All right. Thank you, everybody. I'm Chris Snyder, a U.S. multi-industry analyst. I'm really excited to be up here with Ralliant. About three months into the separation, we have CEO Tami Newcombe, we have Nathan McCurren from IR. Before we get into the Q&A, Tami was just going to kind of provide some opening remarks about the company post-spin.
Awesome. Thank you. Thank you for being here. Honored to have this opportunity. It's actually week 11 for us. I'll give a couple of thoughts just to open, and then I will refer to a presentation. You've got a barcode there. It's been put on our investor part of our Ralliant website. If you want to follow along, I'll stand up and walk through it. Just as I think, you know, throughout my career, I have had the privilege of working with some of the brightest minds in technology and in business. They've really shaped my experience as I've come into the CEO role. A couple of things that are really important at Ralliant. The first is a people-centric culture. I've had the opportunity to handpick my entire leadership team in this process. You'll see a diverse team comes from different industries, from startups to Fortune 50 enterprise-scaled customers.
I'm really pleased with the leadership team. As I pick these people, one of the things that's really important is can we work as a team? We have a belief at Ralliant that we are one team. There's one scoreboard that's for employees, our customers, and our shareholders. The second thing is I've been decades in sales. You have to find the growth in the business. We call it unlocking growth. I'm going to walk through in the presentation some of the growth factors. Where are there tailwinds in end markets where we are uniquely positioned to take advantage of those growth factors? The third thing is an operating rigor and discipline on how we do things. It doesn't matter if you're in sales or you're innovating or in a manufacturing facility. The operating rigor and discipline is how we deliver results and execute on our promises.
With that, I'm going to turn to a presentation. I think it's about slide four. It's where I'm going to get started. I'm going to start with who is Ralliant. Ralliant is a premier player in precision technologies. Maybe I'll tell you that story from our customer's viewpoint. Our customers are engineers, technicians, and innovators that are working in industries where there are breakthroughs and systems that will make the world a better place. Our customers trust us for precision. Typically, that precision is in a very critical environment where the reliability really matters. We operate in two segments. The first segment is our sensors and safety systems. That's exactly what we do in that segment. Our customers are in industrial manufacturing. They're in utilities. They're in defense and space, and then other critical environments. In this segment, we have dozens of brands that are well known by customers.
There's five businesses that we talk about. It's the Qualitrol business, the PacSci EMC business, the Hankscraft Dynapar business, GemCetra, and Hankscraft Dynapar. In our test and measurement business, we specialize in electronic test and measurement. We're on the forefront. Our instruments, our software is on the forefront of the next breakthroughs in advanced semiconductor technologies, communications, and anything electronic that you find in the world. The Ralliant Business System is the how. It's how we bring together all the people, we unlock growth, and have that operational rigor. It is an operating cadence. It's a common language that we use across every function and a common set of tools. It's truly how we deliver sustainable results across the company. If you're following along, I'm going to move to slide six. This is our financial profile. Last year, we were over $2 billion.
Going forward as a public company, our total growth through the cycle is expected to be 3% to 5%. If you look back at 2019 to 2024, our total growth was 3.5%. We aspire to continue to improve that. Our adjusted EBITDA margin targets are the low 20s to the mid 20s. We're diversified both geographically and by end markets. North America is the largest with strong presence in China, the rest of the world, and Western Europe. We serve seven end markets. Now for the fun part. The fun part is growth. How do we unlock that growth? We have a $16 billion market that we can serve with our portfolio today. In these markets, across all seven end markets, we have what I refer to as stronghold positions. These are positions where we are embedded in a customer's workflow. We're differentiated by our specs and our precision.
They count on us in this space. We deliver tremendous customer value, which you will see in the margins in our stronghold positions. We also have opportunity in three growth vectors. A growth vector is where we see a long-term trend for higher growth, 5%, 6%, 7% growth. We have solutions where we believe we can take market share. I'm going to cover all three of those. The first growth vector is grid modernization. Today, we work with over 7,000 utilities across the world in 143 different countries. They trust us to monitor the most critical assets in the electrical grid. This is how we help the utilities avoid power outages and keep the lights on around the world. Our Qualitrol business has been doing this for over 80 years, since the beginning of monitoring these assets. We have over 4 million devices deployed.
