Scott Davis

Scott Davis from Melius Research inquired about Rockwell Automation's cautious CapEx outlook despite broader S&P trends, asking if customers are underspending or delaying budgets, and also questioned distributor inventory levels and sentiment.

Answer

Chairman and CEO Blake Moret explained that while optimism exists and Q1 performance was strong, broad-based order releases for CapEx are not yet evident, necessitating a prudent outlook. He confirmed that distributor inventory levels have normalized, and distributors, while optimistic, are also taking a cautious approach.

Scott Davis asked about Rockwell Automation's cautious CapEx outlook compared to broader S&P trends, inquiring if customers might underspend budgets or delay spending to the latter half of the year. He also questioned the current inventory and sentiment among distributors.

Answer

Blake Moret (Chairman and CEO, Rockwell Automation) stated that the company is taking a 'prudent' approach, noting optimism in certain areas and good discussions about CapEx plans, but lacking broad-based order releases to raise the full-year guide. He confirmed that distributor stock levels are back to normal and distributors are optimistic but also prudent.

Scott Davis asked about the postmortem of the Sensia joint venture dissolution, inquiring why it didn't gain traction as expected and its profitability impact, as well as the potential for process margins to reach discrete margins.

Answer

Blake Moret, Chairman and CEO of Rockwell Automation, explained that the JV faced challenges from its inception just before COVID, particularly in energy markets, and its broad scope added costs. He noted that while it achieved operational profitability, it didn't meet long-term goals, leading to simplification. Moret also highlighted Rockwell's expanded technology capabilities since 2019. He clarified that process applications inherently have lower margins due to higher engineering content but expressed confidence in improving them through Lifecycle Services' rigor, AI, and software-defined automation.

Scott Davis inquired about the postmortem analysis of the Sensia joint venture, seeking to understand why it did not achieve expected traction. He also asked if improving process margins to discrete levels is primarily a function of volumes, costs, product issues, or scale.

Answer

Blake Moret, Chairman and CEO of Rockwell Automation, explained that the JV's challenging start was impacted by COVID-19 and broad scope, leading to high costs. He noted the decision to dissolve was due to not meeting long-term goals and the desire for simplification, especially given Rockwell's expanded technology capabilities. Moret added that process applications inherently have lower margins due to higher engineering content but highlighted Lifecycle Services' success in improving margins through project rigor and the potential of AI and software-defined automation.

Scott Davis from Melius Research LLC inquired about the timing and strategic rationale behind Rockwell's new $2 billion, five-year investment plan, asking if it was an offensive move or a defensive catch-up.

Answer

Chairman & CEO Blake Moret positioned the investment as "solidly on offense," designed to build on recent productivity gains and drive the next phase of margin expansion beyond current targets. CFO Christian Rothe clarified that the $2 billion figure is not entirely incremental, includes run-rate spending, is ROI-based, and aims to create runway for long-term margin growth past the existing 23.5% goal.

Scott Davis of Melius Research LLC inquired about the rationale and timing of Rockwell's new $2 billion, five-year investment plan, asking whether the company is playing catch-up or offense.

Answer

Chairman and CEO Blake Moret positioned the investment as "solidly on offense" to drive margin expansion beyond current targets, building on recent productivity successes. CFO Christian Roethe added that the $2 billion figure is not entirely incremental, includes run-rate spending, is ROI-based with double-digit hurdle rates, and is focused on creating runway for the "next horizon" of margin growth beyond the existing 23.5% goal.

Scott Davis from Melius Research asked for a big-picture view on how customers are balancing reshoring initiatives against macro uncertainties and questioned the impact of tariffs on machine builders selling into the U.S.

Answer

CEO Blake Moret stated that while customers remain optimistic about U.S. manufacturing long-term, project delays are occurring due to concerns over cost certainty (tariffs, interest rates) and end-market demand. He highlighted strength in e-commerce, packaging, and life sciences. Regarding tariffs, Moret noted they are a major issue for China-made machines but that Rockwell's approach for European machine builders is targeted, leveraging manufacturing flexibility and their U.S. presence to mitigate impacts.

Scott Davis of Melius Research inquired about the financial impact of Rockwell's 21,000 SKU rationalization on fiscal 2025 and questioned if the organic growth guidance was overly conservative given strong Q1 orders.

Answer

CFO Christian Rothe explained that the initial SKU cuts targeted low- or no-sale items, resulting in no significant impact on the year's results. CEO Blake Moret added that this is an ongoing process and, while Q1 orders were strong, the company's thesis for gradual sequential growth throughout the year remains intact, justifying the current guidance.

Scott Davis inquired about historical customer responses to tariffs, specifically whether Rockwell Automation has seen pre-buying or inventory build-ups in anticipation of such policies.

Answer

Blake Moret, Chairman and CEO, stated that Rockwell did not observe significant changes in customer buying behavior, such as pre-buying, during previous tariff implementations. He expressed confidence in the company's agility to manage any future tariffs through pricing actions to maintain a positive price-to-cost ratio.

Scott Davis asked about the current state of channel inventories in CSA residential, specifically how far below normal they are. He also sought clarification on data center revenue projections, noting $1 billion in 2025 and 60% order growth, implying $1.6 billion for 2026.

Answer

David Gitlin (Chairman and CEO) stated that CSA residential field inventories at the end of January 2026 were down about 32% year-over-year, reaching 2018-type levels, indicating destocking is largely complete. For data centers, he confirmed the $1.5 billion revenue guidance for 2026, aligning with the analyst's ballpark figure, and noted strong Q4 2025 and January 2026 orders, with deliveries concentrated in Q3 and Q4.

Scott Davis asked about the current state of channel inventories in CSA residential, specifically how far below normal they are. He also inquired about the flow-through of data center orders to 2026 revenues, given the reported $1 billion revenue and 60% order increase.

Answer

David Gitlin, Chairman and CEO, Carrier Global Corporation, confirmed that CSA residential channel inventories in January were down about 32% year-over-year, reaching 2018-type levels, indicating that field inventory targets were met and continued to decrease. Regarding data centers, he stated that Carrier is guiding to $1.5 billion in revenue for 2026, acknowledging strong orders in Q4 2025 and January 2026, with deliveries primarily expected in Q3 and Q4.

Scott Davis of Melius Research asked how the inventory destock and channel reset might impact Carrier's ability to achieve desired pricing for 2026, considering a higher overall cost base. He also sought clarification on whether current cost containment efforts represent structural cost takeout that will persist beyond 2026.

Answer

CEO David Gitlin stated that Carrier expects to announce a mid-single-digit price increase for 2026, aiming for low single-digit yield. He clarified that the cost actions are 100% focused on structural cost takeout, targeting about 3,000 indirect positions, with efforts to prevent re-adding heads through process improvements and AI adoption.

Scott Davis inquired about the impact of inventory destocking and the overall reset on Carrier's ability to achieve desired pricing for 2026, considering a higher cost base. He also asked for details on the nature of the restructuring, specifically if it involves structural cost takeout with lingering benefits.

Answer

CEO David Gitlin stated that Carrier plans to announce a mid-single digit price increase for 2026, expecting a low single-digit yield. He confirmed that the cost actions are 100% focused on structural cost takeout, targeting the elimination of about 3,000 indirect positions. Mr. Gitlin emphasized efforts to make processes more efficient using Carrier's CBS organization and AI in back-office functions, ensuring these cost reductions are permanent.

Scott Davis of Melius Research LLC asked a high-level question about productivity, inquiring whether the benefits are realized more on the gross margin line or in SG&A. He also asked how Carrier internally measures and targets its productivity gains.

Answer

SVP & CFO Patrick Goris responded that productivity impacts both gross margin and operating margin, with the largest opportunity on the cost of goods sold line. Chairman & CEO David Gitlin added that G&A as a percentage of sales has also been reduced significantly. Gitlin stated that the company targets 2-3% net gross productivity per year, with higher targets in specific areas like supply chain.

Scott Davis inquired about the rationale behind the tight $2.90-$3.00 EPS guidance range, seeking insight into management's visibility and confidence. He also asked about the expected top-line tailwind from bolt-on acquisitions over a five-year plan.

Answer

Mark Okerstrom, CFO, attributed the tight EPS range to the business's durability, improved forecasting, 2025 decisions including a 600 basis point EPS tailwind from share repurchases, and a clear command of the cost structure. Olumide Soroye, President and CEO, explained that bolt-on acquisitions are opportunistic enhancements to the value creation story, not a primary driver, and thus a specific top-line tailwind number is not provided as they are not required for success.

