Great. Kicking off day two of the conference here. We've got the guys from Watsco, Barry Logan, Executive VP, and Rick Gomez, VP of Corporate Development.
They're just initials, by the way. We don't—it doesn't actually stand for Executive Vice President.
Yeah, they do. These guys do it. These guys just do everything. They, they do it all. Pat's also up here. Pat covers the distributors for us at J.P. Morgan. Guys, thanks for being here. We're going to tag team a little bit on this one, but just wanted to first start off. I know it's March, I think 12th. It was a little bit warm out yesterday here in New York. It's a little bit chillier this morning. What are you guys seeing so far? Anything evolving since you guys reported from an early selling season indication perspective? Obviously, it's a little bit too early to be definitive, but, you know, anything in the channel that you're seeing that's interesting on the ground as a start?
All right. Read, read some tea leaves early in the season. Yeah, I mean, we had obviously a blowout fourth quarter, blowout, meaning that overall residential businesses were up in the teens. The overall market was up for us at 9%. Nice drop through to the bottom line and so on. I would have expected a bit of a return to more conventional growth rates, but stable. That is what I would say, that is what we have seen, quarter to date. March is half the quarter. March is critical to this time of year, but not necessarily an indicator of what we see going into the season. We are seeing growth. We are seeing margins behave well. I will have a better answer in May, June, July when our business is 30% or 40% larger than it is today. So far, so good. I don't know if you have a color to that.
No, just to note that it was as cool yesterday morning in South Florida as it was this morning up here. We have enjoyed a little bit of springtime ourselves. The only thing I would add to what Barry said is that we are obviously in the middle of an important product transition that is impacting the whole channel. It is impacting the whole market. That seems to be unfolding as planned. You know, first quarter is that 90-120 day period where you have to convert a billion dollars of inventory across 700 locations and get that as precisely right as you can so that you have availability to support your customers come the selling season. We are in the midst of all of that right now, obviously tracking it very closely.
We are seeing good uptick and good acceptance of the new product in the channel. It is starting to now become some element of our sales here in March. As Barry said, I think the real test of all of this will be come the selling season, and we will all be smarter at that point, I think.
Anything with regards to, I am not going to use the term pre-buy because I think it has been used now enough, and anything that has evolved in the channel that you look at and you say, "Oh, that is interesting," kind of post-year end that you have gotten a little more information on from an inventory in the channel perspective, whether it is at contractors or not.
Just on the pricing that's going on out there competitively with the various OEMs and different strategies. Anything surprise you in the last, you know, few weeks here as things evolve?
I can't think of anything on the inventory side that surprised us or has, you know, been tricky. It's going to be tricky to get, as Rick said, a billion dollars of inventory out of the system over the last 120 days and new products into the system over the next, you know, and go through that with a measure of precision. It means our branch managers are having awesome, you know, 10, 12-hour days over the last 60 days to really set the table for the season. I can't think of anything that's happened or going on that's any different than we thought or had wanted. That doesn't mean it's simple. It's a big complex machine that's turning over product, really for the selling season coming up.
On the pricing side, you know, we wanted to be and can be a merchant during these times. We can look to optimize price and margin on what we're selling out of. I think we've done that and doing that. We also have the opportunity to look at a billion dollars of new product that we're about to sell and set price and margin. When I say that, that's not just talking to customers. That's talking to our vendor community as well as to their price coming into the market that we're then passing through. Now we have some science and math and technology to help us do that. We did not have that three or four years ago. I think margins and pricing in general, I would say again, is a positive, because of those kind of two bodies of work going on.
From an inventory perspective, is it being managed pretty smooth where, you know, it's kind of a normal seasonal level and you're churning underneath, or is it going to be lumpy where you're going to get a, you know, a bunch of this stuff in because it's available and that's their ship date to you? Like how, how, how smooth is this Process on inventories?
it is.
Inventory churn.
It is not smooth. It is a bit of a, you know, a wave that flows in. As a distributor of HVAC stuff, we only have one goal with inventory. That is to have it for our customer an hour from now. Our lead times are not next week or two days from now. Our lead time promise is an hour from now. Where we hedge risk of inventory is to have more of it if we feel like the channel or the supply chain is tricky. I could see us, early part of this year, being heavier on the new inventory to assure that and to assess that risk, to address that risk. We get out of season, and we get out of season towards the fall and end of the year, rebalance that. There should also be obviously a more serene supply chain going on, you know, six months from now.
You're saying there's a bit of a pre-buy of the A2L?
I wouldn't say pre-buy. I would say a building of, of inventory because lead times and so on aren't what they're going to be in six months. I don't like the word pre-buy as if we've decided to take part of our balance sheet and buy a ton of new product. That's not what Watsco is or does. This is a purchasing manager in Houston buying for 15 stores, adding a bit of inventory into his market. It may be a different calculus and a different equation in Central Florida. It's not a Watsco pushdown of Strategic, you know, Petroleum Reserve buy.
Bitcoin?
It's not that. This is a very regional, very market-driven, very brand-driven. And, you know, going back to that local contractor that needs the product in an hour. Any thoughts to that?
No, just to have a little fun with Steve that you can't call it a pre-buy during the year. You can only call it if you're crossing a year. So technically you, you're only thinking quarters.
Maybe it's a first quarter pre-buy for the second quarter. The point is you're trying to mitigate the risk by taking on a little bit more of this stuff, you know, as opposed to really managing it tightly to a band, or at least that's your sense of what your guys are doing on the ground.
That's correct. Yeah. And again, it's a learning Process, right? The manufacturers are learning how to get this new stuff out of their factories and plan for it and logistics and push it out in pairs. Again, we sell products in pairs, meaning different factories. We are actually converging product in our stores and having, it's almost a double-edged equation. I'm not just buying from a factory. We are buying from multiple factories and then merging that, converging that into our stores. That's the trickiness. Everything I just said is not simple in these transitions. That's where the phobia of lead times and on-time delivery and things like that derive a bit higher inventory, which is what we should be doing in terms of playing offense with our balance sheet. It is not buying, allocating capital to buy products ahead of time.
Right.
I don't, I don't define it like that.
Right. Just last one from me, and then I'll pass it over to Pat for a couple. Just on the pricing that's coming out, for these guys, any interesting movements on that front? I know most, a couple of guys have been out with like letters about tariffs and pushing that through. Has that actually been triggered yet, or is that still kind of a TBD?
