Ryan Merkel

Ryan Merkel asked for clarification on Q4 gross margin performance and the expected sequential decline into Q1 2026, as well as key factors influencing the 2026 margin guide excluding Cromwell.

Answer

CFO Dee Merriwether attributed Q4 favorability to lower-than-expected LIFO impact and price increases. She detailed Q1 headwinds including LIFO, the Grainger sales meeting's impact on supplier rebates, and private label competitiveness due to tariffs. For 2026, she highlighted segment mix headwinds, UK market exit tailwinds, and High-Touch puts and takes (Grainger sales meeting, price cost, LIFO tailwind in H2).

Ryan Merkel from William Blair asked about the better-than-expected Q4 gross margins, the reasons for the anticipated sequential decline in Q1 gross margins, and the key factors influencing the 2026 margin guidance, particularly regarding organic margin lift excluding Cromwell.

Answer

Dee Merriwether, Senior Vice President and CFO, explained that Q4 gross margins benefited from a less negative LIFO impact and effective pricing actions. She detailed that Q1 gross margins would decline sequentially due to LIFO headwinds and the accounting impact of the biennial Grainger sales meeting. For the 2026 margin guide, she highlighted a 10 basis point headwind from Endless Assortment's faster growth, a tailwind from the UK market exit, and a 20 basis point contribution from High-Touch factors like price-cost normalization and LIFO tailwinds in the second half.

Ryan Merkel sought to quantify the split of the 50 basis point gross margin headwind between LIFO and price-cost timing and asked about the risk of further tariff-driven inflation.

Answer

CFO Deidra Meriwether and CEO D.G. Macpherson reiterated that the majority of the headwind is from LIFO, stating that gross profit margin would have been flat year-over-year without it. On future tariffs, Macpherson noted that while there is always risk, the announced tariffs on countries other than China would not have a huge impact on Grainger.

Ryan Merkel of William Blair & Company, L.L.C. sought clarification on the breakdown of the 50 basis point gross margin headwind between LIFO impact and price-cost timing, and asked about the risk of further price-cost pressures from newly announced tariffs.

Answer

CFO Deidra Meriwether and CEO D.G. Macpherson both emphasized that the LIFO impact is the 'main event' and constitutes the entirety of the current gross margin pressure, stating that gross profit margin would have been flat year-over-year without it. Macpherson added that the tariffs announced that day were unlikely to have a significant impact, as China remains the most critical trade partner to watch.

Ryan Merkel asked for a high-level macro update, inquiring if Grainger has seen any business slowdown and what customer feedback has been regarding the economic outlook. He also sought clarification on the scope of the recent price increase related to tariffs.

Answer

Chairman and CEO D.G. Macpherson stated that business has actually accelerated, with April being the best month of the year, and that customers are more focused on their daily operations than on tariffs. He clarified that the recent price increase was modest overall, applying mostly to Grainger's direct imports and a few specific suppliers, with more significant price changes for certain products.

Ryan Merkel asked for the assumptions behind the 2025 market volume outlook and whether it includes tariff uncertainty. He also questioned if Artificial Intelligence (AI) should be viewed as a transformative force for Grainger or simply another tool.

Answer

CFO Dee Merriwether clarified the outlook assumes market volume will be flat to down 1.5%, similar to 2024, and does not include any potential tariff impacts due to uncertainty. CEO D.G. Macpherson described AI as a powerful set of tools that enhances the business, emphasizing that Grainger's advantage comes from its proprietary data assets (PIM and KIM) and its long-standing use of machine learning.

Ryan Merkel inquired about the specific drivers behind the significant growth acceleration in the Endless Assortment segment and sought confirmation on assumptions for the fourth-quarter outlook, particularly regarding the macro environment and the impact of hurricane-related sales.

Answer

Chairman and CEO D.G. Macpherson attributed the Endless Assortment growth to strong performance with enterprise customers at MonotaRO and the dissipation of B2C headwinds at Zoro, which now showcases robust B2B growth. He also confirmed that the Q4 forecast assumes a stable macro environment and that the temporary sales bump from the hurricane will phase out in November and December.

Ryan Merkel asked about the Home Comfort Solutions (HCS) revenue decline in the fourth quarter, specifically how trends progressed through November and December compared to October, and where the primary surprise in performance originated, distinguishing between one-step and two-step channels. He also inquired about reconciling the 2026 HCS guidance of up 2% with the positive tailwinds presented, as it implies a volume decline of over 3%.

Answer

Alok Maskara, CEO of Lennox International, confirmed that November and December trends for HCS were indeed weaker than October, with the main surprise stemming from worse-than-expected residential new construction activity. He noted that both one-step and two-step channels experienced more destocking than anticipated in Q4. Michael Quenzer, CFO, clarified that the HCS guidance includes a mid-single-digit volume decline for the full year, with a more significant decline in the first half due to continued destocking in the two-step channel (and some in the one-step), anticipating growth to normalize in late Q2, Q3, and Q4.

Ryan Merkel from William Blair inquired about the performance of Lennox's Home Comfort Solutions (HCS) revenue in the fourth quarter, specifically asking about monthly trends (November/December versus October) and the primary source of the unexpected decline (one-step versus two-step channels). He also sought clarification on how the projected HCS growth for 2026 aligns with anticipated market tailwinds, given the implied volume decline.

Answer

CEO Alok Maskara confirmed that November and December HCS trends were weaker than October, with residential new construction being the main surprise. He noted that both one-step and two-step channels experienced similar, albeit deeper than expected, destocking. CFO Michael Quenzer clarified that the HCS guidance for 2026 includes a mid-single-digit volume decline for the full year, with a more significant drop in the first half due to continued destocking, expecting growth to normalize in the second half.

Ryan Merkel asked for more perspective on residential volume declines, including one-step versus two-step performance, sell-through volumes excluding destocking, and key assumptions for the fourth quarter margin trajectory given expected sequential declines.

Answer

CFO Michael Quenzer stated total sales sell-through was down about 10% and sell-in down about 20%. CEO Alok Maskara explained that contractors also engaged in destocking, impacting sales, alongside weak consumer demand due to interest rates, housing turnover, and moderate weather. Michael Quenzer noted growth in parts and supplies, indicating a repair-versus-replace trend. Alok Maskara attributed the Q4 margin decline to reduced manufacturing to right-size inventory, which lessens absorption benefits.

Ryan Merkel asked for more perspective on residential volume declines, including the performance of one-step versus two-step channels, and sell-through versus sell-in volumes, particularly when excluding destocking impacts. He also inquired about the key assumptions behind the expected sequential decline in fourth-quarter margins.

