Walter Liptak

Walter Liptak asked about the timing of cash out for the significant CapEx, including potential pluses and minuses for completing the spending this year. He also inquired whether the new capacity additions are primarily to meet hyperscaler demand or to provide room for future growth, and if a 'phase 2' of data center HVAC build-out might be necessary after this round of CapEx.

Answer

Gene Lowe, President and CEO, stated that the plan is to meet the CapEx guidance for the year, with any shifts likely related to equipment delivery timing. He noted that the $700 million in new capacity, comprising $550 million for data centers and $150 million for custom air handling (predominantly Ingénia), provides runway for the next couple of years. He does not see an imminent need for further CapEx over the next few years but would evaluate opportunities if there's excessive growth in demand, expressing confidence in the current expansion's flexibility.

Walter Liptak inquired about the timing of cash out for data center CapEx, including potential pluses and minuses for completing capital spending this year. He also asked if the current capacity additions are solely to meet existing hyperscaler demand or if they provide room for future growth, and if a 'phase 2' of data center HVAC build-out might be necessary after this round of CapEx.

Answer

President and CEO Gene Lowe stated that the plan is to meet the CapEx guidance for the year, with any shifts likely related to equipment delivery timing. He explained that the $700 million in new capacity, comprising $550 million for data centers and $150 million for custom air handling, provides significant runway for the next couple of years. Mr. Lowe indicated that while there's no imminent need for a 'phase 2' expansion, SPX would evaluate opportunities if there's an excessive acceleration in demand, emphasizing the flexibility provided by the current expansion.

Walter Liptak of Seaport Research Partners asked about the price-cost dynamics and margin outlook for the HVAC and D&M segments in the second half of the year, as well as the company's current capacity for M&A.

Answer

CFO Mark Carano noted that HVAC growth is roughly one-third price and two-thirds volume. He stated that implied D&M margins for the second half are expected to be lower due to the back-half weighted impact of tariffs and investments in new products. Carano confirmed SPX has 'plenty of firepower' for M&A, with about half of its $1 billion credit facility available.

Walter Liptak of Seaport Research Partners asked about the order cadence for the HVAC segment's data center and healthcare end markets and the typical timing for boiler inventory build-up. He also inquired about recent performance and visibility in the Aids to Navigation (AtoN) business.

Answer

CEO Eugene Lowe confirmed strong order trends for data centers, healthcare (notably Ingenia), and institutional markets, with some projects booking into 2026. Executive Paul Clegg explained that boiler orders, typically starting in September, were delayed due to warm weather and normalized lead times, but this is factored into the Q4 guide. Lowe added that the AtoN business has had a very good year in both revenue and margin growth, with no signs of a slowdown.

Walter Liptak inquired whether the $30 million in sales synergies for 2025 met expectations and asked for guidance or expectations for sales synergies in 2026.

Answer

CEO Brian Deck confirmed that the benefits of revenue synergies accelerated through 2025, with $30 million realized, approximately half of which occurred in the fourth quarter. He stated that these synergies are expected to convert to revenue in 2026 and that the company is ahead of pace on its original target of $75 million in cumulative revenue synergies by 2027, with a new target to be provided at the upcoming Investor Day.

Walter Liptak asked if the $30 million in sales synergies for 2025 met expectations and inquired about the guidance or expectations for sales synergies in 2026.

Answer

CEO Brian Deck confirmed that the $30 million in revenue synergies for 2025, with approximately half realized in Q4, was ahead of pace for the original $75 million cumulative target by 2027. He stated that these orders would convert to revenue in 2026 and that new synergy targets would be provided at the upcoming Investor Day.

Walter Liptak of Seaport Research Partners followed up on aftermarket competition, asking how European competitors typically compete (quality vs. pricing) and if there have been significant market changes. He also requested more details on the project funnel in recycling, waste management, and data center construction, specifically focusing on Kadant's involvement in the data center sector.

Answer

Jeff Powell, President and CEO, reiterated that competitors primarily use price undercutting to gain market share, as Kadant maintains strong product quality and service. He emphasized Kadant's value proposition through technical services and total cost of ownership, which helps defend its market position. Regarding data centers, Mr. Powell explained that the booming construction of these massive facilities drives demand for materials like aggregate, sand, concrete, copper, and aluminum. Kadant's material handling group supports the processing of these natural resources, from mining to screening, which are integral to building such large structures.

Walter Liptak followed up on aftermarket competition from Europe, asking about their competitive strategy (quality vs. pricing). He also inquired about the project funnel in recycling, waste, and specifically data center construction.

Answer

Jeff Powell, President and CEO, Kadant, explained that competitors typically undercut on price, but Kadant maintains strong customer relationships through total cost of ownership and technical services. He highlighted that data center construction drives demand for materials processed by Kadant's material handling group, such as aggregates, sand, concrete, copper, and aluminum.

Walter Liptak of Seaport Research Partners inquired about the primary drivers for the second-quarter results exceeding the company's guidance. He asked whether the notable strength in the parts and consumables business was attributable to broader market trends or specific company initiatives driving market share gains. Finally, he questioned if the third-quarter forecast assumes any significant deceleration in parts sales beyond typical summer seasonality.