If I think about the tailwinds that are multi-year that drive our solutions here, there's an aging infrastructure. Over 70% of the U.S. infrastructure is beyond 25 years old. That means upgrades and retrofits, which is time to add new monitoring solutions to those assets. The other piece is new power demand. The expansion of the grid, data centers is a big one driving power demand. The last is just new energy sources that are coming online. In our defense technologies growth vector, we provide energetic materials and voltage safety systems. Energetic materials is an industry word for the electronics and precision explosives that are used in this sector. PacSci EMC is a critical component in 50 long-term defense programs with the primes and the Department of Defense. This puts us in a very unique position to continue growing alongside the replenishment and expanding defense budgets.
The third growth vector, electrification. I'm on slide 10 if you're following. In test and measurement, we specialize in the precision instruments, software, and services that innovators use on the forefront of advancing semiconductor technology, communications, and electronics everywhere. Tektronix has continued to invest in R&D and is extremely well positioned with a loyal base of customers and new product innovation. I'm going to move to product innovation with Tektronix. They have over 75 years of experience in this space. I think it's actually 78 years now. They have an extensive global base. For those existing customers, we continue to innovate. You'll see a fresh lineup of new products, new software, and new services. Next week is actually a major launch for the Tektronix brand in this space of R&D where we have played for decades.
The other side of the innovation is where we're expanding to new customers and into new markets. You'll see more of this as we go through the year. You'll see opportunities where we're moving into more software, more automated test, and the technologies that help test fuel cells, which go into both batteries and to energy storage systems. As I called out on the earnings call, we're seeing a gradual improvement in the business. Q2 was better than Q1. We expect Q3 to be better than Q2. The combination of that improving spend environment and the lineup of new products is an exciting time to be in this space. As I come to a close, I think the last piece is just to reiterate our financial priorities for value creation.
To go through the cycle, we think about a through cycle 3% to 5% total growth and adjusted EBITDA in the low 20% to the mid 20%. We will continue to be disciplined on our industry-leading strong cash flow, a solid balance sheet, and our goal to return value to our shareholders. I'll come back to what I stated in the very beginning, which is I'm here to build a company designed to last. That means a company that can deliver for the quarter while we're preparing to be an industry leader for decades to come. With that, I'm going to open it up to Chris for some Q&A.
Thank you for that. Separations and spins have been a big theme in multi-industry over the last few years. As you guys become a standalone company, what opportunity does that bring compared to being part of a larger, bigger organization?
You know, two words that come to mind: strategic focus. If you go back, I've been in these businesses seven or eight years. Over that time, we have been refining the portfolio. We went through an exercise of portfolio rationalization where we sunset some products where we weren't advantaged. We divested a piece of business that didn't fit the portfolio. We came into the spin with a really nice portfolio. What we get to do now is you heard our growth strategy. It's very focused. We've got stronghold positions. We've got growth factors. It's a simple strategy. Our Ralliant Business System, you know, it's going to be defined by how we operate the business. We're not diverting to SaaS companies or different industries. We know exactly where we want to point our really strong Ralliant Business System. The last piece is just our customers.
Although we're in different end markets, our customers are very technical people that need our application expertise and support and how we bring that to them in a more digital way as we move forward, as we allow them the insights that they need in their businesses. I just think it comes back to strategic focus.
Yeah, no, absolutely. You know, you mentioned in your remarks about Tektronix being a leader in customer R&D labs. The one big bill reinstated permanent expensing for R&D. I guess, what impact do you think that could have on your customers and their R&D spend, and, you know, any timeline for when, you know, any impact could start coming through there?
Yeah, I think simply put, expanding R&D is good for our business. You know, anything in electronics where investments are being made in R&D, more engineers need more instruments. R&D in the utility space, that is an area where we also play. R&D in defense. In general, any lift of R&D is good across many different parts of the business. We're pretty close with our channel and our sales funnels. I couldn't point today to this, you know, we got velocity because people are moving faster or funnels are getting bigger specifically based on the one big beautiful bill.
Yeah. Maybe staying on the theme of government policy, are you seeing any negative impacts or pressure from maybe some of the spending cuts, you know, DOD? I know PacSci EMC, obviously, has government contracts.
