification on refrigerants, normalized channel inventory, and a warm cooling season. He expressed confidence in the team's execution and believes the business is returning to a 'GDP plus' growth framework in 2025.

Julian Mitchell asked about the total company's margin progression, specifically how second-half weighted the margin acceleration is expected to be, and the specific segment-level items driving this trend.

Answer

Mike Stepniak, SVP and CFO, explained that operational margins are expanding by 50-90 basis points, with a 30 basis point headwind from Quantinuum, which is higher in Q1. He noted that margins will sequentially improve, with the second half looking much better. Vimal Kapur, Chairman and CEO, reinforced the 'price, volume, productivity' playbook for margin expansion, similar to 2023. Mike Stepniak added that R&D investment, a 50 basis point headwind in 2025, has normalized for 2026. Julian Mitchell followed up on aerospace margins, asking about mix impacts and the role of commercial OE contract renewals. Mike Stepniak and Vimal Kapur confirmed expected margin expansion in aerospace for 2026, driven by better pricing, abating acquisition integration costs, and supply chain improvements. Vimal Kapur noted that ongoing OE contract negotiations are long-term and expected to positively impact future aerospace margins. Mark Macaluso, Former Head of Investor Relations, reminded about the Q1 lapping effect of Liberation Day on OE pricing.

Julian Mitchell asked about Honeywell's total company margin progression, specifically how second-half weighted the acceleration is and the segment-level drivers. He also inquired about aerospace margins, their year-over-year start, aggregate for the year, mix impacts, and the effect of commercial OE contract renewal timings.

Answer

CFO Mike Stepniak explained that operational margins are expanding 50-90 basis points, with a 30 basis point headwind from Quantinuum, and that margins will sequentially improve after Q1. CEO Vimal Kapur reiterated the playbook of price, volume, and productivity for margin expansion. For aerospace, Mike Stepniak noted that tariffs are largely behind, pricing will be better, and acquisition integration costs are abating, leading to expected margin expansion. Vimal Kapur confirmed ongoing OE contract negotiations that will positively impact future aerospace margins. Mark Macaluso added a note about the Q1 lapping effect for the OE business.

Julian Mitchell from Barclays asked about the Industrial Automation (IA) segment's Q4 organic growth reversal after Q3 growth, seeking clarification on whether it's due to short-cycle demand or long-cycle project delays. He also inquired about the Q4 margin outlook for IA and any one-time headwinds for next year. Additionally, he asked for an update on commercial aerospace destocking and if the 26% Aerospace margin rate is a good placeholder for next year.

Answer

CFO Mike Stepniak noted strong IA orders in Q3 with timing variability in warehouse automation, expressing improved sentiment for the business. He confirmed sequential margin growth for IA in Q4 and expansion in 2026, citing improving backlog and pricing visibility. For Aerospace, he highlighted strong Q3 performance, expected sequential margin improvements from Q2 2025 (the bottom), and largely completed commercial OE recoupling, with robust double-digit orders and over $2 billion in past due backlog.

Julian Mitchell asked about the Industrial Automation (IA) segment's organic growth, which flipped positive in Q3 but is expected to reverse in Q4, questioning if this was due to short-cycle weakness or large project delays. He also sought clarity on IA margins for Q4 and any one-time headwinds for next year, and followed up on Aerospace destocking and the 26% margin rate outlook.

Answer

Mike Stepniak, Senior Vice President and Chief Financial Officer, stated that IA orders looked strong in Q3, with timing variability in larger orders. He expects IA margins to grow sequentially in Q4 and expand in 2026, with no one-time headwinds. For Aerospace, he confirmed Q2 2025 was the margin bottom, with sequential improvements expected into 2026, and destocking largely behind them.

Julian Mitchell from Barclays Investment Bank inquired about the performance drivers in the Aerospace segment, questioning the commercial OE sales trajectory, supply chain improvements, and whether the 25-26% margin represents a new baseline for the next 12-18 months.

Answer

SVP & CFO Mike Stepniak explained that strong orders continue and the commercial OE issue is a transitory destocking event expected to normalize in H2. He noted the margin drag from the Case acquisition and incremental R&D spend. Chairman & CEO Vimal Kapur affirmed these are temporary issues and the margin is not a new baseline, adding that R&D spend is increasing across all segments to drive future organic growth.

Julian Mitchell of Barclays Investment Bank inquired about the performance drivers in the Aerospace segment, focusing on commercial OE sales, supply chain issues, and whether the current 25-26% margin represents a new baseline for the next 12-18 months.

Answer

SVP & CFO Mike Stepniak explained that the commercial OE softness was a transitory destocking issue with an OEM, expected to normalize in the second half. He noted the margin was impacted by the Case acquisition and a $200 million incremental R&D investment. Chairman & CEO Vimal Kapur affirmed these are temporary issues and the current margin is not a new baseline, highlighting that the R&D increase is a strategic investment across all segments to drive future growth.