Answer

EVP & CFO Michael McKenney explained that the beat was primarily driven by stronger-than-forecasted revenue from parts and consumables, which in turn led to a favorable product mix and higher gross margins. President & CEO Jeffrey Powell attributed this strength to a combination of factors: a key strategic focus on the aftermarket and an aging installed base that requires more maintenance due to deferred capital investments over the past two years. McKenney clarified that the Q3 forecast includes only a very modest, seasonal slowdown in parts sales, mainly due to summer vacation schedules, particularly in Europe.

Walter Liptak of Seaport Research Partners sought clarification on the $5-6 million tariff impact, asking if it represents costs the company must absorb or if it will be passed on to customers. He also inquired about the timeline for achieving tariff price-cost neutrality and whether the back-half guidance is contingent on securing new project awards in the second quarter.

Answer

Executive Michael McKenney explained that the $5-6 million figure is the estimated direct material cost from tariffs that cannot be mitigated in the near term. He noted that while the company is using levers like surcharges, these measures are not instantaneous. The ultimate goal is to achieve cost neutrality, but the outcome is uncertain. McKenney confirmed that the back-half guidance depends on securing capital orders in Q2 and Q3, acknowledging the risk that delays could shift revenue into 2026.

Walter Liptak sought more detail on the Industrial Processing segment, asking about the booking mix between capital and aftermarket in the quarter and the key drivers for wood processing, such as housing or interest rates. He also requested an update on business trends in Asia and China.

Answer

Michael McKenney, Executive, confirmed there was decent capital activity in the quarter, particularly in stock prep. Jeffrey Powell, President and CEO, emphasized that a recovery in housing starts, which are near a 30-year low, is a critical driver for the broader economy and Kadant's business. He described the industrial side in China as 'very slow' and noted that Europe remains sluggish, with Germany in particular struggling.

Walter Liptak from Seaport Research asked about the Advanced Technology Solutions (ATS) segment, comparing current data center build-out cycles for advanced chips to prior consumer electronics lead cycles. He sought to understand differences in visibility, capacity insights, and order lead times. He also asked if Nordson is gaining market share, inquiring about a quantifiable "win rate" for its Advanced Electronics offerings.

Answer

Sundaram Nagarajan, President and CEO, explained that order lead times are similar, but the amplitude of the cycle is dampened compared to prior consumer electronics cycles. He highlighted Nordson's improved on-time delivery capabilities (low 90s, targeting 95%) and strategically relocated capacity closer to customers as game-changers. Daniel Hopgood, EVP and CFO, added that the majority of backlog turns quickly, indicating current demand, and robust pipelines provide insight into new projects. Sundaram Nagarajan stated that Nordson does not share win rates externally but believes the company is being rewarded for its focus on innovation, delivery, quality, and market presence.

Walter Liptak asked about the differences in visibility and order lead times for the ATS segment between prior consumer electronics cycles and the current data center build-out for advanced chips. He also inquired about Nordson's 'win rate' in Advanced Electronics, seeking to quantify any market share gains from quick delivery.

Answer

Sundaram Nagarajan, President and CEO, explained that order lead times are similar, but the amplitude of the cycle is dampened. He highlighted advantages from capacity relocation closer to customers and improved on-time delivery (low 90s, marching to 95%) through NBS Next. Daniel Hopgood, EVP and CFO, added that backlog turns quickly, indicating current demand. Sundaram stated they do not share win rates externally but are focused on innovation, delivery, quality, and meeting customer needs, which they believe is being rewarded in the market.

Walter Liptak congratulated the company on five years of NBS Next and asked for reflections on its best and toughest aspects, its growth focus, and what to expect over the next five years. He also inquired about the current state of operational EBITDA within NBS Next and future profitability drivers.

Answer

CEO Sundaram Nagarajan stated that NBS Next was structured for growth, starting with strategic discipline and segmentation, and is about halfway to full effectiveness. He noted that the framework has driven EBITDA margin expansion from 27% to 32% over five years, with current focus on commercial excellence. CFO Daniel Hopgood added that future margin enhancement will primarily come from effective organizational growth, leading to natural margin accretion over time, with a long-term average incremental EBITDA margin of 35% as a target.

Walter Liptak from Seaport Research congratulated Sundaram Nagarajan on five years of NBS Next and asked for reflections on its best and toughest aspects, its growth focus, and expectations for the next five years. He also inquired about the current stage of profitability from the operational EBITDA part of NBS Next.

Answer

Sundaram Nagarajan, President and CEO, highlighted strategic discipline and segmentation as key successes of NBS Next, driving growth and operational excellence, with commercial excellence being the current focus area. He noted the framework is 'halfway there' in terms of effectiveness. Daniel Hopgood, Executive Vice President and CFO, stated that future margin enhancement will primarily come from effective growth, leading to natural margin accretion over time, with a long-term average incremental EBITDA margin of 35% implying continued margin expansion.

Walter S. Liptak from Seaport Research Partners asked about the impact of AI-driven product redesigns by customers and inquired about the quote-to-order cycle in the Industrial Precision Solutions (IPS) segment, specifically if customers were lifting capital spending pauses.

Answer

President & CEO Sundaram Nagarajan responded that AI's impact is in very early stages but that Nordson is exploring its potential. Regarding the IPS segment, he noted that while most of the business sees good order flow, larger system orders in plastics processing and industrial coatings are still seeing customer delays. EVP & CFO Daniel Hopgood added that the plastics business appears to have hit its trough and is showing signs of recovery in activity.

