Tommy Moll

Tommy Moll of Stephens inquired about the drivers behind the strong Aerospace & Defense (A&D) orders, specifically regarding ship set content and the sustainability of the high book-to-bill ratio. He also questioned the conservatism of the A&D revenue guidance for the full year given the strong Q1 performance. Additionally, Moll asked about ESCO Technologies' capital allocation strategy, particularly concerning the M&A pipeline and the potential for a net cash balance sheet.

Answer

Bryan Sayler, President and CEO, explained the lumpiness of Navy orders, including a large UK order and $30 million in US Virginia-class Block VI orders, and noted a robust return of orders from aerospace OEMs. Chris Tucker, SVP and CFO, clarified that Q1 A&D revenue growth was expected to be the strongest, with growth tapering through the year due to tougher comparisons. Sayler further detailed the capital allocation strategy, emphasizing active M&A pipeline rebuilding with a focus on strategic acquisitions in utility, aircraft components, and Navy segments, driven by strong cash flow and low leverage.

Tommy Moll inquired about the specifics of A&D orders, including ship set content for US and UK Navy programs, and sought an enduring takeaway regarding the overall state of orders in the segment. He also questioned whether the full-year A&D revenue guidance appeared conservative after a strong Q1, and later followed up on ESCO Technologies' capital allocation strategy, specifically regarding the M&A funnel and plans given the potential for a net cash balance sheet.

Answer

President and CEO Bryan Sayler explained that Navy orders are inherently lumpy, citing a large UK order and $30 million in US Virginia-class Block VI orders, but could not provide platform specifics. He highlighted a robust return to orders from aerospace OEMs due to increasing build rates and noted stable, growing military aircraft activity. Senior Vice President and CFO Chris Tucker clarified that Q1 is anticipated to be the strongest growth quarter, with growth tapering through the year, particularly in Q4 due to tougher comparisons, while still projecting a solid high single-digit outlook for the core business. Bryan Sayler later stated that cash flow is outstanding and leverage is low, confirming an active rebuilding of the M&A pipeline with healthy market prospects. He emphasized that the primary focus for capital deployment is strategic acquisitions in the utility, aircraft components, and Navy segments, which offer strong long-term secular growth characteristics.

Tommy Moll of Stephens Inc. asked about the details of recent large Aerospace & Defense orders for submarine programs, the drivers of the segment's strong organic margin expansion, clarification on the improved Q4 operational outlook, margin performance at the Doble business, and the potential impact of the AUKUS treaty on the Maritime business.

Answer

President and CEO Bryan Sayler confirmed significant submarine orders and viewed the AUKUS treaty as a long-term positive reinforcing UK naval investment, but noted specifics on new Maritime content would be shared later. SVP & CFO Chris Tucker attributed strong A&D margins to price realization, favorable material costs, positive mix, and operating leverage. Tucker also confirmed the Q4 operational outlook has improved and explained that a Q3 margin dip in the Doble business was due to shipment timing, not a fundamental issue, with strong orders indicating future strength.

Tommy Moll of Stephens Inc. inquired about the significant Aerospace & Defense (A&D) orders for Globe, specifically regarding shipset content for Virginia and Columbia class submarines. He also asked about the organic margin progression in A&D, the operational assumptions behind the raised Q4 guidance, margin performance at Doble, and the potential impact of the AUKUS treaty on the Maritime business.

Answer

President and CEO Bryan Sayler stated that while he couldn't detail new shipset content from the Maritime acquisition yet, the company is very upbeat about the Navy's progression. SVP & CFO Chris Tucker highlighted phenomenal core A&D margins driven by favorable pricing, lower material headwinds, positive mix, and sales leverage. Tucker confirmed the Q4 outlook is operationally stronger, not just due to interest savings from the VACCO sale proceeds. He explained that Doble's Q3 margin dip was due to sales timing and that year-to-date performance remains strong. Sayler addressed the AUKUS treaty, noting it reinforces their conviction in UK shipbuilding investments, though the direct impact is long-term.

Tommy Moll of Stephens Inc. asked about the significant Aerospace & Defense orders for Globe, the drivers behind the segment's strong organic margin performance, the updated Q4 operational outlook, margin progression at Doble, and the potential impact of the AUKUS submarine treaty on the Maritime business.

Answer

President and CEO Bryan Saylor confirmed the positive outlook for naval programs but noted specific shipset content details for the new Maritime business would be shared later. He also stated that the AUKUS treaty, while long-term, reinforces the company's investment conviction in UK shipbuilding. SVP and CFO Chris Tucker attributed the strong A&D margins to favorable pricing, better-than-expected material costs, positive mix, and sales leverage. He also confirmed the Q4 outlook is operationally stronger and explained that Doble's Q3 margin dip was due to sales timing, with the year-to-date performance remaining very strong.