They do. I would say that the PacSci EMC business, which is long-time existing programs, there's a replenishment cycle going on right now. No impact there. Strong demand signals there. I would say, I think we talked about this a little bit around Q2, that there's been more cautiousness in universities and some of the research that is further out. We haven't actually heard cuts, but I think people are cautious about what might be coming.
Yeah. I guess maybe looking at some of your geographies in Q2, Americas, I think, was down about 5%. Can you maybe just talk about some of the pressure that's faced there and how you see the Americas progressing from here?
Yeah, I'm optimistic about the Americas. Really strong in our utility business and the Qualitrol business. In demand signals for PacSci EMC, we're really strong. Q2, we didn't ship as much as we expected to ship. We were down on revenue, but the orders are strong. We're starting to see opportunities here for test and measurement and new products coming out. Americas, I feel really good about. China has stabilized. It was about flat, down 1% to flat for the quarter. In China, we're seeing again some strength in utility and some softening in test and measurement. The softening in test and measurement has been going on for a number of years with some restrictions on export. That's sort of stabilized and starting to gradually improve. Western Europe was by far the worst region that we had. That is specifically electric vehicle and battery.
We don't have as strong a mix in utilities and defense in Europe. That's probably our toughest comp quarter was Q2 for EV and battery.
I mean, I want to follow up on China because the stability there did kind of stand out. When you look at China from here, do you feel like there's a positive rate of change for the businesses there, or is there a concern that there could be a negative rate of change with a lot of the U.S. policy bringing headwinds to them?
I think that one's hard to call because if you go back one year ago, I don't think we would have seen all the tariffs and the things that we're in the middle of now. What I will say is our teams have gotten really good about reacting. We have a very, very strong team in the China market. They tend to move very quickly with news and always finding new opportunities for us that we can go after.
Yeah. The guide calls for, I would say, modest improvement into the back half. The organic growth getting closer, improving off Q2 levels, the decline there. I guess, what gives you confidence in that recovery? Is there anything that you could share you're seeing on orders or book to bill that is telling you Q2 was the trough, essentially?
Yeah, I wouldn't, I don't feel like we're calling a recovery. We tend to see in the test and measurement business a stronger second half than first half. We also have a great lineup of new products there. We're calling that piece. There's typically more defense spend in the third and the fourth quarter. PacSci EMC, we're expecting to be shipping more in the second half. We built the expectations for Q3 really based on what we're seeing in the business without overlaying any type of a macro change.
Maybe turning to the segments and starting with sensing, you know, obviously your bigger division, you know, more stable.
60%.
It gets less focused given the stability. What really stood out to me, as we learned more about that business, was the 30% adjusted EBITDA margins. I think that's real differentiation versus other sensing companies in the market. Wow, how do you guys get that level of margin? Is there ability to expand from these levels?
Yeah. I talked about our stronghold positions. We are playing in spaces, often regulated environments like utilities or food and beverage, or critical and harsh environments where these things have to withstand, you know, the atmosphere down to below the ocean. We have picked where we want to play. I did talk pre-spin, we did some rationalization of the portfolio, which certainly helped that we got out of some businesses that weren't as profitable. It's really, I think margins are the truest example of the customer value exchange. Customers see a lot of value in what we bring, both in the instruments and the depth of the expertise that we have in some of these industries goes 50 to 100 years of working in these spaces. Proud of the team for the work they've done there.
Yeah. I guess, how do you balance growth versus margins in that segment? I would imagine there's more opportunities, whether it's certain industries, certain geographies where you probably could push in and take share and drive top line, maybe harder to get the 30% EBITDA margin in all those. I guess, how do you balance that? As a standalone company, maybe is there any difference in that strategy versus under Fortive?
Yeah, that's, I go back to our strategic focus. Two of our growth factors sit in sensors and safety systems. One is around the opportunity that we see for grid modernization. I do think there's opportunities here for us to expand. Right now, the team has gone from what used to be just monitoring. We just give data to customers, let them try to figure out what that means to moving to more analytics, software, preventative. We put some AI health metrics in there so that customers get more of a sense of, what do I do with this information? I think there's opportunities here to invest. As we talk about organic investment or tuck-in M&A, that's a great example of where we need to go after that.
Yeah, absolutely. The growth in sensing has remained resilient, holding in that like a plus low single range. You talked about Qualitrol and utility. You talked about defense and space. I guess, which end markets within sensing are under pressure? Are there any end markets where you feel like there's a positive rate of change there as we look into next year?
