Mircea Dobre

Mircea Dobre inquired about the drivers behind Caterpillar's impressive order and backlog growth, specifically asking about performance in segments beyond Power and Energy. He also sought clarification on how Caterpillar plans to manage long-term deliveries stretching into 2027 and beyond, ensuring proper margins and pricing amidst volatile cost and tariff environments.

Answer

CEO Joe Creed expressed excitement about the record $51 billion backlog, highlighting strong order rates across all three segments, not just Power and Energy. He noted Construction Industries had one of its best order quarters ever, returning to normal seasonal patterns, and Resource Industries saw strong orders, particularly in South American copper mining. For long-term orders, primarily in Power and Energy, Creed explained that Caterpillar works closely with customers to schedule deliveries, utilizing frame agreements with inflationary indices and escalators for non-frame agreements to protect pricing.

Mircea Dobre asked about Caterpillar's impressive order and backlog growth, seeking details on performance in segments beyond Power and Energy. He also inquired about the strategy for managing pricing and margins for long-term backlog deliveries extending into 2027 and beyond, given cost and tariff volatility.

Answer

CEO Joe Creed highlighted the record $51 billion backlog, noting strong order rates across Construction Industries (CI), Resource Industries (RI), and Power and Energy (P&E). He explained that CI is returning to normal seasonal patterns, RI saw strong, albeit lumpy, orders, and P&E benefits from multi-year visibility. Creed confirmed that long-term orders include inflationary indices for frame agreements and escalators for non-frame agreements to manage price-cost dynamics.

Mircea Dobre of Robert W. Baird & Co. asked about the long-term potential to mitigate tariff costs and if the current drag should be considered a structural headwind for 2026.

Answer

CEO Joe Creed reiterated that it's too early to call any impact "permanent" as the situation is uncertain and all mitigation levers remain available. He deferred specific 2026 commentary, emphasizing the company's strong operational momentum. CFO Andrew Bonfield added that the ultimate focus is on profitable growth in absolute dollar terms, not just margin percentages.

Mircea Dobre of Baird requested clarification on the Construction Industries segment, asking for the expected sequential progression of revenue and margin from Q4 2024 into Q1 2025.

Answer

Executive Andrew R. Bonfield explained that the typical Q1 sales lift from dealer inventory builds will be significantly less in 2025. He noted that this, combined with a price headwind similar to Q4, are primarily timing issues. Underlying sales to users are expected to be relatively stable, with no major demand shift anticipated through the year.

Mig Dobre asked what percentage of the current backlog is deliverable within the next 12 months and about the competitive dynamics in power generation, particularly regarding lead times.

Answer

Chairman and CEO Jim Umpleby stated that, as a general rule, about 75% of the total backlog is expected to be sold within 12 months. He acknowledged that demand for reciprocating engines in power generation is very strong, confirming that if Caterpillar could produce more engines, it could sell more, which is the primary reason for the announced capacity expansion.

Mircea Dobre with Baird inquired about the strong Industrial International orders, seeking an update on various geographies and questioning when these higher order rates would translate into organic growth, given the discrepancy with the forward outlook. He also asked about the company's exposure to different segments of the ag market.

Answer

Chairman and CEO Jennifer Parmentier clarified that Industrial International orders have been choppy, not consistently averaging 5%, and provided regional outlooks: EMEA is expected to be flat to slightly positive with slow industrial recovery, while Asia-Pacific shows positive low single-digit growth driven by electronics and semiconductors. Regarding the ag market, she stated that challenges are broad-based. Executive Vice President and CFO Todd Leombruno added that ag represents only 4% of total company sales, making its movements less impactful.

Mircea Dobre of Robert W. Baird & Co. observed that annualizing the strong Q4 EPS of $7.69 would suggest a full-year figure near $31, and noted that Parker historically exceeds its exit run rate. He asked why fiscal 2026 should be an exception to this trend.

Answer

EVP & CFO Todd Leombruno explained that simply annualizing the record Q4 result is not practical due to business seasonality, with sales weighted 48% to the first half and 52% to the second. He also pointed to certain costs, like stock compensation, that are recognized early in the fiscal year. He emphasized that the Q1 guide still represents year-over-year growth and a record first quarter performance.

Mircea Dobre of Robert W. Baird & Co. asked why the FY26 EPS guidance of $28.90 wasn't higher, pointing out that simply annualizing the strong Q4 FY25 result of $7.69 would yield a number above $30, a pattern of outperformance that has held true in most prior years.

Answer

EVP & CFO Todd Leombruno acknowledged the strong Q4 but explained it is not representative of the full year's seasonality, as sales are typically weighted 48% to the first half and 52% to the second. He emphasized that the Q1 guide, while sequentially lower, would still represent a record for a first quarter with year-over-year EPS growth, reflecting strong execution despite a challenged top line.

Mircea Dobre from Robert W. Baird & Co. asked about Parker's strategy for potential tariffs and the impact of end-market mix on industrial margins, particularly with weakness in the off-highway vertical.

Answer

CEO Jenny Parmentier explained that Parker's 'local-for-local' manufacturing model and past experience provide agility to manage potential tariffs without major supply chain changes. CFO Todd Leombruno and Ms. Parmentier clarified that while distribution has a higher margin profile, the current margin expansion is primarily driven by productivity and cost controls under the Win Strategy, not by favorable mix.