Tommy Moll of Stephens Inc. inquired about the Aerospace & Defense segment's large submarine-related orders, organic margin progression, and the drivers of the updated EPS guidance. He also asked about margin performance at the Doble business and the potential impact of the AUKUS treaty on the Maritime business.

Answer

President and CEO Bryan Sayler and SVP & CFO Chris Tucker confirmed that A&D margins were exceptionally strong due to favorable pricing, mix, and operational leverage. They noted the updated guidance reflects a stronger Q4 operational outlook, lower tariffs, and reduced interest expense. Regarding the Utility segment, they explained a Q3 margin dip at Doble was due to shipment timing, not a fundamental issue, with strong orders pointing to future strength. Bryan Sayler also commented that the AUKUS treaty reinforces the long-term value of the company's UK naval investments.

Tommy Moll of Stephens Inc. inquired about the large Aerospace & Defense orders for Globe, specifically regarding shipset content and the pipeline for Virginia and Columbia class submarines. He also asked about the drivers of organic A&D margin progression, the implied operational strength in the updated Q4 guidance, margin performance at the Doble business, and the potential impact of the AUKUS treaty on the Maritime business.

Answer

President, CEO & Director Bryan Sayler stated there was no significant change to Globe's content but noted additional content from the Maritime acquisition, with details to be shared later. He also viewed the AUKUS treaty as a long-term positive that reinforces UK shipbuilding investments. SVP & CFO Chris Tucker explained that strong A&D margins were driven by favorable pricing, better material costs, positive mix, and sales leverage. Both executives confirmed the Q4 operational outlook is stronger than previously guided. Tucker attributed a Q3 margin dip at Doble to shipment timing, emphasizing strong year-to-date performance and robust orders.

Tommy Moll followed up on automotive, referencing bullish comments from GM on North American spending and asking if visibility or conversations in North America automotive have ticked higher, beyond just orders, since the last quarter when it stabilized at a low level.

Answer

Blake Moret (Chairman and CEO, Rockwell Automation) expressed satisfaction with positive Q1 automotive numbers and outlook, noting past wins (e.g., Hyundai, Lucid) and ongoing modernization investments. However, he reiterated concerns about the volatile tariff environment and the need for positive sentiment to translate into actual orders.

Tommy Moll from Stephens followed up on the automotive market, referencing recent bullish comments from GM regarding North American spending, and asked if Rockwell Automation has observed any increased visibility or positive shifts in conversations, beyond actual orders, since the last quarter's assessment of stabilization at a low level.

Answer

Chairman and CEO Blake Moret expressed satisfaction with positive Q1 automotive results and a positive full-year outlook, noting past wins like Hyundai and current EV modernization work. However, he highlighted ongoing concerns about the volatile tariff environment, reiterating the need for positive sentiment to translate into concrete orders before confirming a significant shift.

Tommy Moll sought clarification on whether the 'down 30%' movement in Q4 2025 residential was a volume or revenue number, and how 2026 movement will track sales given balanced channel inventories. He also asked if Carrier's residential volume headwinds could be partly attributed to Daikin regaining market share lost in late 2024.

Answer

David Gitlin (Chairman and CEO) clarified that Q4 2025 residential volume was down over 40%, with sales down high 30s due to price/mix. Patrick Goris (EVP and CFO) confirmed the 'down 30%' movement was volume (units). For 2026, movement will generally track sales, with a benefit in H2 from the absence of H2 2025 destocking. David Gitlin stated Carrier does not believe its volume headwinds are due to Daikin regaining share; Carrier's share is up a few hundred basis points since its spin and was flat year-over-year in 2025 (sell-out perspective), with plans to hold or increase share in 2026.

Tommy Moll sought clarification on whether the 'down 30' movement in Q4 2025 was a volume or revenue number and how residential movement is expected to track sales in 2026, given balanced channel inventories. He also asked if Carrier's volume headwinds could be attributed to Daikin regaining market share lost in late 2024, of which Carrier was a beneficiary.

Answer

David Gitlin, Chairman and CEO, Carrier Global Corporation, clarified that the 'down 30' in Q4 2025 referred to volume, with actual volume down a little over 40% and sales down in the high 30s due to a mid-single-digit price and mix benefit. For 2026, he stated that movement would generally track sales, with a benefit in the second half from the absence of H2 2025 destocking. He dismissed the idea that volume headwinds were due to Daikin regaining share, noting that Carrier's market share has been up a few hundred basis points since its spin and remained flat from a sell-out perspective last year, with expectations to hold steady or increase share through new products and channel partner positioning.

