Kenneth Newman

Kenneth Newman sought clarification on the expected revenue phasing for fiscal year 2026, specifically how the 'less pronounced sequential growth in H1' aligns with historical Q4 to Q1 sequential declines. He also asked about the memory intensity of Symbotic deployments and the impact of higher DRAM pricing and memory shortages on chip availability and margin stability.

Answer

Izzy Martins (CFO, Symbotic) acknowledged historical trends but noted that the high end of Q1 guidance would break them, with the midpoint implying flat sequential revenue, reflecting an internal goal to move past lumpiness. Rick Cohen (CEO, Symbotic) stated that chips are not a significant problem, as bots primarily transmit data for cloud processing rather than direct on-bot AI, and Symbotic uses lower-priced chips not affected by high-end shortages, ensuring margin stability.

Kenneth Newman sought clarification on the expected phasing of revenue for fiscal year 2026, specifically the 'less pronounced sequential growth' in the first half versus the back half, contrasting it with historical sequential declines from Q4 to Q1. He also asked about the impact of higher DRAM pricing and memory shortages on Symbotic's deployments, chip availability, and potential risks to margins.

Answer

CFO Izzy Martins acknowledged historical trends but noted that the high end of the Q1 guidance could break those trends, with the midpoint suggesting flat revenue to Q4, aiming to reduce lumpiness. CEO Rick Cohen stated that chip availability and pricing are not a significant problem for Symbotic, as their bots primarily transmit data for cloud processing rather than relying on high-end, memory-intensive chips directly on the bots, making it a controllable expense.

Ken Newman of KeyBanc Capital Markets asked for the sequential outlook for Systems gross margin from Q3 to Q4, considering the announced production schedule shifts. He also inquired about the potential to capitalize R&D expenses and the resulting impact on the structural free cash flow profile.

Answer

CFO Carol Hibbard stated the expectation is for Systems gross margin in Q4 to remain at a similar level to Q3, with software gross margins also holding around the 70% level. She clarified that a substantial portion of R&D is now being charged to the contracted ASR project, which contributed to the sequential reduction in reported R&D expense, and that this trend would continue.

Kenneth Newman of KeyBanc Capital Markets Inc. followed up on the tariff issue, asking if suppliers are already pushing price increases and about the potential magnitude of the pass-through. He also questioned if EBITDA margin expansion is possible through SG&A leverage, even with weaker gross margins from tariff pass-throughs.

Answer

CFO Carol Hibbard confirmed that the tariff impact, primarily from Europe, will begin in Q3 and represents a single-digit percentage of a typical system's cost. She added that they are in discussions with suppliers to find offsets. Hibbard also affirmed their focus on SG&A leverage, noting that as they scale and realize synergies from acquisitions, they can improve operational efficiency and profitability.

Kenneth Newman of KeyBanc Capital Markets asked if systems gross margin could exceed 20% in the first half of the year and questioned the competitive implications of potentially cheaper AI model training.

Answer

CFO Carol Hibbard stated that breaking 20% systems gross margin in the first half is optimistic, particularly for Q2, citing the drag from ops gross margin and increased OpEx. CEO Rick Cohen addressed the AI question by emphasizing Symbotic's competitive moat, stating that with 1 billion annual transactions, the company's vast and unique dataset for training AI models keeps it far ahead of competitors, regardless of training cost reductions.

Kenneth Newman requested more color on the sizing of Q1 OpEx increases, specifically the split between tech innovation and EPC in-sourcing. He also asked about the potential gross margin impact from rising steel costs.

Answer

CFO Carol Hibbard clarified that EPC costs are part of COGS, not OpEx, and the Q1 OpEx increase is driven by R&D and SG&A to support scaling. Regarding steel, she explained that most contracts have pass-through clauses, which protect gross profit dollars but could nominally impact the gross margin percentage.

Ken Newman sought an update on the Engineered Solutions segment's performance through October and confidence in backlog conversion, as well as the company's capital allocation priorities between M&A and share buybacks.