Mircea Dobre inquired about the strong, long-cycle order growth, its conversion timeline to revenue, and whether it signals positive industrial organic growth for fiscal 2026. He also asked about managing cost risks, like tariffs, within the large aerospace backlog.

Answer

Executive Jennifer Parmentier confirmed it is fair to expect positive industrial growth in fiscal 2026, noting the long-cycle orders extend beyond the current fiscal year. She detailed that order strength came from North American HVAC and distribution, European energy, and Asian electronics. Regarding risks, Parmentier expressed confidence in fully mitigating tariff impacts through a combination of pricing actions, supply chain strategies like dual sourcing, and ongoing cost reductions via the company's Win Strategy.

Mircea Dobre sought clarification on expected fourth-quarter volumes in the Americas, balancing improving short-cycle business with anticipated year-over-year automation declines. He also questioned the International segment's fourth-quarter margin expectations, considering typical seasonality. His follow-up addressed the contemplation of LIFO charges in 2026 and how temporary cost takeouts might revert with increasing volumes, impacting Americas segment incrementals.

Answer

Gabriel Bruno (EVP, CFO and Treasurer) clarified that International Welding margins are expected to be on the higher end of the 11-12% range in Q4, reflecting traditional seasonality and acquisition benefits. For Americas, he noted sequential automation growth but still low double-digit decline year-over-year due to a strong prior-year Q4. Overall Q4 operating margin is expected to improve 100-200 basis points sequentially, with Americas in the higher end of the 18-19% range. Regarding LIFO, Gabriel Bruno explained it resets annually based on inflationary trends, so 2026 cannot be predicted yet, but Q4 2025 will see charges similar to recent quarters. He added that temporary cost savings are built into the incremental framework and will allow for their return as volumes improve.

Mircea Dobre from Robert W. Baird & Co. asked for a deeper dive into the stabilizing automation business, particularly the automotive component, and questioned if the strength in general industries involved any demand pull-forward due to tariffs. He followed up by asking about the framework for incremental margins in the next growth cycle, given the company's margin resilience and larger automation mix.

Answer

President, CEO & Chair Steven Hedlund clarified that a 'steady' automation outlook for H2 implies a year-over-year decline, as Q4 is typically stronger. EVP, CFO & Treasurer Gabriel Bruno added that he was not seeing any inventory pull-forward and that positive consumable activity reflects real factory demand. Regarding future margins, Bruno stated that the company targets mid-20s incremental margins on mid-single-digit volume growth, with automation expected to contribute at a higher incremental rate as it recovers.

Mircea Dobre sought clarity on the cautious second-half outlook, questioning whether it was driven primarily by automation project delays or a potential slowdown in the more stable consumables business. He also asked for specifics on where the company is facing tariff-related cost headwinds, such as in certain components or sourcing countries.

Answer

CEO Steven Hedlund clarified that the cautious outlook stems from two factors: 1) risk to automation revenue recognition from delayed customer decisions, and 2) concern that further price increases to offset tariffs could negatively impact volumes in the core business. CFO Gabriel Bruno added that tariff pressures are broad-based across steel, components, and accessories, with less than 20% of total COGS exposed. He noted this exposure across their global supply chain is what informs their mid-single-digit pricing response.

Mircea Dobre followed up on the automation business, asking about potential long-term adjustments given persistent automotive challenges and the role of M&A. He also questioned if the current decremental margin performance could be sustained into 2025 if market weakness continues.

Answer

CFO Gabriel Bruno affirmed confidence in the long-term automation strategy and its path to higher margins, stating the company will navigate the cycle without compromising growth. CEO Steven Hedlund added that significant work has already been done to make the automation business more resilient. Regarding 2025 margins, Bruno pointed to the strength of the business model. Hedlund added that it's hard to imagine conditions worsening, but the company has more cost levers to pull if necessary.

Mircea Dobre inquired about the demand outlook for the Access segment into 2026, considering potential production changes and the impact of tariffs on pricing strategies. He also asked for quantification of tariff costs and mitigation strategies for the upcoming year.

Answer

CEO John Pfeifer noted varied customer sentiment, with some near-term hesitancy but long-term market health driven by mega projects and commercial construction. CFO Matt Field quantified the 2025 tariff impact at $30M-$40M, mostly in Q4, with pricing adjustments expected in 2026 as part of a multifaceted mitigation approach.

Mircea Dobre asked about the demand outlook for the Access segment in Q4 and 2026, including production expectations and the impact of tariffs on pricing, as well as the company's tariff mitigation strategy.

Answer

John Pfeifer, President and CEO, noted near-term customer hesitancy in Q3/Q4 but highlighted healthy long-term market drivers like mega projects and commercial construction. Matt Field, EVP and CFO, quantified 2025 tariffs at $30-40 million (mostly Q4) and indicated 2026 pricing would address these. John Pfeifer detailed a multifaceted tariff mitigation strategy focusing on supply chain, engineering, and classification before pricing, aiming to minimize customer impact.

Mircea Dobre from Robert W. Baird & Co. sought clarification on how Oshkosh expects to fully offset tariff headwinds and whether this could become a larger issue in 2026. He also asked about the margin trajectory for the Transport segment in the second half and its sustainability into the next year.