I think some have moved forward with pricing, new pricing in March to get something going because we're already incurring inflation absent tariffs. The tariff discussion adds a layer of risk and reality to, you know, the overall equation for the OEM. The question is, what's reality, right? I think there's a little bit of that consternation on the fence waiting to see what really happens. They'll, you know, that's their question for their meeting is, how's that going? We'll listen to it and be, you know, be the benefactor of it in some ways. I think phase one has kind of occurred and phase two is contention on what's happening with the tariff situation.
Right. Okay. Pat, you want to follow up here?
Yeah. I just wanted to peel back the comment you made on price optimization with respect to the older inventory that you now have. You are not obviously getting OEM price increases for that, but it sounds like you are going to maybe try to get a little price on that stuff. Maybe just peel that back a little bit.
Yeah, it's more past tense at this point than future tense with 410A product. You know, we, when we started the year, our business units felt they could, could gain some price on 410A products. If there's a scarcity value that is created from that, then that, that should, that's a value we should be able to obtain in the market. We'll talk about the materiality of that, you know, when we have the numbers all the way through the quarter. That's been a thinking and a Process really beginning probably in December of last year. It's more past tense than future tense.
Meaning that past tense, meaning that you've, that it was executed in the fourth quarter?
Meaning part of, part of the benefit was in the fourth quarter.
Got it.
Most of the benefit with that particular narrow concept is in the first quarter. It is not something that builds on itself or adds to itself, once we get into the A2L product. Then it is a new product with that second phase of what I said, which is how do we have a good merchant execution on all new products that we will be selling on scale, you know, as we get into the season.
I guess just magnitude-wise, that we should think about it as not double-digit, more kind of mid-single digit?
I don't know what that means.
Not a double-digit price increase, more of like a mid-single digit pricing?
Yeah. I think if you're referring to 410A product.
Yeah. Yeah. They step up on 410A, they, that sliver that you're selling through.
No, I think, look, it's, in the absence of some OEM-initiated pricing action in the market at scale, it's hard to be that aggressive.
Yeah.
You tend to be more measured than aggressive in that scenario. The reason why it's hard ex-ante to, you know, really size the magnitude of this is that there is no single lever at Watsco that says, "Here, let's change price by X." We're talking about 40-60 P&L leaders and 700 locations and 130,000 customers. It really is a bit of a sum of the parts in terms of what we derive at the end of it, which is why looking forward or trying to size it in real time is difficult.
Yeah, I would characterize it more in that low single-digit world because that's the, and, you know, plus we didn't have, as you saw on our year-end balance sheet, we weren't starting with an inflated inventory position of 410A product to begin with. I think our bent and our focus has been more on getting on with a transition, sooner rather than later, and not lingering with legacy product in the channel, which does come with its risks at the end of the year if you have too much of it. It's threading a needle of how much do you think you should have for the customers and measuring lead times on new products for the OEM community.
As I said, we're kind of in that crossover point, you know, here in March and April, and we'll tell you more about it after season. It's in basis points, Steve. If I, if I.
Yeah.
If I, you know, do the algebra on the overall, overall margin, it's not percentage points, but it's, it's more than zero, which is good.
Yeah. I think there was, there were for some of the OEM discussions, there was a narrative that like you just would basically take your 410A and like mark it up to your A2L product and, you know, and move along. Just wanted to make sure we, I had an idea of, of the magnitude.
I'll really say it this directly. There was zero opportunity for that to happen.
Okay.
It's basis points and it's percentage, you know.
Yep.
Single-digit percentage points.
Got it.
In terms of price.
In terms of the volume dynamics last year and how that plays through to 2025, Watsco grew its volumes mid-single digits in residential equipment last year. I think the market was generally kind of flattish, so pretty good relative performance. Can you talk through some of the dynamics that as we roll into 2025 might be a little bit different? I'm thinking about, you know, you had some probably volume coming back from one of your big vendors, Rheem. I said it, you did not say it. Then there was the issues at Goodman, which I do not think is a huge vendor for you, which maybe benefited, you know, volumes for some of your other vendors. As you think about that.
I know.
In 2025, how does that kind of play through in your thinking?
Yeah. I'll try to put things in perspective. And this is, you know, 10-K material, so you can, you can get a sense for it. First, Carrier is, is by far our largest vendor. When I say large, it's again in the 10-K, about half of what we buy, therefore more than half of what we sell. What's unknown or, I would say unknown, what's underappreciated is that's seven different brands. It's not just the Carrier brand. It's multi-branded. It's multifaceted. It's covering different parts of the waterfront. The most sophisticated thing we sell or the cheapest thing we might sell is made by Carrier. It is a bandwidth of products and a spectrum of products.
That is what I would say five years ago with the spinoff, their investment, their understanding of that asset, their dependence on distribution to serve well, to go out and prosecute growth and market share expansion, is where they've done a very good job. I think a year ago, not a year ago, maybe six months ago, they said on a conference call, "We listen to our customers and here's what we're doing." That is us. I didn't hear that phrase six, seven years ago. Maybe they listened, but they didn't necessarily have the capacity or the investment from their parent to go do it.
I would say, especially in the last two years, as things have settled down a bit on product in the post-COVID kind of thing, that's a powerful partner that's come to the table and listening to the strategic objectives and investing in those objectives and helping us go sell product and grow the market. You look in our numbers, the Carrier Enterprise profit sharing that we share with them has doubled in the last five years. It's over $100 million or close to $100 million. That's a benefit to that relationship. That is a two-way street. We've grown our business and they've grown theirs. I'll leave that, let's park that there because it is an ongoing market share and development campaign. We're not done. We're not happy. We're not content. We're not complacent.
We meet every 90 days with the senior leaders and go through a strategy of how we're going to do that. I'll leave it at that. That's part of last year's growth. It's the intention, going forward in a material way because it's by far our most material supplier. Rheem is about a $500,000,000 manufacturer to us. That's roughly 6-7% of our business. I wanted to grow 10-20-30% because it shrunk 5-10-15% a year ago. That's an opportunity to regain share, to regain business. We did some of that last year at a lower margin. We intend to do more of that at a higher margin this year with this change in products.
You got to put the materiality within the scope of what I just said, of being 6-7% of our overall business. Goodman is probably half of that. You know, it is another great vendor. They have been probably the number two player behind Carrier for our entire careers. You know, discount the materiality of that statement. We want to do more business with them in our markets. Much of our Goodman business is in the deep Sun Belt. They have had a choppy period of changing over their products beginning last year. I think when those cylinders finally kick in and hit, it is an opportunity for us. The other 1,400 independent distributors than us will have to deal with a better Goodman set of distribution.