Answer

CFO Michael Quenzer reported total sales sell-through was down about 10% and sell-in down about 20% in Q3. CEO Alok Maskara clarified that destocking occurred at both distributor and contractor levels, influenced by weak consumer demand, high interest rates, a stagnant housing market, and moderate summer weather. Michael Quenzer added that growth in parts and supplies indicates a repair-versus-replace trend. Regarding Q4 margins, Alok Maskara stated the primary factor for the sequential decline is reduced manufacturing to right-size inventory, leading to less absorption benefit.

Ryan Merkel from William Blair & Company, L.L.C. asked for the rationale behind lowering the full-year volume outlook for the Building Climate Solutions (BCS) segment and for clarification on what management means by the commercial market 'nearing a bottom.' He also asked about the impact of weather on the quarter.

Answer

CEO Alok Maskara explained the BCS volume guide was lowered because the expected market bottoming in Q1 did not occur, with industry volumes declining through Q2. However, they now see signs of stabilization, suggesting the market is 'bouncing along the bottom.' Maskara acknowledged a soft start to summer in May but noted that sales strengthened in June and early July, attributing the overall softness to multiple factors beyond just weather.

Ryan Merkel inquired about the reasons for the commercial order delays in Q1, whether the issue is resolved, and the drivers behind the lowered volume outlook for both residential and commercial segments.

Answer

CEO Alok Maskara explained that the commercial slowdown was due to destocking and customers transitioning to new R-454B products, an issue he considers largely resolved with some inefficiencies possibly continuing into Q2. He clarified that the lowered volume outlook is a proactive measure in anticipation of potential macroeconomic softness from tariffs, not a reflection of a current slowdown, as April orders remained healthy.

Ryan Merkel inquired about the magnitude of the Q4 R-410A prebuy, its impact on Q1 2025, and the core assumptions supporting the flat volume outlook for the Home Comfort Solutions (HCS) segment.

Answer

CEO Alok Maskara estimated the prebuy at $125 million, slightly above expectations due to temporary share gains from competitor product shortages. CFO Michael Quenzer confirmed this would create a revenue headwind in Q1 and Q4 of 2025. Alok Maskara justified the flat HCS volume forecast by citing market uncertainties like high interest rates and low home sales, acknowledging the outlook may be conservative.

Ryan Merkel of William Blair & Company asked about the assumptions behind the forecast that 65% of the 2025 market will be A2L products and whether the risk is to the upside or downside. He also requested quantification of the R-410A prebuy destocking impact expected in the first half of 2025.

Answer

CEO Alok Maskara stated the risk around the 65% A2L mix forecast is fairly balanced, noting it could be lower if R-410A prebuy is higher, or higher if competitors' inventory shortages pull demand forward. He emphasized that Q3's strength was driven more by restocking and share gains than prebuy, and expects the prebuy destocking impact to be most pronounced in Q1 2025.

Ryan Merkel asked about the drivers behind the 4% price increase in fiscal Q1, the expectations for price in fiscal Q2, and the potential impact on MSC's financials if IEEPA tariffs are ruled invalid.

Answer

Ryan Mills, VP of Investor Relations and Business Development, explained that Q1 price was driven by carryover from a late June action and a late September/early October action. Martina McIsaac, President and CEO, noted ongoing inflation, particularly in metalworking due to tungsten, and stated that mid-to-high single-digit price increases would be passed on, potentially leading to Q2 price being a little north of 5% year-over-year. Greg Clark, Interim Chief Financial Officer, added that invalid IEEPA tariffs would initially hit the P&L as lower-cost inventory works through, followed by a benefit.

Ryan Merkel inquired about the drivers behind the 4% price increase in fiscal Q1, which exceeded expectations, and sought guidance on the anticipated price trends for fiscal Q2. He also asked about the potential impact on MSC Industrial if IEEPA tariffs are ruled invalid.

Answer

Ryan Mills, VP of Investor Relations and Business Development, MSC Industrial, explained that Q1 price was as expected due to carryover from a late June action and a new action in late September/early October. Martina McIsaac, President and CEO, MSC Industrial, noted ongoing inflation, particularly in metalworking due to tungsten price increases, and stated that mid-to-high single-digit price increases from suppliers would be passed on starting mid-January, potentially leading to Q2 price being slightly above 5% year-over-year. Greg Clark, VP Finance and Corporate Controller, MSC Industrial, clarified that invalid IEEPA tariffs would initially cause a hit as lower-cost inventory works through the P&L, followed by a benefit.

Ryan Merkel asked about the unexpected surge in supplier price increases and its 30 basis point negative impact on gross margin, inquiring about the underlying causes and MSC Industrial Supply's response. He also sought clarification on the company's mid-single-digit revenue growth and 20% incremental margin expectations, specifically regarding gross margin stability and SG&A as a percentage of sales for the fiscal year.

Answer

Erik Gershwind, CEO, acknowledged the unusual nature of the inflation cycle, noting the concentration of increases in a short window. Martina McIsaac, President and COO, elaborated that price realization met expectations, but cost realization did not due to a rapid surge in supplier increases and compressed notification periods. She stated that MSC Industrial Supply has since taken corrective pricing actions in Q1, expecting gross margins to restore. Ryan Mills, Head of IR, added that the 20% incremental margin assumes a $30-$40 million step-up in OpEx, factoring in variable expenses, inflation, investments, and productivity.

Ryan Merkel inquired about the unexpected 30 basis points of negative price cost impact on gross margin in Q4, specifically the surge in supplier price increases, and how MSC Industrial Supply addressed this unusual situation. He also asked for clarification on the expectation for gross margins and SG&A as a percentage of sales, given the target of mid-single-digit revenue growth and 20% incremental margins for the year.

Answer

Erik Gershwind, CEO, and Martina McIsaac, President and COO, explained the unprecedented concentration of supplier increases, exceeding post-COVID inflation. Martina noted that while price realization met expectations, cost realization was higher due to rapid increases and compressed notification periods. MSC Industrial Supply committed to pricing stability in Q4 but implemented further price increases in Q1, expecting gross margins to restore. For incremental margins, Martina anticipates teens in Q1, building through the year, with Ryan Mills, Head of IR, adding that mid-single-digit growth implies a $30M-$40M OpEx step-up, which is achievable.

Ryan Merkel of William Blair & Company requested a breakdown of the drivers behind the improving average daily sales (ADS) trend and asked about the marketing of web pricing to core accounts and their growth potential.

Answer

CEO Erik Gershwind attributed the ADS improvement to a mix of macro factors and building momentum from internal initiatives, noting pricing was not a major variable in recent months. He confirmed marketing for core accounts is in full swing, with the goal of growing that segment at or above the company average, ultimately targeting 400+ bps of outgrowth versus the IP index.