Walter Liptak from Seaport Research Partners sought clarification on a 5% growth figure mentioned for the ATS segment, asking if it was a second-half forecast or a through-cycle expectation. He also asked about recent price increases and whether the company still anticipates full-year sales to be at the low end of its guidance range.

Answer

President and CEO Sundaram Nagarajan clarified the 5% growth for ATS is a 'through the cycle' expectation, not a specific forecast for the second half. Executive VP & CFO Daniel Hopgood described pricing as a regular business process, though some recent actions were to pass on tariff-related costs. Regarding guidance, Mr. Hopgood stated that the Q3 forecast is consistent with full-year expectations, but it is too early to definitively call Q4 and the full year due to macroeconomic and trade policy uncertainties.

Walter Liptak requested clarification on the segment-level assumptions within the full-year sales guidance and asked for more detail on the Industrial Precision Solutions (IPS) segment, particularly the 'green shoots' in the ARAG agriculture business and trends in other industrial sectors.

Answer

CFO Daniel Hopgood reiterated the guidance assumptions, with the low end reflecting modest recovery and the high end a stronger, more broad-based recovery. He noted the ARAG business has stabilized, is seeing order recovery, and should return to growth in Q2. CEO Sundaram Nagarajan added color on IPS, highlighting new product launches, strong performance in nonwovens, and steady results in packaging, with order entry up across the entire segment.

Walter Liptak asked when the company would have clarity on whether a market recovery is materializing, the cause of customer hesitancy, and the long-term EBITDA margin potential for the ATS segment.

Answer

CFO Daniel Hopgood responded that they will have a better view of the second half of the year after Q1 and Q2 play out, noting current customer investments are 'guarded.' CEO Sundaram Nagarajan attributed customer hesitancy to the broad macro and geopolitical uncertainty. Regarding ATS, he stated that the current 27% EBITDA margin is 'best in class' and the focus is on top-line growth rather than further margin expansion, given the segment's high R&D needs.

Walter Liptak asked about the current stage of Franklin Electric's 80/20 implementation, which segments have seen the most work, and the future focus. He also sought clarification on the fueling outlook, specifically regarding above-ground versus below-ground growth, given a competitor's higher growth projections.

Answer

CEO Joe Ruzynski stated the Water Systems business is in the 'first three innings' of 80/20, focusing on SKU rationalization and leveraging new products for portfolio cleanup. CFO Jennifer Wolfenbarger added that Distribution has made significant progress in tail rationalization and supplier negotiation. For fueling, Joe Ruzynski noted positive build schedules, strong international and U.S. markets, and mid-single-digit growth, expecting above-ground products and the grid business to be stronger.

Walter Liptak asked about the company's ongoing 80/20 initiatives, specifically which segments have seen the most work, what 'inning' the company is in, and the future focus. He also inquired about the fueling outlook, comparing it to competitors' higher growth rates, and asked for a breakdown of above-ground versus below-ground project timing and visibility.

Answer

CEO Joe Ruzynski stated that most 80/20 opportunities exist in the Water Systems business, where they are in the 'first three innings,' focusing on streamlining the portfolio, reducing SKUs, and using new product launches to clean up legacy offerings. CFO Jennifer Wolfenbarger added that Distribution has also made great progress with 80/20, including T-rationalization and improved buying. Mr. Ruzynski further noted a two-year effort in Distribution to normalize part numbers for inventory and supplier negotiation benefits. For fueling, Mr. Ruzynski indicated a positive build schedule for major partners, expecting another strong year with mid-single-digit growth. He noted that above-ground fueling products are likely to be a bit stronger, alongside growth in the small grid business.

Walter Liptak asked for a detailed breakdown of the Distribution business's 8.3% operating margin, including the impact of cost structure improvements and mix. He also inquired about the expected profit growth for this segment in 2026, even with a flat market, and the financial implications (accretive status, costs) of the new factory expansion in Izmir, Turkey.

Answer

CEO Joe Ruzynski highlighted a clear focus on managing input costs, strategic contracts, streamlining back-office operations, and leveraging technology for efficiency in the Distribution business, expecting continued profit and volume growth in 2026. CFO Jennifer Wolfenbarger credited the Distribution teams for significant margin and structural cost improvements, including better buying, spending, and SKU rationalization. Joe Ruzynski added that the Izmir factory is expected to start production in Q1, with initial ramp-up costs but a quick return to normalized margins due to its co-located campus.

Walter Liptak of Seaport Research asked about the factors driving the strong 8.3% margin in Franklin Electric's distribution business, including cost structure improvements and mix. He also inquired about profit growth expectations for this segment in 2026 and the financial implications (accretion or costs) of the new İzmir, Turkey factory expansion.

Answer

CEO Joe Ruzynski and CFO Jennifer Wolfenbarger attributed the distribution margin improvement to strategic input cost management, supply chain streamlining, back-office efficiency, and technology leverage, along with SKU rationalization and strategic pricing. They expect continued profit growth in this business for 2026, even with less market tailwind. CEO Joe Ruzynski stated that the İzmir factory is expected to start production in Q1 2026, with some ramp-up costs in the first half but aiming for normalized margins by the back half, with no significant impact to model.