Answer

CEO John Pfeifer clarified that while tariff headwinds persist, a combination of a slightly improved tariff environment, ongoing mitigation strategies like local-for-local production, and general business outperformance allows them to maintain their guidance. CFO Matthew Field stated that the Transport segment's margin is expected to improve steadily due to new contracts for FHTV and FMTV, providing building blocks for continued improvement into 2026.

Mircea Dobre inquired about the specific sources of tariff-related cost headwinds by component or country and asked for details on the Defense segment's NGDV revenue ramp and margin cadence for the year.

Answer

CFO Matthew Field identified the Access segment as the most exposed due to its global supply chain, with China having an outsized impact. For the Defense segment, Field reiterated that NGDV production will ramp to a full run rate by year-end, with revenue and margins expected to increase sequentially throughout the year. CEO John Pfeifer added that Q1's breakeven result does not alter their full-year confidence.

Mircea Dobre from Robert W. Baird & Co. pressed for more detail on the Defense segment's margin cadence, specifically asking about the implied margin for Q1 2025. He also asked if the segment could be expected to return to normalized margins in 2026, given the NGDV ramp and contract repricing.

Answer

CFO Matt Field confirmed that Q1 would be the lowest production quarter for USPS and thus the lowest margin quarter for the Defense segment. CEO John Pfeifer explained that the benefits from repriced contracts for heavy and medium tactical vehicles will materialize slowly, starting in late 2025 and into 2026, while the NGDV margin builds throughout the year with production volume.

Mircea Dobre asked how Oshkosh plans to manage its Access segment in 2025 given added capacity and softer demand, and if restructuring is a possibility. He also inquired if the proprietary chassis on the Volterra EV refuse truck provides a competitive advantage.

Answer

CEO John Pfeifer stated the company has been building resilience through manufacturing flexibility and growing aftermarket revenue, and does not anticipate significant restructuring. EVP and CFO Michael Pack confirmed the integrated Volterra chassis is a competitive advantage, enabling superior safety, productivity, and total cost of ownership benefits.

Mircea Dobre sought clarification on the drivers for stronger Americas margins in 2026, distinguishing between factors within ESAB's control (like restructuring) and broader market reacceleration.

Answer

Shyam Kambeyanda, President and CEO, outlined three key drivers for 2026 margin expansion: strategic pricing, tariff-based supply chain movements to optimize manufacturing, and ongoing restructuring initiatives expected to conclude in early Q1. He reiterated the long-term target of 22%+ EBITDA margins by 2028.

Mircea Dobre of Robert W. Baird & Co. sought clarification on the $30 million in savings and why guidance was only raised by half the amount of the combined savings and FX benefits. He also asked for details on the size of the Mexico business and the specific industries affected by the slowdown.

Answer

CFO Kevin Johnson explained that while savings are incremental, the company is reinvesting $20 million into strategic growth initiatives like AI and commercial excellence. President & CEO Shyam Kambeyanda noted that Mexico and automation comprise 20-25% of the Americas business and saw a drag from transportation and general industry customers pausing orders after tariffs were announced.

Mircea Dobre sought clarification on the $30 million in productivity and back-office savings, asking if it was incremental and why guidance was not raised more, given the savings and FX tailwinds. He also requested details on the size of the Mexico business and the specific industries driving the disruption.

Answer

CFO Kevin Johnson confirmed the savings are incremental for the year but noted the company is also reinvesting $20 million into strategic growth initiatives like AI. President & CEO Shyam Kambeyanda explained that Mexico and automation together represent 20-25% of the Americas business and were the source of the 500 bps headwind, driven by customers in transportation and general industry pausing orders.

Sought clarification on the nature of cost savings, questioned why the guidance raise was less than the combined benefit of savings and FX, and asked for details on the size and nature of the business disruption in Mexico.

Answer

The cost savings are incremental and contribute to EBITDA, but the company is also reinvesting $20M into strategic growth initiatives like AI. The Mexico disruption, which along with automation accounts for 20-25% of Americas business, was caused by new customers pausing orders due to tariffs. A slow recovery is underway, but a full rebound is pending trade stabilization.

Mircea Dobre sought clarification on the Americas organic growth outlook, specifically the price-to-volume split, and questioned if the margin cadence in the Americas would differ from prior years due to tariffs.

Answer

CFO Kevin Johnson confirmed an expected low to mid-single-digit negative core volume in the Americas for the year, with a greater contribution from price to offset tariffs. CEO Shyam Kambeyanda added that while they are confident in margin expansion opportunities, the cadence in 2025 is not expected to follow the same sequential build as in 2023 and 2024 due to the different organic growth environment.

Asked for a breakdown of the organic growth outlook by product line, questioned the conservatism of the guidance, and inquired about the plan to reduce manufacturing footprint.

Answer

The company provided a product line breakdown: consumables flat-to-slight growth, automation/gas control up low-single-digits, and equipment up mid-single-digits. The guidance reflects a still-choppy environment, but they are confident in their execution. The footprint reduction is part of the EBX strategy to efficiently integrate acquisitions.

Mircea Dobre of Robert W. Baird & Co. inquired about the drivers behind the double-digit growth in equipment sales amid a subdued macro environment, asking if it was due to new products or channel stocking. He also asked for an update on European market conditions, particularly if a bottom was forming.