Julian Mitchell questioned the performance of the Industrial Automation segment, focusing on the PSS top-line weakness and the expected margin improvement cadence for the year. He also asked about the scope for share buybacks versus M&A.

Answer

CEO Vimal Kapur explained that PSS was flattish excluding a prior-year royalty payment and that the Q1 IA margin contraction was due to a receivables write-off, with margins expected to improve post-PPE divestiture. Regarding capital deployment, both Kapur and CFO Mike Stepniak emphasized a balanced, opportunistic approach to both share repurchases and time-sensitive M&A.

Julian Mitchell asked about the estimated stranded and stand-up costs for the planned separation of the Aerospace and Automation businesses, as well as the expected free cash flow conversion profiles for the new entities. He also questioned the flattish underlying operating margin guidance for 2025 and why a more aggressive repositioning program wasn't being implemented.

Answer

Incoming CFO Mike Stepniak stated that both Aerospace and Automation are expected to achieve around 100% free cash flow conversion. CEO Vimal Kapur estimated one-time separation costs at $1.5 billion to $2.0 billion but noted it was too early for a precise stranded cost figure. Regarding margins, Mr. Stepniak explained that while three segments will see margin expansion, the overall guidance is impacted by the dilutive effect of the CAES acquisition on the Aerospace segment's margins in its first year. Executive Sean Meakim added that the CAES deal is accretive to segment profit growth.

Julian Mitchell of Barclays PLC asked for preliminary thoughts on 2025, questioning if the lighter top-line results would accelerate cost-cutting measures to protect margins. He also inquired if the macro backdrop increases the urgency of portfolio actions like the Advanced Materials spin-off and PPE divestiture.

Answer

CEO Vimal Kapur stated that while formal 2025 guidance will come in January, the setup is positive with a strong backlog and robust cost position, and all four segments are expected to see organic growth and margin expansion. CFO Gregory Lewis clarified that the lower repositioning guidance for the year was due to Q3's spend level, not a change in strategy. Regarding the portfolio, Vimal Kapur explained that actions are driven by strategic fit with Honeywell's megatrends, noting the PPE exit will be accretive to growth and margins, and that portfolio optimization is a continuous process.

Julian Mitchell asked about the overall operating margins, specifically if the full-year guidance implies a slight year-over-year decline, and requested a segment-level breakdown, particularly for BCS (expected up) and HCS (flat to down). He also sought insights into the first half versus second half margin performance. Furthermore, he inquired about the HCS market outlook for 2026, referencing 2025 unit numbers and asking about the expected degree of repair normalization in the industry.

Answer

Michael Quenzer, CFO, stated that the guidance implies an EBIT margin expansion of approximately 20 basis points, marking the fourth consecutive year of expansion. He noted that BCS margins will be up more, while HCS will be flat to slightly down due to end market conditions. Revenue seasonality for 2026 is expected to be 3-4% less than 50% in the first half and 3-4% higher in the second half, leading to more margin headwinds in H1 but expansion in H2. Alok Maskara, CEO, refrained from predicting specific unit numbers but expects automatic improvements in sell-in due to the end of destocking. He anticipates repair versus replace activity to stabilize and noted improving dealer confidence in the one-step channel, despite ongoing low consumer confidence.

Julian Mitchell from Barclays sought clarification on Lennox's overall operating margins for 2026, asking if the full-year guide implies a slight year-over-year decline and requesting a segment-level breakdown (BCS up, HCS flat/down). He also asked for insights into the first half versus second half margin performance. Additionally, he inquired about Lennox's perspective on the HCS market for 2026, specifically regarding sell-in (e.g., 7.3M-7.4M units) versus sell-out (e.g., just under 8M units) and the expected degree of repair normalization in the industry.

Answer

CFO Michael Quenzer stated that the guide implies an EBIT ROS expansion of about 20 basis points, marking the fourth consecutive year of margin expansion. He expects BCS margins to be up more, while HCS will be flat to slightly down due to end market conditions. Seasonality will see a 3-4% lower revenue split in H1 vs. H2, leading to more margin headwinds in H1 but expansion in H2. CEO Alok Maskara avoided specific unit predictions, focusing on the sell-in number being positively impacted by the end of destocking. He expects repair versus replace activity to stabilize, noting improved dealer confidence despite low consumer confidence.

Julian Mitchell asked about the operating margin trajectory, specifically the magnitude of HCS margin decline due to underproduction in Q4, and the expected duration of margin headwinds from underproduction and acquisition amortization into next year. He also sought an understanding of recent changes in HCS sell-out behavior and the anticipated timeline for volume growth, assuming inventory reduction continues for six months.