Walter Liptak of Seaport Research Partners inquired about the specifics of the company's supply chain exposure to China, its ability to pass on tariff-related costs, and the drivers behind the strength in the residential water market.

Answer

CEO Joseph Ruzynski explained that direct COGS from China is under 10% and the company is mitigating this exposure through inventory management, supply chain adjustments, and leveraging new manufacturing capacity from acquisitions. He confirmed the ability to pass on costs. Ruzynski attributed the strength in the residential segment to market share gains rather than housing market trends and noted that the positive momentum continued into April, supported by a favorable weather outlook for the groundwater business.

Walter Liptak followed up on the M&A discussion, asking about the potential for transformational deals, the company's maximum debt tolerance, and the expected operating leverage and productivity benefits in 2025 from recent restructuring actions.

Answer

CEO Joseph Ruzynski confirmed the company is prepared to execute a larger, transformational deal if the right opportunity arises, noting that market valuations are normalizing. CFO Jeffery Taylor stated the company has about $1 billion in capacity and would be comfortable with leverage up to 3.0x for a strategic acquisition, with a plan to de-lever quickly. Taylor also estimated that productivity efforts would yield 20-50 basis points of margin improvement in 2025.

Walter Liptak of Seaport Research Partners asked for more detail on the Fueling business outlook, including the U.S. versus international view and risks like labor constraints. He also requested color on the planned $3-5M restructuring and the impact of recent hurricanes.

Answer

CEO Joseph Ruzynski noted that the U.S. Fueling business has been stable, with cautious optimism for 2025 as labor constraints and interest rate pressures may temper. He highlighted growth opportunities in Mexico and India. Executive Jeffery Taylor explained the restructuring is a work in progress focused on reducing discretionary costs, optimizing the company's footprint, and finding structural improvements. Ruzynski clarified that the Q3 hurricane impact was not material, though it may cause some project delays into Q4.

Walter Liptak asked about the delta between the $100 million incremental revenue from acquisitions in 2025 and the $8 million in profits, seeking clarity on how much revenue would come through with normalized profit in 2026. He also requested a summary of the potential positives and negatives for 2026, including factors like lower mortgage rates, factory CapEx projects, and the impact of tariffs.

Answer

CFO David Lowe stated that full-year revenue from acquisitions (Corob, Color Service, Radia) is expected to be about $190 million in 2026. President and CEO Mark Sheahan added that the margins from these acquisitions are expected to be typical or in line with overall segment profitability, with Corob's impact fully integrated. For 2026 outlook, David Lowe cited lower mortgage rates, new product launches, and ROI generation as potential positives. He mentioned the unpredictable trade environment (tariffs) and potential armed conflict as negatives, but noted Graco's nimbleness and past price adjustments for tariffs. Mark Sheahan confirmed tariffs are covered by pricing actions and not expected to be a headwind for 2026, emphasizing Graco's ability to navigate uncertain markets.

Walter Liptak from Seaport Research inquired about the profit conversion from the $100 million incremental acquisition revenue in 2025, asking how much of the projected $190 million acquisition revenue in 2026 would come through with normalized profit. He also sought Graco's perspective on potential positives and negatives for 2026, including factors like mortgage rates, CapEx projects, and tariffs.

Answer

CFO David Lowe and President and CEO Mark Sheahan stated that the $190 million full-year acquisition revenue for 2026 (from COROB, Color Service, and Radia) is expected to yield typical margins, aligning with existing segment profitability. For 2026, they highlighted lower mortgage rates, new product launches, and strong ROI from equipment as positives, while noting that tariffs, addressed by 2025 pricing actions, are not expected to be a headwind, and geopolitical events remain an unpredictable factor.

Walter Liptak inquired about the potential for capital projects in the industrial segment to be released in 2026 and whether the 'One Graco' strategy could contribute an additional percentage of organic growth. He also asked whether the 'One Graco' initiative's benefits in 2026 would be more pronounced in top-line growth or profit improvement.

Answer

CEO Mark Sheahan affirmed that the 'One Graco' initiative is definitely aimed at translating into growth beyond what the old regime would have achieved, though he didn't quantify it as a specific percentage. CFO David Lowe noted good quotation activity in traditional Graco markets like farm and construction equipment, consistent automotive investments, and intriguing investment possibilities in commercial aerospace for the coming year, while acknowledging softness in construction-related industrial markets. Mark Sheahan concluded that if volume on the top line can be achieved, it would be the most significant benefit for 2026.

Walter Liptak asked about the 2026 outlook for industrial capital projects, specifically if quote activity indicated potential project releases. He also inquired if 'One Graco' strategic changes could add a percentage point of organic growth in 2026, and whether profit or top-line benefits would be more significant from this initiative.

Answer

CEO Mark Sheahan affirmed 'One Graco' is driving for growth, expecting channel partners to sell more. CFO David Lowe noted good quotation activity in traditional markets like farm and construction equipment, consistent automotive investments, and intriguing commercial aerospace possibilities, despite softness in construction-related industrial markets. He reiterated the 'underbuilt' housing premise. Mark Sheahan concluded that achieving top-line volume would be the most beneficial component of 'One Graco.'

Walter Liptak of Seaport Research Partners asked for clarification on the drivers behind the quarter's operating expense reduction, questioning if it was sustainable and tied to the One Graco initiative.

