Conference Transcript - RAL 2026-02-18

Nathan McCurran, Head of Investor Relations

Great. Well, thanks, everyone, for being here. It's my pleasure to have up next Raliant for the first time here as a standalone company. So excited to have you here. Tammy Newcomb, Chief Executive, Neil Reynolds, CFO. So thank you both. And I think, Tammy, you've got a couple of slides to walk through first.

Tammy Newcomb, CEO

I do. I want to leave plenty of time for questions. Thank you. Thank you for being here. Landing here in Miami, it was a year ago I was here, so a moment to reflect. One year ago, Ralliance was a name on a piece of paper, and our expected spin was January of 2026. And here we sit, having spun in June of 2025, with two quarters as a public company. one of the areas we were purposeful about was ensuring that our operators our presidents in the business focused on our customers they were kept away from all the noise of standing up a public company they focused on innovation they focused on growth and we're seeing the benefit of that as we come into 2026 our guide for q1 with a five to eight percent growth so i think we're off to a good start from a growth standpoint. We still have work to do. Our profit numbers that we talked about on the earnings call were below what we had talked about in our investor day. In investor day, we talked about a low to mid-20s. Our guide for this year was 18 to 20 percent. So one of the things I wanted to cover today is to just make sure that we're very clear on the steady state cost to run the business, and then provide the context of how do we take that forward. And one of the things this team has been extremely good about is the operating rigor to drive our profits faster than our revenue growth. That's just who we are, and that's what we'll do. We did it from 2019 to 2024. We'll do it again. We also want to add to that with growth, which gives us more operating leverage. So we posted this presentation to our website yesterday and also filed in 8K for anybody that isn't caught up on following along here. Three things that I'll just cover real quick here. One is our confidence in the long-term value of the company. And that confidence is demonstrated in a share buyback. We executed $39 million in share buyback. since our earnings call. Next, I talked about this in the beginning, but I want to go into more detail so that we clarify both where we're starting and also what you can expect moving forward from an incrementals and a profitability. And then last, just a shout-out to the team. With the stand-up of the public company, the team was able to deliver both Q3 and Q4 at or above the metrics that we guided on so a good good start there I have three slides in here for those that are new to Ralliance that talks a little bit about who Ralliance is not going to go over those but if you ever want to follow up we'd be happy to just give you the the foundation there what I really want to get into is the guide that we have for 2026 and the metrics that we guided And the growth rate, what's exciting in the growth is the T&M segment, the test and measurement segment, is back to growing in 2026, both for Q1 and for the full year. So healthy balance across our end markets where we're seeing growth. I talked about the adjusted EBITDA. I'm going to talk about that in a little bit more detail. But the incrementals we laid out in our investor day were 30 to 35 percent. And while we're getting back into that range, we're committing to higher incrementals here. And then it's our first year, full year for EPS. And free cash flow is something we do well. If you look back, 117%, that's our operating rigor and committed going forward to keep that strong. So we want to walk through where we start with two quarters of public company experience, you know, a normalized 2025 for us. this is step number one here, takes us to the starting point for our adjusted EBITDA margins. The page after this, we break that down by quarter, and we break that down annually. We had shared the majority of this in the August time frame. You probably remember those that were following a 170 number. We've translated that to the margin impact here, and there's an additional five that we experienced in the second half, five per quarter that we experienced that we've added here. So that's where we start. And then number two and number three are kind of what we're going to do about it. And I'll step through to those pieces. So this is the backup of how we got to this steady state number, but then this is what do we do about it. And this is our RBS playbook, the Raliant Business Systems. It's core to who we are and how we go about optimizing the company and driving efficiencies across the company. Immediately at spin, we announced a cost savings program of $9 to $11 million. We are on track. Some of that is closing rooftops. It's the dis-synergies from separating our services business, and that will play out here in 2026. But we have a funnel of other productivity initiatives that we do. We do value engineering. We do price realization. We do sourcing price strategies. All of that are our monthly metrics on how we manage through cost savings. We do some dynamic resource allocation. We've done a number of things in the fall timeframe. We've reduced some G&A within some of the operating companies to fuel a little bit more R&D. But this is what we will manage. We will manage to ensure the 40% to 45% incrementals, and underneath, that we manage our productivity and our costs so that we can make some growth investments. And we get good operating leverage. So in addition to good operating rigor, we want to outgrow our historicals in these businesses. Historically, these businesses have, over a five-year period, grown about 3%. We have higher ambitions and aspirations for that. You'll see for this year we gave a range of 2% to 6%. But we believe our growth vectors are where we can outperform in defense and utilities. And we've seen high single, low double digit in that space. Industrial manufacturing, there's some pent-up demand there. We're seeing good business there, as well as test and measurement. This can be a growth driver after several quarters of being down. No change to our capital allocation approach. We'll toggle between returning capital and tuck in M&A. Right now we're focused on repurchase. And nothing has changed in our priorities on driving value creation. Team is in place. We've got two quarters underneath us. This team is one that wants to win. We're a winning team. We want to win for our customers. We want to win for our employees. And certainly want to win and deliver for our shareholders. So thank you for a couple of minutes there, and I'll turn it over to you.