Tommy Moll inquired about the current demand environment, specifically asking for an update on general trends and a deeper dive into the data center segment. He also sought clarification on the demand sentiment compared to the previous quarter and asked about the sales synergy opportunities with Particle, particularly how its technology intersects with Digi's existing OEM business and the 'as-a-service' component in OEM relationships.

Answer

Ron Konezny, President and CEO, noted strong demand in mass transit, utility, retail digital signage, and data centers (Opengear product line), indicating an improving trend, especially with the AI infrastructure buildout. Regarding Particle, Mr. Konezny explained its role in 'embedded-as-a-service' for engineering departments, integrating IoT solutions into customer machines. He clarified that Digi maintains a direct relationship with the OEM (end-user) and that the offering is similar to Ventus, including edge device software, connectivity, a cloud platform for insights, and software updates for the OEM's device.

Tommy Moll asked about the drivers for the strong growth in Annual Recurring Revenue (ARR), including service attach rates and successful product categories. He also inquired about the Q4 guidance, which implies flat sequential sales and lower EBITDA, and later asked about the long-term interplay between faster-growing recurring revenue and total reported revenue for fiscal 2026.

Answer

President, CEO & Director Ron Konezny explained that ARR growth is driven by higher attach rates, with nearly all new IT business now including attached services. For Q4 guidance, he noted that caution around product mix impacting gross margin is the primary factor for the profit outlook. Regarding the long-term model, Konezny confirmed that ARR and profitability are expected to continue outpacing top-line growth, as the company prioritizes higher-margin, multi-year solution sales which are more valuable despite dampening one-time revenue.

Tommy Moll explored whether Grainger's outgrowth typically exceeds targets during market stress and falls below in normalized environments, and inquired about the hiring strategy for new seller coverage roles in an increasingly digital environment.

Answer

Chairman and CEO D.G. Macpherson acknowledged strong performance during supply stress but emphasized that it was a smaller portion of overall outgrowth, maintaining confidence in reaching the 400-500 bps target through execution and managing external factors. He stated the hiring process for sellers hasn't changed much, focusing on general selling skills, and noted a broader trend of lack of mechanical talent benefiting Grainger.

Tommy Moll from Stephens asked if Grainger's outgrowth tends to exceed its long-term target during periods of market stress and fall below it in more normalized environments, and also inquired if the company is targeting different types of sellers for new market expansions given the increasingly digital environment.

Answer

D.G. Macpherson, Chairman and CEO, acknowledged that Grainger performed well during supply chain stress but emphasized that it was a smaller component of overall outgrowth, and the company still aims for its 400-500 basis point target. He also stated that the hiring process for sellers remains consistent, focusing on general selling skills, and that the company is not targeting different types of sellers despite the digital shift.

Tommy Moll asked about the rationale for delaying tariff-related price increases until the normal September cycle and the decision-making behind Zoro's SKU count reduction.

Answer

CEO D.G. Macpherson explained that maintaining a normal price increase schedule was best for customer stability and that the LIFO impact was a more significant factor than the price-cost timing. Regarding Zoro, he stated that the SKU reduction was a healthy process to remove low-volume 'noise' products and improve the customer experience, with plans to continue expanding the assortment thoughtfully.

Tommy Moll of Stephens Inc. inquired about the rationale for delaying tariff-related price increases to the standard September cycle and the strategy behind Zoro's significant SKU count reduction.

Answer

CEO D.G. Macpherson explained that the decision to maintain the normal price increase schedule was to ensure customer stability, noting positive feedback. He emphasized that the primary driver of gross profit pressure is the LIFO accounting impact. Regarding Zoro, he described the SKU reduction as a healthy process to eliminate non-performing products that created 'noise' and to improve the overall customer experience, with plans to continue expanding the assortment thoughtfully.

Tommy Moll asked for more detail on the market conditions for Hubbell's electric distribution business, specifically if channel inventories are truly normalized, and whether the mid-single-digit growth guide for 2026 reflects underlying demand or includes a restock component. He also inquired about the M&A pipeline, asking if acquiring at reasonable multiples (despite impressive growth) is still possible and how seller versus buyer expectations are trending.

Answer

Gerben Bakker, Chairman, President, and CEO, confirmed that the mid-single-digit guide accurately reflects end demand, as the destock cycle is over, and customers did not over-pivot to run inventories too low, thus no significant restock is expected. Regarding M&A, Bakker acknowledged that multiples have increased but returns remain strong due to higher growth rates and Hubbell's ability to achieve synergies. He stated that the pipeline is active, and current pricing is generally consistent with what has been observed, not necessarily higher or lower.

