Tomohiko Sano

Tomohiko Sano of JPMorgan Chase & Co. requested more color on pricing power in the stable commercial reroofing market versus other segments and sought clarification on the full-year EPS outlook, noting a more tempered tone.

Answer

CFO Kevin Zdimal explained that pricing for innovation is based on the value delivered, such as labor or energy savings. CEO D. Christian Koch added that the 'Carlisle Experience' reinforces this value, helping maintain price. Regarding the outlook, Zdimal confirmed that while the forecast is lower than the previous double-digit growth expectation, the company still anticipates achieving a record EPS year in 2025.

Tomohiko Sano with JPMorgan Chase & Co. asked about the revised CapEx guidance, specifically inquiring about the items that were adjusted for the full year compared to three months prior. Sano also asked about A. O. Smith's capital allocation priorities going forward, particularly in a persistent macro headwind environment, focusing on buybacks, dividends, and acquisitions.

Answer

Stephen Shafer, Chief Executive Officer, explained that the CapEx outlook was slightly lowered due to pushing out some planned Q4 investments into early next year, partly related to prudence around DOE commercial regulatory initiatives. Charles Lauber, Chief Financial Officer, emphasized the importance of the dividend, the strategy of using buybacks to manage cash levels while reserving firepower for acquisitions, and the continued focus on deploying capital to strengthen the resilient core business and explore higher-growth adjacencies.

Tomohiko Sano asked about the revised CapEx guidance, specifically what items were adjusted for the full year. He also inquired about A. O. Smith's capital allocation priorities going forward, particularly if macro headwinds persist.

Answer

Stephen Shafer, CEO, explained that the CapEx outlook was slightly lowered due to pushing out some Q4 investments into early next year, partly related to prudence around DOE commercial regulatory initiatives. Charles Lauber, CFO, emphasized the importance of the dividend, which has been raised for 32 years. He stated that buybacks are framed to not grow cash while reserving firepower for strategic acquisitions that meet their criteria. Stephen Shafer added that they continue to deploy capital to their resilient core business while also seeking adjacencies for higher growth.

Tomohiko Sano asked for clarification on the EBITDA margin pressure, specifically detailing the timing-related cost headwinds from higher incentive compensation and medical costs, and their expected trend into Q4 and 2026. He also inquired about macro and market trends for education, healthcare, and data centers.

Answer

CFO Chris Calzaretta attributed higher SG&A to incentive compensation due to strong financial performance, noting it's not a go-forward run rate. He explained medical costs were an atypical Q3 spike from high-cost claims, not expected to recur. CEO Vic Grizzle added that education and healthcare segments remain stable, with healthcare slightly positive, and the data center market continues to be robust.

Tomohiko Sano inquired about the EBITDA margin pressure, specifically the timing-related cost headwinds such as higher incentive compensation and medical costs, and how these are expected to trend in Q4 2025 and into 2026. He also asked for an update on macro and market trends for education, healthcare, and data centers for Q4 2025 and 2026.

Answer

CFO Chris Calzaretta clarified that higher SG&A in the Mineral Fiber segment was due to increased incentive compensation, reflecting strong year-to-date financial performance and an updated full-year outlook, and is not indicative of future quarterly run rates. He added that higher medical costs were due to an atypical uptick in high-cost claims in Q3, which is not expected to recur. CEO Vic Grizzle stated that education and healthcare segments remain stabilized, with healthcare showing slightly positive trends. He confirmed that the data center opportunity continues to be robust, supported by new product launches.

Tomohiko Sano asked about the financial contribution of the Temploc product to Mineral Fiber sales and AUV, and its potential for future acceleration. He also inquired about the evolution of the Canopy e-commerce platform and any plans to expand its product offerings.

Answer

CEO Vic Grizzle stated that while Temploc's current sales impact is minimal due to being in the early stages of market development, key building blocks like inclusion in IES software and IRA tax credits are in place for future growth. He added that the Canopy platform is successfully reaching smaller customers and is becoming increasingly profitable, with plans to continue expanding its portfolio.

Tomohiko Sano asked for more color on the outlook for utility segment pricing trends, considering capacity expansions by both Valmont and competitors. He also inquired whether the $11 million bad debt expense in agriculture margins was expected to continue in Q4 and beyond.

Answer

EVP and CFO Tom Liguori stated that the pricing outlook for the utility segment remains strong due to a tight demand-supply balance in the bid market, healthy margins on winning projects, and ongoing tariff mitigation pricing. Regarding agriculture margins, he explained that the $11 million bad debt expense was a prudent reserve for Brazil exposures, indicating that Q4 might still be challenging but expressing confidence that issues would be resolved by Q1, leading to double-digit operating margins.

Tomohiko Sano requested more insight into the outlook for utility segment pricing trends, considering Valmont's and competitors' capacity expansions, and how pricing might evolve for 2026 and beyond.

Answer

Tom Liguori, EVP and CFO, explained that current favorable pricing is partly due to Q1 tariff mitigation plans, with a strong bid market and tight demand-supply dynamics supporting healthy margins. He anticipates the pricing outlook to remain strong for the foreseeable future.

Tomohiko Sano from JPMorgan Chase & Co. asked for color on the drivers of sustained double-digit inspection growth, the impact of technology and AI on margins, and progress with digital strategies internationally.

Answer

EVP & CFO David Jackola noted that low-to-mid single-digit pricing contributes to growth. President and CEO Russ Becker added that technology and AI are expected to provide SG&A leverage over time, though efforts are in the 'first inning.' Regarding international digital strategies like Chubb Vision, he stated it's in its infancy but represents a tremendous opportunity given the company's 50 million connected devices.

Tomohiko Sano of JPMorgan Chase & Co. asked about the outlook for the International business in the second half, given the volume decline in Q2, and how the company expects to achieve its full-year flat organic growth forecast. He also inquired about the margin impact of recent acquisitions in the segment and the expected margin levels into 2026.

Answer

SVP & CFO Mike Wagnes noted that the fourth quarter is seasonally the strongest for the International business and reiterated the full-year outlook for roughly flat organic performance. He highlighted that the Elletech acquisition is margin accretive, with margins in the mid-20s percent range, and that M&A in the segment should be viewed as accretive to the overall International margin rate.