Answer

President and CEO Mark Sheahan confirmed they are on track for their full-year expense reduction goal. He elaborated that the One Graco initiative is a multifaceted strategy focused on long-term efficiency and customer experience improvements—such as consolidating operations and simplifying customer contact—rather than just short-term cost cuts, with positive results already showing in feedback and cash flow.

Walter Liptak of Seaport Research Partners asked for more detail on the sustainability of cost savings from the One Graco initiative, highlighting that operating expenses fell more than organic sales.

Answer

CEO Mark Sheahan confirmed Graco is on track for its full-year expense reduction target. He stressed that the primary goal of One Graco is improving efficiency and the customer experience, not just cost-cutting. He pointed to positive distributor feedback, operational streamlining like a facility closure, and improved inventory management as sustainable, multifaceted benefits of the initiative.

Walter Liptak from Seaport Research Partners asked about the Contractor business trend in Asia and its potential tariff exposure. He also inquired about the timeline and confidence level for making long-term mitigation investments like reshoring or vertical integration.

Answer

Executive Mark Sheahan clarified that Contractor growth in Asia Pacific was driven by Australia and New Zealand, which offset a sluggish China. Regarding long-term strategy, he highlighted Graco's existing U.S. manufacturing base as a key advantage and mentioned exploring greater use of its China factory for the local region. He stated the company is hopeful for a de-escalation in the tariff situation, which would influence the timing and scope of any major strategic shifts in its supply chain.

Walter Liptak from Seaport Research followed up on China, asking about the catalysts for a recovery. He also asked about the potential growth rate for the new Expansion Markets segment and whether the restructuring could lead to divestitures.

Answer

Executive Mark Sheahan attributed China's weakness to significant overcapacity built up in key markets like auto, battery, and solar, suggesting a recovery will take time. Executive David Lowe added that the construction sector downturn there could be prolonged. For the new Expansion Markets segment, Sheahan stated its organic growth would be similar to Graco's overall rate, with the real opportunity lying in future inorganic growth. He concluded that the company likes its current portfolio and has no obvious divestiture plans.

Walter Liptak asked whether the increased penetration and strong performance in HVAC refrigerant containers represent a one-year bump or a sustainable growth trend. He also sought a detailed understanding of the company's seasonality, particularly for the fall and winter periods, and the lead-up to the spring selling season, including inventory lifts and indications from large customers in both consumer and building products.

Answer

Joseph Hayek (President, CEO & Director) indicated that the growth in HVAC refrigerant containers is likely more sustainable than a one-year bump, driven by ongoing mandates for environmentally friendly gases and Worthington's ability to meet demand. Colin Souza (VP & CFO) and Joseph Hayek explained that Q1 and Q2 are typically seasonally weaker than Q3 and Q4, with variations depending on weather events, and that seasonality varies across different product categories.

Walter Liptak from Seaport Research Partners asked for specifics on the tariff impact within the Building Products segment and whether the company was gaining market share. He also inquired about the drivers of the favorable product mix in the Consumer Products segment and asked CEO Joe Hayek about his primary objectives for the upcoming fiscal year.

Answer

CEO Joseph Hayek stated it was difficult to quantify the tariff impact but noted the company is seeing strength in cooling and construction and that its domestic manufacturing and tight supply chain are likely contributing to market share gains. CFO Colin Souza attributed the positive consumer mix to strong performance in Balloon Time, driven by new products and channel expansion. For his objectives, Hayek highlighted leveraging the company's culture to invest in automation, AI, and strategic M&A, with a focus on elevating spaces and experiences for customers to drive long-term growth.

Walter Liptak asked for quantification of the impact of new product initiatives like the Balloon Time mini tank. He also inquired about the next positive catalyst for the consumer business with large chains and the status of the recently launched 80/20 initiative in the water business.

Answer

CEO Joseph Hayek explained that while the specific new products are incremental and not yet material, they are part of a disciplined innovation process driven by the Worthington Business System and customer collaboration. CFO Colin Souza and Hayek noted that for the consumer business, demand is healthy, retail inventory levels are appropriate, and point-of-sale is tracking well. Hayek added that the exit of Party City has shifted some demand to retailers that carry Worthington's products. Regarding the 80/20 initiative, Souza and Hayek confirmed it was just kicked off in the water business in Q4 and they are excited about its potential to improve that business and be replicated elsewhere.

Walter Liptak from Seaport Research Partners inquired about the capital allocation strategy, specifically the pace of share buybacks and the M&A pipeline for Commercial Foodservice. He also asked about the drivers behind delayed equipment replacements and when pent-up demand might return.

Answer

CEO Timothy FitzGerald confirmed that share buybacks will continue but were intentionally front-loaded, and that the M&A focus remains on Food Processing. CCO Steve Spittle explained that the equipment replacement cycle has been repeatedly deferred due to various disruptions since COVID, creating significant pent-up demand. He anticipates this will begin to come through starting next year as equipment ages and repair costs rise.

Walter Liptak from Seaport Research Partners inquired about the future pace of share buybacks, the M&A strategy for Commercial Foodservice amidst sector weakness, and the drivers behind delayed equipment replacement cycles.