Again, I think the materiality of it is diluted in that statement. Nonetheless, I, you know, that would, that's how I would profile the top three. I could go, could tell another half hour story of the next seven, all of which is built on post-COVID as the market flattened out. How do we gain share? What do we do as partners to gain share? I could tell a Mitsubishi story. I could tell a Gree story in China. I could tell a Carrier story about ductless products, et cetera. That's what's going on. It's nice to have this pattern where we're not just figuring, you know, figuring out this crazy circus of either COVID or post-COVID, but now it's actually new product. Things are more serene, certainly six months from now, even more so.
We kind of like, you know, how things are set up.
I guess though the follow-up to that is, you know, Daikin on their call very visibly said their market share was dropped to 19% and that they have initiatives called like WinBack or something, and they want to get 80% of that back, like in the near term. I guess the question is, is that, you know, are you starting to see some of that in the marketplace? Is there because that seems like more of a hammer approach than like that they're going to, that they're going to be very aggressive about this. Are you seeing.
Go ahead.
Anything out there in their, you know, their supply, their behavior, anything like that?
Yeah. I think, I mean, my two cents on it is that Daikin is a far more strategic OEM than they are given credit for. They're very measured in their thinking and in how they do things. I'll take you back maybe two and a half, three years ago where they had massive supply chain disruptions in their facility in Houston. The entire market was in the same state of wondering what they would do and how they would react. They've done so in a very, again, measured, thoughtful way. Nothing seems disruptive. Nothing seems overly aggressive at this point. Just to underscore something that Barry said is, you know, I think there are more material and more long-term thinking than people give them credit for.
You know, what share, what their share is this quarter probably isn't to their satisfaction. I think their eyes are more focused on what it could be in three, five, and ten years. They have been a great partner. We have been a distributor of theirs for 20-some-odd years, maybe longer. It is a partnership that we think has some latent growth potential. Another thread to the question, just to expand on what Barry said earlier, is that for the last 18 months have been more quote-unquote normal as it relates to just supply chain availability. I am referencing specifically residential like commercial product. What that does is that it allows us to prosecute and go after organic growth initiatives that we historically are very, very good at.
You know, there's one not too far from here, actually right in this market. We have a business unit based in Boston that has expanded their territory with their primary OEM, that's Mitsubishi. We have other initiatives with other OEMs going on. The smoothness of the supply chain allows for that kind of organic growth strategy, business unit by business unit, market by market. Combine that with the digital strategy that is, that is sort of how we lead with a lot of these growth initiatives. It means that market share that's gained has a better chance of being sticky, has a better chance of being higher growth, higher quality, higher durability market share going forward.
You mentioned Mitsubishi. The ductless market for you guys is, is, remind us how big is the percentage of units or revenue in, in residential equipment and how that probably grew double digits last year. Is that kind of the outlook for this year as well?
It did. Yeah, I think ductless overall is about 10-15% of total units that we sell. Part of that is commercial products as well. VRF goes beyond residential. VRF would be a material part of that. Actually, that Boston business we are talking about is selling into this market as well. I'm not sure I can splice it in my head with residential versus commercial on ductless, but yeah, there are probably four primary vendors we are doing business with. Mitsubishi is by far the largest in North America and we are their largest customer, for example. Gree, the largest in China, we are their sole, exclusive distributor for the North American market. That has been a developing brand, now a nine-figure brand, in the U.S. market through that relationship.
Carrier has tried to solve its ductless needs for its distribution through partnerships and joint ventures with Midea, Toshiba, now that they own it. That is playing catch-up really to the others. You cannot rule it out because I would say Carrier has the most advanced distribution to go sell that product. It is a work in Process and part of the equation too. Those products have become more efficient, more accepted by contractors, more likely to be recommended by contractors. That was always the barrier of entry for those products, not the manufacturers, not the distributors, but the contractor saying to a homeowner or a business, "You should do this." It will always be, you know, an ingredient of growth in the industry, but it will still be, I think, never disruptive to what the industry is doing.
Maybe we can, sorry, one more question. It's on the market. Flat last year, you guys grew, you know, mid-single digit, gained a decent amount of share. Is this year kind of the market grow a little bit faster and you guys don't have that much share gain? Is that the algorithm that, you know, you're thinking about?
We'll never like say those words out loud. We're not looking for a lot of share gain. We're always looking for a lot of share gain.
That's a good number though. The five versus the flat.
Yeah. The way I've always handicapped this conversation in my career is in March, I don't have insight really to the season yet, is if the long-term 30-year, 40-year compound growth rate of unit growth is 4% rounded, does it look like that? That's about all I can think of, right? I don't see a reason why the market shouldn't be a conventional, you know, kind of market. Our job is to grow share against that, of course. I don't see a reason why the market can't grow, you know, in its long-term, in its long-term growth rate this year.
Okay.
Consumer is strong. Employment is down. Contractor credit, you know, contractor credit is never asked about. It's our biggest leading indicator of what's going on. And credit has been, you know, extreme low risk, extreme write-up, low write-offs. I mean, two or three basis points of write-offs. I've done this job when write-offs of bad debt is 250 basis points, 300 basis points. When it's 10 basis points or less, it's a good market. Yeah.
Got it.
Just to double-click on one element of the answer, you know, share gains don't just magically happen. You have to work hard at those share gains. The question is, what do we have that makes that a more compelling proposition to the contractor? The answer is, this digital platform that now exists within Watsco that is a $2.5 billion part of our business that's in the hands of 60,000 contractors. It allows them to do things digitally and with us that very, very few distributors can offer those same contractors in the market.
I, we, we need to couple, I think, you know, if we, if we go back in time, maybe two and a half years, three years in the markets that we're in, we can confidently say we've grown share about two, 250 basis points over that, over that horizon. We think market share is best gauged over that period of time because, a 90 or a 180-day period isn't always indicative of, you know, a whole lot of things beyond that. We like the long-term trajectory of that market share. It has magically coincided with a great uptick in our digital strategy and our e-commerce business. I don't think that's by accident. I think those are two very, those things are tethered in the end.
If you think about who our customer is, it's largely a three to four truck small business owner-operator, and they've never had access to the technology that we are now providing them. It's helping them think differently about their business. It's helping them envision different possibilities within their four walls, and it's turning that owner-operator into a more sophisticated actor in the channel. Those investments have paid off in spades. I think it is the linchpin to why we think there's confidence beyond whatever the market gives us, whatever that long-term trajectory is of 3-4%. We think there's an upward bias to that over time because of the digital strategy.
