Sabrina Abrams

Sabrina Abrams asked if the assumption that organic growth accelerates through 2026 is correct, given a material FX tailwind in Q1 that tails off later in the year, while total revenue growth remains consistent.

Answer

CFO Michael Larsen confirmed that there is more currency tailwind in Q1, and while Q1 will have positive organic growth, it will be lower than in Q2, Q3, and Q4, aligning with typical seasonality. Abrams also inquired about the strong Q4 performance in Polymers and Fluids, which exceeded her models, and asked if any end-market demand factors traded differently than expected, suggesting the 2026 guide might be conservative. Michael Larsen reiterated that the strong Q4 performance was driven by significant CBI contributions, particularly new product launches in automotive aftermarket (e.g., Rain-X wiper blades), double-digit growth in China's EV-related polymers, and over 20% growth in the biopharma-focused reagents business. He clarified that the 2026 guide reflects a more typical run rate, as Q4's CBI contribution was exceptionally high.

Sabrina Abrams with Bank of America Securities asked for clarification on the organic growth cadence for 2026, specifically if the organic portion of growth is expected to accelerate through the year given a material FX tailwind in Q1 that tails off later. She also inquired about the strong Q4 performance of the Polymers and Fluids segment, seeking details on end-market demand drivers and why the 2026 guide might imply deceleration from Q4's run rate.

Answer

CFO Michael Larsen confirmed that there is more currency tailwind in Q1, and while Q1 will have positive organic growth, it will be lower than Q2, Q3, and Q4, implying an acceleration of organic growth through the year. Regarding Polymers and Fluids, Michael Larsen attributed the strong Q4 to significant Customer-Backed Innovation (CBI) new products, particularly in automotive aftermarket (e.g., Rain-X wiper blades), Polymers in China (leveraging EV growth), and the biopharma-focused Reagents business (up over 20%). He clarified that the 2026 guide for the segment reflects a full-year perspective, and Q4's CBI contribution was likely higher than a typical run rate, not necessarily implying a deceleration.

Sabrina Abrams from Bank of America requested clarification on the cadence of restructuring costs for the year and asked for the updated full-year outlook for Product Line Simplification (PLS).

Answer

Senior VP & CFO Michael Larsen clarified that restructuring spend was $20 million in the first half, with another $20 million expected in the second half, making the full-year impact flat year-over-year. He also confirmed that the outlook for PLS is unchanged, projecting it will remain a one-percentage-point headwind to the organic growth rate for the full year.

Sabrina Abrams followed up on the Customer-Backed Innovation (CBI) framework, asking if ITW is on track for its long-term contribution targets and which segments are most mature. She also asked if the completion of major divestitures increases the company's appetite for M&A.

Answer

CEO Chris O'Herlihy confirmed ITW is on track to achieve 3%+ CBI contribution by 2030, highlighting Welding, Test & Measurement, Food Equipment, and Automotive as segments showing strong progress. Regarding M&A, he stated their disciplined posture hasn't changed; they remain focused on high-quality acquisitions that meet strict criteria for growth, margin leverage, and valuation, using the successful MTS acquisition as a prime example.

Sabrina Abrams from Bank of America questioned why the company isn't assuming price acceleration into the second half, given the raised pricing guide and increased LIFO expense. She also sought clarification on whether the core guidance has been raised, considering various financial adjustments, and if the increased organic growth assumption was driven by pricing or volume.

Answer

Neil Schrimsher, President and CEO, explained that most supplier price increases for 2026 are likely already in place, and the moderation in Q4 pricing (to 200 basis points) reflects the aging or overlap of prior increases. Dave Wells, VP, CFO, and Treasurer, added that LIFO expense doesn't perfectly correlate with pricing due to inventory mix, especially with parts not purchased for 2-3 years. Wells confirmed a modest increase in the core guide, driven by strong underlying margin performance (31% gross margin ex-LIFO) and a slight increase in organic sales growth assumption for the back half. He clarified that the increased organic growth is primarily tied to the raised pricing assumption, with some volume assumptions as well.

Sabrina Abrams asked why the company isn't assuming pricing will accelerate into the second half, given the raised pricing guide and accelerated pricing quarter-over-quarter, despite the increased LIFO expense. She also sought clarification on the updated EPS guidance, asking if the core guide had been raised after accounting for various moving pieces like LIFO, interest expense, share count, and acquisitions. Finally, she asked if the increased organic growth assumption was primarily due to raised pricing or volume.