Ryan Merkel of William Blair sought to understand if the historical sequential sales data on Slide 12 should be considered guidance and asked about the SG&A expense trajectory for the second half of fiscal 2025, including the impact of cost-cutting initiatives.

Answer

CFO Kristen Actis-Grande clarified the slide is a reference point for modeling, not formal guidance, due to low visibility. CEO Erik Gershwind noted that performance hinges on both internal initiatives and the macro environment. On SG&A, Actis-Grande stated second-half expenses will be volume-dependent, with productivity gains like the Columbus CFC closure partially offset by ongoing investments.

Ryan Merkel of William Blair & Company asked about the specific drivers behind the improving average daily sales (ADS) trend and questioned the strategy and growth potential for core accounts, including marketing efforts.

Answer

CEO Erik Gershwind attributed the ADS improvement primarily to macro stabilization and internal initiatives, as recent pricing was not a major factor. He confirmed that marketing for core accounts is in full swing, enabled by last year's web pricing realignment, with the ultimate goal of growing the core customer base at 400 basis points or more above the IP index.

Ryan Merkel followed up on the calendar Q4 2025 slowdown to 3% growth, asking for specific reasons. He also inquired about current pricing trends, commodity performance, and expectations for supplier price increases heading into the new year.

Answer

CFO Bill Brundage attributed the slowdown to continued new residential pressure, stemming from weaker permits and starts, and increased pressure in the HVAC market, which was down about 6% in the quarter. CEO Kevin Murphy noted that overall inflation for the quarter was approximately 3%, with finished goods pricing at the high end of low single-digits and commodities down low single-digits. He specified PVC was in double-digit deflation, steel saw mild inflation, and copper tube and fittings experienced strong inflation. Kevin Murphy expects modest, normalized finished goods price increases for calendar 2026.

Ryan Merkel from William Blair asked for clarification on the reasons behind the projected slowdown to 3% growth in calendar Q4, and sought an update on pricing trends, commodity performance, and expectations for supplier price increases heading into the new year.

Answer

Bill Brundage, Ferguson's CFO, attributed the calendar Q4 slowdown primarily to continued pressure in new residential construction and increased challenges in the HVAC market, consistent with prior expectations. Kevin Murphy, CEO, detailed that overall inflation was 3% in the quarter, with finished goods at the high end of low single digits and commodities down low single digits. He specified PVC deflation, mild steel inflation, and strong copper inflation. Murphy anticipates modest, normalized supplier price increases for finished goods in calendar 2026.

Ryan Merkel inquired about the non-residential market's 15% growth, specifically why the industrial segment's 5% growth was slower than other non-residential areas, and if the company expects the industrial market to remain softer than commercial and civil, despite the onshoring theme.

Answer

Kevin Murphy, President, CEO & Director, Ferguson, clarified that the 5% industrial growth figure includes fire protection, industrial, and facility supply businesses, which were still navigating periods of commodity deflation, particularly in steel pipe pricing. He expressed satisfaction with market share gains and the industrial business's collaboration with water and commercial mechanical segments on large capital projects, suggesting that the 5% growth should not be overly compared to the 21% growth in commercial mechanical.

Ryan Merkel inquired why the industrial market's 5% growth was slower compared to other non-residential segments, despite the onshoring theme, and if this trend is expected to continue relative to commercial and civil.

Answer

CEO Kevin Murphy clarified that the 5% growth figure includes fire protection, industrial, and facility supply businesses, which were still working through commodity deflation (e.g., steel pipe pricing). He expressed satisfaction with market share gains and collaboration with water and commercial mechanical businesses on large capital projects, suggesting the 5% shouldn't be over-read against commercial's 21%.

Ryan Merkel asked for more color on the weakening new residential construction market, including specific trends in the Sunbelt and slowed lot development, and how the guide's assumptions for new residential from August to December reflect this. He also inquired about the non-residential market's 15% growth, specifically why the industrial market's 5% growth was slower than others, and expectations for industrial versus commercial and civil.

Answer

Bill Brundage (CFO) stated that the guide assumes new residential will be a bit weaker in the second half of the calendar year, leading to overall growth below 5%, but doesn't foresee a dramatic fall-off. Kevin Murphy (CEO) reiterated that residential markets were expected to be down low to mid-single digits, potentially a touch more in H2, but emphasized the balanced business mix and growth areas as mitigating factors. Regarding non-residential, Kevin Murphy clarified that the 5% industrial growth figure includes fire protection, industrial, and facility supply businesses combined. He noted that fire and industrial were still working through periods of commodity deflation and expressed satisfaction with market share gains and collaboration on large capital projects, advising not to over-interpret the 5% industrial growth against the 21% commercial growth.

Ryan Merkel asked about the drivers of expected margin improvement in the second half of the fiscal year, particularly given potentially worse siding volumes. He also inquired about fiber cement's performance versus other materials in a market focused on affordability, specifically regarding market share.

Answer

CEO Aaron Erter and Jon Skelly, President of AZEK Residential, explained that second-half margin performance is expected to be more consistent with their cost structure, benefiting from HOS initiatives, healthy price mix, incremental cost synergies, and manufacturing network optimization. They noted that first-half decrementals were over 80%, while second-half decrementals for NAFC (excluding R&D) are projected under 50%. Regarding market share, Aaron Erter acknowledged dissatisfaction with growth but cited challenges from exposure to new construction in the South. He highlighted on-the-wall cost improvements as a game-changer and the structural momentum of resilient materials aligning with evolving building codes and builder preferences.

Ryan Merkel asked about the company's margins, noting that guidance implies Q2 EBITDA margins are the bottom for the year, and inquired about the drivers for improvement in the second half, especially given potentially worse siding volumes year-over-year. He also asked about Fiber Cement's share performance, addressing fears of losing share and how it's performing against other materials in an affordability-focused market.

Answer

President of AZEK Residential Jon Skelly stated that despite soft volumes in the back half, guidance shows more modest margin compression, with second-half performance aligning more with their cost structure. He expects benefits from HOS initiatives, healthy price mix, incremental cost synergies, and manufacturing network optimization. CEO Aaron Erter acknowledged dissatisfaction with growth but cited challenges from new construction exposure in the South. He highlighted 'On-the-wall cost' improvements as a game-changer and emphasized the structural momentum for resilient materials due to wildfires, sustainability, insurance reform, and curb appeal, positioning James Hardie well long-term.

Ryan Merkel of William Blair & Company, L.L.C. asked about the single-family new construction market in the South, questioning how it evolved from April to the present and if it is stabilizing. He also inquired why the AZEK EBITDA contribution guidance appeared lower than street expectations.