Nathan McCurran, Head of Investor Relations

Thanks, Tammy. Maybe first off, you know, you mentioned maybe some pent-up demand in industrial manufacturing, and I know it's a big point of focus for people here around is there signs of any pickup in U.S. sort of short-cycle industrial activity? What are your sort of thoughts on that? You know, what are you seeing in the two segments from that standpoint?

Tammy Newcomb, CEO

Yeah, we saw a nice growth in Q4. It's about 4% in our both industrial manufacturing and other, which is a large part of sensors and safety systems segment. I think there's a couple things here. I think first, it's probably a combination of a few small things. The first being there's definitely pent-up demand. We went through a pull forward of supply chain after COVID. people were cautious I think last year we expected some of the demand to start to hit and then we had tariff uncertainty so now I think we're starting to see more optimism in North America and probably more spotty in Western Europe

Nathan McCurran, Head of Investor Relations

Great and I know the test and measurement segment, kind of the biggest piece of that is diversified electronics and investors often ask, you know, what exactly is in that? What are the big drivers? So maybe, and I think you mentioned some improvement there exiting last year in that diverse-wide electronics piece. So maybe help us understand kind of what drives that top line there. You know, how much is industrial manufacturing? You've also got that EA business in there.

Tammy Newcomb, CEO

Yeah, so diversified electronics, that's to me the part of the business you want to see improve because that's the tens of thousands of customers. That's where we have reach through our distribution channels. And that's an indicator that a lot of companies are opening up CapEx spend, doing more R&D. We play in the advanced research and development side, moving into the test automation and validation with some new products. But the indicators that we get in that business from our distributors, both sell-through, inventory levels, quoting activity, look solid. We've seen those improve ever since Q2 when we spun. Those indicators have gotten better every quarter. In the other two reporting end markets, the semiconductor and communications, that's our direct sales team. Those are the biggest, largest customers in aerospace defense, our hyperscalers, and the semiconductor customers. Those are still a little choppy. We talked about a headwind in a semiconductor. The overall semiconductor has gotten better. That shows up in Diversified. The call we made is just we have customer projects there, and sometimes they don't repeat year over year.

Nathan McCurran, Head of Investor Relations

Got it. That's helpful. On the defense side, you mentioned there's exposure in comms in T&M and then defense on the census side. So, you know, how do we think about framing the total, you know, defense percent of revenue for rally and kind of in aggregate? And they had some lumpiness last year around big projects, comping and that kind of thing. You know, what's the outlook like for 26?