Answer

CFO Michael Quenzer clarified that the full-year ROS is projected to expand by 50 basis points, with HCS slightly up and BCS flat. He noted a 20% decremental in Q4 and an absorption headwind in Q1 next year due to inventory build. CEO Alok Maskara described HCS sell-out as 'bouncing along the bottom' with 'green shoots,' driven by lower interest rates, improving home builder confidence, and pent-up demand from delayed replacements. He expects meaningful growth by Q2 next year after destocking concludes, making 2026 a growth year for both segments.

Julian Mitchell asked about the operating margin trajectory, specifically the magnitude of HCS margin impact from underproduction in Q4, and the expected duration of margin headwinds from underproduction and acquisition amortization. He also sought to understand changes in HCS sell-out behavior in recent months and the timeline for volume growth.

Answer

CFO Michael Quenzer stated that the full-year guide projects about 50 basis points of profit margin expansion, including headwinds from the Breeze acquisition (revenue with zero EBITDA). He noted an implied 20% decremental in Q4, with HCS seeing a slightly higher decremental due to absorption impact, and expects some absorption headwind in Q1 next year. CEO Alok Maskara observed that conditions are 'bouncing along the bottom' with 'green shoots' due to lower interest rates and improved mortgage rates, expecting meaningful growth by Q2 next year when destocking ends, making 2026 a growth year for both segments.

Julian Mitchell from Barclays Investment Bank asked for clarification on the full-year margin outlook, the drivers behind the significant margin difference between Q1 and Q2, and any specific guidance on Q3 versus Q4 performance.

Answer

CFO Michael Quenzer confirmed a full-year margin expansion forecast of about 50 basis points, with a similar expansion in both halves of the year. CEO Alok Maskara added that Q2 is a better gauge of performance than Q1, which was negatively impacted by manufacturing inefficiencies during the A2L transition. Quenzer noted that Q4 will face a tougher comparison due to the prior year's pre-buy and temporary share gains.

Julian Mitchell asked for confirmation of the flat full-year operating margin outlook and its quarterly cadence, and questioned if the 6-point increase in price guidance was assumed to have a one-for-one offset on the 6-point volume reduction.

Answer

CFO Michael Quenzer confirmed the guide implies flat full-year margins, with improvement in the balance of the year driven by the BCS segment. CEO Alok Maskara explained that while the price and volume changes coincidentally offset, the volume reduction was driven by specific assumptions like a slowdown in new construction and consumer confidence, not a direct price elasticity calculation, as replacement demand is largely non-discretionary.

Julian Mitchell asked about the Building Climate Solutions (BCS) segment's revenue outlook, given market concerns, and requested more specific guidance on Q1 earnings seasonality due to the prebuy.

Answer

CEO Alok Maskara expressed confidence in the BCS segment, noting its key markets remain healthy and that the business has been supply-constrained, not demand-constrained. CFO Michael Quenzer addressed seasonality by forecasting a 45/55 first-half/second-half revenue split for 2025, a departure from the typical 50/50, with benefits from mix and the new factory accelerating in the second half.

Julian Mitchell of Barclays asked for clarification on the 2025 margin outlook, questioning if the incremental margin would be similar to 2024's ~30%. He also revisited the prebuy topic, suggesting its net impact might be small given that share gains drove much of the 2024 volume upside and Q1 is a seasonally slow quarter.

Answer

CFO Michael Quenzer indicated that a 25% to 30% incremental margin for 2025 sounds in range, driven by mix benefits and volume gains, though final details are pending. CEO Alok Maskara agreed with the assessment that the prebuy impact is likely limited, noting that restocking and share gains were the primary drivers in Q3, but cautioned that Q4 prebuy activity is still a variable.

Julian Mitchell with Barclays inquired about Otis's total company service retention rate, specifically the figure at the end of 2025 compared to 92% at the end of 2024. He also asked why the 4% portfolio unit growth might be challenging to sustain despite increased service headcount, and sought clarification on the EPS phasing for 2026, given a flat Q1 and a $0.23 increase for the full year.

Answer

Judy Marks, Chair, CEO, and President of Otis Worldwide Corporation, stated that the retention rate outside of China stabilized in 2025 and is expected to show slight improvement in 2026. She clarified that while 4% portfolio growth is not inherently tough to sustain, Otis is consciously prioritizing growth in value (higher-contributing units) over mere volume, which might result in portfolio growth starting with a 3% but driving more top-line maintenance, repair value, and eventual modernization. Regarding EPS phasing, Judy Marks indicated that while the intent is not to rely solely on the second half, increases should be more visible starting in Q2 2026 compared to the previous year.