Answer

CEO Aaron Erter and CFO Rachel Wilson addressed the questions. Mr. Erter noted the company's strong partnerships with large builders concentrated in the South, which has been disproportionately affected by market softness. Ms. Wilson added that national single-family start estimates have been revised down by over 10 points since May. Regarding AZEK's EBITDA, she explained the outlook assumes a conservative low single-digit sell-through growth to account for potential macroeconomic uncertainty, despite not currently seeing a moderation in trends.

Ryan Merkel asked about the drivers behind the strong BASX orders, particularly liquid cooling, and the confidence in the 40%-50% growth outlook for the BASX segment, including order visibility. He also inquired about the implied fourth-quarter gross margin for the Oklahoma segment, seeking clarification on normalized gross margins after accounting for Memphis unabsorbed costs and price/cost timing. Finally, he requested a response to claims from a short report regarding accounting changes inflating revenues and low gross margins for large liquid cooling orders.

Answer

CEO Matt Tobolski explained that improved capacity and visibility allowed for taking on large BASX orders, with strong contributions from liquid cooling at Longview and airside solutions at Memphis and Redmond. He reaffirmed confidence in BASX's growth for 2025 and 2026. Regarding Oklahoma's gross margin, Matt Tobolski stated that normalized margins are in the mid-30s with headroom, after adjusting for Memphis impact and tariff dislocation, acknowledging some temporary inefficiencies from new product introductions. On the short report, Matt Tobolski reaffirmed the integrity of financial reporting, adherence to GAAP (ASC 606), and the custom-engineered nature and profitability of the liquid cooling orders, noting that contract asset changes were due to the scale of a single large order.

Ryan Merkel asked about the drivers behind the strong Basics orders, the confidence in the 40-50% growth outlook for the Basics segment, and the visibility of future orders. He also inquired about the implied fourth-quarter gross margin of 31% and the normalized gross margins for the Oklahoma segment. Additionally, Ryan Merkel sought comments on recent short report claims regarding inflated revenues due to accounting changes and low liquid cooling gross margins.

Answer

CEO Matt Tobolski explained that increased capacity and execution visibility allowed for taking on large Basics orders, with Q3 orders being a mix of airside and liquid-side solutions, heavily focused on the Memphis facility ramp. He noted a strong pipeline and broad interest from data center developers. For gross margins, Matt Tobolski confirmed the mid-30s range for the Oklahoma segment, acknowledging temporary inefficiencies from new Basics product introductions. Regarding the short report, Matt Tobolski reaffirmed the integrity of financial reporting, adherence to GAAP (ASC 606), and confidence in the business. He clarified that the increase in contract assets was due to one large custom-engineered liquid cooling order, which is priced well and not low-margin, with Q3 showing conversion to receivables and expected cash strength in Q4.

Ryan Merkel questioned the confidence level in the new guidance capturing all ERP-related downside risk and asked about the immediate actions taken to mitigate issues. He also sought context on the Q4 growth assumptions and the potential for margin improvement in 2026.

Answer

CEO Matt Tobolski expressed confidence that the new guidance is achievable with upside potential, noting the recovery path is visible. He explained that immediate actions included deploying teams to manage third-party supplier constraints. He clarified the Q4 guide assumes continued, albeit incomplete, ERP recovery and production ramps at Tulsa and Memphis. For 2026, he suggested margins would approach the long-term target of 32-35%, even with further ERP rollouts planned.

Ryan Merkel asked about the core rooftop business, questioning if Q4 order pushouts had returned, if the company was gaining market share, and if there was a pre-surcharge order surge in March. He also sought clarification on the Q2 guidance, which seemed modest compared to analyst expectations.

Answer

President and COO Matthew Tobolski confirmed that the Q4 booking softness is resolved and order cadence is strong, indicating market share gains. He explained that while there was activity before the 6% surcharge, the company capped pre-surcharge orders to manage the impact. Regarding Q2 guidance, Tobolski stated that while operating income will be up significantly, modest EPS growth is expected due to a higher anticipated tax rate compared to Q1's unusually low rate and increased interest expense from higher debt.

Ryan Merkel inquired about the Q1 outlook for the AAON Oklahoma segment, the reasons for the year-over-year sales decline in the BASX segment, and the underlying assumptions for the full-year 2025 mid-to-high teens growth guidance.

Answer

CEO Gary Fields explained that the Oklahoma segment's Q1 performance is affected by the lead time on new R-454B orders booked late in Q4. President and COO Matthew Tobolski clarified that while the BASX segment (Redmond facility) is capacity-constrained, the overall BASX brand, including production at the Coil Products segment, is experiencing strong growth. Tobolski added that the full-year guidance is tempered by uncertainty around the recovery pace in the traditional nonresidential market affecting the Oklahoma segment, which offsets the dynamic growth expected from data centers.

Ryan Merkel inquired about the expected severity of the slowdown in the AAON Oklahoma segment, the drivers behind the forecasted sequential earnings decline from Q4 to Q1, the nature of the large $174.5 million data center order, and visibility into future large-scale orders.

Answer

CEO Gary Fields explained that the Oklahoma segment's softness is due to typical seasonality amplified by a reduced backlog, but he expects a turnaround as headwinds like the refrigerant transition, election uncertainty, and interest rates subside. He also noted the new Longview facility will take a quarter to ramp up, affecting Q1. President and COO Matthew Tobolski clarified that the Q1 earnings decline is expected to be sequential (from Q4) not year-over-year. He added that the large order was for a liquid cooling deployment for an existing customer across their enterprise and that the pipeline contains numerous other orders in the $20+ million range.

Ryan Merkel asked for an update on Watsco's total sales quarter-to-date in Q4 and sought clarification on the shape of Q3, specifically if July was flat and August/September were tough, and the reasons for any significant unit volume drop.

Answer

Albert Nahmad (Chairman and CEO, Watsco Inc) and Aaron J. Nahmad (President, Watsco Inc) indicated Q4 quarter-to-date total sales were soft, declining in the mid-single to 5-10% range in dollars. Barry Logan (Senior VP, Watsco Inc) attributed Q3 unit declines primarily to new construction and consumer discretion, noting it appeared to worsen in August and September, but emphasized the temporary nature of such dynamics.

Ryan Merkel asked for an update on Watsco's total sales quarter-to-date in Q4. He sought clarification on whether Watsco's unit decline aligns with Carrier's reported 30% unit decline. He also inquired about the shape of Q3, specifically if July was flat and August/September were rough, and the reasons for the unit volume drop.

Answer

Albert Nahmad (Chairman and CEO, Watsco Inc) described Q4 sales as 'soft,' 'single digit,' and 'mid-single digit' decline in revenue. Aaron J. Nahmad (President, Watsco Inc) specified a '5% to 10% range, decline in dollars' for October. Albert Nahmad (Chairman and CEO, Watsco Inc) clarified they are 'not in that arena of softness' compared to a 30% unit decline. Barry Logan (Senior VP, Watsco Inc) attributed the Q3 unit decline primarily to new construction, noting it 'looks like it' got worse in August and September but is historically a short-term dynamic.