Tammy Newcomb, CEO

Yeah, if you look in the defense and space and market, that's where we play in production programs. These are programs we measure in 10 years, 20 years, 30 years in production. And of recent, following, actually following our investor day, we realized an uptick in the replenishment for those production programs. So those are existing programs that we're on today that we thought were sunsetting over the next several years that we've, through the government, through the primes, have indicated, no, we're going to extend those programs. And you see that's in our backlog. When I talk about the two years of backlog in those production programs, what's not in our backlog, and what I haven't spent a lot of time talking about yet, but there's been recent articles around surge demand, and there's 12 critical missile programs that we're talking about taking that replenishment level up to a different level, probably 2028 to 2034 type time frame. We're actively working with the defense primes, but we've not factored that into any of the guidance at this point. If you flip over the other place you called it, if you look at the comms, the communications piece of test and measurement, in there there's probably half of that, maybe two-thirds of that, is aerospace and defense, that's in the research. That's in programs that are in advanced research today that will move into production in the next three, five years kind of thing. So very different parts of the realization workflow.

Nathan McCurran, Head of Investor Relations

I see. But total defense is sort of comfortably in the teens or 20% of total company revenue probably. That's sort of okay. um and if we're thinking about kind of very near term um earnings cadence you have an explicit first quarter guide um how are we thinking about kind of you know first half second half any way to understand in that how the margins kind of step up through the year yeah so first of all

Neil Reynolds, CFO

we provided a q1 guide as you mentioned as well as a total year guide um given the nature of our businesses there's a significant portion of it that's more short cycle we talked about that test of measurement a lot of the industrial business as well so what we've done is if you look at the guidance for the year we talked about two to six percent kind of growth rate an improvement in the margins from the new from a new albeit from a new baseline in terms of the margins the way we set it up is it's more front half loaded from a growth perspective until we get better visibility into the second half so you could say there's some prudence from that perspective in terms of how we're thinking about that. And then from a margin perspective, we thought about this as about 40 to 45% incrementals as we start to grow the revenue throughout the year. And again, I think that would be very much in line with, you know, a more front half loaded growth rate, and then we'll see how

Nathan McCurran, Head of Investor Relations

that plays out into the second half of the year. Perfect. And what's the visibility like, you know, as you said, it's mostly a short cycle business, but there is like defense grid and so forth. there's a reasonable backlog. Has that backlog sort of swollen a lot in some of those longer cycle businesses? You know, what's been the trend there on, say, you know, the grid side and also defense?

Tammy Newcomb, CEO

Yeah, we continue to grow the more durable contractual reoccurring type business across the portfolio. So the defense in space is predominantly contractual revenue. We get really good visibility there. In our utilities business, about 30% is project-oriented, so we have good visibility there. And then in the test and measurement space, about 20% is services, where we have good visibility. But you add all of that up, you're still, about 60% of the business is still short-cycle business. So as we look, we have real good visibility in the quarter you're in and probably one quarter out, so what that short-cycle business looks like. and that's how we put the guide together and probably more weighted towards the test and measurement piece where we see changes happen quicker, honestly, and when we get into Q2, we'll get good visibility into Q3 and we'll continue to update everyone. But to Neil's point, we took a, we used the word prudent, maybe conservative look at the second half when it came to test and measurement.

Nathan McCurran, Head of Investor Relations

Perfect. And if we're thinking about operating costs from here, is the operating cost kind of run rate segment and corporate in first quarter? Is that the right level, or is there another kind of step up sequentially into the second quarter?

Neil Reynolds, CFO

Yeah, I don't think so. I think that the run rate, I think, is kind of where we're at, maybe where we finished Q4. But I think the more important thing here is to think about incrementals moving forward. What we're trying to communicate is that we do have a lower starting point. And we acknowledge that, and we certainly own that. But I think as you look forward, it's about driving incrementals and looking for opportunities to invest with including those incrementals. So, for instance, as we start thinking about investing into the business, it's really about number one is we're going to grow our profit faster than our revenue. We have a history of doing this historically, and we are absolutely committed to doing that going forward. So when businesses invest in things moving forward, they have to go earn it. It's kind of how we talk about it internally. So there are business units or opcos in our company that had to take their G&A cost down to fund some of the things they want to do to grow. So that's something we're committed to and we'll continue to do. We'll stay focused on the profit and the cost side, but all that will be baked into incrementals moving forward. So that 40% to 45% we talked about is inclusive of anything else going forward, and we'll manage that.