Tommy Moll asked for more details on the market conditions for Hubbell's electric distribution business, specifically regarding normalized channel inventories, and whether the mid-single digit growth guide for 2026 accurately reflects underlying demand or includes a restock component. He also inquired about the M&A pipeline, asking if acquiring companies at reasonable multiples despite impressive growth remains possible and how seller versus buyer expectations are trending.

Answer

Gerben Bakker, Chairman, President, and CEO, confirmed that the mid-single digit growth guide for electric distribution accurately reflects underlying demand, as the destocking phase is over, and customers did not over-pivot to excessively low inventories, thus no significant restock is expected. Regarding M&A, Mr. Bakker acknowledged that multiples have increased but returns remain good due to higher growth rates and synergies from bolt-on acquisitions that scale with Hubbell's portfolio. He noted that current multiples are generally consistent with recent pricing, and Hubbell remains disciplined in its approach.

Tommy Moll inquired if the reduction in organic revenue guidance for 2025 was entirely within the utility segment, and if the shape of the recovery, though shifted in timing, remained as expected, including for distribution. He also sought clarification on Hubbell's organic earnings algorithm for 2026, beyond the 4-6% top-line growth.

Answer

Bill Sperry, EVP and CFO, confirmed that both points regarding the utility segment's organic guidance reduction and the shifted but expected recovery shape were accurate. Gerben Bakker, Chairman, President, and CEO, added that distribution saw a good inflection in Q3, with the pace shifted. Sperry explained the organic earnings algorithm as 4-6% top-line growth with 25-30% incrementals, leading to high single-digit growth, buttressed inorganically to achieve double-digit mid-cycle sustainable earnings growth.

Tommy Moll from Stephens sought clarification on the utility segment's recovery pace, asking if the reduced organic guidance for the year was entirely within utility and if the recovery shape was as expected but timing shifted. He also inquired about the organic earnings algorithm for 2026, beyond the 4-6% top-line growth.

Answer

Bill Sperry (EVP and CFO, Hubbell Incorporated) confirmed that the reduced organic guidance was entirely within the utility segment, and the recovery shape was as expected, but timing shifted. Gerben Bakker (Chairman, President and CEO, Hubbell Incorporated) added that the pace for distribution also shifted. Sperry outlined the organic earnings algorithm as 4-6% top-line growth with 25-30% incrementals, leading to high single-digit growth, buttressed inorganically to reach double digits.

Inquired about the impact of copper and other commodity inflation on earnings and the company's hedging strategy. Also asked if the operational earnings outlook for the year has improved, stayed the same, or worsened, independent of accounting changes.

Answer

Management stated they use price as their primary hedge against commodity inflation and feel well-covered, not exposed. The new FIFO accounting provides more time to react to cost increases with pricing. Operationally, they are on track to meet their original goals, which is considered an accomplishment given they've had to overcome new tariff costs and a more challenging first-half volume environment.

Asked if the company could gauge the actual consumption or install rate of its products by VIP customers in 2024 to understand true demand. Also inquired about the M&A pipeline and the company's appetite for a rumored large transformer deal.

Answer

While not tracking at an SKU level, the company uses customer CapEx budgets and project plans to gauge demand, and noted that growth in the public power market in 2024 gives them confidence that install rates are growing. On M&A, they just closed a small bolt-on acquisition, the pipeline remains robust, and they declined to comment on specific rumors.

Tommy Moll asked about the HVAC content as a fraction of total data center spend, and whether that fraction is expected to be higher, lower, or the same in 2-4 years based on future designs. He also inquired about the residential pricing outlook for 2026, assuming incremental price realization, and Trane's pricing relative to competitors.

Answer

Dave Regnery, Chair and CEO, estimated the HVAC content fraction would likely remain about the same, but the power consumed by thermal management might decrease, allowing more power for computing. Chris Kuehn, Executive Vice President and CFO, stated the flat to down 5% residential outlook is primarily volume-driven, assuming some level of price (new increases or carryovers), but noted it's a rough estimate, possibly a modestly lower year for pricing, without commenting on competitor pricing or specific future plans.

Tommy Moll asked about the future HVAC content fraction in data centers (2-4 years out) and the potential trade-off between thermal management power consumption and computing power. He also followed up on residential pricing, asking if the flat to down 5% sales outlook assumes incremental price realization in 2026 and if Trane's pricing aligns with peers.