Scott Davis asked for clarification on the tight $2.90-$3.00 EPS guidance range, questioning if it reflects high visibility or a new guiding approach. He also sought to understand the expected top-line contribution of 'bolt-on' M&A within a five-year plan, asking if it's quantifiable (e.g., 1% or 2% tailwind) or too opportunistic to specify.

Answer

Mark Okerstrom, CFO, attributed the tight EPS range to business durability, improved forecasting, a 600 basis point EPS tailwind from 2025 share repurchases, strong cost structure command, and the recurring revenue profile. Olumide Soroye, President and CEO, stated that bolt-on M&A is opportunistic and hard to quantify, emphasizing that the value creation thesis relies primarily on accelerating organic growth through the Fortive Business System, with bolt-ons serving as enhancements rather than necessities.

Scott Davis asked for an update on Fortive's Landauer business, its outlook, and observations regarding competitor activity in the radiation test market.

Answer

President and CEO Olumide Soroye highlighted excitement for the Landauer business, noting its highly recurring nature within the AHS segment and strong growth driven by mission-critical radiation monitoring. He emphasized customer reliance on Landauer as a trusted brand and the team's innovation efforts, including finding add-on services and thinking about the business like a software model.

Scott Davis inquired about the outlook for Fortive's Landauer business, asking for an update on its performance and what the company is observing, especially given competitor activity in the radiation test sector.

Answer

Olumide Soroye, Fortive's President and CEO, conveyed excitement for the Landauer business, emphasizing its highly recurring revenue model within the AHS segment and its faster-than-fleet-average growth. He noted customer reliance on Landauer for mission-critical radiation monitoring, its trusted brand status, and ongoing innovation efforts to add services and expand its offerings, treating it like a software business.

Scott Davis of Melius Research LLC asked about the potential organizational distraction caused by the combination of the Ralliant spin-off and the simultaneous leadership transition.

Answer

CEO Olumide Soroye acknowledged the significant workload but stated that the core operating companies were not meaningfully disrupted. He credited the Fortive Business System (FBS) culture for maintaining focus and ensuring business continuity, highlighting the team's resiliency and excitement for the future.

Scott Davis from Melius Research LLC asked about the internal impact of the recent major corporate events, questioning how much of a distraction the Ralliant spin-off and the simultaneous CEO transition were for the organization.

Answer

CEO Olumide Soroye acknowledged the significant workload but emphasized that the company's strong culture, rooted in the Fortive Business System (FBS), ensured operational continuity. He explained that the spin-off activities were largely handled at the corporate level, which minimized disruption for the customer-facing operating companies. He highlighted the team's resiliency and current excitement about the company's future direction.

Scott Davis asked about the specifics of "localizing production" to mitigate tariffs and whether the significant decline in Test and Measurement was due to delayed orders or a fundamental drop in demand.

Answer

President and CEO James Lico explained that localizing production is an acceleration of an existing multi-year strategy to de-risk the supply chain, using contract manufacturing and current facilities rather than large new investments. Regarding Test and Measurement, Lico confirmed it was primarily customers delaying orders due to macroeconomic and tariff uncertainty, particularly in the semiconductor and electronics sectors, pushing the expected recovery into 2026.

Scott Davis of Melius Research questioned the volatility in the company's tax rate. He also asked for an updated assessment of the realistic long-term growth rate potential for the ASP and Provation businesses.

Answer

SVP and CFO Charles McLaughlin explained that Q4 tax rate volatility was due to unpredictable discrete items that are not forecasted. President and CEO James Lico projected ASP's long-term growth at mid-single-digits, supported by procedural growth and a new innovation cycle. He estimated Provation's growth potential at high-single to low-double-digits, driven by SaaS conversion and the adoption of its Apex Insights AI tool.

Scott Davis of Melius Research inquired if high-performance customers like NVIDIA have different needs that impact Tektronix's margins and asked if recent customer spending delays were more related to election uncertainty than general macro factors.

Answer

President and CEO James Lico clarified that high-performance customers buy Tektronix's best, tailored solutions, which does not create a margin headwind. He confirmed that some spending delays are indeed linked to pre-election uncertainty among government customers, which has amplified the general macro caution and channel inventory reluctance.

Scott Davis inquired about Johnson Controls' strategy for its new CDU (Cooling Distribution Unit) offerings, specifically whether the goal is to bundle them into total solutions or if they remain separate purchases, and the market direction for these products. He also asked for observations from the Asia Pacific region, particularly regarding stabilization in China and growth opportunities elsewhere.

Answer

CEO Joakim Weidemanis explained that CDU sales are a mix of standalone and combined offers, with opportunities for integrated solutions, especially with key accounts. He noted that adding CDUs positions JCI to lead in evolving thermal architectures for optimal performance. Regarding Asia Pac, he reported continued stabilization in China due to a shift in vertical focus and service investment, while expressing excitement for growth in other major economies like Southeast Asia and India, driven by data centers, healthcare, and pharmaceutical manufacturing.

Scott Davis asked about Johnson Controls' strategy for its new CDU (Cooling Distribution Unit) offerings, specifically whether the goal is to bundle them into total solutions or if they remain separate purchases, and the market direction for CDUs. He also sought observations from the Asia Pacific region following recent visits.

Answer

CEO Joakim Weidemanis explained that CDU transactions are a mix of standalone and combined offers, with significant opportunity for integrated solutions, especially with key accounts. He noted that CDUs were added to lead in the evolving thermal architecture of data centers. Regarding Asia Pacific, Joakim Weidemanis observed continued stabilization in China, with a shift in vertical focus and investment in service, though not expecting a return to past growth rates. He expressed excitement about growth opportunities in other major economies like Southeast Asia and India, driven by data centers, healthcare, hospitals, and pharmaceutical manufacturing.

Scott Davis asked about changes to compensation structures and KPIs within the organization to drive accountability for the numerous changes being implemented (80/20, lean, leadership changes). He also inquired about the unwinding of any remaining matrix management structures.

Answer

CEO Joakim Weidemanis stated that the company is establishing and rolling out nine enterprise KPIs to drive accountability for holistic results, and while there are some tweaks to compensation approaches, no fundamental big changes are necessary. He added that unwinding matrix management is 'work in progress' with the team, with some tweaks made since he joined, but no major structural moves at this point.

Scott Davis of Melius Research LLC asked CEO Joakim Weideminis for his perspective on accelerating growth in the Fire and Security business and how it can create synergies with the HVAC business.

Answer

CEO Joakim Weideminis described HVAC and Fire & Security as fundamentally different businesses serving similar customer bases. He noted that while current business system initiatives are focused on higher-growth HVAC and controls, the same principles will be deployed in Fire & Security over time. He also confirmed that a comprehensive strategic review of the entire portfolio is underway with the board, with conclusions expected in the coming months.

Scott Davis asked about the plan to deploy LEAN principles within a large organization like Johnson Controls and questioned the company's readiness for such an initiative. He also followed up on whether this would drive SKU rationalization.

Answer

CEO Joakim Weidemanis explained that while the LEAN foundation is not strong, the organization is open-minded. The strategy is to start with specific end-to-end value streams rather than a broad rollout. He confirmed that SKU rationalization is an integral part of the value stream mapping process, though a separate exercise for low-hanging fruit has also begun.

Scott Davis asked if the nature of the order book has changed, specifically if orders have a longer duration now. He also questioned why incremental margins were not higher given the favorable service mix and pricing in the backlog.

Answer

CFO Marc Vandiepenbeeck confirmed a shift toward longer-cycle business, driven by a strategic focus on attaching services and growing in verticals like data centers and healthcare, which have longer planning horizons. He attributed the incremental margin performance to pressure from foreign exchange and uncertainty around the potential impact of tariffs in the second half.

Scott Davis asked about service and digital attachment rates for large data center installations compared to traditional buildings. He also inquired about the pricing power within the data center vertical.

Answer

CFO Marc Vandiepenbeeck stated that service attachment rates in data centers are stronger than the portfolio average, though digital adoption varies. He noted pricing power is robust due to differentiated, engineered solutions, resulting in a better margin profile. CEO George Oliver added that the trend for service connectivity is significantly up as customers recognize the value of proactive maintenance on complex sites.