Julian Mitchell inquired about the total company service retention rate at the end of 2025, given the 92% rate at the end of 2024, and why the 4% portfolio unit growth might be challenging to sustain despite increased service headcount. He also asked for details on the EPS phasing for the year, specifically how the $0.23 increase would be distributed across the remaining nine months after a flat Q1.

Answer

Judy Marks, Chair, CEO, and President of Otis Worldwide Corporation, stated that the retention rate outside of China stabilized in 2025 and is expected to strengthen in 2026. She clarified that while 4% portfolio growth is sustainable, the company is consciously prioritizing 'growth in value' by focusing on higher-contributing units, which might result in a slightly lower unit growth rate but higher overall value. She explained that the intent is not to depend solely on the second half for EPS growth as in the previous year, expecting to see more EPS increase in Q2 compared to the prior year.

Julian Mitchell asked about the free cash flow trend, noting a divergence where adjusted operating margins rise but free cash flow margins fall, and inquired if this trend could reverse soon. He also sought clarification on changes in the cash restructuring burden and the impact of rising modernization on the business's free cash flow dynamics. Additionally, he asked for an update on service pricing and margin dynamics within China, given that China is expected to comprise a significant portion of the maintenance portfolio unit expansion in 2025.

Answer

Cristina Méndez, EVP and CFO, Otis Worldwide Corporation, explained that Q3 saw sequential free cash flow improvement to $337 million, with an 81% conversion rate, below the historical 100% due to working capital buildup from the shift in business mix (declining new equipment, growing service). She expressed confidence that this is temporary, with a return to 100% conversion by 2026, supported by positive new equipment orders, modernization advances, and improving collections. Judy Marks, Chair, CEO, and President, Otis Worldwide Corporation, clarified that China is not expected to account for half of next year's portfolio growth. She noted a more disciplined approach to service conversions and pricing in China, focusing on higher-tier cities and leveraging the merger of two service brands for improved efficiency and productivity, which is expected to enhance service contribution in 2026.

Julian Mitchell, MD and Industrial Equity Research Analyst at Barclays, inquired about the trend of rising adjusted operating margins but falling free cash flow margins, asking when this dynamic might reverse. He also sought clarification on the burden of cash restructuring and how the rise in modernization affects the business's free cash flow dynamics. Additionally, he asked for an update on service pricing and margin dynamics within China, particularly given its significant contribution to maintenance portfolio unit expansion.

Answer

Cristina Méndez, EVP and CFO, noted a sequential improvement in Q3 free cash flow to $337 million, with an 81% conversion rate, below the historical 100%. She attributed this to temporary working capital buildup from the business mix shift (declining new equipment, growing service), expecting a return to 100% conversion by 2026. Positive signals include positive new equipment orders in Q3 (generating advances), modernization projects having similar favorable working capital dynamics to new equipment, and improving collections. Judy Marks, Chair, CEO, and President, clarified that China is not expected to comprise half of next year's portfolio growth. She discussed a disciplined approach to growth in China, focusing on tier-one cities and merging service brands for efficiency, anticipating improved service contribution in 2026.

Julian Mitchell from Barclays Investment Bank asked about the company's free cash flow, which has been flat for four years despite sales and income growth, and questioned if industry payment terms were changing. He also asked how operating margins could expand in the second half despite increased tariff headwinds.

Answer

EVP & CFO Cristina Méndez attributed the flat cash flow to a business mix shift away from new equipment, which has more favorable working capital, calling it a temporary effect. CEO Judith Marks added there have been no structural changes to industry payment terms. Regarding margins, Méndez explained that the impact of tariffs will be more than offset by a favorable business mix from accelerating repair and modernization sales, combined with savings from the Uplift and China transformation programs.

Julian Mitchell from Barclays Investment Bank asked a broader question about why free cash flow has been flat for four years despite earnings growth, and also questioned the drivers of the back-half operating margin step-up given tariff headwinds.

Answer

EVP & CFO Cristina Méndez explained that flat free cash flow is a temporary result of a business mix shift away from new equipment, which has more favorable working capital, and not due to structural changes. She noted the back-half margin expansion will be driven by a strong acceleration in higher-margin repair and modernization sales, plus savings from cost programs, which will offset the tariff impact.

Julian Mitchell of Barclays asked about the expected cadence for organic sales and operating margins through the remainder of the year, noting the contrast between flat Q1 sales and the 3% full-year growth guide, and the 40 bps Q1 margin expansion versus a flatter full-year outlook.

Answer

Chair, CEO and President Judy Marks stated that top-line growth will be steady and accelerate from Q1 levels as repair and modernization backlog conversion improves. CFO Cristina Mendez provided margin cadence details: New Equipment margins will face headwinds in Q2 from lower-priced China backlog, while Service margins will see a tough Q2 compare before accelerating in the second half. Overall, she guided for flattish total company margins in the first half, with expansion in the second half.