Ryan Merkel of William Blair inquired about the weaker-than-expected Q2 volumes, seeking reasons and an update on July trends. He also questioned the sustainability of the record 29% gross margin, asking if it was a temporary benefit.

Answer

EVP Paul Johnston attributed soft Q2 volumes to lumpy demand and a 15-20% decline in residential new construction. EVP Barry Logan noted weakness in Mexico but confirmed July trends were improving. On margins, Logan acknowledged a temporary benefit from OEM price hikes but stated a new floor of '27% plus' is expected for the second half. President A.J. Nahmad and CEO Albert Nahmad added that internal pricing technology and a future mix shift to parts also support margin strength.

Ryan Merkel sought confirmation that the weak first quarter should not be extrapolated and asked for a breakdown of the underperforming business segments, including the impact of the A2L transition, international sales, and commercial products.

Answer

CEO Albert Nahmad gave a direct 'Yes' to confirm Q1 weakness should not be extrapolated. Executive Barry S. Logan detailed the negative factors, including declines in non-equipment sales, a ~10% drop in commercial products (also impacted by the transition), weak international sales, and a nearly 2% negative impact from one less selling day.

Ryan Merkel questioned why new customer growth was such a significant driver specifically in the fourth quarter and asked for a profile of these new customers. He also asked for more detail on why the A2L transition represents an incremental growth and share gain opportunity.

Answer

Executive Rick Gomez clarified that the new customer growth trend built throughout the year, not just in Q4, and that it was driven by attracting mid-tier contractors who benefit from Watsco's product depth and technology. Executive Barry S. Logan explained that any new product transition energizes the sales force and creates value, which, combined with Watsco's investment capacity, presents a share gain opportunity.

Ryan Merkel requested a breakdown of the mid-single-digit growth in October between pricing and volume, and asked for a bridge to reconcile the current gross margin back to the 27% target.

Answer

EVP Barry S. Logan detailed that Q3 total unit volumes were up 4%, driven by double-digit ductless growth, while ducted units declined 1% with a 1% price decline due to mix. CFO Rick Gomez explained that the path back to 27% gross margin is clear, as underlying transactional margins remain stable. The recent variance is due to mix shifts between equipment/non-equipment, residential/commercial, new construction/replacement, and the faster growth of larger, tech-enabled customers.

Ryan Merkel inquired about the progression of demand since July, identifying where the upside in the third quarter originated, and then followed up on the early buy program's performance relative to market trends and the reception to Hayward's 6-7% price increase.

Answer

Kevin Holleran, President and CEO, highlighted strong sales out demand, particularly in September, which positioned channel inventory well. He noted extended warm weather, strong performance in OmniX controls, lighting, filtration, and significant growth in Canada (up 20%), Europe (low teens), Asia (up 20%), and Australia (high single digits). Regarding early buy, Mr. Holleran explained the customary discounts and extended payment terms, acknowledging inflation and tariff headwinds, and expressed a desire for a more stable inflationary environment. He stated that the price increase was a dollar-for-dollar offset to tariff impact.

Ryan Merkel inquired about the progression of demand since July, identifying where the upside in the third quarter originated, and later asked about the early buy program's performance relative to a flat market and the reception to Hayward's 6%-7% price increase.

Answer

Kevin Holleran, President and CEO, noted progressively stronger sales out for Hayward products through Q3, culminating in a strong September, aided by warm weather. He highlighted strong performance in controls, lighting, and filtration, with significant growth in Canada (over 20%), Europe (low teens), Asia (over 20%), and Australia (high single digits). Regarding early buy, Mr. Holleran explained that discounts and extended payment terms are customary, and price increases were necessary due to inflation and tariffs, with tariff impacts being dollar-for-dollar offset by pricing actions.

Ryan Merkel inquired about the gross margin outlook for the second half of 2025, given the strong Q2 performance, and asked for both a near-term and long-term perspective on the new pool construction market.

Answer

President and CEO Kevin Holleran attributed the record Q2 gross margin to productivity gains, product line rationalization, higher volume, and price-cost neutrality. SVP & CFO Eifion Jones explained that while second-half margins will moderate as tariff-related price increases offset costs, the full-year guidance still implies year-over-year margin improvement. Regarding the new pool market, Holleran stated the outlook remains for a modest decline in 2025 but noted the market is near trough levels and represents a "coiled spring" that could rebound with improvements in interest rates and the housing market.

Ryan Merkel asked for a breakdown of the planned 3-5% U.S. price increase for 2025 between inflation coverage and strategic pricing initiatives. He also questioned if strategic pricing would be completed in 2025 and asked about the potential for further gross margin expansion.

Answer

CEO Kevin Holleran explained that approximately 3% of the price increase is to achieve price-cost neutrality against inflation, with the remainder coming from strategic value-based pricing. He clarified that value pricing is an ongoing initiative, not a one-time project. CFO Eifion Jones added that while the company has opportunities to enhance gross margins through its strategic pillars, he would not provide a definitive target for 2025.

Ryan Merkel inquired about the visibility of low single-digit organic growth in October and requested more details on the stabilization of the repair and upgrade market. He also asked for insights into Q4 gross margin and SG&A expectations given the EBITDA outlook.

Answer

Doug Black, Chairman and CEO, confirmed positive organic sales growth in October, acknowledging Q4's tougher comparison and weather sensitivity. He noted that the repair and upgrade market, particularly hardscapes and lighting, appears to be stabilizing. John Guthrie, EVP, CFO, and Assistant Secretary, indicated that Q4 guidance does not project as strong a gross margin outperformance as Q3, but strong SG&A leverage is expected to be the primary driver.

Ryan Merkel asked if the low single-digit organic growth outlook for Q4 was already being observed in October and requested more details on the stabilization of the repair and upgrade market. He also questioned the expected gross margin and SG&A performance for Q4, given that EBITDA was projected to be slightly below street estimates even after accounting for branch closures.

Answer

Chairman and CEO Doug Black confirmed positive organic sales growth in October, noting that Q4 has tougher comps and is weather-impacted. He indicated that the repair and upgrade market, particularly hardscapes and lighting, showed signs of stabilization, suggesting a potential bottom. EVP, CFO, and Assistant Secretary John Guthrie stated that Q4 guidance did not anticipate as strong a gross margin outperformance as Q3, but good SG&A leverage was still expected to be the primary driver of performance.