Answer

President and CEO Neil Schrimsher reported continued good order activity in Engineered Solutions, with teams focused on conversion. He noted some MRO softness in flow control but anticipates improvement, expressing optimism for H2 FY26 driven by wafer fab equipment, life sciences, pharma, and data center participation. On capital allocation, Mr. Schrimsher reiterated priorities: organic growth, M&A (active pipeline), and shareholder returns (dividend, buybacks), emphasizing a disciplined acquisition approach.

Ken Newman sought color on the Engineered Solutions segment's performance through October, confidence in backlog conversion timing, and the company's capital allocation priorities between M&A and share buybacks, especially concerning the deal environment for automation.

Answer

Neil Schrimsher, President and CEO, reported continued good order activity and focus on conversion in Engineered Solutions, expecting stronger performance in the second half of fiscal 2026 due to wafer fab equipment, life sciences, and data center opportunities. He reiterated capital allocation priorities: organic growth, M&A (active pipeline with bolt-ons and mid-size targets), and shareholder returns via dividends and buybacks, noting the deal environment is not more difficult.

Ken Newman of KeyBanc Capital Markets questioned the assumptions behind the low end of the organic sales guidance, sought clarity on margin trends by segment for fiscal 2026, and asked about the possibility of adjusting earnings for intangible amortization.

Answer

President & CEO Neil Schrimsher explained that the low end of the guidance reflects a prudent approach given macro and tariff uncertainty, with the midpoint assuming these headwinds abate in the second half. CFO David Wells clarified that Q4 AR provisioning primarily impacted the Service Center segment and expects margins to normalize. He noted Hydrodyne's mix impact on Engineered Solutions margins is improving. Regarding adjusted earnings, Wells stated a preference for maintaining consistent reporting and transparency rather than adding back intangible amortization.

Kenneth Newman of KeyBanc Capital Markets Inc. asked about the sustainability of the company's mid-to-high teens incremental margin target amid potential headwinds like LIFO expense. He also inquired about capital deployment priorities, particularly the balance between M&A and the newly announced share repurchase program.

Answer

President and CEO Neil Schrimsher reaffirmed the long-term mid-to-high teens incremental margin goal, citing the company's proven ability to manage through inflationary cycles. He stated that growth, through both organic investment and M&A, remains the primary capital allocation priority, but confirmed they will be active with buybacks. CFO David Wells added that with leverage at just 0.4x, the company has 'plenty of dry powder' for all capital deployment opportunities.

Kenneth Newman requested clarification on January's sales trends, the company's long-term target for the business mix between Engineered Solutions and Service Centers, and the outlook for revenue growth in the automation and tech subsectors.

Answer

President and CEO Neil Schrimsher explained that January sales improved from down double-digits early in the month to up low-single-digits in the final weeks. He stated that while Engineered Solutions could grow to 50% of the business, a balanced 50-50 mix would be a good outcome. He also noted encouraging order rates in automation and tech. Executive Ryan Cieslak added that both segments would likely trend similarly in Q3, with Engineered Solutions potentially outperforming in Q4.

Kenneth Newman asked for quantification of the hurricane impacts on October sales trends and for color on the monthly sales comps for November and December. He also inquired whether management believes Applied is gaining market share, given its outperformance relative to a competitor's weaker industrial demand.

Answer

President and CEO Neil Schrimsher stated it was difficult to quantify the hurricane's impact but acknowledged some customer disruption. Executive Ryan Cieslak provided color on comps, noting November's is similar to October's while December's is easier. Schrimsher attributed the company's strong performance to its strategic focus and execution, highlighting the trend of customers consolidating spend with more capable suppliers and the growing contribution from cross-selling initiatives.

Ken Newman (via Katie) inquired about the expected stability of packaging margins for full year 2025 compared to 2024, the impact of cost-out initiatives on packaging margins this quarter, and the remaining potential for further improvements within that segment. He also asked about the long-term EBITDA margin potential for TriMas Aerospace, referencing a peer's 30% margin.