Julian Mitchell sought to clarify the drivers behind the expected EPS cadence of a flat first half and stronger second half in 2025. He also asked if the New Equipment backlog is expected to be up by year-end 2025 and what underpins the China stabilization assumption.

Answer

Executive Cristina Mendez confirmed the H1/H2 cadence is driven by challenged New Equipment results and FX headwinds in H1, with transformation benefits flowing through in H2. Executive Judith Marks provided a regional backlog breakdown showing a mixed picture and explained the China stabilization outlook is based on discussions with local officials and state-owned enterprises, not on assumptions of new stimulus.

Julian Mitchell sought clarification on the Q4 operating profit outlook, noting it implied a significant year-over-year increase driven by Service. He also asked about the 2025 New Equipment margin outlook, questioning the assumptions for pricing and any additional cost-out measures.

Answer

EVP and CFO Cristina Mendez confirmed the analysis, stating Q4 Service profit would be very strong with margins above 25%, offsetting a New Equipment profit decline. For 2025, she and CEO Judith Marks indicated that New Equipment margins would likely persist at the lower second-half 2024 rate due to mix shifts and fading tailwinds, but strong Service performance would drive mid-single-digit overall operating profit growth.

Julian Mitchell inquired about the competitive threat from smaller turbine makers, their potential to gain market share, and the possible negative effects on pricing in the gas power equipment market given GE Vernova's measured capacity increases and long lead times.

Answer

CEO Scott Strazik reiterated that slot reservation agreements continue to show 10-20 points of pricing strength. He viewed smaller applications as enabling earlier power that GE Vernova cannot provide, rather than direct competition for base load, emphasizing the importance of efficiency for 20-year business cases. CFO Kenneth Parks added that GE Vernova's own aero-derivative unit sales (63 orders in 2025) inform their understanding of how customers utilize such equipment.

Julian Mitchell inquired about the threat of smaller turbine makers gaining market share, given GE Vernova's measured capacity increases and long lead times, and the potential negative effects on pricing in the equipment market.

Answer

CEO Scott Strazik reiterated pricing strength in SRAs and viewed smaller applications as enabling earlier power rather than direct competition for base load, emphasizing the economic advantage of heavy-duty gas turbines for base load. CFO Kenneth Parks highlighted GE Vernova's own aero-derivative units, with 63 orders booked last year, informing their market perspective.

Julian Mitchell asked for clarification on the significant positive delta between power equipment dollar orders and gas gigawatt orders, seeking insight into price versus mix tailwinds. He also inquired about GE Vernova's capacity addition plans for aeroderivative gas turbines given strong demand and competition.

Answer

CEO Scott Strazik attributed the dollar-to-gigawatt delta to the mix of aeroderivative versus heavy-duty gas turbines and simple versus combined cycle bookings. He confirmed strong demand and expected growth for aeroderivatives, stating factories are well-prepared. Scott Strazik reiterated accelerating price and margin trends in gas turbines and slot reservation agreements, promising an update on equipment backlog margin in the Q4 earnings call. CFO Ken Parks noted that excluding non-gas power orders, the order per gigawatt metric appears relatively flat sequentially.

Julian Mitchell asked for clarification on the positive delta between power equipment dollar orders and gigawatt orders, seeking insight into price versus mix tailwinds, and GE Vernova's plans for capacity additions in aero derivatives.

Answer

CEO Scott Strazik confirmed strong demand and expected growth for aero derivatives, with factories prepared for this. He attributed the dollar vs. gigawatt delta to the aero vs. heavy-duty mix and the inclusion of combined cycle components (steam turbines, generators) in dollar orders but not gigawatt orders. He reiterated accelerating price and margin trends in gas turbines, expecting significant equipment backlog margin growth. CFO Ken Parks clarified that after backing out non-gas power orders, the order per gigawatt dollar figure remains relatively flat quarter-to-quarter, with positive growth in both heavy-duty and aero sides.

Julian Mitchell asked about the demand outlook and margin trajectory for the Electrification segment, noting regional differences, potential softness in European HVDC projects, and margins approaching medium-term goals.

Answer

CEO Scott Strazik acknowledged the strong margin performance, suggesting a potential update to the 2028 targets later in the year. He confirmed that while core demand for transformers and switchgear is strong, large HVDC projects face more scrutiny and pricing is decelerating, requiring a focus on productivity. CFO Ken Parks added that significant margin is already locked into the backlog from prior periods, which will support future profitability as it is delivered.

Julian Mitchell asked about the demand outlook and margin trajectory for the Electrification segment, noting regional differences, potential softness in European HVDC projects, and margins approaching the company's medium-term goals.