Answer

CEO Timothy FitzGerald stated that share repurchases will continue, though they were front-loaded. He explained the M&A focus remains on Food Processing, with the priority for the core business being organic growth and executing the spin. CCO Steve Spittle attributed the delayed replacement cycle to a series of market disruptions and expects the pent-up demand to begin materializing in the coming year.

Walter Liptak asked for an update on the full-year 2025 sales guidance, which was previously at low single-digit growth, and inquired which business segment's outlook had changed the most.

Answer

CFO Bryan Mittelman responded that the full-year outlook is now more muted due to changes in the macroeconomic and trade environment, which create uncertainty and affect customer investment decisions. He noted that while the Commercial segment is the largest driver, the challenges are present across most segments. Mittelman declined to provide a specific range but indicated that with growth being challenged in at least two segments, the overall company outlook would reflect that.

Walter Liptak inquired about the expected benefits from supply chain initiatives in 2025 and the extent of shared supply chain synergies between the Food Processing business and the other two segments.

Answer

Executive Steve Spittle confirmed that supply chain initiatives are expected to yield cost savings in 2025 and noted the company is well-positioned to handle tariffs due to its domestic manufacturing focus. Executive Timothy FitzGerald clarified that while one team oversees the supply chain, synergies are much greater between the Commercial and Residential segments than with the more distinct Food Processing business.

Walter Liptak sought confirmation on the 30% commercial margin target, asked for a delineation between North American and international sales performance, and inquired about the Chipotle double-sided grill test.

Answer

Executive Timothy FitzGerald confirmed the 30% commercial margin target remains achievable through strategic initiatives and a mix shift to high-margin innovations. He stated North America has been tougher recently, while Europe has performed better and Asia has been a headwind. Executive Steve Spittle added that Latin America is seeing growth driven by ice and beverage. Regarding Chipotle, Timothy FitzGerald declined to comment on a specific customer but used the double-sided grill as an example of their successful automation-focused product pipeline.

Walter Liptak of Seaport Research Partners asked about the tax implications of the renewables divestiture, potential cost synergies from the sale, and the impact of tariffs and price/cost dynamics on the residential business.

Answer

CFO Joe Lovechio indicated the renewables sale would be tax-efficient. Chairman & CEO Bill Bosway added that stranded costs are expected to be minimal and that the company is effectively managing tariffs, which have not had a material impact. Bosway noted that current price/cost management is much less challenging than the inflationary period of 2021-2022.

Walter Liptak of Seaport Research Partners asked for the specific magnitude of the revenue and profit reduction in the Renewables outlook and the long-term view for the business. He also inquired about the company's supply chain exposure to China, its ability to offset potential tariffs, and how the direct-to-contractor model adds value and impacts margins in the Residential segment.

Answer

Executive William Bosway explained that the Renewables outlook was reduced by 15-20% as a precaution against potential project timing shifts, an impact offset by strength in other segments and acquisitions. Regarding the supply chain, he noted that Gibraltar has been diversifying from China for years and has a well-established playbook from 2021-2022 to mitigate tariff impacts through productivity, pricing, and mix management. He confirmed the direct-to-contractor model is accretive, creating value and higher margins through speed, localization, and innovative products that enhance contractor productivity.

Walter Liptak asked for more detail on the size and timing of residential participation gains, the robustness of the 80/20 program, the potential for product substitution in Residential due to tariffs, and the company's process for portfolio review leading to divestitures.

Answer

Executive Joseph Lovechio quantified the 2024 impact from delayed residential gains at around $5 million to $6 million, which is now starting to materialize. Executive William Bosway added that the 80/20 pipeline is as large as ever and that the company is well-prepared for tariffs, having playbooks from past experiences. He expressed low concern about product substitution in the conservative residential market. Bosway also confirmed that portfolio review is a regular, formal process conducted with the Board annually and tracked quarterly by a committee.

Walter Liptak of Seaport Research focused on the Renewables business, questioning the confidence level in a return to 'normal' by early December given past volatility. He also asked about the long-term addressable market for community solar and the expected revenue and operating margin levels for the segment in Q4 2024 and Q1 2025.

Answer

Executive William Bosway clarified that a return to normalcy is a multi-step process. He explained that while the December 3rd installation deadline is a key milestone, true clarity on panel costs and market stability will likely come after the final AD/CVD investigation rulings are issued in Q1 2025. He expressed long-term optimism for the solar market, citing a large backlog of interconnection agreements, but confirmed that Renewables revenue and margins are expected to remain suppressed through Q1 2025 due to these ongoing uncertainties.

Walter Liptak from Seaport Research Partners asked for the rationale behind reinstating incentive compensation programs, questioning if it was a direct result of Q2's better-than-expected performance. He also inquired if any other factors besides resilient volumes stood out as a positive surprise during the quarter.

Answer

President, CEO & Chair Steven Hedlund clarified that incentive bonuses are formulaic, while the reinstatement of the merit (base salary) increase followed a 90-day pause. The pause was a precautionary measure against potential volume declines from tariffs; since volumes were more resilient than feared, the program was restored. Hedlund and EVP, CFO & Treasurer Gabriel Bruno both emphasized that while volumes were the main positive surprise, Q2 results were also impacted by the absence of a Q1 headwind in Turkey and the benefit of a one-time retail load-in.