Answer

CFO Teresa Finley confirmed expectations for relatively stable packaging margins year-over-year for 2025, noting ongoing tariff pressures as a headwind. President and CEO Thomas Snyder highlighted that the company is early in its operational excellence program for packaging, identifying significant opportunities for improvement through footprint optimization, lean principles, and standardization, particularly looking into 2026. Regarding aerospace margins, Finley stated satisfaction with current levels while acknowledging continuous opportunities for improvement through robotics and increased throughput. Snyder added that facility visits show energy around increasing throughput, value stream mapping, and waste reduction, with capacity growth primarily constrained by skilled human resources, which they aim to increase by about 10% annually.

Ken Newman of KeyBanc Capital Markets inquired about TriMas's long-term portfolio strategy, particularly the future of the Aerospace segment. He also asked about the drivers behind the implied moderation in Aerospace operating margins for the second half of 2025, the potential revenue from the 2026 Airbus contract, opportunities for self-help improvements in Packaging, and the normalized incremental margin for Aerospace during an up-cycle.

Answer

President & CEO Thomas Snyder stated the immediate focus is on maximizing the current portfolio through operational improvements, while a long-term strategic review continues. CFO Teresa Finley explained that the second-half Aerospace margin moderation is due to normal seasonality and some non-recurring Q2 customer benefits. Regarding the Airbus contract, Finley deferred specific guidance to 2026. Both executives acknowledged significant margin improvement opportunities in Packaging through standardization and process integration, particularly with recent acquisitions, though they did not provide a specific target. Finley confirmed the first-half incremental margin for Aerospace is a fair assumption for the current up-cycle.

Kenneth Newman of KeyBanc Capital Markets asked if full-year segment guidance was maintained, inquired about potential headwinds beyond freight costs, and questioned the timeline for production shifts due to tariffs. He also probed the strong Q1 Aerospace organic growth versus the conservative annual outlook and asked about customer inventory levels and potential pre-buying activity.

Answer

President and CEO Thomas Amato confirmed that segment guidance is unchanged due to broad market uncertainty, particularly around tariffs. He stated that while the company incurred a one-time freight expense in Q1, similar costs are not expected, but relocating production could take over a year if needed. Regarding Aerospace, Amato attributed the conservative outlook to general uncertainty despite the strong start. He also noted no abnormal customer pre-buying activity and said the company would have more clarity on tariff impacts by the end of Q2.

Kenneth Newman inquired about the quantifiable margin enhancement expected in 2025 for each business segment, the impact of tariffs on the Packaging business, and the company's strategic direction regarding its portfolio and the ongoing CEO search.

Answer

CFO Scott Mell provided specific margin enhancement targets for 2025: 100-150 basis points for Packaging, 150-200 bps for Aerospace, and 100-150 bps for Norris Cylinder. President and CEO Thomas Amato addressed tariffs, explaining that near-term mitigation involves commercial actions while long-term solutions could involve relocating manufacturing, a 12-18 month process. Regarding strategy, Mr. Amato stated the Board is assessing how to unlock maximum shareholder value from its high-quality business platforms. Mr. Mell added that the Board is actively working with Spencer Stuart on the CEO search.

Kenneth Newman of KeyBanc Capital Markets inquired about labor risks in the Aerospace segment, the potential impact of the Boeing strike on inventory and orders, and the drivers for the anticipated Q4 margin improvement in the Packaging segment. He also asked about the company's portfolio strategy in light of a new major shareholder, the M&A pipeline, and the expected financial profile of the GMT Aerospace acquisition.

Answer

President and CEO Thomas Amato confirmed that with a new 3-year labor agreement at its single unionized aerospace facility, no further near-term labor disputes are expected. He noted that a backlog of orders should mitigate any immediate impact from the Boeing strike. The expected Q4 packaging margin improvement is attributed to eliminating operational inefficiencies from a rapid demand snap-back, not just volume absorption. Regarding portfolio strategy, Amato stated the board's review process is a normal course of business and has not changed. CFO Scott Mell added that the GMT acquisition is expected to be accretive to adjusted EPS, while Amato described the M&A pipeline as active for Packaging and more selective for Aerospace.