Ryan Merkel of William Blair & Company, L.L.C. inquired about the adjusted EBITDA outlook, asking if investors should focus on the midpoint of the range and what the primary risks are for the second half. He also sought clarity on the long-term 13% to 15% EBITDA margin target, specifically the expected contributions from gross margin versus SG&A leverage.

Answer

CEO Doug Black stated that the company feels confident about landing solidly within the provided guidance range. He identified the primary risk as a potential further deterioration in market demand, though he expressed confidence in the company's ability to outperform the market. Regarding long-term targets, Black explained that both gross margin and SG&A leverage will drive margin expansion, but he expects SG&A leverage to be the larger contributor, driven by focus branch improvements and productivity initiatives.

Ryan Merkel asked for the company's expectation for organic sales growth and pricing in the second quarter, and sought more detail on the 10-15% tariff exposure, including the specific products affected.

Answer

Executive Vice President John Guthrie stated that SiteOne anticipates low single-digit organic growth in Q2, with pricing expected to be between negative 1% and flat. Guthrie clarified that the 10-15% tariff exposure is primarily indirect, stemming from suppliers sourcing from countries like Mexico and China, as SiteOne's direct imports are less than 1% of sales. CEO Doug Black added that the most affected product categories are irrigation, lighting, and some landscape supplies. Guthrie noted supplier price increases are mostly in the 4-8% range, which the company expects to pass through.

Ryan Merkel asked about the drivers behind SiteOne's better-than-expected organic sales, questioning if it signals end-market stabilization or successful market share gains. He also sought clarification on comments about 'enhanced' future growth.

Answer

CEO Doug Black attributed the performance to both resilient maintenance and new construction markets and more consistent market share gains, despite continued weakness in repair and remodel. Regarding future growth, he clarified his comments referred to enhanced adjusted EBITDA growth, expecting margins to expand as headwinds from price deflation and the dilutive Pioneer acquisition subside, complementing ongoing operational initiatives.

Ryan Merkel questioned the commodity pricing trend, specifically asking about the year-over-year decline in Trichlor and PVC, and other components. He also sought to understand the reasons behind the persistent chemical deflation, particularly for Trichlor, and how it differs from historical patterns.

Answer

SVP and CFO Melanie Hart stated that PVC is still declining, though improving quarter-over-quarter, and chemical pricing is down more than the overall 1% commodity impact, with Trichlor down in the mid to high single digits. President and CEO Peter Arvan explained that Trichlor prices, while down slightly, are still significantly higher than pre-COVID levels, and he doesn't view the current muted movement as alarming, attributing it to normal ebbs and flows in demand and potential import regulation impacts.

Ryan Merkel inquired about the primary reason for the lowered full-year EPS guidance and asked if the price competition mentioned in Q1 had eased during the second quarter.

Answer

CEO Peter Arvan attributed the guidance adjustment to the lack of anticipated interest rate cuts, which dims the outlook for a new pool construction rebound in the second half. Regarding pricing, he confirmed that the competitive pressure seen in Q1 has abated and current competitive activity is within normal seasonal patterns.

Ryan Merkel inquired about the top-line growth expectations for the second quarter, the timing of price increase realization, and sought clarification on the components of the full-year guidance, specifically regarding pricing, gross margins, and new pool construction trends in markets like Texas.

Answer

CEO Peter Arvan confirmed that a low single-digit top-line growth expectation for Q2 is a fair assessment and noted that the full impact of recent price increases would be more weighted towards the second half of the year. CFO Melanie M. Hart added that the guidance midpoint assumes improving trends in discretionary spending in the back half, particularly in Florida, California, and Arizona, while acknowledging that Texas remains a softer market.

Ryan Merkel questioned the rationale behind the flattish outlook for new pool construction units given high interest rates and also asked for the key offsets driving the flat-to-up gross margin guidance for 2025.

Answer

President and CEO Peter Arvan stated the new construction outlook is based on positive dealer feedback, though he conceded growth would likely be weighted to the second half of the year. SVP and CFO Melanie M. Hart added that gross margins are expected to be supported by supply chain initiatives, increased sales of higher-margin private label products, and ongoing pricing discipline, which will offset negative mix and an accounting headwind.

Ryan Merkel followed up on equipment pricing, asking for specifics on what the company is seeing from OEMs for 2025. He also requested clarification on the gross margin outlook for Q4 and the full year, noting the typical seasonal patterns.

Answer

President and CEO Peter Arvan confirmed that expected equipment price increases are in the 2% to 3% range. VP and CFO Melanie M. Hart clarified that the Q4 gross margin should be similar to the prior year and that the full-year margin will align with the year-to-date rate. She emphasized that current margins are well ahead of pre-pandemic levels, even with headwinds from lower new construction sales.

Ryan Merkel from William Blair inquired about any signs of improving orders and demand in the lighting market, and whether lower interest rates are needed for an uplift. He also asked about the gross margin outlook for 2026, specifically if a 50% gross margin target is still reasonable given productivity efforts.

Answer

Neil Ashe, Chairman, President, and CEO, Acuity, stated that the company expects more of the same economic context and is not modeling market improvement, emphasizing ABL's ability to perform in a tepid environment through market share gains and new verticals. Regarding gross margins, Mr. Ashe explained that while the company expects continued expansion through mix and ABL performance, the percentage margin impact of tariffs and price increases will be a temporary headwind of 50-100 basis points at ABL.

Ryan Merkel followed up on gross margin, asking for expectations for Q4 and whether the 50% level is achievable given the anticipated impact of tariffs. He also asked about the cadence of orders during the quarter and feedback from agents regarding the pull-forward.

Answer

Neil Ashe, Chairman, President & CEO, stated that Q3 was largely unimpacted by price increases or tariffs, but the dilutive margin impact from dollar-for-dollar tariff coverage will begin in Q4. He reiterated that combining Q3 and Q4 should yield a normalized second-half performance. He confirmed there was evidence of order acceleration as customers sought certainty, and the company is monitoring how demand rebuilds.

Ryan Merkel of William Blair & Company followed up on the tariff discussion, asking if the new tariffs could be competitively favorable for Acuity and seeking reasons for the strong gross margin performance, as well as the potential significance of the lag in passing on price increases.

Answer

CEO Neil Ashe agreed that Acuity is likely advantaged by the tariffs due to its diversified supply chain, including its Mexico and U.S. manufacturing footprints. CFO Karen Holcom attributed strong gross margins to the growing contribution from the higher-margin Acuity Intelligence Spaces (AIS) segment and the successful product vitality strategy in the lighting business. Neil Ashe added that while a pricing lag may be mildly dilutive to percentage margins temporarily, the company will focus on covering the full dollar cost of tariffs.