Answer

Dave Regnery believes the HVAC content fraction will likely remain about the same, but the power consumed by thermal management systems might decrease, allowing more power for computing. Chris Kuehn declined to comment on specific residential pricing plans but stated the flat to down 5% outlook assumes some level of price (new increases or carryovers), noting it's rough estimates, possibly a modestly lower year to flat on pricing, driven by volumes.

Tommy Moll inquired about residential pricing, referencing a previous quarter's discussion of a mid-single-digit list price increase yielding low single digits, and asked if this remains a reasonable expectation for the current year. He also sought clarification on the residential volume outlook, specifically whether the one-step channel is implied to be up for the full year, given that destocking is nearly complete, or if other headwinds are still anticipated.

Answer

Alok Maskara, CEO, confirmed that a mid-single-digit increase for new pricing remains a reasonable bogey, which, combined with carryover effects from the transition to R-454B (replacing R-410A), contributes to the overall mid-single-digit price mix in the guidance. For residential volumes, Alok Maskara stated that one-step is expected to be flattish to slightly up, while two-step will be down, particularly as two-step destocking continues into the second quarter. He noted that an early and hot start to summer could potentially alter this assumption for the two-step channel.

Tommy Moll from Stephens asked about Lennox's residential pricing strategy, specifically if a mid-single-digit list price increase yielding low single-digit actual price realization remains a valid expectation for the current year. He also probed into the residential volume outlook for the one-step channel, questioning whether it is expected to be up for the full year now that destocking headwinds are largely in the rearview mirror.

Answer

CEO Alok Maskara confirmed that a mid-single-digit new pricing bogey is reasonable, combined with a carryover effect from the R-454B mix shift from 2025, contributing to the overall mid-single-digit guide. Regarding one-step volumes, Alok Maskara indicated that it is expected to be flat to slightly up for the full year, outperforming the two-step channel, which is anticipated to be down due to destocking extending into Q2.

Tommy Moll asked for a more precise outlook on fourth-quarter HCS volumes, specifically direct versus two-step expectations, given differing prior-year comps. He also inquired about framing reasonable accretion expectations for the recent acquisition (Durodyne and SUPCO) in 2026.

Answer

CEO Alok Maskara explained that Q3 direct versus indirect performance was applied to Q4, implying two-step would decline more than one-step. He noted parts and accessories growing across both, more so in two-step, while one-step is impacted by weak residential new construction. October trends are close to expectations. CFO Michael Quenzer estimated accretion in the $0.30 to $0.40 range for 2026, pending final purchase price allocation, highlighting the acquired business's 25% EBITDA margins before amortization and expecting incremental EBITDA margin and top-line growth.

Tommy Moll requested a more precise outlook for Q4 HCS volumes, specifically regarding direct versus two-step expectations, given differing prior-year comps. He also asked for a framework on the potential accretion from the Durodyne and SUPCO acquisition in 2026.

Answer

CEO Alok Maskara stated that Q4 HCS direct versus two-step expectations are based on Q3 performance, implying a greater decline in two-step, with parts and accessories growing more in two-step. He noted that the one-step business is impacted by weak residential new construction. CFO Michael Quenzer estimated the Durodyne and SUPCO acquisition could be accretive by $0.30-$0.40 per share in 2026, with 25% EBITDA margins before amortization, contributing to top-line growth.

Tommy Moll from Stephens Inc. requested details on the withdrawal of the tariff-related surcharge and asked about future tariff risks. He also questioned the philosophy behind the EPS guidance raise, suggesting it might be conservative given strong Q2 results.

Answer

CEO Alok Maskara explained that the total tariff impact is now expected to be less than half of the initial $250M estimate due to mitigation efforts and lower-than-expected China tariffs, which allowed them to withdraw the majority of the related surcharge. On guidance, Maskara cited remaining market uncertainties (tariffs, RNC weakness) for maintaining a $1 EPS range, aiming for a balanced outlook. CFO Michael Quenzer added there is some conservatism in cost assumptions.

Tommy Moll inquired about the details and sizing of cost measures implemented in early fiscal Q2, asking if they were linked to the service model optimization or primarily aimed at the selling organization. He also sought comments on the expected seasonality for gross margin percentage and operating expenses for the remainder of the fiscal year.

Answer

Martina McIsaac, President and CEO, MSC Industrial, explained that the cost measures were part of the sales optimization program, extending principles from core selling roles to other customer-facing service roles, resulting in a headcount benefit in early Q2. Greg Clark, VP Finance and Corporate Controller, MSC Industrial, quantified that these actions would offset a large portion of the $4 million quarter-over-quarter headwind from merit increases. Greg Clark also suggested that Q2 gross margin would likely be at the upper end of the 40.8% plus or minus 20 basis points range, with potential upside in the back half depending on core customer acceleration and inflation. For OpEx, he advised modeling variable expenses with sales growth, noting expected productivity improvements and stronger incremental margins in the back half.