Answer

President and CEO Neil Schrimsher explained that most announced supplier increases for 2026 are likely in place, and Q4 pricing is expected to moderate due to the aging of prior increases. CFO Dave Wells added that LIFO expense doesn't perfectly correlate with pricing, as it's influenced by the mix of purchases, including parts not bought for several years. Schrimsher confirmed a modest increase in the core guide, driven by strong underlying margin performance and cost control, with the overall guidance tightening at the upper end of the previous range. Wells clarified that the increased organic growth assumption for the back half is primarily tied to raised pricing, but also includes some volume assumptions.

Sabrina Abrams questioned the dynamic of order conversion from backlog in Engineered Solutions, specifically regarding lead times and potential customer delays, and asked about the company's updated outlook on pricing cadence for the year.

Answer

Neil Schrimsher, President and CEO, explained that project conversion times vary by complexity and schedule, but continuous order expansion in fluid power and flow control is encouraging. He noted a shift in project focus towards power generation and life sciences. Regarding pricing, Schrimsher stated that while Q1 saw 200 basis points, it's too early to project a ramp beyond that for the full year, pending market activity and supplier increases.

Sabrina Abrams questioned the timing of Engineered Solutions order conversion, given positive order growth and typical lead times, and asked about the company's outlook on pricing cadence for the year.

Answer

President and CEO Neil Schrimsher explained that project conversion times vary by complexity and schedule, noting continuous order expansion in fluid power and flow control, with some shifts to power generation, life science, and pharmaceuticals. He expects conversions to occur, some in H2 FY26. Regarding pricing, Mr. Schrimsher stated it's early, with Q1 at 200 basis points within guidance, and further ramping depends on market activity and additional supplier increases.

Sabrina Abrams from Bank of America requested the specific dollar contribution of Hydrodyne to EBITDA in the quarter and asked for the amount of LIFO expense embedded in the fiscal 2026 guidance.

Answer

CFO David Wells disclosed that Hydrodyne contributed just over $7 million of EBITDA in Q4, resulting in approximately $0.03 of EPS contribution, and the company is on track to meet its $0.15 accretive EPS goal for the first twelve months. For fiscal 2026, Wells stated the guidance embeds $14 million to $18 million in LIFO expense. President & CEO Neil Schrimsher added that at the guidance midpoint, incremental margins are expected in the low teens, but would be in the high teens excluding M&A mix and LIFO.

Sabrina Abrams of Bank of America questioned why the Q4 guidance implies a deceleration despite positive sequential trends and strong orders. She also sought clarification on the drivers behind the expected increase in SG&A and margin deleveraging in the fourth quarter.

Answer

President and CEO Neil Schrimsher described the Q4 guidance as 'appropriately prudent' given macro uncertainty from tariffs, and noted that longer-cycle Engineered Solutions orders will benefit fiscal 2026 more directly. CFO David Wells attributed the Q4 margin pressure to several factors: the higher SG&A structure of the newly acquired Hydradyne, and a difficult year-over-year comparison due to a LIFO liquidation benefit in the prior-year Q4, which creates a 20 basis point headwind.

Sabrina Abrams asked about supplier pricing behavior, whether price/cost has normalized, and for a more detailed explanation for the expected sequential moderation in gross margins from Q2 to Q3.

Answer

President and CEO Neil Schrimsher confirmed there are no signs of disinflation, with supplier price increases becoming more normalized in frequency and size. CFO David Wells explained the sequential gross margin moderation is due to the non-recurrence of a supplier rebate and an expected step-up in LIFO expense as inventory levels normalize. He also noted the lower LIFO in Q2 was a function of inventory reduction, not lower price inputs.

Sabrina Abrams asked about Applied's inventory strategy and whether any customers are still destocking. She also questioned why Q1 EBITDA margins were slightly below expectations and what drove the variance.

Answer

President and CEO Neil Schrimsher stated that Applied is not pulling back on its own inventories and is investing to be prepared for demand. He noted that customer destocking is largely over, with some lingering effects only in the off-highway mobile segment. Regarding margins, Schrimsher and CFO David Wells explained the result was largely in line with internal plans, attributing the slight dip to the timing of sales within the quarter, conscious investment in growth initiatives, and a tough year-over-year comparison in gross margin, as the prior year's Q1 benefited from vendor rebate anomalies.

Sabrina Adams asked about ITT's incremental margins, specifically the implied 33% in Q4, and how to project incrementals into next year compared to the past couple of years, which historically approached 40%. She also inquired about the evolving pricing environment, customer acceptance, and the impact of idiosyncratic pricing on the aerospace side.

Answer

CFO Emmanuel Caprais stated that ITT's incremental margins, excluding acquisitions, were around 40% in Q3 and are expected to be similar in Q4, suggesting a 30-35% range for 2026. CEO Luca Savi explained that pricing dynamics vary by business: CCT retains more pricing power, IP pricing is strategic and analytical, while automotive operates under a different dynamic.