Answer

CEO Scott Strazik confirmed strong margin performance, suggesting the 2028 target for Electrification may be updated later in the year. He noted that while large, lumpy HVDC projects face scrutiny, core equipment orders remain strong. Strazik added that pricing gains are decelerating, increasing the need for cost productivity. CFO Ken Parks emphasized that significant margin expansion from the past two years is already embedded in the backlog and will be realized as it's delivered in future years.

Julian Mitchell questioned the full-year EBITDA margin guidance, noting that H1 performance appears on track to meet the annual target, which seems to imply a less-than-normal seasonal step-up in H2. He asked for factors that might cause this.

Answer

CFO Ken Parks explained that while the start was strong, Q1 is the smallest quarter, and the new $300-$400 million tariff impact was not in the original guide. He noted the tariff impact is most immediate in the Wind segment. CEO Scott Strazik added that it was only 90 days into the year and they would reassess performance in the summer.

Julian Mitchell from Barclays asked for details on the Power segment's organic sales growth trajectory for 2025 and the expected growth drivers within Power Services.

Answer

CEO Scott Strazik explained the growth pace is based on the known rollout of the existing backlog, giving them high visibility. He noted opportunities in both contractual and transactional services due to higher utilization. CFO Kenneth Parks added that they expect an acceleration to high single-digit growth in '26 and beyond.

Julian Mitchell inquired about the execution timeline for the remaining $3 billion offshore wind backlog and sought an update on the U.K. project following recent turbine blade issues.

Answer

CEO Scott Strazik stated that the offshore backlog completion, previously targeted for late 2025, is now delayed. He confirmed the blade issue stemmed from a manufacturing deviation in Canada affecting a small percentage of blades, and that work is resuming at both the Dogger Bank and Vineyard Wind projects. CFO Ken Parks added that the $700 million charge taken this quarter is intended to cover all anticipated costs for blade remediation and project delays.

Julian Mitchell asked about the outlook for the TEP segment and Neptune's top line, specifically the confidence that organic growth won't continue slowing into next year given declining backlog dynamics. He also inquired about the implications of Roper's AI efforts on core R&D and whether there's a view to acquire more AI-intensive businesses.

Answer

President and CEO Neil Hunn clarified that Neptune's backlog dynamics reflect a normalization of order lead times from the COVID period, not a decline in demand, and the business is returning to normalized growth after accelerated prior years. EVP and CFO Jason Conley stated that AI is driving productivity, so the R&D envelope is expected to remain stable, with small, market-accelerating AI tuck-ins being an option but not the primary acquisition strategy.

Julian Mitchell asked about the outlook for Roper Technologies' TEP segment, particularly Neptune, and the confidence that organic revenue growth won't continue slowing into next year given current backlog dynamics. He also inquired about the implications of AI efforts on core R&D, specifically if it could be a headwind to core margin expansion, and the strategy for acquiring AI-intensive businesses.

Answer

Neil Hunn, President and CEO, clarified that Neptune's backlog decline is due to the normalization of order lead times post-COVID, not demand issues, and the business is returning to normalized growth after accelerated growth in prior years. Jason Conley, EVP and CFO, stated that AI is driving productivity, allowing the R&D envelope to remain consistent while achieving more, thus not posing a headwind to margin expansion. Mr. Conley mentioned that while small tuck-ins for AI solutions may occur occasionally, it's not the primary acquisition strategy.

Julian Mitchell questioned the confidence in a back-half organic growth acceleration given recent bookings data, and asked about the EBITDA margin outlook for the Application Software segment.

Answer

President and CEO Neil Hunn clarified that trailing 12-month bookings are up low-double digits, which is the key indicator for future revenue, not a single quarter's result. EVP and CFO Jason Conley added that growth will be supported by improvements at DAT, Foundry, and Neptune. For margins, he expects nice core margin expansion in Application Software, with acquisition margins also improving through the year.

Julian Mitchell asked for color on the 2025 EBITDA margin outlook, specifically the trajectory of core versus headline margins. He also inquired about the revenue outlook for the Technology Enabled Products (TEP) segment, the expectation for Neptune, and the segment's Q4 backlog performance.

Answer

EVP and CFO Jason Conley confirmed that core margins should be up in 2025, but headline margins will be impacted by acquisitions like Transact, especially in the first half. President and CEO Neil Hunn stated the TEP segment is expected to have high single-digit growth, with Neptune performing well. Jason Conley added that TEP backlog has normalized from elevated supply-chain levels but remains healthy, with distributors restocking.

Julian Mitchell asked about the expected recovery slope for the Network Software segment, particularly for DAT, Loadlink, and Foundry, and questioned the outlook for TEP segment EBITDA margins returning to year-on-year expansion.