Scott Davis asked about the opportunity in Venezuela, specifically regarding the aging equipment, potential for rebuilds, Emerson's installed base, and the impact of sanctions. He also inquired if there is a wider total addressable market (TAM) beyond traditional upstream oil and gas, including downstream or other industries.

Answer

Mike Baughman, EVP and CFO, Emerson, acknowledged a long history with PDVSA, an estimated $1 billion installed base, and existing China partners. He noted that Emerson hasn't transacted directly since sanctions but has with Chevron (sub-$1M/year). Emerson has a plan to mobilize but is watching for national oil law amendments and foreign investment. Ram Krishnan, EVP and COO, Emerson, added that power would likely be the first area of investment. Mike Baughman reiterated power generation as a valid opportunity but highlighted significant challenges: brain drain, security, and the need for congressional enablement of investment, stating Emerson is preparing to hit the ground running when conditions improve.

Scott Davis asked about the opportunity in Venezuela, given the old, aging equipment needing refresh, and if Emerson is already engaging with customers or preparing to benefit from a potential rebuild. In a follow-up, he inquired if there's a wider Total Addressable Market (TAM) in Venezuela beyond traditional upstream oil and gas, including downstream or other infrastructure.

Answer

Mike Baughman, EVP and CFO, and Ram Krishnan, Chief Operating Officer, acknowledged Emerson's long history with PDVSA and an estimated $1 billion installed base in Venezuela. They noted that while sanctions limited transactions, they've been working with Chevron and are preparing to mobilize investments if national oil laws are amended. Ram Krishnan added that Power would likely be the first area of focus. Mike Baughman further explained that while power generation is a valid opportunity, the country faces significant challenges including a 'brain drain' (lack of engineers, technical knowledge), security issues, and the need for congressional approval for investment, indicating that a full recovery is 'ways away' but Emerson is preparing.

Scott Davis of Melius Research LLC asked for details on the Ovation business model, questioning the mix of new projects versus retrofits in its order growth and the profitability of initial installations compared to the aftermarket.

Answer

President & CEO Lal Karsanbhai and COO Ram Krishnan explained that Ovation's 40% order growth is fueled by a mix of greenfield projects, plant life extensions, and modernizations. They confirmed that while initial project installations are profitable, the ongoing MRO and aftermarket services represent a more profitable revenue stream.

Scott Davis from Melius Research asked what new strategic capabilities Emerson gains with full control of AspenTech that were not possible before. He also sought clarification on the timeline for fully offsetting the financial impact of recent tariffs.

Answer

CEO Surendralal Karsanbhai and COO Ram Krishnan responded that full ownership allows for accelerated execution of a software-defined automation architecture, integrating AspenTech and DeltaV platforms. Krishnan added that commercial engagement momentum will increase in greenfield projects and key end markets like power and life sciences. Regarding tariffs, Krishnan confirmed that mitigation programs will completely cover the impact by the end of fiscal 2025.

Scott Davis from Melius Research congratulated ITW on top-line improvement and inquired about the company's M&A strategy for 2026, given the significant share buyback and lack of M&A mention in prepared remarks. He also pressed for details on what it takes to achieve 3% Customer-Backed Innovation (CBI) growth, specifically whether it requires increased spending or optimizing existing resources, referencing the strong patent filing growth.

Answer

CEO Chris O'Herlihy clarified that M&A is 'certainly on the table' for high-quality acquisitions that extend long-term growth and leverage the business model, despite challenging valuations. He cited the successful MTS deal and a recent bolt-on acquisition in semi-manufacturing as examples. CFO Michael Larsen added that ITW remains a disciplined acquirer, prioritizing reasonable risk-adjusted returns, and that the $1.5 billion buyback is a key part of capital allocation, contributing 2% to EPS growth. Regarding CBI, Chris O'Herlihy explained that achieving 3%+ growth is not about spending more but rather focused leadership, continued investment in capabilities, and codifying an effective innovation framework, which is already yielding results like increased patent filings.

Scott Davis congratulated ITW on top-line improvement and asked about the role of M&A in 2026, given its absence from prepared remarks, and whether it's off the table or opportunistic.

Answer

CEO Chris O'Herlihy clarified that M&A is opportunistic and on the table for the right companies that extend long-term growth potential and leverage the business model, citing the successful MTS acquisition and a recent bolt-on deal. CFO Michael Larsen added that being a disciplined acquirer is challenging due to valuation, and ITW prioritizes deals that generate reasonable risk-adjusted returns, while share repurchases remain a key capital allocation strategy. Davis also inquired about what it takes to reach the 3%+ CBI target, asking if it requires more spending or better utilization of existing resources. Chris O'Herlihy explained it's not about spending more but rather a higher level of leadership focus, continued investment in capabilities, and the effective implementation of a holistic innovation framework, similar to the 80/20 Front-to-Back approach. Michael Larsen added that CBI yield has been incorporated into ITW's long-term incentive plans, aligning with its strategic importance.

Scott Davis questioned how ITW successfully increases margins in a down-volume environment, using the Automotive segment as an example, and inquired about the company's M&A strategy.

Answer

CEO Christopher O'Herlihy explained that margin improvement without volume growth is driven by sustainable, bottom-up enterprise initiatives like 80/20 front-to-back and higher-margin CBI. Regarding M&A, he affirmed ITW's disciplined approach, stating they are actively reviewing opportunities but remain selective, seeking high-quality, strategic fits that extend long-term growth potential, similar to the successful MTS acquisition.

Scott Davis asked for CEO Richard Tobin's perspective on the new portfolio's "entitlement" through-cycle growth rate, suggesting around 5%. He also inquired about the aging installed base of closed-case refrigeration, asking about pent-up demand and typical replacement cycles.

Answer

CEO Richard Tobin confirmed the through-cycle growth rate is likely between 3-6%, with 5% being achievable. For refrigeration, he described it as a "tale of two cities": the CO2 rooftop business (a technology play where Dover is a market leader) is a growth platform, while the retail refrigerated door case business has been transformed for profitability with rebuilt industrial footprint, now a $500 million business with nice margins and good cash flow. He emphasized growing the CO2 side quickly due to its early innings and leadership position.

Scott Davis asked for an updated perspective on Dover's new 'entitlement' through-cycle growth rate for its current portfolio, suggesting a range of 4-5%. He also inquired about the aging installed base of closed-case refrigeration units, the potential for pent-up demand, and the typical replacement cycle for these products.

Answer

CEO Richard Tobin confirmed the through-cycle growth rate is 'somewhere between 3-6, depending on GDP and everything else, but clearly can do 5.' For closed-case refrigeration, he differentiated between the high-growth CO2 rooftop systems (where Dover is a North American leader) and the retail refrigerated door case business, which has been transformed for profitability and cash flow, with capacity now constrained. He noted the CO2 business is in early innings with a leadership position.

Scott Davis of Melius Research asked about Dover's M&A pipeline and strategy, and also inquired about the long-term growth outlook for the 80% of the portfolio not categorized as a high-growth platform.

Answer

President and CEO Richard Tobin revealed a robust M&A pipeline with nearly $400 million of revenue under LOI, primarily in proprietary, bolt-on deals. Regarding the rest of the portfolio, Tobin explained that its historical growth was masked by the intentional shrinking of low-return businesses. He asserted that with this cleanup largely complete, the portfolio's 'real' organic growth rate should be more visible going forward.

Scott Davis questioned whether current market volatility could lead to lower M&A valuations and asked for the specific quarterly growth rate of the thermal connectors business.

Answer

Executive Richard Tobin stated that while some M&A deals have been paused due to uncertainty, there is not yet enough data to confirm a trend of lower valuations. An executive then clarified that the thermal connectors business grew over 100% year-over-year in the quarter.

Scott Davis asked if the refrigeration growth story in 2025 is primarily about CO2 systems or if there is also a component of pent-up demand from customer underinvestment. He also requested a breakdown of capital expenditures between maintenance and growth.

Answer

Executive Richard Tobin clarified that the refrigeration story is more about margin performance through productivity and the growth of CO2 systems, as Dover has capped its capacity in the traditional retail refrigeration business. He estimated maintenance CapEx to be roughly $40 million, with growth CapEx around $60 million, excluding IT spending.

Scott Davis asked about the M&A environment, focusing on the necessity of synergies for deals to be viable, and inquired about who specifies thermal connectors for data center applications.

Answer

CEO Richard Tobin stated that larger M&A deals rely on synergy extraction, leveraging a playbook developed from internal optimization, and noted recent Clean Energy deals have significant synergy potential. For thermal connectors, he explained that while there are recommended specs, Dover sells to the end-user or builder and has the most product currently in use in the ecosystem.