Answer

CEO Shyam Kambeyanda attributed the strong equipment sales to commercial excellence initiatives, a complete product portfolio, and significant progress in North America, explicitly denying it was due to channel stocking. He characterized the European market as subdued but stable, similar to Q2, with the company gaining share through strategic product line simplification despite softness in automotive and yellow goods sectors.

Mircea Dobre inquired about Herc Holdings Inc.'s progress in right-sizing its fleet post-acquisition, seeking clarity on the expected completion timeline and the magnitude of equipment disposals. He also asked about the impact of increased national account and mega project business on the company's margin framework for 2026.

Answer

Aaron Birnbaum, SVP and COO, explained that much of the heavy lifting for fleet right-sizing was completed in Q3, with more work expected in Q4, aiming to finish by 2026 if economic demand remains strong. Mark Humphrey, SVP and CFO, added that about half of the estimated $253 million in necessary fleet activity was done in Q3. Larry Silber, President and CEO, addressed the margin impact, stating that while national account activity is robust, they do not anticipate significant margin dilution due to minimal equipment movement and increased specialty product deployment on these projects.

Mircea Dobre inquired about the progress and timeline for right-sizing the fleet post-acquisition, including the magnitude of disposals, and also asked about the impact of the increasing national accounts and mega projects on Herc Holdings Inc.'s margins for 2026.

Answer

Aaron Birnbaum, SVP and COO, explained that much of the heavy lifting for fleet right-sizing was done in Q3, with more work expected in Q4, aiming to return to normal disposal cadence in 2026. Mark Humphrey, SVP and CFO, added that about half of the estimated $253 million activity for the back half of the year was completed in Q3. Larry Silber, President and CEO, stated that while mega project activity is expected to continue into 2026, there is no significant margin dilution due to minimal equipment movement, larger volumes, and increased specialty product deployment on these projects.

Mircea Dobre of Robert W. Baird & Co. asked to distinguish between cyclical and structural issues in H&E's performance, and questioned the strategy for recovery. He also inquired about the company's path to deleveraging and the expected timeline for resuming M&A activity.

Answer

SVP & CFO Mark Humphrey stated the company will follow its integration plan and reiterated the goal of reaching its 2-3x leverage target within calendar 2027. CEO Lawrence Silber confirmed that M&A is paused for the 'near term' until the integration is complete, synergies are being achieved, and leverage is reduced.

Mircea Dobre asked if mega projects are a margin headwind, contrasting with H&E's experience. He also inquired about the plan and timeline for deleveraging post-acquisition, especially in an uncertain macro environment.

Answer

COO Aaron Birnbaum explained that mega projects are not a margin headwind for Herc because its broad product and specialty fleet offerings provide premium returns that offset any pricing pressure on general rent. CFO W. Humphrey stated pro forma leverage would be just over 3.5x, with a plan to return to the 2x-3x target range within 24 months by running their standard downturn playbook if needed (cutting CapEx, managing costs).

Mircea Dobre asked about the business impact from recent California fires and sought clarification on why the mega project start forecast shows significantly more growth than combined non-residential and infrastructure forecasts.

Answer

COO Aaron Birnbaum stated that no special revenue from the California fires is embedded in guidance, as the focus is on emergency response and awaiting rebuilding funds. He also explained that many large, privately-funded mega projects are not captured in traditional non-residential construction data sets like Dodge. CFO W. Humphrey added that no Herc branches were damaged.

Mircea Dobre sought clarification on whether the updated guidance includes a normal hurricane season assumption or if it's a placeholder. He also asked what drove the $50 million revenue guidance increase and why it didn't translate to a larger EBITDA uplift.

Answer

CEO Lawrence Silber confirmed the guidance bakes in a 'historical normal average' for hurricane impact, which is just one of several positive factors. He and CFO W. Humphrey explained the muted EBITDA impact is due to the margin drag from recent acquisitions and greenfields, which are not yet at mature profitability levels. Humphrey also cited accelerating mega project growth as a key driver for the higher revenue outlook.

Mircea Dobre from Robert W. Baird & Co. sought clarification on the equipment margin outlook, questioning what was driving the increased revenue guidance if margins weren't improving significantly. He also asked about the potential scale of the inventory reduction beyond the $100 million target and how the company is handling model year 2026 OEM price increases.

Answer

CFO Bo Larsen explained that while consolidated equipment margins are guided down 100 bps, domestic ag margins are down more, with the impact being partially offset by a stronger sales mix from the higher-margin Europe segment. He noted the revenue uplift is from stronger used equipment sales. CEO Bryan Knutson stated that internal inventory reduction goals are 'significantly higher' than the public target. Regarding OEM pricing, Knutson said they are partnering with suppliers on a targeted, deal-by-deal basis, while Larsen cautioned that passing on further cost increases will be challenging and could lead to demand destruction.

Mircea Dobre of Baird requested a regional breakdown of inventory reduction targets, sought clarification on the drivers behind the increased European revenue guidance, and asked about the cadence of domestic agriculture sales and margin recovery for the remainder of the fiscal year.

Answer

Executive Bryan Knutson detailed the $100 million inventory reduction plan, attributing it mainly to Domestic Ag (approx. 60%) and Europe (approx. 40%), with a focus on used equipment. He explained that a significant EU stimulus in Romania is driving the European revenue upgrade. Executive Bo Larsen added that European equipment margins are strong at around 15.5%, while domestic Ag margins, which were 3.3% in Q1, will improve in the second half as aged inventory is cleared. He projected domestic Ag equipment sales to be down about 30% YoY for the remaining quarters.