Tommy Moll asked for details on the cost measures implemented in early fiscal Q2, specifically if they were linked to the service model optimization or the selling organization, and inquired about the expected seasonality for gross margin percentage and operating expenses for the remainder of the fiscal year.

Answer

Martina McIsaac, President and CEO, explained that the cost measures were part of the sales optimization program, extending principles from core selling roles to other customer-facing and service roles, resulting in a headcount benefit in early Q2. Greg Clark, Interim Chief Financial Officer, quantified this by stating it would offset a large chunk of the $4 million quarter-over-quarter headwind from two extra months of merit. For gross margin, Greg suggested staying at 40.8% ± 20 basis points with potential upside in the back half, and for OpEx, to model normal variable expense with sales growth, noting expected productivity improvements and stronger incremental margins in the back half.

Tommy Moll inquired about the significant improvements in seller effectiveness KPIs, such as customer touches and sales per rep per day, asking about the drivers behind these inflections and the current stage of operational changes. He also sought to understand the broader macro environment by distinguishing between MSC Industrial Supply's self-help initiatives and external challenges, particularly given the national account data.

Answer

Martina McIsaac, President and COO, stated that the company is in the "third inning" of sales effectiveness, driven by a new sales management process, good territory design, and clear expectations. Erik Gershwind, CEO, described the macro environment as stable with pockets of improvement (e.g., aerospace) and stabilization (e.g., heavy equipment, agriculture), but also acute softness (e.g., heavy truck). He noted that core customer improvements are largely due to self-help initiatives like website upgrades and marketing, while national accounts are showing encouraging signs in September and October after Q4 softness. Ryan Mills, Head of IR, highlighted the core customer's five consecutive months of year-over-year growth as evidence of self-help.

Tommy Moll asked about the significant improvements in seller effectiveness KPIs, such as customer touches and sales per rep per day, seeking insight into the drivers behind these inflections and the current stage of operational changes. He also questioned how to differentiate between MSC Industrial Supply's self-help initiatives and broader macro trends, especially given national account performance.

Answer

Martina McIsaac, President and COO, indicated they are in "about the third inning" of operational changes, attributing improvements to a new sales management process, territory design, and performance assessment, enabling more effective customer coverage with fewer sellers. Erik Gershwind, CEO, described the macro environment as stable with pockets of improvement (e.g., heavy machinery, agriculture) and acute softness (e.g., heavy truck). He emphasized that core customer improvements are largely due to self-help initiatives like website upgrades and marketing, a point reinforced by Ryan Mills, Head of IR, citing five consecutive months of core customer growth despite a sub-50% MBI.

Tommy Moll from Stephens Inc. asked for more color on the nature of supplier price increases and sought a preliminary outlook for fiscal 2026 margins, including gross margin and OpEx drivers.

Answer

CEO Erik Gershwind explained that supplier price pressures have broadened from surgical tariff-related issues to more general inflation. For fiscal 2026, he cautiously projected revenue stabilization, stable gross margins, and moderating OpEx growth due to productivity efforts, suggesting a return to a more typical incremental margin profile.

Tommy Moll from Stephens Inc. asked for more detail on the nature of supplier price increases and sought a preliminary outlook for fiscal 2026 margins, focusing on gross margin and key OpEx drivers.

Answer

CEO Erik Gershwind described supplier discussions as fluid, noting that price pressures have broadened from surgical tariff-related issues to more general inflation. For fiscal 2026, Gershwind was cautious but outlined a path to more typical incremental margins, citing revenue stabilization, stable gross margins, and moderating OpEx growth driven by productivity initiatives and the leveling off of prior investments.

Tommy Moll asked about the data center market opportunity, including competitive dynamics, the size of the opportunity (referencing a $5 billion deficit), traction with different customer types, and the status of hyperscaler orders within the current backlog.

Answer

President and CEO Aaron Jagdfeld explained that the data center market presents a unique opportunity due to a structural supply deficit in backup power components. He noted productive conversations with hyperscalers, though no orders are currently in the backlog, and emphasized Generac's trusted brand and aggressive expansion plans, including increased CapEx and M&A exploration. He confirmed initial shipments have begun.

Tommy Moll asked about the data center market opportunity, including competitive dynamics, the size of the opportunity (previously framed at $5 billion deficit next year), traction with specific customer types, and the nature of conversations and orders with hyperscalers.