Yeah. The scorecard, just to, again, now I'll exhaust the thought, but if I take our 9% growth in the quarter sales, the digital community was in the teens. The non-user, non-digital community was less than nine. No. What happens is, is it the more advanced, ambitious, technology-driven contractors growing at a faster rate, taking share from their, you know, could be, that could be an answer, right? Could be a share wallet discussion with our user community. Could, you know, could be a few different things. We also know the attrition of that user community is a fraction of the attrition of our conventional old, old school contractor that might want to go on Trane's trip to Portugal this year instead of our trip to Mexico.
We, you know, our industry still has customer trips going somewhere. You lose market share with a customer if they liked someone else's trip better. You know, still happens, by the way. That is not like 1970. We may be going to Portugal this year. I do not know. I know which contractors are going to grow faster over time. That is why we really like this digital strategy. We always invite anyone to come down after our conference calls to listen to that and hear it. It is a longer-term perspective. We get questions about AI. We get questions about what the manufacturers are doing and what our competitors are doing.
We have always believed that if we are there first with our customer to take them to basically run their business on our platforms, that is an advantage no one else can create if we do it first. That is where these investments are paying off, we think also.
We want to ask, obviously, a question on gross margin, but before we do that, anybody in the audience have questions on the markets? Want to ask? No? Okay. Maybe just talk about how we should think about the gross margin performance. 27% has been kind of your line in the sand for gross margin. Should we think about that as kind of what the expectation is for 2025 as well? Because, you know, there's a lot going on this year with product transition or what have you. Should, could be better than that. Could be, you know, at the high, you know, higher than that.
Sure. I feel, I feel better than worse about answering that question, by the way. We pegged 27% a couple of years ago after increasing gross margin during COVID. The fundamental question was, is it temporary or permanent? I think Steve sat in our office at a meeting, I think it was you, and you asked, is there any risk of going back to where it was? I said, there's no risk. Yeah, that's like a straightforward statement not often said, you know, in a meeting. That's because we also felt very strong that the technology, the culture, the tools in the field, just if not just simply the people doing their job that had raised margin were going to keep, you know, pushing the boundary of what had been a 25% gross margin.
The other, you know, interesting analysis is everyone in this room manages a portfolio. Everyone's portfolio last year went up 21%, and I'm making the number up. What's my point? My point is inside that portfolio, you have underperformers, you have outperformers. What you report as your investment return is an average, right, of your portfolio. Those are our gross margin. When we say 27%, that is an average across 10 business units. We have business units that are at 30, which then admits to you that we have business units less than 27. What are the attributes and what's the leadership and what's the technology use and what's the constant struggle, the constant improvement criteria you need to get to well beyond 27%? I'm almost doing therapy about this now in answering your question.
I could be a little more, again, straightforward maybe, but we see 27% again as a, as a, as today's stopping point. We see higher margins over time, assuming our portfolio of, of business units are adopting some of the technologies, are better at those technologies of, of their peers that are already closer to that. It's also a product mix opportunity. Our business units that are higher have a bigger mix of parts and supplies. Those that are lower do not. When we sell parts and supplies, we're in the 30s, 35-40% margins for some product lines. Equipment, therefore, I'm telling you is less than 27. So we want to grow our equipment business. It's more profitable when we do, but to our margin, the parts and supplies, you know, algebraically at least, are is an upside to, to our current, our current, performance.
If I think real short term, again, where we have a measure of inflation going on this year, we have a measure of new product growth coming in this year. As of March 12th, a pretty stable market that we see ahead of us, I would expect, you know, to improve margin this year, not have margin risk. I say that March 12th. So any, you know.
What on, on that parts and supply side, there's been a bit of volatility on the gas front. 410A is, you know, down and kind of stable. But the 454B we've heard is it's either availability, some canister issues, or, you know, they're raising price to offset, you know, the 410A weakness they didn't expect. Anything on that front that's a variable that's influencing your results here in the near term? Or maybe just an update on what you're seeing on that gas in the channel?
Sure. First, refrigerant is a $200 million product for us. Again, 3% of sales, just to, I like to scope, scope the answer when, before I give the answer or give some scope before I give the answer. There has been, I would say, deflation on average over the last three years in 410A gas, which defies logic, because it's become a more scarce product, but nonetheless, that's what it is. As for, I don't think there's a story to tell. Margins are sound, margins are fine in refrigerant. There's no price volatility per se. There's no more deflation going on. I don't think we're, nor are we seeing the upside of greater scarcity that, that economically should occur. With 454, it's probably less than $25 million of revenue today.
That will grow as contractors stock their trucks and get that infrastructure kind of in place. Nothing early on that I would say is a trend or a signal that we see, that we see, Steve. That is also an OEM question where they are buying rail cars of it in a factory. You know, it is a more material event at the OEM level. We are buying 25-pound containers, one pallet at a time. You should ask them that question. That is a broader dynamic.
Okay. Gre at. Right at time. Thanks, guys.
Thank you, everybody.
Thank you.
Okay. Great. We've got Aijanna Zellner and Christian Rothe from Rockwell. Guys, thanks so much for being with us today. We usually just like to do a bit of a, you know, intro and state of the union as a start. If you'd like to kick it off with any, you know, kind of comments on, you know, what you guys have been talking about in the last few weeks and what you're seeing out there, we can just start there and then we'll go into it.
Sure. I can do that. Thanks, Steve. Happy to be here and thanks for having us. Yeah, we reported Q1 earnings. For us, we're at a fiscal year. The first quarter for us was a good quarter. We performed better than our own expectations on the bottom line, kind of in line with expectations on the top line. The book-to-bill was a little bit better than what we would've expected. We got over $2 billion in orders for the first time in what I think seven quarters. That was really strong performance and it was pretty broad-based. Certainly had a lot of discussion on the conference call and days afterwards around, hey, is there any pre-order, pre-buy going on?
I'm sure you're gonna ask us some more of those questions as well. The discussion on our conference call, though, was around the fact that, you know, it really felt like it was pretty broad-based and it was all aspects of our business and on top of that, around the globe. You know, in areas that you probably, if you were gonna see a pre-buy, you wouldn't be seeing it there. That part was good, but you know, it's one quarter. We got a full year ahead of us. I'm sure you're also gonna talk, Steve, about some of the ramp that we have as the year goes on and we wanna make sure that we continue to grow incrementally and gradually during the course of the year, both on the sales side as well as the margin side.
We're focused on executing against that.