Walter Liptak inquired about the company's progress in reshoring its supply chain, specifically finding new local suppliers for electronics to mitigate tariffs. He also asked if the automation quotes they are seeing are directly tied to reshoring initiatives, especially within the automotive sector.

Answer

CEO Steven Hedlund explained that reshoring the supply chain is a long-term process, as domestic supply for certain grades of steel is limited, and key electronics and accessories are predominantly sourced from China. While they are working with suppliers to establish operations in other countries, this takes time. Hedlund confirmed that much of the current quoting activity is indeed tied to reshoring, but customers are delaying final project commitments due to the fluid trade policy environment, making it uncertain if interest will convert to orders.

Walter Liptak inquired about customer reactions to potential tariffs, such as demand changes or pre-buying activity, and channel inventory levels. He also asked for the reason behind the increased annual cost savings target.

Answer

CEO Steven Hedlund noted that customers are awaiting clarity on the dynamic tariff situation and that significant pre-buys have not occurred. CFO Gabe Bruno explained the cost savings target was increased because Q4 actions, particularly on discretionary spending, had a much better-than-anticipated impact, leading to a higher annualized run-rate.

Walter Liptak asked if the recently announced cost savings actions were purely a reaction to the current slowdown or part of a longer-term structural improvement plan. He also requested more detail on the timing and ramp-up of these savings.

Answer

CEO Steven Hedlund explained that the actions are a combination of both. Temporary savings involve postponing discretionary spending, while permanent savings involve structural changes like site consolidations and organizational streamlining, which are easier to execute in a slower market. CFO Gabriel Bruno detailed the timing, noting the program would generate $10 million to $14 million per quarter, ramping up in Q4 from the $2 million benefit seen in Q3, and reaching its full run rate in 2025.

Walter Liptak of Seaport Global Securities asked for clarification on the Safety and Security Systems (SSG) group's margin targets, the progress of its PCB insourcing initiative, and the sustainability of its high quarterly margins.

Answer

President & CEO Jennifer Sherman clarified that SSG's targets were raised last year and they are currently monitoring the tariff situation. She confirmed the fourth PCB line is on track for year-end completion, which will enhance flexibility and new product development. SVP & CFO Ian Hudson noted that Q2's high SSG margin was partly due to a favorable inventory reserve change that may not repeat, though benefits from insourcing are expected to continue.

Walter Liptak inquired about the health of municipal spending, particularly in large cities, and Federal Signal's pricing flexibility in response to rising material costs and potential tariffs.

Answer

President and CEO Jennifer Sherman highlighted the company's diversified revenue streams, noting strong police orders and the stability of water tax funding for sewer cleaners. She stated that reliance on major cities has decreased due to a 'good, better, best' product strategy. Sherman also confirmed the ability to pass on costs, including potential tariffs on chassis, and mentioned that most raw material inputs for ESG are locked in for the year.

Walter Liptak asked if the double-digit price increases could cause project delays for municipal customers, sought more detail on the timing lag between tariff costs and price realization, and requested guidance on gross margin.

Answer

Paul McAndrew, President and COO, stated they don't anticipate project delays as the price hikes are on fast-turn repair and specialty products not typically part of large municipal projects. CEO Marietta Zakas explained the lag is due to existing backlogs. CFO Melissa Rasmussen guided for an implied 37% gross margin for the second half of the year, noting Q3 would be more challenged than Q4 due to the pricing lag.

Walt Liptak from Seaport Research asked a follow-up question on tariffs, focusing on the potential impact on raw material supply and pricing for the foundries. He also inquired about the timing of projects for the spring construction season.

Answer

President and COO Paul McAndrew clarified that raw material supply is predominantly domestic and not expected to be impacted by the announced tariffs. CEO Marietta Zakas added that the main risk is the direct cost of imported components and potential for broader economic inflation. Regarding project timing, Zakas reiterated the short 2-4 week lead times for most products, and McAndrew noted the company is well-positioned for the upcoming construction season.

Walter Liptak asked for more details on the 'Mueller 1' initiative mentioned in the prepared remarks, questioning if it entails specific profit improvement programs or long-term margin targets.

Answer

CEO Marietta Zakas described 'Mueller 1' as an internal initiative to foster collaboration and alignment across the entire organization, encouraging employees to operate as one unified team. President and COO Paul McAndrew added that this approach drove benefits in fiscal 2024 through coordinated efforts in operational excellence and commercial activities. While no specific new targets were provided, they stated the benefits are reflected in past results and future guidance, with a continued focus on driving gross margin improvement over time.

Walter Liptak inquired about the company's pricing actions to mitigate tariffs, specifically asking about price increases versus surcharges and the potential impact on gross margins.

Answer

CEO Jillian Evanko detailed the company's three-tiered pricing approach for projects, long-term agreements, and book-and-ship business, confirming a price increase was issued in April for the latter. CFO Joseph Brinkman added that tariff exposure is primarily on raw materials, not finished goods, and they can pivot to domestic suppliers. They believe these actions will allow them to manage the impact without a material effect on margins.

Walter Liptak asked for a definition of the company's 'cash culture,' what has changed, and for quantification of any special cash flow actions planned for Q4 and 2025.