Kenneth Newman asked for guidance on sequential gross margins from Q3 to Q4, considering the lower Q3 gross margins and stronger SG&A leverage. He also inquired if Herc Holdings Inc. would disclose H&E Equipment Services Inc.'s specific contribution to rental revenue and adjusted EBITDA for the quarter to assess core dollar yield.

Answer

Mark Humphrey, SVP and CFO, advised that total DOE and SG&A in Q3 was approximately 55%, which is a reasonable proximity for Q4, though Q4 might see slightly less efficiency due to a seasonal revenue downtick. He stated that Herc Holdings Inc. would not disclose separate performance metrics for H&E Equipment Services Inc. and Herc Holdings Inc. but confirmed the combined business performed as expected in Q3.

Kenneth Newman asked for guidance on how to project gross margins sequentially from Q3 to Q4, given that Q3 gross margins were lower than expected while SG&A leverage was stronger. He also inquired if Herc Holdings Inc. had disclosed H&E's specific contribution to rental revenue and adjusted EBITDA in the quarter, to better understand core dollar yield.

Answer

Mark Humphrey, SVP and CFO, explained that Q3 had some 'noise' in the original view due to expense mapping. He suggested that the combined DOE and SG&A in Q3, approximately 55%, is a reasonable proximity for Q4, though Q4 might be slightly less efficient due to a seasonal revenue downtick. Humphrey stated that the company does not disclose separate performance metrics for H&E and Herc post-integration, but confirmed that the overall business performed as expected in Q3.

Ken Newman from KeyBanc Capital Markets Inc. asked for details on the $125 million cost synergy target, specifically the portion related to headcount and the timing of these reductions. He also inquired about the strategy to recapture market share lost during the H&E transition.

Answer

SVP & CFO Mark Humphrey confirmed a 'pretty good chunk' of synergies are from headcount and that the company is on track to achieve 50% of the run-rate target by year-end via a phased plan. SVP & COO Aaron Birnbaum stated that Herc has data on lost customers and is actively using its larger sales force to 'claw that back.'

Kenneth Newman asked if EBITDA flow-through normalized in March back to the 40-50% range. He also questioned the source of confidence in local market stability, suggesting it may have been down year-over-year in Q1.

Answer

CFO W. Humphrey confirmed it was fair to assume flow-through normalized in March as demand recovered. CEO Lawrence Silber expressed confidence in local market stability due to business diversification and the expansion of specialty offerings, and he stated that he did not believe local revenue was down year-over-year in Q1.

Kenneth Newman asked for expectations on the cadence of core dollar utilization for 2025 and whether management believes the rental industry is currently overfleeted, especially in local markets.

Answer

CFO W. Humphrey stated the goal is to maintain dollar utilization by managing fleet mix, but acknowledged the challenge from slower local markets. CEO Lawrence Silber asserted that the industry is not overfleeted, citing discipline in disposals and rates from peers and OEMs, and attributed local market softness to a slowdown in new project starts, not excess supply.

Kenneth Newman asked for a bridge explaining the drivers of the implied Q4 EBITDA margin expansion, questioning the contribution from hurricanes, volume, and cost actions. He also inquired if it was fair to assume fleet growth beyond replacement levels in 2025.

Answer

CFO W. Humphrey attributed the expected Q4 margin strength to cost actions taken in Q2, strong demand components, and a more favorable year-over-year comparison, noting the hurricane impact was still uncertain. CEO Lawrence Silber stated it was too early to guide 2025 fleet growth but confirmed that, at a minimum, the company would cover replacement CapEx, prioritizing mega projects and acquisition needs.

Ken Newman (via Katie) inquired about the risk of difficulty in passing on supplier price notifications to customers, especially if they accelerate, citing rising tungsten prices as an example. He also asked about the year-to-date impact of the government shutdown, specifically MSC Industrial Supply's federal exposure and the observed slowdown in public sector sales.