Great. Let's just kind of like jump into, you know, what's been happening here, first of all, on the demand side. Most of the companies here have not, you know, CapEx remains, you know, solid and kind of stable, sluggish, but it hasn't, you know, really softened. The ISM print I thought was pretty weak. Aijanna, you've been around for a little while. Some of the companies we cover have decoupled from the ISM. Is the ISM still something you guys look at as an indicator and how does that kind of inform your views, going forward?
Sure. I would start, Steve, as you know, we look at a lot of different indicators when we do forecasting. Historically, you know, we've correlated the most with industrial production, over longer periods of time. We do, of course, look at a lot of different things, you know, PMI, ISM, IP. It is one factor. We talked about PMI getting above 50 was a good, good indicator.
Yep.
We do look at our customers as well. What's going on with their pipeline? What's going with our win rates? What are we hearing from individual industries that we serve? Certainly a lot of things factor into it, our surveys about distributors and machine builders. We take it all in as we look at how do we forecast our orders and sales and run our business. It's not a particular one, one factor like ISM or PMI.
Got it. Is it, you know, the step down to 48 new orders? I mean, is that, is that something that when that happens, you kind of like go out and canvas your, your customers and try and figure out if there's a change or that's not really that material of enough of a change to, to start to react?
Yeah. So we have a pretty normal cadence for us, and so we're doing periodic surveys of the OEMs and machine builder side of the business, and we're also in constant conversations with our distributor partners. So really there was nothing that we react to around that, but let's be honest, right? We are a short cycle business. So we are just as interested as anything else to see what the orders were yesterday.
Are we. Any comments on that?
No, no comments.
Okay. The 3M was here yesterday and they talked about orders holding up okay, but they actually, you know, took their sales down by, you know, a moderate amount, 2% to one and a half. I don't know if that's, you know, the channel basically just being a little more cautious about when they want to take the product. Is that what you guys kind of saw in orders, that the channel's just a little more cautious about wanting to have the product, or was that more of just a timing, like, hey, this is when I really need it? You know, I'd like maybe just explain that disconnect a bit between the orders and the timing of the shipments.
Yeah. Just to make sure we're level setting on that, this is really going back to, again, our first quarter.
Yeah, the first quarter.
That's right. Where we talked about the fact that book-to-bill was greater than one, and that really the delta around that had to do with the delivery dates on some of the projects. It was more related to the project activity and the demand data of those customers. You know, if there was anything we were gonna see when it comes to distributors not wanting to take the stock, right? A hesitation around that, you would see them put in some different delivery dates on the standard product portion of the business and we did not see that at all. They were taking it at the lead times that we were offering. There was no real manipulation around that that we saw. Generally, felt fine with it.
Probably just to confirm that we are not actually giving interim updates on our view right now. Understand that maybe 3M did that yesterday, but for us, we're not feeling like this is a moment for us to do that.
Yep. And that is standard practice for you guys. Totally understand.
It is. Yep.
Yeah. We still have to ask and kind of get it, get it.
Absolutely. Yep.
We have to give it a try. Maybe just to, you know, expanding the lens a little bit from a demand perspective, and you guys have guided, for, you have provided forecasts for the verticals. Maybe, what informed those forecasts? Let's just kind of like walk through some of them here and what you're seeing. You know, I'll start with food and bev because that's, you know, people don't talk about it a lot, but that's your biggest single end market. I'm sure some of that comes through European machine builders, but maybe what informed your forecast on food and bev? How does that decouple from their CapEx budgets? Maybe just an update on the vertical there.
Sure. First of all, let's talk about what happened in Q1 for us, fiscal Q1. Food and beverage and broadly hybrid, industry segment that has Food and Beverage, Home and Personal Care,S ife science, Tire did better than we expected. Food and Beverage, not seeing a lot of greenfields there. Now we are winning some of them here and there, but the majority of spend is really customers' investments in their productivity, efficiency, resilience, cybersecurity. We are seeing spend there. What we see with machine builders, especially packaging machine builders who serve predominantly or in a big way, Food and Beverage and home and personal care, kind of the broader consumer packaged goods sector, we are seeing some green shoots there. It's encouraging, and you might notice, Steve, that especially HPC, those machine builders are viewed as a leading indicator on the recovery side.
Now it's only one quarter. That was a kind of an early, green shoot, but that was one of the things that gave us confidence. We haven't changed our expectations for the full year for Food and Beverage, but certainly it's a great data point. We talked about European machine builders. As you know, this is where we had a lot of our excess inventory last year, especially with our largest controllers. We are seeing that destocking coming to an end. That's great. We see a stabilization, especially with Italian machine builders. Overall, Food and Beverage and HPC came in better than we expected.
Yeah. Maybe I'll add to that just to say that we do obviously have sales teams that are focused on verticals and part of their Process is to actually go engage with those end user customers and talk to 'em about their CapEx and OpEx budgets. You know, the view that they got from those customers around the projects they had planned for this year, it supported our overall view for what we thought our performance was gonna be for fiscal 2025.
I'll just add, Steve, we are expecting a gradual sequential improvement. When you look at our forecast for the full year, whether it's by industry or for the company, it's one view from a year-over-year standpoint. Remember, first half of last year, we still had some product backlog.
Yep.
It is really more of a quarter-over-quarter story. We do expect a gradual improvement, and Food and Beverage certainly is one of them.
Did you, I would assume that a lot of those guys, you said Italian, you know, the European OEMs, do they talk at all about kind of cross-border risks and, you know, reciprocal tariffs or anything like that? You know, your customers coming, not necessarily you guys coming cross-border, but the customers coming, you know, into the U.S., have they talked about that at all? I mean, I'm sure it's pretty fluid, but.
Yeah, I think it's pretty fluid. Obviously they're, when they're talking to us, they're asking us questions around what, what does it mean for them from a pricing perspective? 'Cause of course they wanna have predictability in their business. Then of course it's happening on the other side for them too, which is, okay, what's the, what's the potential impact on their business and how exactly are they gonna be in a position to recover if there are additional costs? As we all know, it's a fairly dynamic environment, and there's some difficulty to have predictability around it right now.
I think the key for us at least, and with our discussions with all of our customers, whether they be OEMs or our distributors, is that we are putting in place a Process to say, hey, look, if we're gonna actually incur a cost, that our intention is to recover that, and here's our Process for doing it.
and on these OEMs, you talked about that being the, you know, the biggest aspect of destocking. basically you're saying that like the growth there is actually for them is not that great, but you guys are now kind of like recoupling to that trend line. and that's kind of a gradual thing.
I think a good word is stabilization.