Sabrina Adams inquired about CCT margins, specifically the incremental margins over the past two years versus the implied Q4 incrementals, and the outlook for 2026 incrementals. She also asked about the evolving pricing environment, customer acceptance, and any idiosyncratic pricing dynamics, particularly on the aero side.

Answer

Emmanuel Caprais, CFO, stated that ITT's incremental margins in Q3, excluding acquisitions, were around 40%, with Motion Technologies being the strongest. He expects similar incrementals in Q4 (excluding acquisitions) and suggested 30-35% as a good range for 2026. Luca Savi, CEO and President, explained that pricing dynamics vary by business: CCT retains more pricing power, IP pricing will be more strategic and value-based, and automotive has a 'completely different dynamic.'

Sabrina Abrams asked for the rationale behind trimming the high end of the full-year margin guidance and for clarity on the Q3 to Q4 margin cadence. She also pointed to the strong core incremental margins in CCT and asked what is driving such excellent execution.

Answer

CFO Emmanuel Caprais attributed the minor guidance adjustment to higher M&A costs and an unfavorable mix from the fast-growing but still dilutive Svanohoi acquisition. For CCT's strong performance, he credited significant pricing actions, which added 450 basis points of margin improvement, and productivity gains from new automation projects at key facilities, leading to a core CCT margin of 21.5%.

Sabrina Abrams of Bank of America Corporation asked for clarification on the tariff impact timeline and the price/volume mix in the organic growth guidance, and also inquired about trends in the CCT distribution business.

Answer

CFO Emmanuel Caprais confirmed the $50-$60 million tariff impact is for the remaining nine months of 2025 and is expected to be fully offset, with pricing contributing about 2 points to the full-year organic growth guidance. CEO Luca Savi noted that while CCT distribution orders were down year-over-year, they grew 20% sequentially and remain at a high level, indicating a positive overall picture.

Sabrina Abrams questioned the difference between government wholesale inflation data and Grainger's reported pricing, and asked for color on the demand cadence during the quarter.

Answer

CEO D.G. Macpherson suggested Grainger's scale may allow it to incur lower cost increases than others, noting its pricing will eventually reach a 3-4% run rate. He characterized the demand environment as relatively muted but stated that Grainger is performing reasonably well, with solid volume share gain in the quarter and into July.

Sabrina Abrams of Bank of America asked about the discrepancy between Grainger's reported pricing and broader government inflation data for wholesalers, and also inquired about the demand cadence during the quarter.

Answer

CEO D.G. Macpherson suggested that Grainger's scale may allow it to incur fewer cost increases than smaller peers, and noted that Grainger's pricing will increase to a 3-4% run rate by year-end. He characterized the overall demand environment as 'relatively muted' but confirmed that the company achieved solid volume share gain during the quarter.

Sabrina Abrams asked for clarification on how to reconcile the modest 1-1.5% net price impact with the potentially much larger impact implied by high tariffs on Chinese imports. She also requested more color on the expected cadence of price/cost dynamics throughout the year.

Answer

Chairman and CEO D.G. Macpherson explained the 1-1.5% impact is small because the initial price actions were limited to a smaller portion of their products, primarily direct imports, and did not contemplate the most severe reciprocal tariffs. SVP and CFO Dee Merriwether added that price/cost dynamics are noisy, but the company is targeting a Q2 operating margin near 15% and will manage toward price/cost neutrality over time, though timing differences may occur.

Sabrina Abrams questioned if the shift to a volume-based outgrowth target alters long-term margin or EPS targets. She also asked for the drivers behind the expected margin ramp throughout 2025, starting from a low point in Q1.

Answer

CEO D.G. Macpherson confirmed there are no changes to the company's long-term financial targets or its earnings algorithm. CFO Dee Merriwether explained the Q1 margin pressure is due to a slow sales start, FX headwinds, and one fewer selling day, leading to an operating margin near the low end of the annual guidance range (~15%). She noted margins will ramp from there as sales volume recovers through the year.

Sabrina Abrams inquired about the traction of self-help initiatives for gaining share in the High-Touch Solutions (HTS) segment and the outlook for market outgrowth in 2025. She also asked if further pricing actions are needed given the neutral price-cost spread.

Answer

Chairman and CEO D.G. Macpherson highlighted strong returns from leveraging proprietary data for marketing and seller coverage. SVP and CFO Dee Merriwether reiterated the 400-500 basis point average outgrowth target, despite current measurement noise. On pricing, she noted a September increase helped achieve a neutral price-cost spread for the year-end and that the company's philosophy is to pass on inflation.