Answer

Martina McIsaac, President and COO, expressed satisfaction with price realization so far and confidence in constructively passing on future inflation, emphasizing MSC Industrial Supply's technical value proposition. Erik Gershwind, CEO, added that customers are understanding of price increases due to transparency and the company's ability to provide offsetting cost savings. Regarding the government shutdown, Martina McIsaac explained that the public sector, strong in Q4 and September, saw softening in October due to the shutdown, impacting federal sales. Erik Gershwind noted that federal sales, roughly two-thirds of public sector, experienced significant drops in pockets, but expects a restoration of spend and continued market share capture once the shutdown ends. Ryan Mills, Head of IR, clarified that government exposure is weighted towards military and defense.

Ken Newman from KeyBanc Capital Markets questioned if the outperformance of 'Made in USA' products was due to customer pull-forward ahead of price hikes and asked about the volume growth needed to achieve margin stability.

Answer

President & COO Martina McIsaac stated that the 'Made in USA' growth is a legitimate shift driven by cost-out programs, not a pre-buy. CEO Erik Gershwind deferred on specifying a volume target for margin growth, citing market uncertainty, but reaffirmed the company's long-term goal of 20%+ incremental margins over a cycle.

Kenneth Newman questioned whether MSC was observing any pre-buying activity from customers ahead of tariff announcements, particularly in March. He also sought more detail on the performance and outlook for key end markets like automotive and aerospace.

Answer

CEO Erik Gershwind responded that the company has seen no evidence of outsized pre-buying activity to date. Regarding end markets, he noted that while heavy manufacturing was soft in Q2, it saw progressive improvement through the quarter and into March. He specified that automotive and heavy truck remain very soft, while the aerospace outlook is robust, though overall uncertainty has increased.

Kenneth Newman of KeyBanc Capital Markets asked for specifics on Q2 SG&A productivity savings, the outlook for OpEx leverage, and current demand trends from large OE automotive and aerospace customers.

Answer

CFO Kristen Actis-Grande detailed the expected productivity savings and provided a framework for modeling second-half OpEx. CEO Erik Gershwind described the end-market environment as generally soft, except for aerospace, and noted that lower sales per vending machine and implant program reflect customers tightening spending, despite some growing optimism for calendar 2025.

Ken Newman from KeyBanc Capital Markets questioned if the outperformance of 'Made in USA' products was due to customer pre-buying ahead of price hikes and asked about the volume growth needed to achieve the 20% incremental margin target.

Answer

President & COO Martina McIsaac stated that the 'Made in USA' product growth is not from pre-buying but from legitimate shifts driven by cost-out programs with customers seeking tariff alternatives. CEO Erik Gershwind reiterated the 20%+ incremental margin goal over a cycle but declined to give a specific volume threshold, pointing instead to leverage, productivity, and stable gross margins as key drivers.

Inquired about Arcadia's gross margin outlook, the volume needed for margin recovery, the lag time for interest rate cuts to impact orders, and the price-cost dynamics across segments due to tariffs.

Answer

Arcadia's margins are highly dependent on volume due to its fixed cost structure and will remain challenged in the near term; a significant volume increase is needed for recovery. An interest rate cut could boost orders within one to two quarters. The company has successfully passed through tariff costs in Arcadia, but NobelClad faces volume challenges, and Dyna has experienced some margin compression.

Ken Newman from KeyBanc Capital Markets asked about the expected gross margin performance for the Arcadia segment in Q3 following recent cost-cutting measures. He also questioned the potential lag time between an interest rate cut and a recovery in orders, and the price-cost dynamics across all business segments amid the current tariff environment.

Answer

CFO Eric Walter stated that Arcadia's margins are highly dependent on volume due to significant fixed costs and that performance will be 'touch and go' for the next few quarters. CEO James O'Leary estimated a lag of one to two quarters for commercial orders to recover after a rate cut, with a quicker response in residential. He detailed that Arcadia passes on tariff costs, NobelClad sees a volume impact, and DynaEnergetics has absorbed some margin pressure.

Asked about the financial impact of a large completed project on the Arcadia segment's Q1 EBITDA and Q2 profitability, and inquired about supplier pricing trends and the company's own ability to implement price increases.