Mircea Dobre from Baird requested a regional inventory update, details on the significant European revenue guidance increase driven by Romania, and clarification on the domestic Ag segment's sales cadence and margin improvement drivers for the remainder of the year.

Answer

Executive Bryan Knutson explained the inventory reduction is focused on Domestic Ag (60%) and Europe (40%), primarily targeting used and aged seasonal products. The European guidance increase is driven by significant EU stimulus funds in Romania, which constitutes half of the segment's business. Executive Bo Larsen added that domestic Ag margins are expected to improve in the second half as aged, interest-bearing inventory is cleared. He projected domestic Ag equipment sales to be down about 30% YoY for the remaining quarters.

Mircea Dobre of Robert W. Baird & Co. questioned the effectiveness of government aid in stimulating demand, the adequacy of the planned $100M inventory reduction, inventory levels on a per-unit basis versus historical norms, and the SG&A outlook for fiscal 2026.

Answer

Executive Bryan Knutson acknowledged commodity prices are the primary demand driver but viewed past government aid as a stabilizing factor. Executive Bo Larsen explained the $100M inventory reduction is a starting point that will be adjusted based on demand, targeting an inventory turn ratio of 1.9-2.0x in the medium term. Larsen also provided guidance for fiscal 2026 SG&A to be approximately $380 million, or 17.3% of sales.

Mircea Dobre of Baird asked a series of questions covering inventory reduction plans for Q4 and fiscal 2026, the geographic focus of destocking, the forward outlook for equipment margins, the risk of a large used equipment write-down, the level of OEM support, and Titan's view on Deere's pessimistic industry forecast.

Answer

Executive Bo Larsen confirmed that inventory reduction will continue in Q4 and accelerate in fiscal 2026, with the bulk of the effort focused on the U.S. and about $70 million in Europe. He projected domestic Ag equipment margins would remain in the low 5% range through fiscal 2026, with continuous market-based adjustments mitigating the risk of a single large write-down. Executive Bryan Knutson added that CNH is providing support similar to Deere's programs and that Titan's $400 million inventory reduction target is appropriate, even considering a potentially weaker market, due to factors like equipment cost inflation and a different lease return environment than in the last cycle.

Mircea Dobre of Robert W. Baird & Co. asked for clarification on lower rental margins and a high 'other expense' line item in Q2. He also questioned the modest inventory reduction target for H2 FY25, the significant margin pressure, and whether new equipment orders are for stock or are presold.

Answer

Executive Bo Larsen explained the 'other expense' was a net figure from a sale-leaseback expense and a tax credit gain. He attributed lower rental margins to reduced utilization. Larsen noted the inventory decline is modest because they are still receiving old orders and sales forecasts have been lowered. He anticipates margins in FY26 will be similar to H2 FY25, not more compressed. Executive Bryan Knutson confirmed that new orders are almost exclusively presold with customer names.

Mircea Dobre of Robert W. Baird & Co. questioned why tariff uncertainty didn't spur pre-emptive orders in Q2. He sought clarification on how Manitowoc is mitigating 90% of the $35 million tariff impact and whether these costs are being spread across products or targeted. Dobre also highlighted a perceived disconnect between the reduced tariff forecast and the increasingly cautious management commentary on demand.

Answer

CEO Aaron Ravenscroft explained that customers had hoped for lower tariffs and were deterred by the final 15% rate, causing them to pause. He confirmed that tariff costs are being offset by targeted price increases on affected models, not spread across the portfolio. Addressing the cautious tone, Ravenscroft stated they are now witnessing the real-world price elasticity he had previously worried about, an effect that was only a projection in the prior quarter.

Mircea Dobre from Robert W. Baird & Co. asked for clarification on the revenue outlook for the Vegetation Management division for the second half of the year, the specific nature and magnitude of costs related to facility consolidations, and an update on the CEO succession process.

Answer

President & CEO Jeffery Leonard projected a continued, albeit slow, revenue build in Vegetation Management but cautioned against expecting significant margin improvement in Q3 due to an unfavorable product mix in forestry. EVP & CFO Agnes Kamps added that the consolidation costs mentioned relate to productivity and learning curves, which are improving, particularly in the U.S. Ag plant. Regarding succession, Leonard confirmed the process is well advanced and a conclusion is expected in the third quarter.

Mircea Dobre from Robert W. Baird & Co. asked for clarification on the second-half revenue outlook for Vegetation Management, the specific costs impacting the division's margins, and an update on the CEO succession plan.

Answer

President and CEO Jeffery Leonard projected a continued but slow revenue build in Vegetation Management, noting uncertainty in forestry. EVP and CFO Agnes Kamps added that confidence is higher on the agricultural side due to strong orders and improved plant productivity. Kamps attributed margin pressure to the learning curve post-consolidation. Leonard cautioned against expecting significant margin improvement until Q4 due to an unfavorable product mix in forestry. Regarding succession, Leonard confirmed the process is on track for a conclusion in Q3.

Mircea Dobre from Robert W. Baird & Co. asked for clarification on the second-half revenue outlook for Vegetation Management, the specific margin impact from facility consolidations, and an update on the CEO succession process.