Scott Davis inquired about Parker's ability to effectively implement pricing strategies to offset inflation and rising commodity costs, particularly for OE products. He also asked about the primary gating factors influencing the 6-12 month timeline for closing the Filtration Group acquisition.

Answer

Jennifer Parmentier, Chairman and CEO, affirmed that Parker's pricing capabilities are strong, and they continuously respond to commodity price changes to protect EPS. Todd Leombruno, CFO, highlighted the record margins across all businesses. Jennifer Parmentier clarified that the Filtration Group closing timeline is primarily due to standard regulatory filings and processes.

Scott Davis with Melius Research inquired about Parker-Hannifin's M&A pipeline, seeking an update on potential acquisitions given the recent Curtis deal and the success of past larger transactions like Meggitt.

Answer

Chairman and CEO Jennifer Parmentier affirmed the company's commitment to actively deploying capital, highlighting the recent Curtis Instruments acquisition. She reiterated that the M&A strategy remains focused on strategic and disciplined acquisitions where Parker is the best owner, with an active pipeline of deals of all sizes aimed at being accretive to growth, resiliency, margins, cash flow, and EPS.

Scott Davis of Melius Research asked if the combination of the Curtis acquisition and a significant share buyback signals a strategic focus on smaller, bolt-on M&A. He also inquired about the impact of tariffs and the company's methods for managing them across its decentralized structure.

Answer

Chairman & CEO Jennifer Parmentier responded that Parker's M&A pipeline includes deals of all sizes and the company remains opportunistic. On tariffs, she emphasized that teams are effectively managing any impact through a strong, coordinated pricing function and robust processes, ensuring no negative effect on EPS. EVP & CFO Todd Leombruno added that the company's global footprint and local-for-local model provide additional flexibility.

Scott Davis of Melius Research LLC inquired if the Curtiss acquisition and large share buyback signaled a focus on smaller M&A. He also asked how the company manages tariff impacts across its decentralized structure, given the topic wasn't mentioned.

Answer

Chairman and CEO Jennifer Parmentier stated that Parker's M&A pipeline includes deals of all sizes and the company remains ready for larger opportunities. EVP & CFO Todd Leombruno added that the company's strong cash flow provides optionality. On tariffs, Parmentier confirmed that teams are managing the issue effectively through robust pricing processes and analytics to ensure no EPS impact. Leombruno highlighted the company's local-for-local model and creative supply chain as additional mitigating factors.

Scott Davis of Melius Research inquired about the M&A environment, the composition of Parker's pipeline, and the company's confidence in completing deals in 2025. He also asked if any unusual activity, like pre-buying ahead of tariffs, influenced the strong order rates.

Answer

CEO Jenny Parmentier described a robust M&A pipeline with targets of all sizes, emphasizing a disciplined approach focused on acquiring companies where Parker is the best owner. She confirmed that order strength was driven by fundamental demand in aerospace, defense, HVAC, and semiconductors, not by unusual factors like pre-buying.

Scott Davis asked for color on how much of the recent margin gains are attributable to underlying operational improvements versus mix, particularly in the industrial businesses. He also inquired about the current M&A pipeline, including potential deal sizes and types.

Answer

Executive Jennifer Parmentier attributed operational improvements to the Win Strategy and a decentralized structure, where enhanced tools provide general managers with better visibility and cost control, which she expects to continue as volume returns. On M&A, she described the pipeline as active with deals of all sizes, but noted timing is hard to predict, emphasizing the focus on strategic fit. Executive Todd Leombruno added that the company's preference is acquisitions but it will remain active with capital deployment, referencing the recent share repurchase.

Scott Davis asked whether the strong Applied orders were broadening out across various end markets like office and education, or if the incremental strength was primarily concentrated in data centers.

Answer

Dave Regnery confirmed that while data centers remain very strong, the growth in Americas Commercial HVAC was broad-based across 12 of the 14 verticals tracked, including retail and office. He also noted that the pipeline remains very robust and broad-based.

Scott Davis asked whether Trane Technologies' strong Applied orders are broadening out across various end markets like office and education, or if the incremental strength is primarily concentrated in data centers.

Answer

Dave Regnery, Chair and CEO, confirmed that while data centers remain very strong, the company experienced broad-based growth across 12 of the 14 verticals tracked in Americas Commercial HVAC, including recovery in retail and office. He also noted that the pipeline remains very robust and broad-based.

Scott Davis from Melius Research LLC questioned the drivers behind the sequential improvement in incremental margins, from 25% to 32%. He also asked about the increased confidence in the China outlook and whether competitors have adjusted to Trane's stricter credit terms.

Answer

EVP & CFO Chris Kuehn attributed the strong margin performance to growth in the high-margin services business, excellent factory productivity, and strong volume leverage, while reassuring that strategic investments have not slowed. On China, Chair & CEO Dave Regnery explained that confidence stems from reaching the one-year anniversary of their tightened credit policies, making comparisons easier, and observing improving sequential performance, which supports their forecast for flat revenue in Asia for the full year.

Scott Davis asked about the logistics of applying tariff-related surcharges to the company's massive applied equipment backlog, questioning if contracts are flexible enough to accommodate this. He also inquired about the market response in China to Trane's strategy of avoiding risky projects and whether competitors have acted rationally in that space.

Answer

CFO Christopher Kuehn explained that while some larger applied project contracts have tariff protections, the primary strategy is to first reduce the dollar impact through supply chain optimization and sourcing. CEO David Regnery added that their 'in-region for region' manufacturing strategy is a competitive advantage. On China, Regnery noted the team is educating customers on their new credit terms and is seeing sequential improvement. He expressed confidence in the team's ability to outperform the challenging market long-term, stating it's the right strategy despite taking a few quarters to fully implement.

Scott Davis from Melius Research asked if Trane Technologies internally measures the number of energy audits it performs as a leading indicator or a 'frontlog' for future sales. He also inquired if artificial intelligence is now being used to create digital twins of buildings significantly faster than in the past.

Answer

CEO Dave Regnery confirmed that the company tracks many leading metrics within its operating system, including energy audits, to drive its business but did not disclose specifics. He stated that combining structured machine learning data with unstructured data from the BrainBox AI acquisition allows them to drive previously unattainable results. Regarding digital twins, Regnery affirmed they use all available tools, including AI, to continuously improve the speed and compelling nature of their digital twin demonstrations for customers.

Scott Davis from Melius Research inquired about the materiality and growth of the data center vertical for Trane Technologies and asked for context on the maturity of the China market, particularly regarding a potential shift to services.

Answer

CEO Dave Regnery highlighted Trane's long-standing strength in the complex data center vertical, noting it's projected to grow in the mid-teens. He emphasized their system-level approach with direct customer engagement. CFO Chris Kuehn added that even excluding data centers, other commercial HVAC verticals are showing very strong growth. Regarding China, Regnery explained the recent downturn was due to both market deterioration and a prudent decision to tighten credit policies, requiring down payments for orders and progress payments for shipments, expressing long-term confidence in the local team.

Scott Davis asked about Honeywell's pricing strategy, seeking to understand how much of the 4% price increase is structural due to a change in approach versus a pass-through of tariffs and inflation.

Answer

Vimal Kapur, Chairman and CEO, attributed persistent inflation drivers (labor, electronics, commodities) in industrial segments to the need for a more mature, long-term pricing strategy that varies by region and leverages differentiated new products. He expects 2026 pricing to be similar to 2025, around 3-3.5%, focused on preserving volume and margins. Mike Stepniak, SVP and CFO, added that the portfolio's migration to high-growth verticals and increased revenue from New Product Introductions (NPIs) also contribute to better pricing. Scott Davis followed up on the use of a vitality index or similar metrics to track NPI acceleration. Vimal Kapur stated that while a vitality index (currently in the high 40s) is still measured, Honeywell now also tracks the percentage of revenue from new products, which was approximately 4% in 2025, aiming to maintain that rate to drive growth through innovation.

Scott Davis asked about Honeywell's pricing strategy evolution, specifically differentiating between tariff pass-throughs and structural price increases resulting from changes in approach to projects, contracts, and new products. He also inquired about the use of a vitality index or similar metric to track new product introduction (NPI) acceleration and its contribution to revenue.