Yeah, the story stays pretty similar. We've seen tailwinds for a couple of years here in the utility space. We're continuing to see that in the defense space, both in replenishment. We're getting a lot of quote activity now on some surge demand that hasn't shown up in orders yet, but lots of quote activity. If I were to pick someplace that's been softer, I would say industrials in Western Europe. We still can't figure out, you know, when that's going to turn. We've worked with the largest industrial customers we sell to, and inventories are good. They don't have, there was a big channel stocking right after COVID. That seems to be settled. We haven't seen the demand signals there start to turn around. It's probably the softest market for us right now.
Yeah, no.
One thing I'd add on that, Chris, this tends to be the part of the business, and this is really our industrial manufacturing and other end markets, tends to be the part of the business most closely correlated to manufacturing PMIs. As Tami pointed out, there was a big increase at the end of COVID, coming out of COVID, followed by a slowdown right in line with what PMIs have trended at. It's now been pretty stable for about five or six quarters.
Yeah, no, I appreciate that. Maybe moving over to test and measurement, obviously a challenging couple of years for that side. Are you seeing a positive rate of change? Obviously the comps get easier, so that helps improve the top line performance. Are you seeing reasons for optimism or things getting better?
Before I address the soft quarters that you're talking about, I want to take you back. There were seven or eight quarters from 2022 to early 2024 where everybody was asking, why is Tektronix leading in test and measurement? What are they doing right that nobody can keep up with Tektronix? I just want to remember, we were celebrating in the end zone for a couple of quarters there. It's a lot to do with test and measurement being a broad space. Where you are in the engineering workflow from R&D to production, also where your specialties are, Tektronix is very, very good at power electronics. During that wave, it was a big EV, battery, infrastructure buildout, and very, very strong. That softened the last several quarters. We're seeing good signs of just gradual improvement in that business.
We look at it, we've got a large direct sales organization, so we get instant signals from them every month. We're doing funnel reviews. About 50% of the business goes through the channel, so channel reach is pretty good. A lot of our channel partners also sell semiconductor components, so we get pretty good visibility there. The indexes, we're probably—the semiconductor index is one that we follow quite close. We track our wins and our losses. Everything seems really healthy in the business. We're just out there fighting. The other thing I remind people, when you're working with some of the largest semiconductor companies around the world, they're equally as much work when they're buying and when they're not buying. They're innovating around the clock. Their CapEx spend comes in chunks.
We've committed to taking care of our customers through this, and that'll pay off as we come out of this.
Do you feel like, you know, you talked about we had a huge run-up. There's a lot of industry challenges. Do you feel like the company is holding or maintaining its share in that test and measurement market? This is just, you know, end market headwinds that are facing?
Yeah, in the places that Tektronix plays. Tektronix is a $900 million business. Where they play, I ended up at this company because a recruiter called me and said the name Tektronix. I'm an electrical engineer. That's like saying Kleenex. It's an amazing brand. They are known for oscilloscopes, and they're always number one or number two in that space where they play. In the Keithley Instruments portfolio, it's another place. That word to a scientist or researcher is a well-known brand. In those places, they've continued to hold share.
Yeah, absolutely. On the segment margins, a lot of pressure in the first half. Q2 did show nice improvement versus Q1. I think the first half was tracking in like the high single-digit range. You guys are targeting mid-teens to low 20s there. Can you just talk about why did the margins decline so much in the first half of the year? What are the bridge or the drivers of that improvement as we look into 2026?
Yeah, a couple of pieces to that. I think first, if you go back to towards the mid-part to late part of 2024, I think across the industry, we all expected 2025 to be a much better year in semiconductor and test and measurement. We had made a decision at that point. We were not going to slow down any of our R&D. We continued to fuel R&D. Volume plays a big role in this business as far as margins, and volume is down. Holding the R&D, lower volume, probably the biggest contributor. You can add in a little bit from tariffs, a little bit of public company costs, additional headwinds that we faced in that business. That's where we are. What are we doing about it? We announced as soon as we spun our first earnings call, we announced a cost savings program.