Answer

President and CEO Aaron Jagdfeld highlighted the unique opportunity due to a structural supply deficit in backup power for data centers. He noted no hyperscaler orders in the current backlog but productive conversations, with Generac working to be added to approved vendor lists. He emphasized Generac's trusted brand and aggressive expansion plans, including increased CapEx and M&A, with initial shipments already underway.

Tommy Moll of Stephens Inc. inquired about Generac's recent entry into the data center market, asking when revenues might become meaningful, if incumbent lead times remain extended, and what key learnings the company has gathered so far.

Answer

Chairman, President & CEO Aaron Jagdfeld described the data center opportunity as one of the largest in the company's history, with a global backlog already exceeding $150 million. He stated that revenue impact will be minimal in 2025 but a significant story for 2026. Jagdfeld highlighted a structural market deficit of roughly 5,000 generators for 2026, creating a rapid entry opportunity. He noted the company may need to make bold moves to add capacity for 2027 and beyond, potentially making the C&I segment larger than the rest of the company in the future.

Tommy Moll asked about the repair versus replace dynamic, noting non-equipment business trends were ahead of equipment. He inquired if price elasticity among homeowners was the simplest explanation. He also asked if Carrier's reported October distributor movement (down 30%) and expected November/December declines (mid-20%) were reasonable for Watsco's equipment business, clarifying if this referred to volumes or sales.

Answer

Paul Johnston (EVP, Watsco Inc) explained it's a 'repair and replace' market, with geographic differences (Sun Belt vs. North) and varying dealer behaviors. Aaron J. Nahmad (President, Watsco Inc) clarified non-equipment includes parts (8% of revenue) and supplies (over 20%), stating consumer spending on homes is a larger factor than parts substituting replacements. Albert Nahmad (Chairman and CEO, Watsco Inc) acknowledged 'some merit' to the softness. Paul Johnston (EVP, Watsco Inc) noted that last year's Q4 was inflated by 410A shipments, making current HRI data less indicative. Rick Gomez (VP of Corporate Development, Watsco Inc) clarified Carrier's figures were unit volumes. Aaron J. Nahmad (President, Watsco Inc) added that last year's Q4 unit volumes were up 15-20%, creating a tough comparable, and current noise is temporary. Rick Gomez (VP of Corporate Development, Watsco Inc) then discussed Watsco's control over customer service, margins, expenses, inventory, OEM partnerships, balance sheet, and technology amidst macro factors.

Tommy Moll asked about the repair versus replace dynamic, the performance of non-equipment business relative to equipment, and potential price elasticity among homeowners. He also inquired about Watsco's expectations for Q4 equipment business, referencing Carrier's reported distributor movement.

Answer

Paul Johnston (EVP, Watsco Inc) explained the repair and replace dynamic varies by dealer and geography. Aaron J. Nahmad (President, Watsco Inc) clarified non-equipment as parts and supplies, noting its limited impact on replacement market discussions and emphasizing consumer spending on homes. Albert Nahmad (Chairman and CEO, Watsco Inc) acknowledged Q4 softness. Rick Gomez (VP of Corporate Development, Watsco Inc) clarified that Carrier's reported declines were in unit volumes, not sales dollars, and highlighted Watsco's focus on controllable factors like customer service, margins, and technology amidst market volatility.

Tommy Moll of Stephens Inc. questioned the inventory investment for the A2L transition, asking if it was higher than planned and how it might trend. He also inquired about the current M&A environment and pipeline.

Answer

CEO Albert Nahmad confirmed inventory levels were higher than hoped due to soft demand but have already been reduced from a peak of $2 billion to $1.8 billion. On M&A, Nahmad expressed eagerness to acquire, noting the soft market may create opportunities and that a deal of size is 'under study.' President A.J. Nahmad affirmed they have the balance sheet to support ambitious acquisition plans.

Tommy Moll asked about the assumptions for year-end budget flush in Q4, seeking quantification of Elo's top-line contribution and the sequential organic growth. He also inquired about the forward visibility and pipeline for RFID, especially in light of recent high-profile announcements in the fresh category.

Answer

CFO Nathan Winters stated that the full-year organic growth rate remains consistent with prior guidance. For Q4, he noted that approximately 8.5 percentage points of the 9.5% growth guidance come from Elo, Photoneo, and favorable FX, with Elo contributing $100 million. This leaves organic demand flat year-on-year, with year-end spend expected at similar levels to the previous year. CEO Bill Burns highlighted strong double-digit RFID growth over several years, with a robust pipeline across retail, transportation & logistics, manufacturing, and government. He confirmed that new opportunities like fresh and grocery further drive demand, and customers continue to expand RFID use cases due to demonstrated value.