Answer

CEO Vimal Kapur attributed persistent inflation drivers (labor, electronics, commodities) to a more mature pricing strategy, which is differentiated by region and product. He expects 2026 pricing to be in the 3-4% range, similar to 2025, with a focus on preserving volume and margins. CFO Mike Stepniak added that migration to high-growth verticals and NPIs contribute to better pricing. Vimal Kapur confirmed measuring revenue from new products (approximately 4% in 2025) and maintaining a vitality index in the high 40s, emphasizing growth through new products and market-allowed price.

Scott Davis asked for details on the unusually high 22% order growth, questioning if it was driven by discrete projects or was broad-based across segments. He also followed up on the performance and accretion of the six meaningful deals completed in the last two years, and if they were ahead of deal models.

Answer

Vimal Kapur, Chairman and Chief Executive Officer, confirmed the order growth was broad-based across all segments, with long-cycle being stronger but short-cycle also growing, and expects this momentum to continue. He noted that the M&A deals are performing very well, with most being on or ahead of their Total Value Added (TVA) targets. Mike Stepniak, Senior Vice President and Chief Financial Officer, added that most deals will become organic contributors by Q4 and 2026, exceeding expectations for both revenue and cost synergies.

Scott Davis from Melius Research asked if the 22% order growth in the quarter was driven by discrete large projects or was broad-based across segments. He also inquired about the performance of the six meaningful acquisitions made in the last two years, their 2025 tailwind, and their expected flow-through into 2026.

Answer

Chairman and CEO Vimal Kapur confirmed the order growth was broad-based across all segments, with long-cycle being stronger but short-cycle also growing, expecting the trend to continue into Q4 as a result of portfolio revitalization and R&D investments. He stated that the acquisitions are performing very well, averaging 12x multiple, and are mostly on or ahead of their Total Value Added (TVA) plans, contributing to organic growth and margin expansion. CFO Mike Stepniak added that most deals will become organic contributors from Q4 into next year, remaining accretive and exceeding TVA targets for both revenue and cost synergies.

Scott Davis of Melius Research LLC asked about Quantinuum's path to an IPO, specifically the hurdles involved. He also questioned the timing of the significant increase in R&D spending ahead of the company's planned separations.

Answer

Chairman & CEO Vimal Kapur explained that the main hurdle for Quantinuum's IPO is demonstrating more commercial evidence to prove its revenue stream, targeting a 2027 timeline. Regarding R&D, he clarified the spending increase is a long-term strategic decision to accelerate organic growth, initiated last year and unrelated to the spin-offs. SVP & CFO Mike Stepniak added it is a high-ROI investment for future growth.

Scott Davis from Melius Research LLC asked about the quantum computing business, Quantinuum, inquiring about the specific hurdles to getting it ready for an IPO. He also questioned the timing of the significant R&D spending increase, noting it was unusual for a company preparing for a breakup.

Answer

Chairman & CEO Vimal Kapur stated that Honeywell is committed to deconsolidating Quantinuum and is currently fundraising. The key hurdle is demonstrating more commercial evidence to prove the revenue stream, with a target IPO timeline around 2027. Regarding R&D, Kapur explained the increase is a strategic decision to accelerate organic growth across Honeywell for the long term, independent of the spin-off timeline, and aims to move the company's R&D spend towards the upper quartile.

Scott Davis asked about the timing of neutralizing tariff impacts through pricing and mitigation efforts and requested a ranking of tariff exposure by business segment.

Answer

CFO Mike Stepniak stated that mitigation efforts, including pricing and productivity, should bring tariff impacts to a neutral run-rate well before year-end, likely in the second half. He identified Industrial Automation and Aerospace as the segments with the largest tariff exposure, while Building Automation is largely protected and ESS has minimal direct exposure.

Scott Davis inquired about the timeline for naming the management teams for the separated companies and whether an external search would be conducted for the Aerospace leadership. He also sought clarification on the 2025 EPS bridge, questioning if the M&A contribution was effectively net neutral given the significant below-the-line headwinds like interest expense.

Answer

CEO Vimal Kapur responded that management teams will be announced as the process progresses over the next 12-18 months and that the Board will decide on leadership. Incoming CFO Mike Stepniak broke down the $0.52 below-the-line headwind, attributing $0.33 to interest expense (largely from M&A), $0.10 to repositioning, and the rest to pension and corporate costs. Executive Sean Meakim clarified that the acquisitions are still expected to be 1-2% accretive to the business in 2025.

Scott Davis from Melius Research LLC asked about the tangible customer deliverable or "killer app" from the Honeywell Forge and Google Gemini AI partnership. He also questioned the strategy to fix the Intelligrated business, asking if its issues stem from the market, product innovation, or customer concentration.

Answer

CEO Vimal Kapur explained the Google AI partnership is designed to monetize Honeywell's installed base by creating new applications on the Forge platform and embedding Google's Nano AI into edge devices, with the first product launch expected in early 2025. Regarding Intelligrated, he acknowledged its underperformance but noted the business is bottoming out with a significant shift toward higher-margin aftermarket services. He cited the high capital investment required by customers for large-scale projects as the primary constraint on growth.

Scott Davis (Melius Research) sought a 'postmortem' on Danaher's recent restructuring efforts, asking for tangible details beyond margin impact, such as changes in rooftops, headcount, or fixed assets. He also inquired about the current flu season's impact, specifically if Danaher observed a significant pickup in orders in January following a strong pre-order season in Q4.

Answer

Rainer Blair, President and CEO, described the restructuring as traditional Danaher Business System productivity, involving consolidating rooftops, driving process efficiency, and reducing associates, leading to sustained cost savings. Regarding the flu season, Blair noted a significant pickup in cases in late Q4, contributing to the respiratory revenue beat, and projected Q1 respiratory revenue around $500 million despite a recent decline in ILI.

Scott Davis asked for more tangible details regarding Danaher's restructuring and cost actions beyond their margin impact, specifically inquiring about changes in rooftops, headcount, or fixed assets. He also asked if Danaher was observing a significant pickup in respiratory orders in January, following a strong pre-order season in Q4, given the severity of the flu season.

Answer

CEO Rainer Blair described the cost actions as traditional Danaher Business System productivity improvements, involving consolidating rooftops, driving process efficiency, and reducing associates, with expected long-term and significant cost savings. Regarding the flu season, Rainer noted a significant pickup in cases in the second half of Q4, leading to a beat in respiratory revenue. He stated that while the ILI has since come down, testing remains robust, with Q1 respiratory revenue projected around $500 million.

Scott Davis asked for clarification on the mix between respiratory and sexual health within Cepheid, noting strong sexual health growth but a flattish total Cepheid outlook for 2026, and sought confirmation on Cepheid's overall growth expectations for the coming year. He also inquired about changes to Danaher's contract structures over the past few years, given tariff, cost inflation, and supply chain dynamics, and whether these structures allow for easier pricing adjustments.

Answer

Matt McGrew, Executive Vice President and CFO, clarified that the respiratory guidance of flat year-over-year ($1.7 billion) does not include sexual health, which is part of the non-respiratory base business expected to grow high single-digit to low double-digits. He confirmed that Cepheid is expected to grow overall in 2026. Rainer Blair, President and CEO, stated that Danaher has introduced more flexibility into its contract structures over the years. He noted that in bioprocessing, there is significant flexibility and leverage to implement differentiated pricing for differentiated solutions.

Scott Davis noted the recent stability and asked about the mix between respiratory and sexual health within Cepheid, given strong sexual health growth but a flattish total Cepheid guide for 2026. He sought clarification on whether Cepheid is expected to grow overall in 2026. He also inquired if Danaher's contract structures have adapted to allow easier pricing adjustments in response to tariffs, cost inflation, and supply chain dynamics.

Answer

Matt McGrew (EVP and CFO) clarified that respiratory revenue is guided flat year-over-year, while sexual health (part of non-respiratory) is expected to continue high single-digit to low double-digit growth, leading to overall Cepheid growth in 2026. Rainer Blair (President and CEO) stated that contract structures have gained more flexibility over the years, enabling differentiated pricing for differentiated solutions, particularly in bioprocessing.

Scott Davis asked for an update on the structural cost-out program and inquired about the outlook for the early-stage biotech market, questioning if AI spending was crowding out investment and how the market might evolve.

Answer

EVP & CFO Matt McGrew stated that about half of the targeted $150 million in structural cost savings has been realized, with the remainder expected in the second half. President & CEO Rainer Blair described the early-stage biotech market as stable but at low activity levels due to a tough funding environment. He views AI as an ultimate tailwind that will help validate therapies and drive more volume into manufacturing.