Answer

The company acknowledged the large California project's completion will impact Q2 results but did not quantify its Q1 contribution, confirming Arcadia's commercial business will remain profitable. They stated it is currently difficult to predict future pricing actions due to supply chain uncertainties.

Ken Newman inquired about the demand trend at Arcadia during Q3 and into October. He also asked for clarification on the restructuring actions, including costs and payback, and questioned whether the recently added paint capacity contributed to the current overcapacity issues.

Answer

The executives responded that Arcadia's demand was relatively level but weak throughout Q3 and declined to comment on October trends. They clarified that current actions are about upgrading personnel rather than formal restructuring with associated cash costs. They explicitly stated that the new paint capacity did not cause the overcapacity issues; the problems stemmed from under-absorption in the high-end residential product factories.

Kenneth Newman of KeyBanc Capital Markets inquired about the timing of Arcadia's demand decline in Q3 and trends into October. He also sought clarification on restructuring actions, questioning the status of the ERP system, the scope of sourcing initiatives, and their associated costs and payback. Finally, he asked if the new paint capacity contributed to overcapacity issues.

Answer

CEO Michael Kuta stated that Arcadia's demand was "fairly level" through Q3 and declined to comment on Q4 specifics. Executive Chairman James O'Leary clarified that the current actions are about "top grading" personnel, not formal restructuring, and that the ERP implementation "could have gone smoother." He noted the costs are part of doing business and not a discrete restructuring charge with a specific payback. Both O'Leary and Kuta confirmed that the new paint capacity was not the source of the absorption issues; the problem was concentrated in the high-end residential business.

Ken Newman asked for the amount of pricing realized in Q2 from the annualized $40 million tariff mitigation plan and whether price-cost would normalize in the second half. He also inquired about Elo's supply chain, specifically its international manufacturing footprint and potential tariff exposure.

Answer

CFO Nathan Winters disclosed that a little less than $10 million in price was gained in Q2, slightly below expectations, and the goal remains to fully mitigate tariff impacts in 2026. He explained that Elo's supply chain is similar to Zebra's, using contract manufacturers in Southeast Asia, but with the key difference of an owned manufacturing facility in China for touch panels, which Zebra sees as a strategic asset to leverage.

Kenneth Newman asked why the Q1 tariff impact was lower than expected and inquired about the breakdown of the full-year $70 million tariff impact between the two business segments.

Answer

CFO Nathan Winters attributed the lower Q1 impact to successful front-loading of purchases ahead of tariff effective dates and inventory capitalization timing. He clarified the full-year impact is relatively balanced between segments, though slightly more weighted to the AIT segment due to fewer product exemptions compared to the EVM segment.

Ken Newman of KeyBanc Capital Markets asked about the company's confidence that volumes won't react negatively to back-half price increases and questioned the drivers of potential deleverage in the Endless Assortment segment.

Answer

CEO D.G. Macpherson expressed confidence in realizing prices, stating that while inflation will likely mute overall market demand, Grainger is not uniquely exposed as competitors are also raising prices. CFO Deidra Meriwether reiterated that the moderation in Endless Assortment's growth and leverage is primarily due to Zoro cycling tougher year-over-year comparisons.

Ken Newman asked about the confidence that volumes won't react negatively to price increases and the drivers behind lower implied incremental margins for Endless Assortment in the back half.

Answer

CEO D.G. Macpherson stated that while general inflation will impact market demand, Grainger is not uniquely exposed as competitors are also raising prices. CFO Deidra Meriwether explained the lower incremental margin outlook for Endless Assortment is due to Zoro cycling tougher sales comps from a stronger back half in the prior year.

Kenneth Newman asked for quantification of the impact from holiday timing on Q4 daily sales and whether January sales trends had normalized. He also requested a breakdown of the dollar SG&A spend for 2025 investment initiatives.

Answer

CFO Dee Merriwether quantified the Q4 sales impact as a ~50 basis point headwind from holiday timing, partially offset by a hurricane benefit. CEO D.G. Macpherson confirmed that January activity, outside of early weather disruptions, had returned to normal levels. Regarding SG&A, management declined to provide specific dollar amounts but noted incremental investments would focus on marketing and seller expansion.