Answer

CEO Jeffery Leonard projected a continued slow, sequential revenue build in Vegetation Management. CFO Agnes Kamps added that confidence is higher on the Ag side due to order growth and productivity gains. Regarding margins, Leonard cautioned against expecting significant Q3 improvement due to an unfavorable product mix in forestry, suggesting a Q4 improvement is more likely. On succession, Leonard confirmed the process is on track and expects a conclusion in the third quarter.

Mircea Dobre from Robert W. Baird & Co. asked for clarification on the revenue and margin outlook for the Vegetation Management division in the second half of the year, including the lingering effects of facility consolidation costs, and also inquired about the CEO succession plan.

Answer

President & CEO Jeffery Leonard projected a slow but continued revenue build for the Vegetation Management division, while EVP & CFO Agnes Kamps added that confidence is higher on the agricultural side due to strong orders. Regarding margins, Kamps attributed the impact to productivity ramp-ups post-consolidation. Leonard cautioned against expecting significant margin improvement in Q3 due to an unfavorable product mix in forestry, suggesting a Q4 improvement is more likely. On succession, Leonard confirmed the process is on track for a conclusion in Q3.

Mircea Dobre of Robert W. Baird & Co. sought clarification on the cost impact of tariffs on U.S. components and raw materials, the flow-through of steel prices, and the company's outlook for Q2 performance in each business segment.

Answer

CEO Jeff Leonard estimated that reciprocal tariffs could increase purchased material costs by about 5%, translating to a 1-2% impact on total cost of goods sold, which will be managed through efficiencies and pricing. He noted that steel price increases have already been passed on to customers, a standard practice the market is used to. For the Q2 outlook, Leonard projected continued slow, sequential improvement in sales and margin for the Vegetation Management division. For the Industrial Equipment division, he expects expansion in both sales and margin, supported by a robust backlog of over $500 million.

Mircea Dobre of Baird questioned if Vegetation Management sales would continue to decline towards the stabilized order rate, potentially eroding margins despite cost cuts. He also asked about SG&A trends and the reason for the sequential margin softening in the high-performing Industrial Equipment division.

Answer

President and CEO Jeff Leonard acknowledged the logic, stating the company will be "playing defense" in Vegetation Management through at least Q1 2025 but emphasized that "huge chunks of cost" have been structurally removed. CFO Agnes Kamps added these cost savings are permanent. Regarding SG&A, Leonard confirmed reduced bonus accruals helped in Q3. For Industrial margins, he cited pre-election caution for some order flattening but sees room for modest expansion in 2025.

Peter Kalemcaryian, on behalf of Mircea Dobre of Robert W. Baird & Co., asked for quantification of the market share gain embedded in the 2025 guidance and for commentary on Fendt's share in North America amid potential tariff impacts.

Answer

SVP & CFO Damon Audia stated that while specific figures are not disclosed, AGCO is gaining share across its brands and regions. Chairman, President & CEO Eric Hansotia elaborated on pricing strategy, explaining that tariff-related costs are managed across the entire global portfolio to maintain competitive balance, rather than being applied directly to the affected products.

Mircea Dobre from Robert W. Baird & Co. questioned the timeline for normalizing dealer inventory, asking if the issue would be resolved in Q1 or Q2, and what benchmarks would guide Q2 production. He also sought clarity on the confidence behind the forecast for positive pricing in 2025 after a negative Q4.

Answer

CFO Damon Audia explained that while European inventory is in good shape, the process will extend into Q2 for South America and potentially longer for North America, depending on farmer sentiment. Regarding pricing, he cited carryover from new Fendt models, a tax law change in Argentina that affects the metric, and expected positive pricing in North America as factors supporting the 0% to 1% positive full-year forecast.

Mircea Dobre sought to clarify the 2025 demand outlook, asking if the combination of lower unit inventories and higher 'months of supply' implied a mid-teens market decline next year. He also questioned why Q4 production cuts were not more aggressive, given that guidance suggested stable to slightly higher sequential production.

Answer

Damon Audia, SVP & CFO, and Eric Hansotia, CEO, indicated that while the market will be down in 2025, they do not expect another large decline like in 2024. Hansotia framed 2025 as likely landing between 2024 levels and the previous cycle's trough. Audia explained that Q4 production appears higher sequentially mainly due to a rebound in Europe after extended Q3 shutdowns and that the company is still producing to fill specific retail orders.

Mircea Dobre asked about the reasons for the $20 million reduction in EBITDA guidance, the specifics of tariff mitigation plans, and the margin and revenue outlook for the Aerials (AWP) segment in the second half.

Answer

SVP & CFO Jennifer Kong-Picarello explained the EBITDA adjustment was due to an unfavorable mix in Aerials and higher tariffs, which offset stronger ES performance. President & CEO Simon A. Meester detailed mitigation strategies including supply chain collaboration and insourcing. For Aerials, management expects a mid-single-digit operating margin in Q3, down from Q2, due to tariffs and mix, but expressed confidence in the full-year outlook based on normal seasonality and backlog visibility.

Mircea Dobre questioned if the $0.40 tariff guidance includes potential tariffs on UK-produced goods affecting the MP segment. He also asked about the long-term sustainability of the high Environmental Solutions (ES) segment margins.