Yeah. Where are you when it comes to that? Will we be more normal and in line by kind of year-end with those guys or do you still have a ways to go?
I think the most important part is for the whole company. We're talking about really end demand is starting to be, being represented in our sales.
Yeah.
Right? As we go through the year, this is why we are not really going to talk too much about orders going forward, because if we are back to that normal environment pre-pandemic where orders and sales are kind of sitting on top of each other.
Yeah.
That, that's a, I guess, a good way to just to explain where we are with that stuff.
Yeah, that's been my view as well. Obviously everybody, you know, likes orders. That's kind of the food and bev. Any signs of, you know, longer term, food and bev? What is the natural growth rate you see in that industry?
We haven't shared that just for that particular industry, but there are a lot of areas within the food and beverage segment. 'Cause it's, you know, there are a lot of areas there. There's agricultural processing, there's protein, there's.
Yep.
You know, confectionery and all those things. We are working with the leaders in all of the different segments on their next gen platforms, production logistics, what we're doing with autonomous mobile robots is a source of a lot of conversations and pipeline there. They're investing in software. I know we can, we might talk about it later, but a lot of what we're doing with AI and how for them really it's more if you, if they're not building out capacity right now, it's how do they increase their production volume and yield and improve their quality. We're doing that a lot more with our advanced technology, with our AI, with our software offerings. It's an attractive market. Food and beverage has never been the fastest growing, but it also has been very resilient through the years.
We expect that it's 20% of our total revenue. It is our single largest vertical within that. This is why it's one of our focus industries. We see a lot of areas, sub-markets that are slated to grow faster than the average.
Right. Lastly, on the hybrid side, Life Sciences, you know, seems like it's a bit of a, there's some waves here, there's a big wave and then it settles in and now it seems like there's a bit of a pickup there as well.
Yeah.
On the Life Sciences side, maybe just the same conversation.
We had a, yeah, we actually increased our forecast for the full year in Life Sciences. We see a lot of good activity, similar to food and beverage and HPC. A lot of customers are investing in their resilience and overall kind of efficiency, production efficiency. However, we do see some greenfields there, especially on the GLP-1 side, and we have good presence there. As you might know, we have a very strong software offering, especially in MES and digital, a lot that helps us a lot with Life Sciences companies. We had a pretty large win with a European Life Sciences company just last quarter we talked about. It is a combination of our core automation and some of our newer software offerings, but well positioned. We expect that to do better than we thought coming into the year.
When it comes to that five to eight, I'm sure, you know, the long-term growth rate, I'm sure Life Sciences is at the high end of that when you think about it longer term.
When we introduced that 5-8% longer term framework, target, growth target, we talked about five focus industries. Life Sciences was one of them.
Yeah.
We talked about it for a reason. Okay.
Turning to discrete and auto, just talk about what's going on underneath the surface there. There's obviously, you know, the EV stuff, not the biggest market for you guys, but still.
Yep.
important and, you know, growing.
Yeah.
Obviously some concerns there around the future of that capacity. Just talk about the difference between EVs and the traditional OEMs.
Automotive is about 10%, a little bit less than 10% of our total revenue, of which EV is about a third. In our Q1, Automotive actually came in as expected. Yes, it's challenged. We continue, we expect it to be challenged. Especially if you look at automotive brand owners, they're not, they're kind of delaying their CapEx plans right now. They're still spending on their OEE and productivity. This is where, again, our OTTO AMR business is doing well, because these customers are trying to complement their scarce labor with technology with autonomous mobile robots. There's growth. If you look at historically, Automotive for us has been driven by both model changeovers and MRO. These model changeovers are not going anywhere. Customers, these automotive companies will need to continue to innovate to get more models out there, which drives business for us.
For sure, we have a great readiness to serve the EV market. We've talked about it, but regardless of the powertrain, whether it's ICE, hybrid, you know, battery, we are well prepared to serve these customers. Longer term, we think it's gonna be good. EV growth, it is going to be there. It's more subdued. It's less than we all expected a few years ago, but it's still growing. We think longer term we're well positioned, but, you know, it certainly is being impacted by some of the trade and policy uncertainty this year as well.
I guess on those mega projects that you guys had highlighted two years ago, semis, we could also throw in there, from a discrete perspective. Are you seeing any signs of life in those projects that have been delayed, that may be coming back on, or what's kind of the timeline, the reset timeline of some of those?
We do see projects. In fact, when we talk about projects or mega projects, semiconductors is one of the verticals there that has a lot of those projects in the pipeline. This year we expect to be challenged. If you look at the excess inventory, especially in industrial and EV markets, you look at the trade and policy uncertainty similar to automotive, that's certainly weighing on these customers' plans.
Right. There is not a lot of visibility in those things, you know, re-accelerating.
not, not in fiscal 2025 in a big way, but like I said, quarter over quarter, we do expect kind of a gradual improvement for a world company.
One last one on discrete, warehouse automation was very strong. What, what's driving that organically?
E-commerce and warehouse automation. We kind of combine both the e-commerce, but also a more broader warehouse automation application space, continues to be strong. It's a combination of new fulfillment centers on the e-commerce side, and we serve the whole ecosystem. The end user, the SIs, the machine builders who serve that customer segment. That's going strong. We have a great combination of our core automation, but also some of the newer offerings, including our Emulate3D , our digital twin software to help us there. On top of that, just really broadly, if you look at the infrastructure for warehouses today, it's not sufficient to meet today's and tomorrow's needs. That's driving a lot of modernization of existing warehouses for other customers.
We're talking about global logistics companies, parcel companies, traditional retailers who are, who want to have the competitive advantage and they wanna use this opportunity to upgrade. It's both. One more thing, we did talk about our data center business. It's also grouped in that as well. All three are doing well. That's right.
The Cubic business, you report the data center stuff like that.
Right. That's right.
Yeah. That is very strong, obviously. And then just lastly on Process, that is a market that has been coming back, but pretty slow. Any comments there on how that is gonna trend?
Sure. We haven't changed our outlook for Process. We think, if you look at within that, energy is about 15% of our total, of our total revenue. And it's a combination, of course, traditional oil and gas, but also what we're doing with the, you know, carbon capture, decarbonization, renewables. Q1 was a, was a tough year-over-year comp. That kind of informs what happened there. Overall, well positioned. There's still customer investment in oil and gas. Where we place is really getting more out of the existing wells, is using software automation to expand that a lot more on upstream. We're also working with direct air capture, CCUS broadly, renewables. We think it's a good business. For us, we have been investing in our Process architecture, Process technology, and expertise. That's been paying off.