Ryan Merkel from William Blair & Company inquired about the expected full 12-month earnings accretion from the QSC acquisition, recent order trends, and whether improved performance in the independent channel signals a broader demand recovery.

Answer

Neil Ashe, Chairman, President and CEO, stated that a full-year accretion figure isn't the focus, but the integration is off to a good start. He noted that while it's too early to call a demand inflection, the company is confident about calendar 2025, citing positive data and field interactions. He attributed strong performance in the C&I channel to the company's product segmentation strategy, while noting that weaker retail results were a point-in-time issue.

Ryan Merkel of William Blair & Company asked for the pricing outlook for the second half of the year, context on the strong 24% unit growth, and confirmation of the operating ratio expectation for the third quarter.

Answer

President & COO Amy Rice stated that the year-over-year RPU delta should compress in the coming quarters as the company laps the beginning of the spot market softness from Q3 2024. She attributed the strong unit growth to the Brothers acquisition, a full quarter of new market share gains, and some organic growth. Management also confirmed they expect to maintain the Q2 adjusted operating ratio in Q3 despite seasonally lower revenue.

Ryan Merkel of William Blair sought more detail on the Q1 forecast, asking about the source of visibility that supports the expected recovery from a soft January. He also asked for clarification on whether the Q1 outlook being 'similar to Q4' applied to both revenue and EBITDA, and questioned if the weak spot market premium would persist. Finally, he asked about the potential for new business wins in 2025.

Answer

President and COO Amy Rice explained that Q1 visibility comes from near-term pipelines, such as import cars already in transit, and customer conversations indicating a ramp-up in March. CFO Bradley Wright clarified the Q1 outlook applies to revenue and operating ratio. Rice advised that conservatively assuming the current weak spot premium continues is prudent, and highlighted that new business can come from both recent contract wins becoming more visible and from several large OEM bids occurring this year.

Ryan Merkel from William Blair asked about the drivers for the October volume pickup and whether the trend persisted into November. He also inquired about the timeline for dealer inventory normalization and the potential impact of OEM incentives. Finally, he asked if market share gains were being driven by competitor struggles.

Answer

CFO Bradley Wright attributed the October volume increase to a broader market rebound, while President & COO Amy Rice clarified the trend had pulled back in early November, warranting caution for Q4. Rice noted that they are seeing more dealer incentives, which, along with new models, should help clear inventory. She attributed market share opportunities to the company's expanded nationwide offering rather than commenting on specific competitor weakness.

Ryan Merkel of William Blair & Company, L.L.C. asked for an estimate of the total pool retail industry's sales decline to assess Leslie's market share loss, and also inquired about the scale of cost reductions and potential store closures.

Answer

Interim CFO & Treasurer Tony Iskander estimated the overall industry decline is in the low-to-mid single-digit range. He confirmed the company cut variable costs in response to lower sales but stated that store closures are not planned for the current year. He also mentioned a target of $5-10 million in cost optimization benefits starting next year.

Ryan Merkel from William Blair questioned the drivers behind the Q1 gross margin miss and sought reassurance on the outlook for margin expansion. He also asked about the specific factors driving the 9% growth in the PRO segment and the timeline for rolling out PRO services across all stores.

Answer

CFO Scott Bowman detailed that the Q1 margin was impacted by higher inventory adjustments and fixed-cost deleverage. He explained that adjustments are now being made more frequently, shifting costs from the back half to the first half, which will create a tailwind later in the year. CEO Jason McDonell attributed the strong PRO growth to better in-stock positions on key SKUs and a focused team effort. He confirmed the initiative to serve PROs from all 1,000 stores is already in progress, supported by assortment changes and the new LFC network.

Ryan Merkel questioned the strategies to improve gross margins, asking if the focus is on cost-cutting or top-line growth, and also inquired about inventory levels and the new localized assortment strategy.

Answer

CFO Scott Bowman stated that the primary path to improving gross margins is driving top-line sales to gain leverage on fixed costs like occupancy and distribution centers, rather than further cost takeouts. On inventory, he noted there is still room for reduction by optimizing allocation and consolidating slow-moving items, which frees up capital for critical 'never out' products. CEO Jason McDonell added the goal is 'precision inventory' tailored to local markets.

Ryan Merkel inquired about current order trends, asking if there was a lift in June and July. He also asked for an update on the fiberglass pool backlog and whether that segment is expected to return to growth in the second half of the year.

Answer

CEO Scott Rajeski confirmed an uptick in orders post-Memorial Day, with strength in auto covers and liners, and noted fiberglass has 'turned nicely.' He stated the fiberglass backlog has held up well, though short lead times of 2-4 weeks make it a dynamic measure. Rajeski affirmed his expectation that fiberglass will return to growth in the second half, citing positive trends over the last several weeks.

Ryan Merkel inquired about the outlook for SG&A leverage versus gross margin expansion for the remainder of the year, and also asked for an update on the market reaction to new pool molds and progress in the sand states.

Answer

CFO Oliver Gloe explained that SG&A leverage is expected to increase as the year progresses due to sales growth and the anniversarying of certain costs. CEO Scott Rajeski added that progress in the sand states is encouraging, with new models resonating well, and the company anticipates accelerating its revenue improvement in those states by 200-300 basis points in 2025.

Ryan Merkel of William Blair asked for feedback from dealers heading into the pool season and inquired about early signs of success for the company's strategic investments in the sand states (Florida, Texas, Arizona, California).

Answer

Executive Scott Rajeski stated that dealer feedback is more positive this year compared to last, describing the sentiment as "cautiously optimistic." He noted that about a third of larger dealers report backlogs are flat or up, a significant improvement from the prior year. In the sand states, Rajeski highlighted a 40% year-over-year increase in leads in Texas following the "GOOTSA" ad campaign and good traction at the Babcock Ranch master planned community. He also quantified that fiberglass sales in the sand states grew from 15% to 17% of the company's total.

Ryan Merkel inquired about the structural changes driving higher profitability and whether Latham could achieve 20%+ EBITDA margins in a market recovery. He also asked about dealer sentiment for 2025 and the strategy behind increased sales and marketing investments.

Answer

CEO Scott Rajeski and CFO Oliver Gloe confirmed that returning to and exceeding 20% EBITDA margins is a key objective. They attributed this potential to restructuring, lean manufacturing, and investments in scale that create significant operating leverage. Rajeski noted improved dealer sentiment for 2025, while Gloe specified that the increased S&M spend is targeted at building a presence in the Sand States ahead of a recovery.

Ryan Merkel of William Blair & Company, L.L.C. asked about the change in the repair and remodel (R&R) market outlook from flat to down and questioned why the level-loading strategy is accretive to margins.