Scott Davis questioned the long-term growth algorithm for the China diagnostics business given VBP pressures and inquired about balance sheet priorities, specifically M&A versus share repurchases.

Answer

President and CEO Rainer Blair expressed long-term confidence in the China market, viewing recent pricing changes as a normalization toward global levels. He reiterated that M&A remains the top priority for capital allocation. EVP and CFO Matt McGrew added that market dislocations historically create attractive M&A opportunities.

Scott Davis inquired about the practical applications and impact of artificial intelligence (AI) on Danaher's business, particularly at Cepheid. He also asked for an update on the performance of the Abcam and Aldevron acquisitions relative to their initial deal models.

Answer

President and CEO Rainer Blair explained that AI is being used to accelerate R&D cycle times for assays and is integral to digital pathology advancements at Leica Biosystems. EVP and CFO Matt McGrew reported that Abcam is tracking close to its deal model, but Aldevron is behind due to a slower-than-expected recovery in genomics end markets, though it remains a strategic long-term asset.

Scott Davis asked about the significance of smaller customers in the bioprocessing segment and at what point their slower recovery might become less material to the overall business. He also requested an update on capital allocation, specifically regarding the buyback and the M&A funnel.

Answer

EVP and CFO Matt McGrew clarified that smaller customers represent about 25% of the bioprocessing business and are highlighted due to different dynamics, such as funding environment sensitivity. He noted the destocking pain was mainly with larger customers and is now largely over. On M&A, President and CEO Rainer Blair stated that while the funnel is active and dynamic, valuations remain elevated, and the company will maintain its disciplined approach. McGrew also clarified the buyback was completed across Q2 and Q3.

Scott Davis inquired about TE Connectivity's increased AI revenue forecast for fiscal year 2026, seeking confirmation of the $200 million increase and details on how capacity additions link to scaling AI revenues and improving margins over time.

Answer

CEO Terrence Curtin confirmed the $200 million increase in AI revenue forecast for fiscal 2026, noting growth across all hyperscaler customers and strong DDN orders. He explained that TE Connectivity has been scaling nicely, with new program awards for later in the year and into 2027, contributing to improved margins in the Industrial Solutions segment.

Scott Davis inquired about TE Connectivity's increased AI revenue forecast, seeking confirmation of the $200 million raise and details on how capacity additions link to scaling revenues and expected margin improvements as capacity matures.

Answer

CEO Terrence Curtin confirmed the $200 million increase in the AI revenue forecast for fiscal 2026, driven by new program awards across all hyperscaler customers, with significant ramps expected in the second half of the year and into 2027. He noted that the company has been scaling effectively, improving margins in the Industrial Solutions segment, benefiting from both AI volumes and overall business improvements.

Scott Davis asked about the significant tailwind from AI, specifically inquiring about the updated forecast for AI revenue in fiscal year 2026, following the $900 million generated in fiscal year 2025, and the progress on achieving company-average or higher margins from AI-related scale.

Answer

CEO Terrence Curtin confirmed the strong momentum, noting over $900 million in AI sales for fiscal year 2025, tripling the prior year's revenue. He suggested a baseline of at least $600 million in dollar growth for fiscal year 2026, aligning with hyperscale CapEx growth estimates of 20%. Curtin also highlighted significant growth in non-AI cloud business, which doubled to $500 million, and double-digit growth in enterprise and telecom applications, indicating a broadening demand beyond just AI.

Scott Davis of Melius Research inquired about the profitability and operational scale of TE Connectivity's rapidly growing AI business, asking if it has reached or surpassed company-level margins.

Answer

CEO Terrence Curtin confirmed the AI business revenue will exceed $800 million in fiscal 2025, up from $300 million in the prior year, and is on a run-rate to surpass $1 billion. He stated its margins are slightly above the Industrial segment's average and noted the company is still in the 'middle to early innings' of this growth trend, with strong momentum expected to continue into fiscal 2026.

Scott Davis asked about the geopolitical risks of anti-American sentiment in foreign supply chains and for clarity on how TE Connectivity is recovering tariff costs, particularly within automotive contracts.

Answer

CEO Terrence Curtin clarified that tariff impacts are more significant in the Industrial segment than in Transportation due to TE's localized manufacturing strategy. He explained that the company's local-for-local approach, with local design, manufacturing, and sourcing, mitigates anti-American sentiment as TE is viewed as a local partner. He noted this strategy minimizes cross-border shipments and thus tariff exposure.

Scott Davis asked about the potential for incremental margin leverage in the Transportation Solutions (TS) segment once a market recovery occurs, questioning if costs would return proportionally or if outsized gains were possible.

Answer

CFO Heath Mitts stated that the company is confident in maintaining TS margins at 20% or better. He explained that significant future leverage would come from a recovery in the highly profitable Commercial Transportation business. Mitts also highlighted that past restructuring, particularly in Western Europe, has reduced the fixed cost base, enabling the segment to perform well even in low-growth environments.

Scott Davis from Melius Research inquired about the visibility for stabilization in the factory automation business, noting it appears to be one of the toughest end markets for the company.

Answer

CEO Terrence Curtin acknowledged the persistent weakness in discrete factory automation and building automation, particularly in Europe. He stated that while the market feels like it's 'bouncing around the bottom,' a recovery has been slower than expected. Curtin mentioned that some customers are still destocking and anticipates that a tangible improvement is unlikely until calendar year 2025.

Scott Davis asked about DuPont's balance sheet plans, including target leverage, potential M&A activities like Spectrum, and the strategy for deploying capital in 2026, following the share buyback announcement. He also inquired about the renewed focus on lean and operational excellence, the opportunity, and the current state of lean implementation within the portfolio.

Answer

Antonella Franzen, Chief Financial Officer, outlined a target net debt to EBITDA leverage below 2 times, with $1 billion cash and $3.25 billion pro forma debt, and confirmed a $2 billion share repurchase authorization with an imminent $500 million ASR. Lori Koch, CEO, discussed opportunistic M&A in healthcare (CDMO, medical packaging) and water, emphasizing a rich pipeline and prudent approach with ROIC targets. Lori Koch also detailed the operational excellence initiatives led by Dave Cook, focusing on enhanced management standards, eight core KPIs, and a cultural shift towards continuous improvement.

Scott Davis asked about DuPont's balance sheet strategy, including target leverage, cash management, the new share repurchase authorization, and potential M&A activities like tuck-in acquisitions.

Answer

CFO Antonella Franzen stated a target net debt to EBITDA leverage below 2x, with $1 billion cash on the balance sheet and a $2 billion share repurchase authorization, including an imminent $500 million ASR. CEO Lori Koch highlighted opportunistic M&A in healthcare (CDMO, medical packaging) and water (RO capacity in China), emphasizing a robust pipeline and prudent return profile.

Scott Davis of Melius Research LLC inquired about the drivers behind the 1% price decline in the Industrials segment and asked if DuPont plans to use pricing to offset recent tariff impacts.

Answer

CEO Lori Koch clarified that the price decline was not related to Tyvek but was a give-back of prior inflationary pricing in the diversified industrials space. She added that tariff mitigation relies primarily on supply chain adjustments rather than price surcharges.

Scott Davis of Melius Research LLC inquired about the drivers behind the 1% price decline in the Industrials segment and asked if DuPont plans to use pricing to offset recent tariff impacts.

Answer

CEO Lori Koch clarified the price decline was a giveback from prior inflation-driven hikes in the diversified industrials space, not related to Tyvek. She added that tariff mitigation relies primarily on supply chain adjustments, with only minor use of surcharges.

Scott Davis asked for a breakdown of the tariff impact between the future ElectronicsCo (Qnity) and IndustrialsCo, and questioned the long-term strategy for intermediate products shipped to China, including potential production moves or IP concerns.

Answer

CFO Antonella Franzen stated the estimated $60 million net tariff impact for 2025 is split evenly between ElectronicsCo and IndustrialsCo. She also clarified that ongoing mitigation efforts should prevent the 2026 impact from simply doubling. CEO Lori Koch confirmed there are no plans to move fixed assets, as the company believes it can manage the impact through supply chain adjustments, exemptions, and pricing actions.

Scott Davis asked for the size and growth rate of DuPont's AI-related revenues and inquired about the sustainability of incremental margins into 2025.