Nathan McCurran, Head of Investor Relations

and i think you mentioned you know the investor date sort of a 30s operating leverage goal or forecast or guide and and the sort of nearer term is for more like you know 40 to 45 so when we're just comparing those two numbers you know it's the point of the 40 to 45 it's it's elevated because you're coming into an early part of a cyclical recovery and then as growth normalizes. That's why a 30s operating leverage is appropriate. That's exactly right. I think

Neil Reynolds, CFO

we've seen a couple of years of decline in test and measurement, particularly as that came down, we obviously saw some negative decrementals. But on the flip side, as we start to come back up, we see a higher growth rate projected in 2026 than we see through cycles. We start to see that return. And that in turn comes with better incrementals as we start to move forward into 2026 and beyond.

Nathan McCurran, Head of Investor Relations

And, you know, when you think about the segment and operating costs step up, sometimes investors worry, okay, was the business, you know, underinvested in, perhaps inside prior, you know, organizational structures? You know, could that lead to a need for prolonged investment step up now? Rallion is a standalone company. Maybe sort of help give us some confidence why that isn't the case and why you think, no, the current run rate exiting last year is the right cost base?

Tammy Newcomb, CEO

If I think about what was on paper versus actually what happened in Q3 and Q4, there's three buckets. One, the corporate cost, higher than we expected. The second one is the synergies, so less price power on a lot of the contracts that we signed up for as a $2 billion company. And then the third piece is the visibility into the cost of our employee base. Our employee base is global, a lot of manufacturing, 20 different manufacturing sites, so we just have a different cost per employee. All of these things are normal get-after for efficiencies. Some are contractual. They'll take a little bit longer than others. As far as investing in the business, we were invested in to be a 3% grower business. That's what we have been doing from 2019 to 2024. When I talk about ambitions to be much higher than that, we have to invest to do that. We've got two businesses that have had high single, low double-digit growth now for two years, I think almost three years now. Those businesses need some boost in capacity. That capacity comes in the form of extra shifts that we need to add, sourcing teams, industrial automation so that we can automate a lot of the work that we do, and we're leveraging AI across the businesses. But we want to continue to invest in both capacity and in innovation. In a few select places, we have opportunity to add selling resources to drive some additional growth. So I think we're looking at these as growth businesses, and it's a different way that we would invest.

Nathan McCurran, Head of Investor Relations

Got it. And the point is sort of in future you can encompass that reinvestment into a 30s incremental margin.

Tammy Newcomb, CEO

Correct, and near-term into a 40% to 45% incremental. Exactly what Neil said is we will earn that. The 40% to 45% is first. I don't think this was clear when we talked on the earnings call about our growth initiatives. that those will be savings that we need to drive internally to fuel those growth investments.

Nathan McCurran, Head of Investor Relations

Like the 40 to 45 is a net?

Tammy Newcomb, CEO

Correct. It's a net number.

Nathan McCurran, Head of Investor Relations

And you mentioned, Tammy, the second point I think was around sort of pricing. You know, that was one of the three sort of shortfall buckets that you just cited. Any context around that? Was it, you know, because of competition or things just weren't in place to get price up quickly enough with inflation and tariffs? How comfortable do you feel on price today?

Tammy Newcomb, CEO

We have good operating rigor on price. We typically get 1.5% to 2% price. Last year, we outperformed on that and covered the dollars for the tariff costs. Certainly a little pressure there on our gross margins, but dollar for dollar covered that in the price increases.