Answer

An executive explained that while the freight market is stabilizing, DAT and Loadlink are expected to return to modest growth next year through packaging and price, independent of market improvement. Foundry's recovery is now expected in 2025. Regarding TEP margins, an executive stated that after being down due to tough comps and investment at NDI, margins should inflect back up in the fourth quarter, aiming for flat for the full year.

Julian Mitchell inquired about the Americas segment's Price, Productivity, Inflation, and Investment (PPII) bucket, asking if a gross price of 4-5% is a good placeholder and if PPII will remain a tailwind, in the context of the long-term 35% incremental margin target.

Answer

SVP and CFO Mike Wagnes explained that PPII improved as the year progressed, effectively combating inflation, particularly tariffs. He reiterated that Allegion's strategy is to drive pricing and productivity to cover inflation and investment, thereby supporting margin expansion. He affirmed the long-term incremental margin target of 35% for long-term investors and noted that the implied margin expansion for Q4 is calculable.

Julian Mitchell inquired about the flattish adjusted operating margins in Q3 year-over-year, asking if a pickup with margin expansion is expected in Q4, and how corporate cost movements will impact Q4 and next year. He also asked about the Americas segment's PPII (price, productivity, inflation, investment) tailwind in Q3, whether a 4-5% gross price is a good placeholder, and if the mid-30s operating leverage target from Investor Day remains on track.

Answer

SVP and CFO Mike Wagnes explained that Q3 saw segment margin expansion offset by higher corporate costs, but expected margin expansion for the full year and Q4. He provided a run-rate estimate for corporate costs. For the Americas, Mr. Wagnes noted that PPII improved as the year progressed, driven by pricing benefits covering inflation (including tariffs), and reiterated the long-term incremental margin target of 35% for the Americas segment.

Julian Mitchell from Barclays Investment Bank asked for a breakdown of the key drivers behind the significant full-year adjusted EPS guidance increase. He also sought clarification on the expected acceleration in organic sales growth in the second half, questioning the split between price and volume and the contributions from non-residential versus residential markets.

Answer

SVP & CFO Mike Wagnes detailed that the EPS guidance raise was driven by three main factors: strong operational performance in the first half, the impact of accretive acquisitions, and favorable foreign exchange rates. Regarding second-half growth, he explained the primary driver of the acceleration is the timing of tariff surcharge revenue, with the majority recognized in H2, supplemented by continued strength in the non-residential business.

Julian Mitchell focused on the Americas residential market, asking about replacement demand and market share opportunities. He also questioned if the 'price productivity net of inflation' line in the profit bridge would remain neutral for the year.

Answer

CEO John Stone described the residential market as soft due to high mortgage rates and noted it was premature to assess tariff-related share shifts, emphasizing their focus on electronics innovation. CFO Michael Wagnes affirmed the full-year goal is for the price/productivity line to be neutral, despite potential quarterly fluctuations like the Q2 timing lag.

Julian Mitchell from Barclays inquired about the implied adjusted operating margin expansion in the 2025 forecast and the specific organic sales growth expectations for the Americas' residential, non-residential, and electronics businesses.

Answer

CFO Michael Wagnes confirmed that Allegion expects margin expansion in 2025, likely at the lower end of the previously stated 50-100 basis point framework, with seasonality similar to 2024. He also noted that non-residential growth is expected to be stronger than residential, and electronics growth is anticipated to outpace the overall Americas segment.

Julian Mitchell asked for details on the residential market outlook for 2025, including the mix between new construction and aftermarket, and the typical lag between interest rate changes and revenue impact. He also questioned the growth trajectory for the electronics business, asking about medium-term assumptions and the likelihood of returning to trend growth in 2025.

Answer

CFO Mike Wagnes clarified the residential business is approximately two-thirds aftermarket and one-third new build, with the aftermarket responding more quickly to economic shifts than new construction. CEO John Stone addressed electronics, stating that after a year of unusual comparisons, he expects a more normal environment in 2025. He reaffirmed the long-term view of electronics as a high-single to low-double-digit growth driver for Allegion.

Julian Mitchell from Barclays Investment Bank inquired about the opportunity of pairing AirJoule's technology with gas turbines and the strategic rationale behind choosing Hubbard, Texas for the waste heat to water demonstration project.

Answer

Chief Commercialization Officer Bryan Barton explained that pairing with power generation systems creates a 'combined heat and power plus water' solution, capturing significant waste heat from inefficient engines. For the Hubbard project, Barton highlighted the unique situation where the town's well water is naturally hot (140°F), providing a free source of geothermal heat that AirJoule can use to demonstrate its waste-heat-to-water capabilities and pursue regulatory certification.

Julian Mitchell from Barclays Investment Bank inquired about the opportunity of pairing AirJoule technology with gas turbines and reciprocating engines, and asked for more details on the site selection for the waste heat to water demonstration project in Hubbard, Texas.