Answer

CEO Jillian Evanko described 'cash culture' as an embedded, sustainable process linking commercial, project management, and operations to improve milestone billing and collections. CFO Joseph Brinkman confirmed some cash repatriation from restricted countries will occur in Q4. However, Evanko clarified that these non-operational actions, along with a potential small divestiture, are not included in the 2024 or 2025 free cash flow guidance.

Walter Liptak requested more detail on the project timing issues, asking which business segments and geographic regions were most affected.

Answer

CEO Jillian Evanko clarified that the timing issues impacted larger projects across both the Specialty and HTS segments, a shift from the past. She attributed the delays to a combination of late-quarter order intake, customer schedule changes, and resource reallocation to meet urgent needs. Geographically, the impact was concentrated in their largest regions: the Americas and Europe.

Walter Liptak requested key financial metrics for Kito Crosby, including the purchase price multiple, LTM sales, and margins. He also asked for a geographic sales breakdown and clarification on which imports to the U.S. might be affected by tariffs, and questioned the Mexico factory consolidation plan in light of tariff discussions.

Answer

President and CEO David Wilson provided the metrics: an 8x post-synergy multiple (over 10x pre-synergy), $1.1 billion in LTM sales, and a 23% EBITDA margin. He detailed Kito Crosby's geographic sales mix as ~60% North America, ~20% Europe, and ~20% Asia. Wilson identified imports from Japan as the most significant potential tariff exposure. CFO Gregory Rustowicz affirmed that the Mexico consolidation remains strategically sound due to the substantial savings, even with potential tariffs.

Walter Liptak asked for an update on the Monterrey facility consolidation, details on the stability of the short-cycle business, and more information on recent e-commerce customer activity.

Answer

CFO Greg Rustowicz reviewed the Monterrey project timeline, confirming the Charlotte consolidation is complete and further steps are being planned to achieve the 200 basis point margin goal. CEO David Wilson described the short-cycle business as stable despite some destocking pressures, noting October orders were up mid-single digits. Wilson also highlighted strong momentum in e-commerce with both new and existing customers, including a significant new multi-order project.

Walter Liptak requested more detail on the European heat pump market's decline and recovery prospects for 2025, and sought clarity on whether further global footprint consolidation was planned beyond the French facility.

Answer

CEO Robert Pagano affirmed the European heat pump market is tough and its recovery depends on government incentives, with a potential bottoming in the first half of 2025. He clarified that while the company always reviews its global footprint for productivity, the French plant is the only specific consolidation currently being pursued. CFO Shashank Patel added that weak comps in 2025 will help, but the outcome depends on destocking and incentive finalization.

Asked about the geographic drivers of the poultry market recovery and the performance and initiatives within the aftermarket business.

Answer

The biggest opportunity for poultry recovery is in North America. The company is pleased with the 5% aftermarket growth, driven by initiatives in on-time parts delivery, digital offerings (OmniBlu), and service network optimization. The Marel merger is expected to significantly enhance aftermarket capabilities.

The analyst asked about several topics including: intra-quarter order trends for AGV and poultry in April, the potential for Q2 orders to be flat year-over-year, the reason for the decline in aftermarket sales, the cadence of cost savings realization, and the nature and potential quantification of sales synergies from the proposed Marel merger.

Answer

The company stated that AGV orders missed in Q1 are expected in Q2 and that quoting activity for poultry is strong. They declined to give specific Q2 order targets but expect sequential improvement. The aftermarket sales decline was explained as a reversion to a more normal mix after a very strong prior-year quarter. Cost savings are on track to hit their full run rate by the end of Q2. Regarding Marel, revenue synergies will likely be quantified in dollars later and will be driven by cross-selling full-line solutions and combining service networks.

Inquired about the drivers of the 2024 margin improvement and the composition of the volume growth, specifically asking about the contribution from aftermarket sales and the OmniBlu platform.

Answer

The 2024 EBITDA growth is driven roughly 50/50 by volume benefits and margin improvements. Margin expansion comes from restructuring savings ($7-9 million), ongoing supply chain initiatives (value engineering, resourcing), and operating leverage. The revenue mix is expected to remain around 50% recurring, with good momentum from the OmniBlu platform through new customer adoption and conversions from the older iOPS platform.

Walter S. Liptak from Global Hunter Securities asked about the R&D process and spending trends, the expected 2016 EBITDA contribution from the 3PI unit, and how the company expected to maintain debt covenant compliance in the first half of 2016 given a back-half loaded revenue forecast.

Answer

COO Eric Cohen stated that R&D spending in dollar terms is expected to decline in 2016 due to higher project hurdle rates. CFO Michael Lewis confirmed 3PI is expected to be profitable for the year after reaching breakeven in Q4 2015. Regarding covenants, Lewis emphasized a focus on improving the balance sheet and managing cash but did not forecast compliance for the first half of the year.

Walter Liptak of Global Hunter asked about the specific trends in the oil and gas business during Q2 and July that prompted the guidance reduction, and whether PSI is experiencing pricing pressure from upstream producers seeking cost reductions.

Answer

Chairman and CEO Gary Winemaster explained that a significant factor in the guidance change was the removal of an anticipated $25 million in revenue from the delayed 4,000 series heavy-duty engine program, which was part of the original oil and gas forecast. While PSI's natural gas engines offer a cost-reduction solution for producers, he acknowledged that overall reductions in production sites are creating headwinds for the segment.