Natalia Bak

Natalia Bak inquired whether the recent colder weather and snow had led to any near-term pickup in replacement activity or pull-forward demand within the Contractor Solutions segment during the current quarter. She also asked about the progress on exceeding initial cost synergies for recent acquisitions, the current position on the margin maturity curve, and the expected additional synergies. Lastly, she sought clarification on the margin contraction in the Specialized Reliability Solutions (SRS) segment, distinguishing between pricing lag and structural material costs, and when pricing is expected to fully offset inflation.

Answer

Joseph Armes and James Perry stated that while order volumes were encouraging, they hadn't observed a significant direct impact from cold weather on replacement activity, noting less exposure to heating and more to air conditioning. Regarding synergies, James Perry confirmed exceeding the initial $10 million target for MARS Parts, with most synergies actioned, though the full financial impact will materialize over 12 months. For SRS, James Perry attributed margin contraction primarily to unfavorable product mix (softer energy markets) rather than pricing lag, as price increases had already come through. He highlighted that recent acquisitions and restructuring actions are expected to help achieve a sustained 20% EBITDA margin in the segment, with benefits taking effect from April 1st.

Natalia Bak asked if recent colder weather and snow had led to any near-term pickup in replacement activity or pull-forward within the Contractor Solutions segment. She also inquired about the progress on acquisition cost synergies, the current position on the margin maturity curve, and the expected additional synergies. Lastly, she asked about the margin contraction in the Specialized Reliability Solutions (SRS) segment, the impact of pricing lag versus structural costs, and the timeline for pricing to fully offset material inflation.

Answer

Joseph Armes, Chairman, CEO and President, and James Perry, EVP and CFO, noted minimal direct impact from colder weather on Contractor Solutions, with encouraging order volumes in December and January, and minor shipping delays expected to be recovered. Perry confirmed exceeding the initial $10 million synergy target for MARS Parts, with integration progressing well towards a 30% margin goal within 12 months. For SRS, Perry explained that margin pressure was primarily due to product mix, with price increases offsetting tariffs, and highlighted restructuring actions and acquisitions expected to drive the segment towards a sustained 20% EBITDA margin from April 1st.

Natalia Bak of Citigroup inquired about the impact of reshoring on the business, asking about any upcoming contracts or OEM relationships shifting from competitors. She also asked about the long-term strategy for diversifying into new verticals like data centers and defense, and sought details on the sustainability of the military backlog, specifically the mix between recurring and new programs.

Answer

President, CEO & Director Jag Reddy confirmed that MEC is seeing significant reshoring activity, particularly in aluminum fabrications, which is driving new business wins. He noted that while steel fabrication inquiries are high, decisions are slower due to tariff uncertainty. He highlighted the AccuFab acquisition as key to the data center diversification strategy and mentioned a legacy business pipeline of over $280 million. For military, he explained the backlog is mostly recurring revenue from stable, long-term platforms like JLTV and Humvee, which are expected to continue.

Natalia Bak from Citigroup Inc. asked about the current tone of customer conversations compared to recent months. She also inquired about the revenue mix between long-term and short-cycle projects and its effect on forward visibility, as well as the expected timing for a recovery in the Agriculture market.

Answer

Executive Jagadeesh Reddy characterized conversations in the Ag and Powersports markets as 'slightly muted' due to ongoing destocking, but noted the company is ahead of schedule on its $100 million new business win target, with many wins starting in 2026 and 2027. He explained that while most new business has a longer lead time, tariff-related reshoring opportunities could start up in the second half of the year. For the Ag market, he stated the current assumption is for a gradual recovery in 2026. Executive Rachele Lehr added that new wins are incorporating the company's value-based pricing model, which will benefit future margins.

Natalia Bak also asked about the timing for recovery in the agricultural end market.

Answer

CEO Jag Reddy stated that the initial assumption is a gradual recovery for agriculture in 2026, but a bounce back is possible depending on global trade policy and farmer sentiment.

Asked for an outlook on the macro environment, the potential impact of the new administration and IRA rollbacks, and whether the HVAC refrigerant prebuy was affecting results.

Answer

The company remains favorably inclined on the macro environment, expecting a normal year of growth, and believes its focus on high-growth markets allows it to outperform. They see minimal impact from potential IRA changes as it was not a major tailwind, and they are agnostic to refrigerant types. The refrigerant prebuy may have been a minor headwind in Q3 as distributors managed working capital, but it is not a long-term concern. From an M&A perspective, higher rates and regulatory scrutiny are viewed as a competitive advantage.