Answer

Chief Commercialization Officer Bryan Barton explained that pairing with turbines creates a 'combined heat and power plus water' solution by capturing significant waste heat. For the Hubbard project, Barton detailed that the city's well water is naturally very hot (140°F), providing a unique source of geothermal heat that AirJoule can tap into to demonstrate its waste heat to water capabilities.

Julian Mitchell from Barclays questioned the reduction in the high end of the EPS guidance despite tailwinds from FX and M&A. He also asked for confirmation that the backlog is not expected to decline materially due to strong order intake.

Answer

CFO Olivier Leonetti clarified that the midpoint of the EPS guide was raised by $0.07. He explained the guidance reflects a balance of tailwinds (FX, Fiberbond) and headwinds (strategic investments, underperformance in Vehicle/eMobility, and general prudence). CEO Paulo Ruiz and Leonetti both confirmed the view that the backlog is unlikely to decline, and will likely increase, given the strong order flow and an expected book-to-bill ratio above one.

Julian Mitchell of Barclays sought clarification on the 45% data center sales growth figure, asked if 2025 guidance assumes similar growth, and inquired about the drivers for the guided margin expansion in Aerospace.

Answer

Craig Arnold, Chairman & CEO, clarified the data center growth figure includes the broader IT channel and is not solely a component of Electrical segment sales. He and Paulo Sternadt, President & COO, confirmed 2025 guidance assumes continued very strong data center growth. For Aerospace, Paulo Sternadt attributed the expected margin improvement to a dedicated focus on operational performance and efficiency gains.

An analyst on behalf of Julian Mitchell at Barclays asked about the extent of current capacity constraints, trends in lead times for products like switchgear and UPS, and the timeline for new capacity coming online. They also inquired about the expected growth gap between Electrical Americas and Electrical Global in 2025.

Answer

Chairman and CEO Craig Arnold acknowledged that lead times are still not ideal due to stronger-than-forecasted demand, particularly in Electrical Americas. He confirmed the $1.5 billion in investments is targeted at these constraints. Regarding the 2025 growth gap, Arnold noted it's too early for specific segment guidance but suggested the Americas would likely continue to see disproportionate growth due to its exposure to mega trends like data centers and reindustrialization, while Europe's short-cycle markets are just beginning to bottom out.

Julian Mitchell of Barclays Investment Bank asked whether the improvement in the general industrial and safety businesses was driven by company-specific initiatives or a better macro environment, and also requested guidance on the earnings cadence between Q3 and Q4.

Answer

CEO William Brown attributed the momentum primarily to 'self-help' from new product introductions and commercial excellence initiatives, stating the macro environment remains sluggish and is moving laterally. CFO Anurag Maheshwari advised that Q3 EPS is historically higher than Q4 and expects a similar dynamic this year, with a rough split of 52% of second-half EPS in Q3 and 48% in Q4.

Julian Mitchell of Barclays sought clarity on the full-year organic sales outlook, asking if growth is expected to be steady throughout the year or if a dip is anticipated in Q2. He also requested details on the phasing of the net tariff impact and its potential variation by business segment.

Answer

CFO Anurag Maheshwari responded that the company is trending toward the lower end of its 2% to 3% organic growth range but expects a stable trajectory. He clarified that Q2 sales should be at or slightly better than Q1, with no dip expected. Regarding tariffs, Maheshwari explained the financial impact will be concentrated in the second half of the year due to existing inventory levels, and that more detail on the segment-level impact would be provided later.

Julian Mitchell sought to understand the operating margin expansion framework, specifically the delta between the $450 million total productivity figure and the previously cited COGS target. He also asked for details on the significant sequential EPS step-up expected from Q1 to Q2 2025.

Answer

CFO Anurag Maheshwari clarified that the $450 million productivity number is a total company figure including SG&A, while the 2% target (~$250M) is specific to COGS. He explained the Q1 to Q2 EPS jump is primarily due to the timing of equity-based compensation, which creates a $0.15 headwind in Q1 2025 that reverses to become a tailwind in Q2, as the accrual returns to a historical Q1 pattern versus being deferred to Q2 in 2024.

Julian Mitchell from Barclays asked about the medium-term path to achieving high-40s gross margins and how operating expenses would factor in. He also inquired about the demand outlook for next year and the net impact of accelerating new product introductions against portfolio pruning efforts.

Answer

CEO William Brown stated that achieving high-40s gross margins is possible, driven by a targeted 2% annual net productivity on the $13 billion cost base, though the journey won't be linear. He expects R&D and SG&A to remain relatively stable as a percentage of sales. Regarding growth, Brown noted that while new product introductions are accelerating, their main impact will be felt in late 2025 and 2026. Near-term growth hinges on improving sales execution and on-time delivery.