Answer

CEO Simon Meester emphasized that the primary tariff mitigation strategy is through supply chain adjustments, declining to comment on specific pricing for the MP segment. CFO Jennifer Kong-Picarello addressed ES margin sustainability by pointing to the expected $25 million in run-rate synergies by 2026, which will support profitability despite investments needed to sustain record throughput.

Mircea Dobre questioned why the Materials Processing (MP) segment is expected to decline less than AWP, given its weaker backlog coverage, and asked about Q1 margin expectations. He also followed up on whether shifting production due to tariffs would undermine the long-term margin benefits of the Mexico facility.

Answer

Executive Simon Meester explained that the MP segment has strong forward visibility through its dealer model and is expected to bottom in Q1 before improving sequentially, driven by an aging fleet and positive quoting activity. Executive Julie Beck noted Q1 MP margins would be consistent with Q4. Regarding the Mexico plant, management clarified they have options to repurpose it for other regions and are not planning to change the physical footprint, thus preserving its value.

Mircea Dobre of Robert W. Baird & Co. asked about the business impact of tariff uncertainty during Q2 and questioned the company's capital allocation strategy, particularly regarding M&A and the potential for more aggressive buybacks.

Answer

President & CEO Chris O'Herlihy stated that since ITW produces over 90% of its products in the regions where they are sold, the direct tariff impact is manageable. On capital allocation, he reiterated a disciplined M&A approach, while Senior VP & CFO Michael Larsen confirmed the current strategy of prioritizing internal investments, a growing dividend, and systematic buybacks is considered optimal and well-aligned with the enterprise strategy.

Mircea Dobre asked for a segmental breakdown of the estimated $175 million tariff impact, the timeline for offsetting these costs, and the split between pricing versus other actions, questioning the ability to raise prices in a weak market. He also asked about the Q2 revenue outlook and risks to the second-half new store opening schedule.

Answer

An executive, identified as Steve, detailed the tariff impact as roughly 70% Commercial, 20% Residential, and 10% Food Processing. He stated the company is confident it can mitigate the impact by year-end through a July 1 price increase, supply chain moves, and operational initiatives. He specified the price increase would be in the mid-to-high single-digit range, covering a predominant part of the cost. He also confirmed expectations for sequential revenue improvement in Q2 and that customer new store opening plans for the second half remain higher year-over-year.

Mircea Dobre questioned the full scope of the strategic review, asking if the Residential business was also being evaluated for alternatives, and sought details on the Commercial Foodservice outlook, particularly the drivers for its expected growth inflection in 2025.

Answer

Executive Timothy FitzGerald affirmed the portfolio is under continuous review but the current action is focused on Food Processing, highlighting the Residential segment's significant margin recovery potential. Regarding the Commercial outlook, Executive Bryan Mittelman and Executive Steve Spittle projected sequential improvement driven by chain customer new store plans, increased general market quoting activity, and strong international momentum.

Mircea Dobre asked about the Q4 Commercial Foodservice outlook diverging from normal seasonality, distributor inventory levels, the lack of a January 1 price increase, and the significant decline in SG&A. He also followed up on the company's capital deployment strategy.

Answer

Executive Steve Spittle explained that the typical Q4 distributor inventory build is not expected due to higher interest rates and improved lead times, and clarified that destocking is largely complete. He also noted that while a Jan 1 price increase isn't planned, strategic pricing actions will continue. CFO Bryan Mittelman and Executive Timothy FitzGerald detailed approximately $50 million in ongoing restructuring and cost-saving initiatives contributing to margin strength and lower SG&A. On capital deployment, Bryan Mittelman stated cash is being held for flexibility for M&A and they are evaluating all options for capital return.

Mircea Dobre asked how the Q2 guidance compares to the original plan, sought clarity on modeling the $15 million tariff impact, and inquired about recent demand trends. He also questioned the potential for restructuring in the Hydraulics segment given its persistent margin pressure.

Answer

CEO Sean Bagan confirmed that first-half performance is ahead of their internal plan and that they expect to mitigate most of the $15 million tariff headwind, so it should not be modeled as a direct cost hit. He noted positive demand trends, with order intake exceeding sales for five consecutive months. Regarding Hydraulics, Bagan acknowledged the margin pressure but pointed to green shoots and a focus on growth, while stating that restructuring remains an option if growth does not materialize.

Mircea Dobre questioned the potential impact of tariffs on Mexico operations, the reason for sequential margin compression in Q1 2025, the expected timing for organic growth to turn positive, and the path back to historical mid-20s EBITDA margins.

Answer

CEO Sean Bagan explained that Helios has the flexibility to move production from Mexico back to its Tulsa facility if necessary, though this would likely have a cost impact. He noted competitors face similar tariff pressures. The sequential margin compression in Q1 is primarily due to the reset of full incentive compensation accruals for the new year. He anticipates organic growth will turn positive in Q3 2025. To return to mid-20s EBITDA margins, Bagan stated the company would likely need to reach a revenue run rate of around $1 billion, given changes in business mix like the smaller post-COVID scale of the high-margin Balboa business.

In a follow-up, Mircea Dobre of Baird asked about the company's strategy for its Tijuana, Mexico facility given potential tariff changes and the renegotiation of NAFTA.