Answer

President & CEO Bryan Fairbanks explained the revised R&R outlook reflects reports from other industry experts and general consumer uneasiness. SVP & CFO Brenda Lovcik stated that level-loading is accretive because it enables higher production volumes in Q3 and Q4, leading to greater operational efficiencies, but did not quantify the impact.

Ryan Merkel of William Blair & Company, L.L.C. asked about the change in the repair and remodel (R&R) market outlook from flat to slightly down, and requested more detail on why the level-loading strategy is accretive to margins.

Answer

President & CEO Bryan Fairbanks explained the revised R&R outlook reflects external industry reports and general consumer uneasiness. SVP & CFO Brenda Lovcik stated that level-loading is accretive because it enables higher production volumes in Q3 and Q4, driving manufacturing efficiencies, but declined to provide a specific quantification of the benefit.

Ryan Merkel asked about the rationale behind the product refinement for Trex's Enhance decking line and its expected sales impact. He also sought clarification on the Q2 margin guidance and requested a quantification of the margin impact from the Enhance product changeover.

Answer

CEO Bryan Fairbanks explained the Enhance product change was driven by customer feedback to create a stronger, more aesthetically pleasing board, which incurred some one-time changeover costs in Q1. CFO Brenda Lovcik clarified that the Q2 margin guidance refers to gross margins and will be impacted by level-loaded production and residual costs from the Enhance changeover. She noted the three primary margin headwinds—railing conversion, level loading, and the Enhance changeover—were roughly equal in impact.

Ryan Merkel from William Blair & Company questioned the rationale for flat Q2 sales guidance and the cadence of EBITDA margin throughout 2025.

Answer

CEO Bryan Fairbanks explained that the flat Q2 comparison is due to a revised inventory strategy, which avoids the significant channel loading seen in Q1 of the prior year and shifts about $40 million in sales to later in the year. CFO Brenda Lovcik added that EBITDA margin will be more back-half loaded, as Q1 and Q2 will see higher SG&A spending on marketing for new product launches and retail initiatives.

Ryan Merkel inquired about the assumptions for Q4 sell-through, specifically the breakdown between premium and lower-end products, and sought clarity on the drivers for the 2025 EBITDA margin guidance exceeding 31%.

Answer

CEO Bryan Fairbanks confirmed a low single-digit decline in Q4 sell-through, with high single-digit growth in premium products and a mid-single-digit decline in entry-level products. CFO Brenda Lovik added that the 2025 EBITDA margin guidance of over 31% is adjusted for onetime costs and reflects continued margin expansion from cost takeouts.

Ryan Merkel inquired about the drivers behind the significant Q2 gross margin increase, asking for a breakdown of the FIFO timing benefit versus other factors like freight. He also questioned the sustainability of this margin level and the reasons for the revenue acceleration in July, as well as seeking more detail on the strategy to attract new, higher-value customers.

Answer

SVP & CFO Tex Clark attributed the 200 basis point gross margin expansion roughly equally to FIFO inventory timing and favorable transportation costs, noting the benefit is already waning in Q3 but that year-over-year expansion should continue. CEO Anesa Chaibi and CFO Tex Clark explained that July's growth was broad-based but led by strategic accounts, supported by new go-to-market pilots. CEO Anesa Chaibi clarified that the customer acquisition strategy involves a deliberate shift away from price-sensitive customers toward those with higher lifetime value by aligning the organization to specific industry needs.

Ryan Merkel of William Blair & Company, L.L.C. inquired about the key drivers of the significant Q2 gross margin increase, the outlook for margins in the second half, the source of the sales acceleration seen in July, and clarification on the company's strategy to be more 'intentional' in attracting new customers.

Answer

SVP & CFO Tex Clark attributed the 200 basis point gross margin expansion roughly equally to FIFO inventory timing and favorable transportation costs, noting that about 100 basis points of this benefit is expected to reverse in the second half. Regarding July's mid-single-digit growth, Clark stated it was broad-based but strongest in strategic accounts. CEO Anesa Chaibi added that new go-to-market pilots are contributing to the momentum and explained that being 'intentional' means aligning the organization around specific customer needs and shifting focus from price-sensitive customers to those with higher lifetime value.

Ryan Merkel of William Blair & Company followed up on gross margin expectations for the second half of the year, asking for the rationale behind how deeper fastener inventory helps margins. He also questioned management's confidence in achieving double-digit sales growth.

Answer

EVP & Interim CFO Sheryl Lisowski reiterated the expectation for full-year 2025 gross margin to be flat with 2024. CEO Daniel Florness added that the fastener expansion improves margin mix by stocking more MRO and spot-buy items, which carry a better margin profile. President & CSO Jeffery Watts expressed confidence in achieving double-digit sales growth for the rest of the year, citing a very strong contract pipeline.

Ryan Merkel asked for clarification on how to reconcile the intense holiday-period shutdowns with management's comments about growing customer optimism for 2025, and for more detail on the new customer site sales concentration disclosure.

Answer

CEO Daniel Florness suggested the severe shutdowns were a way for companies to "clear the decks" and recharge for a new year after a challenging 2023. CFO Holden Lewis added that post-election certainty contributed to improved sentiment. Regarding sales concentration, Florness clarified that the top 1% of customer sites (about 2,500 locations) represent approximately 48% of sales, which he views as a sign of success in serving large, complex customers.

Ryan Merkel from William Blair & Company asked if the stronger sales finish in September marked a turning point for outgrowth and inquired about the gross margin outlook for Q4.

Answer

CEO Dan Florness stated he believes the company has "turned a corner" due to recent organizational changes and expects outgrowth to improve into 2025. CFO Holden Lewis added that he expects Q4 gross margin to perform slightly better than typical seasonality, with the negative impact from lower rebates seen in Q3 likely to be less significant.

Ryan Merkel asked about recent business trends, specifically inquiring about performance through Q4 and into Q1 2025. He also sought clarity on Hillman's strategy for potential future tariffs and whether this was factored into the 2025 guidance.

Answer

CEO Jon Adinolfi noted that Q4 was pressured but stable, and this trend has continued into Q1 2025, aligning with their expectations. On tariffs, Adinolfi confirmed they would manage them as they did in 2018 by passing on costs dollar-for-dollar and that nothing is currently in the guidance due to uncertainty. Executive Chairman Douglas Cahill added that tariffs could create an opportunity for Hillman to take over categories that retailers previously imported directly.

Asked for clarification on why Q2 margins are guided lower than expected, specifically the impact of investments, and inquired about the gross margin progression for the rest of the year.

Answer

Q2 margins are impacted by several temporary factors: new product ramp-up costs, flow-through of Q1's low utilization, continued pressure in the Commercial segment, and non-recurring commercial investments. Gross margins are expected to improve sequentially through the year as production volume and utilization increase.