Process is our largest industry segment if you look at our revenue breakdown.
For a lot of these end markets, I mean, can you significantly decouple from customer CapEx budgets? I mean, are there any where you see, you know, an opportunity to really like outperform customer CapEx budgets?
You mean broadly industry or Process?
Broadly. Any of these industries you'd highlight, hey, the CapEx budgets are here, but like we have something that's really gonna, you know, drive a plus 3-4% growth relative to CapEx budgets, kind of outgrowth.
Yeah. I mean, if you look at what's going on right now, whether it's food and bev, whether it's automotive, whether it's Life Sciences, the customers are optimizing their offerings right now. They're not, they're reluctant to make any large capital outlays right now, but they're investing, whether it's AMR, whether it's software, could be MES, it could be our digital twin. It's really cybersecurity and the recurring revenue we have through that in addition to other managed services. Not to say completely decoupled. CapEx still drives a big part of our business. We have been investing in diversifying our revenue streams to give us more access to some other things that are more resilient.
One last question on demand, more higher level. I think in November, when all this happened, new administration, I, I'm sure that there were some customers that, you know, saw the writing on the wall and wanted to get ahead of things. Did you have any conversations or have you had any conversations, where people are kind of like proactively looking at reshoring and bringing it back to the U.S.? Have you seen an uptick in those conversations, the translation from, you know, tariffs and all the noise out there into the actual kind of on the ground, bringing stuff back to the U.S.?
Yeah. I don't know if I would necessarily, specifically index it to an administration or the election or anything like that, but it's been an ongoing conversation for sure around folks that are looking for bringing their production closer to their end user customers, taking out some of the issues that they may have seen during the supply chain crisis. You know, labor, efficiency, labor availability continue to be issues. And so the ability to maybe invest closer to where their customers are and taking labor out of the equation. I mean, that's where Rockwell lives. That's where, that's where we can help them.
A bit more evolutionary than, you know, kind of an inflection?
Right.
Okay. Just moving away from demand and to the margin side, you know, this is a topic that's near and dear to your heart, I'm sure.
Absolutely. Yeah.
How is that progress coming along? I know you've only been here for a relatively short period of time, but some big expectations out there. What are maybe some of the things that have surprised you early on here? Any challenges, opportunities?
Yeah. I, you know, I think, just to go back in time a little bit. I have been with the organization for seven months. You know, before I joined, there was a cost out program that was underway. That started in the second half of fiscal 2024. The first wave of that was really more focused on SG&A and bringing more efficiency into our organization. That was primarily headcount related, and that was mostly done in the second half of fiscal 2024. If you go from kind of one year ago or a little bit more than a year ago to today, we are down, I think, 12% in headcount in that timeframe. Part of it from reductions and then part of it through normal attrition and just being conservative on our add backs.
That is, you know, really we're seeing the kind of the annualization of that through the first half of this year. The second wave is underway right now. That wave is really more focused on the COGS area. And, looking at our direct material spend, our indirect materials, our logistics spend, trying to bring more efficiency into our operations, our SKU, SKU count and, and rationalizing that, which is really where I've dug in a lot more. I like the program a lot. I think it was, it's a great opportunity. It's not to say that the Rockwell team had been doing anything wrong.
It was really more of the fact that, over the last three, four years and the supply chain crisis, it was all hands on deck and, working really hard to get, the materials in the door, to get 'em converted and get 'em out the door as fast as possible. When you're doing that, right, you're spending a bunch of extra money on, the logistics side, doing things via air freight instead of ocean freight. You're spending money on overtime. You're probably not being super efficient in your operations. We weren't doing a lot of productivity projects, in our factories during that timeframe. This is a really good opportunity to have that reset. That should yield us about $250 million of savings in fiscal 2025. Of course, we're gonna get the annualized benefit of that into fiscal 2026.
On top of that, you know, if volume does continue to grow, then we are gonna get that benefit just because it is a really hard program to implement when you are talking about a low to no volume growth environment. When you actually do get some volume growth, then you really yield the benefits of these kind of programs.
The 30-35% incremental margins you guys have talked about, I think that's still the number.
35%.
35% incremental margins you guys have talked about. Is that, is that still the number or should you expect if we get a little bit of volume, you should be above that, you know, early in that cycle? You know, are you, are you, is there an upside bias to that number?
Yeah. I mean, we are generally, we're holding that 35% just because, you know, at least the way I look at it, first of all, from quarter to quarter, it's probably not gonna, you know, it's not gonna be as simple and easy as that. And that overall through that cycle, we should be looking at a 35% number. Now, theoretically, you know, if we continue to execute this really well, you continue to expand your gross margins, then you should be in a position to build off of that. Not quite ready to sign up for that one.
Got it. Is there a wave two of this perhaps on the COGS side next year, a more, you know, and what I mean by that is a more kind of official plan, as opposed to just, you know, getting the volume leverage, or is this, are we kind of like done with the whole kind of?
No, I appreciate you asking the question 'cause it's really important. You know, I'll go back even to before I started at Rockwell. One of the first discussions I had with Blake in the interview Process was around, okay, this is great. I understand it's a really good initiative. What's the organization doing to make sure that a framework is put in place to turn this into something that's not event driven, but is really more of a way of life?
and so, it was already in Process and there was work being done on it, but that's how we ended up on the Rockwell Operating Model and, taking all the learnings, all this good work that the organization has done, using this opportunity for a reset and then taking that and building off of it and turning it into a really strong continuous improvement and operational excellence program, which we talked about at our Investor Day in November. It is not necessarily another wave to come behind this. It is really more of a, how do we institutionalize it, have it so that it continues to evolve regardless of who the leaders are of the organization or any individuals and make it so that it's really part of our way of living.
The way we'll see that is not necessarily like, hey, on, you know, October 1 or whatever, we've got another $50 million plan that's gonna result in this much in savings. It's just more like, hey, we're guiding to 35% plus incremental margins. You know, that's the way we would, it'd be much more just organic and part of the business as opposed to another item of the bridge.
Yeah. I think it probably will be more just part of the business and not really part of the bridge. You may see us take some of that yield off of those and use it to reinvest in the business.
Yep.
Yep.
That makes a ton of sense. Turning to tariffs, maybe just remind us,
Actually, can I pause you for a second?
Sure.
Can we, I want, I wanna take a moment and just talk about investment in the business,
A hundred percent.
If we can.
Yeah.
'Cause, you know, you've had an underweight rating on Rockwell for quite some time.