Answer

Sean Bagan, Interim President, CEO, and CFO, stated that while the company is monitoring the situation, it is not currently backing off its Mexico strategy. He emphasized the flexibility of Helios's footprint, noting that production in Tijuana can be replicated in U.S. facilities if necessary. Bagan explained that any decision to shift manufacturing would be part of a broader footprint optimization evaluation should new tariffs or trade agreements negatively impact the current cost benefits.

Mircea Dobre sought clarification that the company's guidance excludes tariff impacts and asked for a quantifiable estimate of that impact. He also questioned the full-year margin progression given the strong Q1 start and requested the trailing 2024 EBITDA for the TerraSource acquisition, separate from synergies.

Answer

CEO Jaco van der Merwe confirmed that the current guidance for 2025 excludes tariff impacts. He estimated the potential COGS impact could be 4% to 10% if no mitigating actions were taken, but stated the company's goal is to neutralize this through pricing, forward-buying, and supplier negotiations. He acknowledged Q1 was strong but felt it was too early to raise guidance. CFO Brian Harris declined to provide a specific historical EBITDA for TerraSource but noted it could be approximated from the transaction details provided.

Mircea Dobre questioned the size of the inflation buffer in the Specialty Vehicles backlog, asked why guidance was not raised after a strong Q1 beat, and inquired about the sustainability of strong order intake for fire and ambulance vehicles.

Answer

CFO Amy Campbell stated that while Q1 exceeded internal expectations, the company is maintaining its full-year guidance to account for known and unknown risks, including potential inflation, though a path to the top half of the range exists. CEO Mark Skonieczny noted that ambulance chassis costs are a pass-through, mitigating some risk. Campbell also confirmed that Specialty Vehicle orders remain meaningfully above long-term trends but it's too early to know if this is a new normal.

Mircea Dobre of Baird inquired about REV Group's operational progress, asking if the 'heavy lifting' is complete, the potential for more aggressive M&A, the criteria for acquisitions, the possibility of further divestitures, the sustainability of the Specialty Vehicles margin bridge, and the deployment strategy for the new share repurchase authorization.

Answer

President and CEO Mark Skonieczny stated that while significant progress has been made, operational improvement is a continuous process, with the Fire segment expected to reach the Ambulance segment's level by the end of Q2 2025. He confirmed the company has the flexibility for M&A and is actively looking for opportunities tangential to the specialty vehicle space. CFO Amy Campbell added that the 14-16% margin target for Specialty Vehicles is considered structurally sustainable, and the share buyback provides management with flexibility to act based on market conditions and other capital allocation priorities.

Mircea Dobre asked for an update on the wind-down of the ENC business, including its revenue and EBITDA impact in the quarter. He also inquired about the magnitude of the performance drag from the terminal trucks business, the nature of recent restructuring charges, and the sustainability of RV revenue given its declining backlog.

Answer

CEO Mark Skonieczny stated the ENC wind-down is ahead of schedule, recognizing about $40 million in revenue in Q3, with completion expected in early Q4. CFO Amy Campbell added that ENC was accretive to margins. Regarding terminal trucks, Mark Skonieczny confirmed the business is at a cyclical trough and is a mid-single-digit EBITDA margin business long-term. He also clarified that recent restructuring charges were entirely related to the ENC closure. On RV demand, he noted it's a 'wait and see' situation, but the company is actively flexing costs to align with demand.

Mircea Dobre asked for guidance on the expected margin cadence for the full year across all three equipment segments, given the slow start in Q1.

Answer

Executive Josh Beal explained the cadence will be atypical. Construction & Forestry margins are expected to improve sequentially throughout the year due to heavy underproduction in the first half. Large Ag will follow a more normal seasonal pattern, with sales and margins likely peaking in Q2. CFO Josh Jepsen confirmed Q2 and Q3 should be strong margin quarters for Large Ag, with Q4 marking a return to year-over-year sales growth.

Mircea Dobre inquired about the fourth-quarter outlook, seeking a breakdown of manufacturing margin and SG&A expectations. He also questioned if the Q4 revenue forecast is based on firm orders and challenged the view that Q4 represents a cyclical trough, citing ongoing production cuts across MEC's key end markets extending into 2025.

Answer

Executive Todd Butz projected a slight sequential decrease in Q4 manufacturing margin due to fixed cost under-absorption from lower volumes, but noted SG&A would see a favorable impact from cost reductions. He confirmed the Q4 revenue outlook is based on firm orders. Executive Jagadeesh Reddy addressed the 2025 recovery, expecting powersports to rebound first in H1, followed by construction, with the commercial vehicle market picking up in H2. He noted that while the agriculture market downturn may persist, it only represents 8% of total revenue.

Asked for specific guidance on Q1 revenue and margins, the reasons for strong recurring revenue growth in 2023 and its expected moderation in 2024, and the performance of the original equipment (OE) business, particularly the recovery assumptions for the poultry market.

Answer

Q1 2024 is expected to have modest year-over-year revenue growth and margin improvement of 75-100 basis points. The strong 2023 recurring revenue growth was driven by customers deferring CapEx in favor of refurbishment and the full-year inorganic impact of the Bevcorp acquisition; this will moderate as equipment spending recovers. The OE business was down in 2023, primarily due to North American poultry weakness (down >20% from mid-cycle) and a normalization in pet food. The 2024 forecast assumes a partial, second-half recovery in poultry.