Answer

CEO Lori Koch stated that AI-related sales were up approximately 30% to over $300 million and are a key growth driver for the future ElectronicsCo. She projected very strong incremental margins in the mid-40% range for 2025, down from the low to mid-60s in 2024, noting that price headwinds and inflation are expected to be net neutral to the bottom line.

Scott Davis of Melius Research inquired about the key factors enabling a potentially faster timeline for the planned business separations and the specific reasons behind the customer pre-buying activity in the electronics segment in China.

Answer

Executive Chairman Ed Breen explained that significant progress in the legal entity and IT workstreams has increased confidence in accelerating the separation timeline, possibly towards the earlier end of the 18-24 month window. CEO Lori Koch clarified that the pre-buy in China is driven by new semiconductor fabs coming online, which need to procure materials for qualification and ramp-up, totaling $40 million in the second half of the year.

Scott Davis asked about Eaton's CapEx guidance, specifically if the combined $1.2 billion for this year and next might need to be upsized for 2026 given the strong order book. In a follow-up, he inquired about the current status of channel inventories, asking if they are back to more normal levels and for an update on specific market segments.

Answer

CFO Olivier Leonetti stated that CapEx in 2026 will be higher than 2025, representing a peak year, before returning to historical proportions of revenue by 2027. CEO Paulo Ruiz added that Eaton is accelerating hiring and ramping up existing expansions. Regarding channel inventories, Paulo Ruiz believes the residential market has bottomed out. He noted that other markets like Distribution IT (DIT) and utilities are recovering strongly, with double-digit order growth in both North America and EMEA for DIT, and very strong orders in utilities during Q3.

Scott Davis asked if Eaton's CapEx guidance of $1.2 billion for 2025 and 2026 combined might need to be upsized for 2026 given the strong order book. He also inquired about the current state of channel inventories, specifically if they have returned to more normal levels.

Answer

Olivier Leonetti, Executive Vice President and Chief Financial Officer, confirmed that CapEx in 2026 will be higher than in 2025, representing a peak year before returning to historical proportions of revenue by 2027. Paulo Ruiz, Chief Executive Officer, added that Eaton is accelerating hiring and ramping up existing expansions. Regarding channel inventories, Ruiz stated that residential inventories have likely bottomed out. He noted that Distribution IT has recovered with double-digit order growth in North America and EMEA, and the utilities business also saw very strong double-digit order growth in Q3.

Scott Davis from Melius Research LLC asked if Eaton has a path to achieving a 40% gross margin once new capacity is fully scaled and temporary investments like the ERP rollout are complete.

Answer

CFO Olivier Leonetti referenced the company's long-term guidance for 400 basis points of margin expansion and confirmed they have a line of sight to those numbers. He stated that planning to be close to a 40% gross margin is included in the current guide, with a ramp expected in the second half of the year.

Scott Davis asked about the current state of product lead times and whether they have normalized. He also questioned if Eaton is accelerating its North American capacity expansion plans in light of recent tariff announcements.

Answer

President and COO Paulo Sternadt responded that lead times have improved by 20-25% but are not yet back to normal as the company remains heavily loaded. Regarding capacity, he clarified that the previously announced $1.2 billion in investments were planned well before the tariffs and are proceeding as scheduled. He expressed confidence in these investments due to strong end markets, long-term customer commitments, and the fungible nature of Eaton's capacity across different end markets. No new acceleration is needed at this time.

Scott Davis from Melius Research asked for a breakdown of the $900 million CapEx plan between growth and maintenance, and questioned the strategic rationale for maintaining eMobility as a standalone reporting segment.

Answer

Olivier Leonetti, EVP & CFO, estimated that approximately 80% of the capital expenditure is for growth. On eMobility, he explained that its distinct growth and margin profile warrants separate reporting for investor transparency. Paulo Sternadt, President & COO, and Craig Arnold, Chairman & CEO, added that while reported separately, the business is run to maximize synergies with the Vehicle and Electrical segments.

Scott Davis of Melius Research asked for context on the 40% win rate for mega projects, questioning if it's higher than historical rates and if it reflects selective bidding on more profitable projects. He also requested a breakdown of the new capacity additions between new facilities versus expansions of existing ones.

Answer

Chairman and CEO Craig Arnold clarified that the 40% win rate is indeed higher than Eaton's underlying market share, attributing this success to the company's strength in large, complex projects. He stated the goal is to win every order, not to be selective. Regarding capacity, Arnold explained that the additions are a mix of all three approaches: expanding existing footprints, adding lines to current facilities, and building new greenfield sites, depending on specific needs.

Scott Davis (Melius Research) sought clarification on what Xylem's CEO meant by "structure" within the company's culture, processes, and structure transformation. He also inquired about Xylem's capital deployment priorities, given its low net debt to EBITDA ratio of 0.4x, specifically regarding the M&A pipeline and the potential for share buybacks.

Answer

CEO Matthew Pine clarified that "structure" refers to Xylem's pivot from a highly matrixed organization to one with discrete divisions and 16 P&Ls, fostering greater accountability, empowerment, and faster decision-making by reducing approval layers. Regarding capital deployment, Mr. Pine outlined priorities: core investments, M&A, dividends, and opportunistic share buybacks. He highlighted a strong, actionable M&A funnel focused on small to medium bolt-ons, with an annual target of deploying $1 billion for $60-$75 million in EBITDA, while remaining open to strategic, transformational opportunities.

Scott Davis of Melius Research asked for clarification on what Xylem specifically means by 'structure' in its operating model transformation. He also inquired about Xylem's capital allocation priorities for the next 12 months, including M&A backlog and the potential for share buybacks.

Answer

CEO Matthew Pine explained that 'structure' refers to pivoting from a highly matrixed organization to one with discrete divisions and GMs under segments, driving better accountability and faster decision-making. Matthew Pine outlined capital priorities as investing in the core, M&A (targeting $1 billion annually for small to medium bolt-ons), dividends, and opportunistic share buybacks, noting a strong M&A funnel driven by a new bottoms-up process.

Scott Davis of Melius Research asked about the M&A environment and Xylem's capital deployment plans, given its strong balance sheet. He also questioned if the 1% growth in the Water Solutions and Services (WSS) segment was simply due to normal project lumpiness.

Answer

CEO Matthew Pine affirmed that M&A remains a key priority for capital deployment, noting an active funnel of targets, and mentioned the company is also focused on portfolio optimization through divestitures. CFO Bill Grogan confirmed that the WSS segment is inherently lumpy and its Q1 growth was muted by a difficult comparison to a large $150 million project in the prior year. He stated that underlying orders were strong and backlog grew, suggesting a rolling 12-month view is more indicative of the segment's health.

Scott Davis of Melius Research sought to quantify the revenue headwind from Xylem's 80/20 initiatives and requested an update on the company's on-time delivery performance.

Answer

CEO Matthew Pine clarified that the revenue headwind from 80/20 actions is slightly less than two percentage points. On operational performance, Pine reported significant progress, stating that on-time delivery improved by 500 basis points in 2024. He aims for an additional 500-700 basis points of improvement to reach best-in-class levels, a goal he expects to approach in 2025 as 80/20 initiatives simplify factory operations.

Scott Davis asked whether positive price realization was driven by executing on previously priced backlog or by securing new, incremental price increases. He also requested color on market weakness in Europe and Asia, particularly China, and whether these issues were short-term.

Answer

Executive Matthew Pine stated that positive pricing was a result of both factors, highlighting a 60 basis point positive price-cost spread in Q3 and continued opportunities for strategic pricing. Regarding China, which is mid-single digits of revenue, he noted that tight liquidity for municipalities and real estate issues are causing project delays, a situation he expects to linger in the short term before China returns to being a growth driver. He also mentioned softness in the Middle East and parts of Africa.

Scott Davis inquired about Vertiv's services opportunity, specifically the margin structure of services versus equipment, and whether the service business is currently outgrowing equipment or if its growth lags during this hyper-growth period for equipment.

Answer

Giordano Albertazzi, CEO of Vertiv, highlighted that the service business is a unique competitive advantage, accretive to overall business margins, and generates significant recurring revenue. He noted that while equipment growth is currently very high, the service business typically lags but is accelerating, driven by increased equipment density and complexity in new data centers, which fosters higher service penetration.

Scott Davis asked for more details on Vertiv's services opportunity, including the margin structure compared to equipment, and whether services growth is currently outpacing or lagging equipment growth during this hyper-growth period.