Ken Newman sought clarification on pricing realization from supplier increases given WESCO's project mix, asked about the current status of price increase lead times, and inquired about the utility business's project vs. stock-and-flow mix and its expected margin cadence upon returning to growth.

Answer

EVP & CFO David Schulz confirmed that the realized price impact is about half of the announced supplier increases due to the project business mix and that WESCO is holding suppliers to contractual 60-90 day lead times. Chairman, President & CEO John Engel stated there was no meaningful mix shift to report in utility and reiterated that as sales recover, the segment's lean cost structure will deliver 'exceptional' operating leverage and 'handsome' margin expansion.

Kenneth Newman sought clarification on whether the EPS guidance included a full year of preferred dividends and asked for the assumptions behind the Q1 organic growth guide, given the strong January start.

Answer

EVP and CFO David Schulz confirmed the EPS guidance assumes only a half-year of preferred dividend payments, as the company plans to redeem the stock in June. He explained the Q1 low-to-mid-single-digit organic growth guidance balances the strong January start against tougher comps in February and March and continued softness in the UBS segment during the first half of the year.

Kenneth Newman asked for the sequential margin outlook for the EES segment in Q4 and inquired about how the company prioritizes capital allocation between paying down its preferred debt and pursuing M&A.

Answer

CFO David Schulz stated that while CSS margins should improve sequentially, EES and UBS margins will face pressure from lower sales volumes, leading to an overall company adjusted EBITDA margin that is flat to slightly down in Q4 vs Q3. On capital allocation, he confirmed that value-accretive M&A is the top priority. The company will balance using cash for tuck-in acquisitions against warehousing cash for the upcoming preferred debt takeout, with the ability to leverage the balance sheet if needed.

Ken Newman's associate from KeyBanc Capital Markets asked about the impact of tariffs on pricing in the quarter and the price-cost outlook for the second half of the year. He also inquired about performance expectations for Jexpro Services in the back half, specifically whether a 20% incremental EBITDA margin remains a valid assumption.

Answer

EVP & CFO Ron Knutson stated that the company does not expect any margin compression from tariffs, as they manage it through proactive customer collaboration on pricing and sourcing, noting that only about 6% of product purchases come from China. Regarding Jexpro, Knutson expressed confidence in its second-half performance due to strong end-market trends and backlog visibility, though he did not quantify a specific incremental margin. Chairman & CEO J. Bryan King added that Jexpro's margins are also influenced by ongoing strategic investments in commercial capabilities and growth initiatives, as well as revenue mix, which can create noise in near-term contribution margins.

Ethan, on behalf of Ken Newman from KeyBanc Capital Markets, asked about the impact of tariffs on pricing in the quarter, whether price-cost was neutral, and the outlook for the second half. He also questioned expectations for Jexpro Services, given tougher comps, and the viability of a 20% incremental EBITDA margin.

Answer

EVP & CFO Ron Knutson stated that the company does not expect margin compression from tariffs due to proactive sourcing and customer management, noting that only about 6% of product purchases come from China. Regarding Jexpro, Knutson expressed confidence in its second-half performance due to strong end markets and backlog visibility. Chairman & CEO J. Bryan King added that ongoing investments in Jexpro's commercial capabilities could create some noise in contribution margins, but the underlying business momentum remains very strong.

Ken Newman of KeyBanc Capital Markets asked if the strong start to the year in the Lawson segment was due to holiday timing or potential customer pre-buying ahead of tariffs, and questioned the risk of tariffs impacting the Canadian business's margin targets.

Answer

Executive Ronald Knutson explained that the January sales lift was nearly double the normal seasonal rebound from December, indicating genuine momentum. Executive John King attributed the strength primarily to rebuilding the sales force, which allows for better customer coverage, rather than pre-buying. On tariffs, King stated the impact is not significant and that the Canadian margin improvement plan is based on internal cost-cutting and consolidation, not cross-border revenue synergies that would be at risk. Knutson added that the company has a proven history of working with customers to mitigate any margin impact from tariffs.