Tommy Moll asked for details on the Q4 budget flush assumption, specifically quantifying Elo's top-line contribution and the sequential quarter-over-quarter organic demand. He also inquired about the recent success in RFID, including a high-profile announcement in the fresh category, and if Zebra's business would benefit, seeking forward visibility and pipeline indicators for continued elevated growth rates.

Answer

CFO Nathan Winters stated that the Q4 guide includes $100 million from Elo, with overall organic demand expected to be flat year-on-year, excluding M&A, FX, and pricing. He noted that year-end spend is anticipated to be similar to last year. CEO Bill Burns confirmed strong double-digit RFID growth over several years, with a robust pipeline across retail, transportation & logistics, manufacturing, and government. He highlighted new opportunities in grocery (fresh category), quick-serve restaurants, and healthcare, driven by expanded use cases and Zebra's comprehensive RFID solutions.

Tommy Moll sought clarification on the 'balanced' second-half outlook, asking about the underlying assumptions for large deal conversions and what was observed in Q2. He also questioned the strategic thinking behind acquiring Elo and moving more into consumer-facing markets.

Answer

CEO Bill Burns reiterated that the outlook is balanced, factoring in some year-end spending at similar levels to last year, while acknowledging softness in Europe. He explained the Elo acquisition extends Zebra's strategy into the consumer-facing side of retail and other verticals, driven by customer demand for a unified Android platform across mobile and fixed devices for use cases like self-service checkout, kiosks, and in-store media networks.

Tommy Moll asked for more insight into the utility business, specifically the performance of the public power segment versus investor-owned utilities (IOUs), and questioned the visibility and metrics supporting the significant increase in the full-year data center growth outlook from 20% to 40%.

Answer

Chairman, President & CEO John Engel detailed that while IOUs returned to growth, public power customers are lagging due to a slower destocking cycle but are expected to recover in the second half. Regarding data centers, Engel emphasized WESCO's outstanding visibility, which stems from direct end-user relationships, shared customer build schedules, a record backlog up 36% year-over-year, and an expanding scope of supply driven by AI applications.

Tommy Moll of Stephens Inc. inquired about the outlook for the third quarter, asking for specifics on July's daily sales pacing and whether to expect any significant changes to the consolidated EBITDA margin compared to the second quarter's performance. He also requested an operational update on the Canadian branch consolidation.

Answer

EVP & CFO Ron Knutson responded that July's sales trends were consistent with Q2. He noted that while Jexpro Services faces tougher comps in the second half, Lawson Products has easier ones, creating a netting effect. Knutson stated there were no unusual items in Q2's margin but reminded that Q4 typically sees some compression from fewer selling days. Regarding Canada, he confirmed they are early in the process of consolidating six locations, with four slated for 2025, and that the process is proceeding well without major disruptions. He also highlighted the strong standalone performance of Bolt Supply, which achieved nearly 16% EBITDA margins.

Tommy Moll of Stephens Inc. asked for guidance on third-quarter performance, including July's daily sales pacing and the consolidated EBITDA margin outlook. He also requested an operational update on the Canadian branch consolidation.

Answer

EVP & CFO Ron Knutson responded that July's sales trends were consistent with Q2, noting that while Jexpro faces tougher comps in the second half, Lawson has easier ones. He stated there were no unusual items affecting Q2 margins that would impact the rest of the year, but pointed out Q4 has fewer selling days. Regarding Canada, Knutson confirmed that four of six planned facility consolidations are in process for 2025 and that the company is realizing its underwritten gross margin expansion goals.

Tommy Moll of Stephens Inc. sought clarification on the Q4 outlook, asking if the guided high single-digit sequential revenue decline should be based on the Q3 guidance that includes or excludes the one-time benefit. He also asked about the planning cycle and visibility for the logistics business into next year.

Answer

CFO Dennis Fehr clarified that the Q4 seasonal decline guidance should be applied to the Q3 revenue guidance that *excludes* the one-time benefit. CEO Matt Moschner explained that while Cognex has multi-year discussions with logistics customers, firm orders typically fall within a 3-to-6-month visibility window once CapEx is approved, a trend he sees as stable.

Tommy Moll of Stephens Inc. asked for more insight into the upcoming enhancements for fastenal.com aimed at capturing spot-buy purchases and how competitors are responding to Fastenal's market share gains.

Answer

CEO Daniel Florness detailed the significant opportunity in capturing spot-buy business from existing large accounts and smaller customers through an improved e-commerce platform, aiming to stabilize and grow the under-$5k customer segment. President & CSO Jeffery Watts noted that competitors find it difficult to match Fastenal's global footprint and integrated supply chain solutions, which provides a competitive advantage, especially during times of uncertainty like the current tariff environment.