Answer

CEO Giordano Albertazzi stated that the service business is a unique competitive advantage, accretive to the overall business, and generates significant recurring revenue. He noted that during periods of rapid product system growth, services typically lag but are accelerating, driven by new technology and higher rack densities, which increase service penetration.

Scott Davis of Melius Research LLC asked for more granular detail on the root causes of the operational inefficiencies and execution challenges mentioned in the prepared remarks.

Answer

CEO Giordano Albertazzi attributed the issues to three main factors: 1) inefficiencies from transitioning the supply chain to mitigate tariffs, 2) costs like premium freight and overtime from managing this transition during a period of 34% growth, and 3) specific operational challenges in the EMEA region. He expressed confidence these issues would be resolved.

Scott Davis of Melius Research LLC requested a deeper explanation of the root causes for the operational inefficiencies, asking if they were standard issues like premium freight or more complex problems related to capacity expansion.

Answer

CEO Giordano Albertazzi attributed the issues to a combination of factors: inefficiencies from tariff-related supply chain transitions, the compounding effect of managing 34% growth (leading to overtime and premium freight), and specific executional challenges in the EMEA region. He expressed confidence these issues would be resolved.

Scott Davis of Melius Research inquired about the expected timeline for tariff mitigation efforts throughout 2025 and whether repricing existing contracts is a key part of the strategy.

Answer

CEO Giordano Albertazzi confirmed that the benefits of countermeasures will increase as the year progresses, involving both price actions on new and existing orders and supply chain reconfigurations. CFO David Fallon added that the net dollar impact from tariffs is expected to decline sequentially through the year. Albertazzi also reaffirmed the company's goal to be tariff-neutral entering 2026.

Scott Davis of Melius Research questioned Vertiv's capital allocation plans for its growing cash balance, asking about M&A opportunities, and inquired about the source of confidence in driving high incremental margins.

Answer

CEO Giordano Albertazzi confirmed that M&A is part of the strategy and that the company has strengthened its process for evaluating opportunities, with more details on capital allocation to be shared at the upcoming investor event. He attributed confidence in future margin expansion to continued operational leverage from volume growth and the expectation of a favorable price-cost environment.

Scott Davis asked how the structural changes at Roper and recent acquisitions have impacted the company's core or 'entitlement' organic growth rate. He also asked about the long-term EBITDA margin target for the newly acquired Subsplash business.

Answer

President and CEO Neil Hunn stated that the core portfolio's organic growth profile has improved to a target of 7-7.5%, up from 6-6.5% historically, with growth-accretive acquisitions providing a hedge or further upside. EVP & CFO Jason Conley clarified that the long-term EBITDA margin target for Subsplash is in the low 40s, which is below the Network segment's average but represents a substantial improvement from its current level.

Scott Davis sought clarification on the impact of tariffs and asked if potential weakness in port activity could negatively affect the DAT freight business.

Answer

President and CEO Neil Hunn clarified that the tariff impact is limited to around $10-$15 million as most products in the TEP segment are USMCA compliant. Regarding DAT, he explained that its monetized carrier network does not fluctuate with daily spot demand, and they have assumed flattish carrier volume for the year, with growth driven by pricing actions.

Scott Davis asked if Roper would consider issuing equity to fund M&A if opportunities were compelling enough. He also inquired about the company's philosophy on internal versus external hiring for leadership roles and the development of its internal talent pipeline.

Answer

President and CEO Neil Hunn stated that while the first source of capital is the $5 billion on the balance sheet, the company would consider equity for highly compelling deals, though the return bar would be higher. On talent, he emphasized the success of their 'talent offense,' noting that after initially hiring externally, the focus on development is creating a strong internal bench, with recent promotions like Buck Brody at ConstructConnect demonstrating the strategy's success.

Scott Davis asked if pricing power is normalizing back to pre-inflationary levels and questioned whether generative AI ultimately raises the barrier to entry for competitors or lowers it.

Answer

President and CEO Neil Hunn stated that software pricing is reverting to its normal, historical cadence after a period of outsized increases, while pricing in the TEP businesses is more tied to new product launches. On AI, Hunn argued it raises the barrier to entry, as incumbency provides both the specific, nuanced data and the knowledge of what questions to ask, which are critical for generative AI tools to be effective in their vertical markets.

Scott Davis of Melius Research LLC asked about the impact of 3M's new product plan on margins versus growth and the effectiveness of using new products to gain pricing power with historically tough customers like auto and big-box retailers.

Answer

Chairman and CEO William Brown explained that the new product innovation (NPI) initiative, with a 70% year-over-year increase in launches, is expected to improve both growth and margins. He noted that while pricing is easier to achieve in industrial businesses, new products represent a key avenue for capturing value from all customer types, including the more challenging auto and consumer channels.

Scott Davis from Melius Research asked for an assessment of 3M's tariff exposure relative to its competitors and how this might influence its ability to pass on price increases. He also questioned whether 3M has observed any anti-American purchasing behavior from its global customers.

Answer

CEO William Brown addressed the questions, suggesting that 3M's competitive exposure to tariffs is mixed across its diverse businesses. However, he believes 3M is likely 'a little bit better positioned' than many competitors due to the flexibility of its global network. On the second point, Brown stated that the company has not yet seen any anti-American bias in customer purchasing behavior, though it is still early.

Scott Davis asked for more details on the changes being made to the sales organization, including the 'quota pull forward,' and sought to quantify the potential revenue growth impact of achieving 100% on-time-in-full (OTIF) delivery performance.

Answer

CEO William Brown clarified that near-term growth will come from improved commercial execution of the existing portfolio. He explained that pulling sales quotas forward to January 1 from April aims to drive early momentum. Regarding OTIF, Brown stated it's difficult to quantify the exact growth impact but acknowledged that poor performance, especially in Safety and Industrial (low 80s), is definitely resulting in lost sales and that improving service is fundamental to driving top-line growth.

Scott Davis of Melius Research inquired about the operational transformation, specifically the priority and potential of supply chain reorientation, and asked about the timeline and nature of changes to the company's incentive and compensation structure for 2025.

Answer

CEO William Brown explained that supply chain is a high-focus area within the $13 billion cost of goods sold, targeting 2% net productivity through supplier consolidation and value engineering. He emphasized that improving on-time-in-full (OTIF) delivery is a key lever for both growth and operations. Regarding compensation, Brown stated that clear objectives are the first priority, but adjustments to the 2025 compensation plan are forthcoming for both executives and the sales force to drive the right behaviors.

Scott Davis of Melius Research inquired about the drivers behind the record Q1 orders and the rationale for the significant share repurchase program.

Answer

CEO Luca Savi clarified that the strong order growth was not due to pre-buying but driven by large, long-term Industrial Process projects and significant contributions from the kSARIA and Svanehøj acquisitions. He also stated the share buyback reflects confidence in ITT's long-term outlook and is not indicative of a slowdown in M&A activity, with the M&A pipeline remaining healthy.

Scott Davis asked for a functional explanation of what ITT means by its 'M&A muscle' and what specific changes have been made to its diligence and integration processes.

Answer

CEO Luca Savi described the 'M&A muscle' as a combination of extensive cultivation, relationship-building with targets, and rigorous due diligence, which has enabled exclusive deals and successful integrations for recent acquisitions like Svanehøj and kSARIA. He noted this capability is proven by the ~$1.2 billion deployed on M&A over the last five years and the discipline to walk away from deals that don't meet their criteria.

Scott Davis questioned if the significant growth in pump projects was due to changing purchasing patterns by EPCs and asked for an update on managing production and contract negotiations with Boeing amid its disruptions.

Answer

CEO Luca Savi clarified that the large project growth figure is more a result of timing volatility than a fundamental shift in purchasing behavior, highlighting the 10% year-to-date growth as more indicative. Regarding Boeing, Savi explained that ITT is working closely to support their production restart, which will have an approximate $10 million revenue impact on CCT in Q4. He confirmed that contract negotiations are proceeding as planned due to upcoming expiration dates.

Scott Davis asked for more detail on the mechanics and timing of mitigating tariff impacts and inquired about real-time demand indicators from the Videojet business for customer confidence.

Answer

President and CEO Jennifer Honeycutt expressed confidence in mitigating the 3.5% gross tariff exposure through ongoing pricing, supply chain, and manufacturing footprint optimizations, noting they can move a production line in about six months. She added that demand for the PQI business remains strong, with four consecutive quarters of growth in equipment and consumables and no signs of softening in April order patterns.