What we're getting after is some dyssynergies in our services business. About a third of the Tektronix service business got carved out and stayed with our parent company. It's Fluke Services. It made sense, but that left us with places where we need to optimize. We called out about $9 to $11 million in savings with that program. The second thing is just getting the volume up, and that's why I highlighted the new product. There are eight new products being launched in Tektronix. Over half have already been launched. A big one next week. There's another major launch that'll come in Q4. Just getting the volume up with new products is probably the second biggest lever there.
Yeah. You know, very high gross margins at test and measurement, you know, relative to the broader industrial world. I guess, what kind of incrementals can we expect for this business into a potential recovery?
Yeah, we didn't break incrementals out by businesses. We targeted 30% to 35%. I always say mileage will vary by quarter. That's a sort of over a period of time, you'll see 30% to 35%. We were purposeful in doing that because in our capital allocation, the first thing on our list is to do some organic reinvestment here. That's the reason that you see the 30% to 35%.
On test and measurement, it feels like the margin in Q2 was better than Q1. You guys talked Q3 in the low double-digit range, maybe some sequential improvement. Do you feel like that business has a pathway in 2026 to get to that mid-teens? You guys called out a mid-teens to low 20s. Do you think that's in play for 2026 or is that maybe still too early to get into that range?
Yeah, so we're 11 weeks. Coming back to that, we only gave guidance for Q3 on the call. Our target range is absolutely the mid-teens to the low 20s, which is absolutely what we expect to do in test and measurement.
When I think about Ralliant and compare it to history, I think in the last up cycle, so say 2019 to 2024, the business did about a 50% incremental. Obviously, the target is for something 30% to 35%, which is lower than that. Is that just because the reinvestment, which would obviously boost the top line, or is there anything else in that that's keeping the incrementals below history?
Yeah, it's really back to the last part that I answered. It's a number that'll be averaged over time and gives us the opportunity to reinvest in our growth factors. As I said a number of times, you'll see us hit the ball right up the middle of the fairway. We're going to invest in our growth factors where we've got tailwinds. We've got solutions where we can take share. That'll be both organic and any tuck-in M&A that we do.
Appreciate that. Maybe, you know, going to capital allocation, M&A feels like a smaller piece of the capital allocation versus history. It still is a use of capital for the company. Can you talk about the M&A process? Is it different versus when the company was under $40 million?
Yeah, I would say a different approach. First, with organic being our priority, followed by we've already authorized a dividend that we'll pay in Q3. We have a $200 million authorized share buyback. Third is tuck-in M&A. What will look different is these businesses that we're looking for would have synergies with the businesses we have today. Year three, double-digit ROICs, plug in under an existing, we're not standing up a segment. We're not standing up a new business. We're not getting into a SaaS business. We're tucking these into the businesses we have in those three growth vectors. You'll see smaller deals. I talked to the team about three, four different deals that we can do to strengthen where we play in these growth vectors.
Is there any preference for, you know, if it's hardware, software, you know, building out service, any preference there?
I think probably our right-hand dribble is product. What you may or may not know is 75% of our engineering force are software engineers. They're embedded engineers that deliver software through our products. There could be something that gets delivered on a product that makes sense for software. I don't see us buying a SaaS company. That's out of our wheelhouse right now. Services are something we'll always consider. We're sort of the experts in the services because it's our equipment we bring back and we calibrate and we repair. We'd have to see where the synergies were with the services. I think product's probably the most likely.
Yeah. Maybe, talking about policy, has, I guess, global tariffs, whether it's U.S. tariffs or China reciprocal tariffs, is that creating any competitive changes in the market, whether it's competitive advantages for you guys in the U.S. versus international products that are getting shipped in or competitive disadvantages because you guys did ship from the U.S. to China, feeling some tariff inflation on that.
There's certainly been price increases by both us and all of our competitors to compensate for the tariffs. When a customer is making a buy decision across our portfolio, price is going to be a factor, but not the main factor. We're not commodities. We're precision instruments, precision sensors, energetic materials. People are making decisions based on performance, on quality, reliability, the depth of our technical people that show up. A lot of our people in the field, we call them salespeople, but they're technical experts in the areas that our customers work. You don't tend to get a, oh, you're 5% more, you're 5% less. It's much more about the problem that we solve and the solution that we bring to the table.
Yeah, appreciate that. We are up on time. Thank you, Tami. Thank you, Nathan. Appreciate you guys coming.
Thank you so much.
Thanks, guys.
Thank you.