Yep.
You know, you've been fairly critical of our investment spending, you know, during the last half a dozen years or so. And so, I, we should take the opportunity, right? It's your conference. We should talk about it.
Sure.
We should talk about the investments that Rockwell's making in our business, in particular, in new product development. And so, you know, just to give the facts out there. About 6% of our sales are plowed back in new product development every year. That's NPI specifically. We feel comfortable with that number. That number is heavily from the software c ontrol side, Software is a much bigger investment number, right? That's in the low teens for us. For Intelligent Devices, that's a kind of mid-teens percentage. And intelligent.
Mid-single digits.
Oh, sorry. Mid-single digits. Pardon me. It's a mid-single digits number. And that is a business that has a heavier configured order portion of the business, which is not something that needs R&D spend.
Yep. Labor.
Specifically. Yes, exactly. It's labor. And so for the product portion of that business, it's also getting an outside spend. And Lifecycle Services , again, is more of a project type business, which doesn't need that kind of investment. You know, I've read your reports, I've seen the questioning around our investment level for sure. At the same time, ultimately, especially when you're talking over a half a decade or longer timeframe, this should ultimately manifest in an answer in things like market share.
A hundred percent.
You know, from our data points and what we look at, and, you know, our data points are pretty broad based around, we look at industry data points, we look at what's happening with our win rates, we look at what's going on with the competitive environment and our peers and what we can see from the detail around that. We feel like, during that kind of half a dozen years that we've held on or gained share in most of our product categories. We feel like our investment level is pretty good. At the same time, again, your conference, your floor.
Sure.
We talk about it?
A hundred percent. What I've seen in the numbers and the bridges you guys have given, there was a $2 billion investment account. You guys would talk about how much that was either going up or down year over year, and you could see whether that was tracking with sales or not, i.e. falling in the margin or not. In times where you guys were seeing volume declines, that number was being toggled back and effectively being used to defend margins, which is, you know, your strategy and your prerogative. In addition, if you then translate that and go to the, you know, the field, and the field work we do, we go to conventions, we visit, you know, with your competitors and look at the different booths and the offerings.
You go to the other company's booths and they are certainly a lot more fancy than what you guys are presenting from a, whatever it is, software perspective. In addition, going to Pack Expo, visiting with several of your machine builder partners that you've introduced us to over the last 15 years, Chris Hart introduced us, you know, a while ago. The feedback from some of those customers is that you guys are losing sockets on some of those products. I have never said in my reports that I can see in the revenue numbers that you guys are losing market share. I have always talked about it as a risk 'cause I can't see it. I agree with that. I have never said that Siemens is substantially outgrowing you guys, but that's the mosaic that I see.
As a smaller company with a much smaller R&D budget, Siemens has obviously invested, I don't know, $5 billion-$10 billion in software to come over the top. Clearly a more, they were early on that. They were much more focused in that strategy versus you guys where it's been definitely more fragmented. That's the mosaic I see.
Sure, Steve. If I may.
That's where I am.
Add two things. One really quickly. The old version of investment spend, there was a big base, as you know, had SG&A and R&D in it.
Sure.
That is what we used to report. We went away from it because it was really obscuring the true NPI spend. You can look at our R&D spend through the years and it matches what Christian said, about 6% of sales. Within investment, when you do have some years, you have to drive productivity. We always drive productivity in the functions. That functional spend was not that $2 billion spend. It was not really true new product development that you were looking at. Going forward, we are going to talk only about R&D so then you can see what we are doing. That is more of, I guess, reporting, structural categorization. On the share part, especially you mentioned Siemens or fancier industry booth. Listen, at the end of the day, it is what we are doing for our customers in our production automation space.
Yes, Siemens is spending a lot of money in the production design, in the product design and product automation space. The recent acquisitions, the R&D, we are focusing, we've carved out production space. In that space, we've made significant investments organically and inorganically over the last several years, as you know. We think we have a leading portfolio actually. I'll be happy to talk about whether on the software front, on a devices front, but there's a big difference. There's PLM, there's CAD, there's EDA, and then there's actual production. Those are very different areas.
They also have a virtual PLC that they're pretty excited about. And it's, you know, like for like versus your virtual PLC, it just, it's hard to, I'm not a technical expert, but, you know, at face value, it's kind of hard to.
I'm glad you brought it up actually. You were at our Investor Day in our Automation air.
Yeah.
When you look at virtual controller, by the way, we do have our version that.
This is like 0.0001% of what you're saying.
Right. Right. No, the most important part is really it's software defined automation and virtual controller is only one part of it. What we are doing is so much broader than that, which is really how do you take and define and design application content and then you can just be hardware agnostic. It's not just a PLC, it's visualization, it's I/O, it's how you deliver all the content. What we have with our cloud native platform, we're better positioned than anyone else to do that. We can talk about virtual PLCs, we can talk about software, we can talk simulation all day long. We did not mean to kind of ambush you here, but I think it's an important conversation to have because R&D is there and we are, you know, developing leading technologies in our space.
Totally. And to be clear about this, I'm not sure like bullet one, two, and three of my thesis has been about market share. Just factually, you know, the street had like $14 a share of earnings as their forward estimates and you guys are doing nine. I think like that has nothing to do with market share. That has more to do with almost like 75% to do with how the cycle played out and where people's expectations were at that time. You know, I don't want to, I don't want the message to be that like, I'm underweight Rockwell because you guys are like losing share left and right. You know, if things picked up tomorrow and the cycle changes, like I don't think you guys are gonna sit there and not participate.
Understood.
Just to be clear.
I'm glad we cleared up the R&D part.
Yeah.
The R&D and investments, I think.
Sure.
Yeah. Maybe, one other data point just to make sure we're, that we all are on the same page around this, that new product development investment amount, that 6% number, that actually excludes any of our sustaining R&D. Sustaining spend for engineering is above another two points to three points that we're spending. Our total engineering spend is upwards of high single digits. We are spending a fair bit. Again, really overweight as a percentage on the software side of the business.
Yeah. To be clear, if the economy picks up and CapEx picks up and we start building a bunch of plants in the U.S., I don't think you guys are gonna sit that out. Obviously, share in this industry changes very slowly over time because you're leveraging installed base and nobody really rips and replaces unless something's wrong.
That installed base is a, is a great powerful tool for us.
It is for sure.
Yep.
I really appreciate this conversation. This is actually a ton of fun.
Yeah. Me too.
I love it.
All right.
Yeah.
Thank you.
That's it. That's all we got time for.
All right. Great.
Thank you.