Ken Newman of KeyBanc Capital Markets asked about the contribution of price to revenue growth and its sustainability amid tariffs. He also questioned if the high incremental EBITDA margin implied in the Q3 guide is a sustainable baseline for operating leverage going forward.

Answer

CFO Dennis Fehr stated that pricing has moved from a headwind to a more neutral factor, and that tariff impacts are being mitigated through supply chain work rather than just price increases. Regarding margins, Fehr noted that while leverage is strong, investors should be mindful of typical Q4 seasonality causing deleverage. He affirmed the company is on track for its long-term goal of achieving over 20% adjusted EBITDA for the full year 2026.

Ken Newman of KeyBanc Capital Markets inquired about the performance trend of smaller, local accounts from Q1 to Q2. He also asked if the new tax bill could be pulling forward construction timelines for power projects, particularly in renewables.

Answer

President & CEO Matthew Flannery stated that while local account activity improved seasonally, it has stabilized on a year-over-year basis, with future growth likely tied to macro stability and sentiment. On power projects, EVP & CFO William Grace noted that renewables are a small part of their overall power business. Both executives indicated they see a strong opportunity in power overall, regardless of generation source, and are not seeing a significant pull-forward or change in their plans based on the tax bill.

Kenneth Newman inquired about the trends observed in the smaller local accounts and the outlook for this segment for the rest of the year. He also asked how margins in the Yak matting business might be affected by fluctuations in spot lumber prices.

Answer

Executive Matthew Flannery noted that while the local market has the least visibility, their ground-up forecasting gives them confidence to stay within guidance ranges. He added that the company is better positioned with larger customers who have deeper pipelines in a slowdown. Executive William Grace commented on the Yak business, stating they have not experienced significant margin pressure from lumber prices and are comfortable they can maintain margins.

Kenneth Newman noted the softer general rent growth in 2024 and asked if the 2025 guidance assumes a similar profile. He also asked about the magnitude of demand between national and local accounts and any corresponding rate differentials.

Answer

Executive Matthew Flannery confirmed the 2025 guidance assumes a growth profile for general rent versus specialty similar to 2024, emphasizing the flexibility of CapEx to meet demand where it arises. Executive William Grace added that no appreciable shift in business mix is expected. Regarding customer types, Flannery stated that while national accounts leverage their scale, the market is competitive across all segments and there are no significant dynamics to call out.

Kenneth Newman sought clarification on the seemingly optimistic tone regarding local account demand stabilization and asked if any financial impact from recent hurricanes was embedded in the Q4 margin guidance.

Answer

Executive Matthew Flannery confirmed that optimism stems from their customer confidence index and the emotional lift from a pivot in interest rates, though the timing of this sentiment turning into projects is uncertain. Executive William Grace clarified that no material impact from hurricanes is included in the guidance, as any effect would be minor at their scale and likely a 2025 event.

Kenneth Newman from KeyBanc Capital Markets questioned the minimum sales growth needed to achieve historical incremental margins and asked for color on end-market conditions, particularly in heavy manufacturing.

Answer

CFO Holden Lewis explained that revenue growth north of mid-single digits is still the level required to begin leveraging the P&L. CEO Dan Florness noted that while customer business has been weak, he sees a higher probability of stabilization in 2025. Holden Lewis specified that Ag, consumer durables, and pulp/paper remain weak, with some effects from the Boeing strike impacting aerospace.

Kenneth Newman from KeyBanc Capital Markets asked for an update on the Gas Utilities destocking timeline, using a baseball analogy of which 'inning' the process is in. He also questioned how the margin profile for that business would recover and inquired about capital allocation plans given the company's strong balance sheet.

Answer

CEO Rob Saltiel estimated the destocking process is in the 'sixth or seventh inning,' with most of it complete but some lingering into 2025. He clarified that the Gas Utilities margin profile—slightly dilutive on gross margin but accretive on net margin—is not expected to change. Regarding capital allocation, Saltiel highlighted the company's unprecedented balance sheet strength and flexibility, stating that the board is actively considering options to benefit shareholders but did not disclose specific plans.