Neil Reynolds, CFO

Yeah, I think that's exactly right. I think we have seen the pricing. I think we were able to cover the tariffs with pricing as well as some other supply chain actions last year. We anticipate getting some pricing going again back into 2026, and that's baked into the plan. But I think from a cost perspective, I think that's where we're going, Julian, is really, look, we're two quarters in. We identified that we have a lower basis to start with, but that's baked into the plan in terms of a new kind of steady, kind of normalized run rate. But that absolutely doesn't mean that's not an area we're going to go after and attack. I mean, if you look at the rally and you look at this segment historically, the team has very, very strong operating cadence, operating rhythm, and attention to detail on cost. So this is going to be an area that we're going to focus on going forward as well. So not just from a pricing perspective, but all the other levers that we can use to kind of go drive, you know, cost improvement moving forward. So I think the guidance that we gave is really just a steady state of what we think about things and how they move forward. This is an area we're absolutely going to be focused on to drive improvement over time.

Nathan McCurran, Head of Investor Relations

And is it fair to say that since there's sort of the corporate cost run rate adjustment at last Q2 earnings, that guidance hasn't gone up again since? Is that fair? It's on the segment side, the extra cost.

Neil Reynolds, CFO

It's on the – exactly. I mean, there might be a bit of a modest amount there, but I think the corporate cost we talked about in scanning up the company, so to speak, at the corporate level is more or less in the same zone, maybe a little bit higher. But what we're really talking about here is cost related to operating the businesses. What we talked about is employee costs, healthcare costs, inflationary costs like that, but also dissynergies related to contracts as a smaller company after we spun where we saw some dissynergy there as well. But again, those are areas that we've identified and we certainly can go after from a cost perspective.

Nathan McCurran, Head of Investor Relations

In competitive landscape-wise, anything you're watching, are the competitors remaining pretty disciplined in a cost-inflation environment in terms of price?

Tammy Newcomb, CEO

You know, the brands that we have have been in the market for 50 to 150 years. The customers come to us, we're trusted for the domain expertise. Price is always going to be a part of the equation. The customers are really looking to solve a problem. often in an application that's a mission-critical application where uptime, reliability, accuracy, precision, it's non-negotiable. It's in a place where lives matter in some of these applications. So although price is part of every equation, they're looking for our expertise when we talk to them about solutions.

Nathan McCurran, Head of Investor Relations

Great. And, you know, I think that one area people might want comfort on is mix can move around. So just in the interest of sort of, you know, minimizing margin surprises from here, anything we need to be aware of in terms of any real outlier businesses on margins? I think on the earnings call, you mentioned PacSci, for example, has lower margins than sensors, so you get a very heavy shipment quarter for those products. There will be some margin pressure for that little period.

Neil Reynolds, CFO

Any other kind of mixed factors you think we might need to watch out for? I think actually the biggest swinger is 10-tested measurement. It's very volume sensitive, as you know, so that could actually, on the upside, provide some positive swing. I think you're right, though, on sensors and safety systems. I think there is a bifurcation, I would say, within the segment from a margin perspective where you see defense and space run at lower margins than the average for sensors and safety systems. So if that was to grow faster, that could cause a little bit of margin degradation, albeit at higher growth rates. But I also think that the sensing businesses, particularly if you think about utilities, run at a higher rate. So if that also grows faster, it can be somewhat of a natural offset. So, look, we've given the annual guide and the quarterly guide. So I think as we get closer each time, we'll be able to narrow these. And I think one thing, Julian, that in terms of approaching it that way, is I think we can get better control of the communication and the narrative by providing that as we go into each of the quarterly earnings and updates around anything that may shift in that time frame.

Nathan McCurran, Head of Investor Relations

And just, you know, you provided the segment guides, you know, about eight, seven, eight months ago, you know, since then a couple of drops on the cost base, the EA write-down. So what's the level of confidence that those kind of medium-term segment margin guides, you know, they're still intact kind of thing. There isn't much downward pressure on the medium-term outlook.

Tammy Newcomb, CEO

Yeah, I think I just reinforce Neil talked about the volume recovery and test and measurement is probably the thing we're watching the most, and that's a positive, that they've been below the guide that we gave seven to eight months ago. We want to get them squarely in that space. They're one of the operating companies that have done some restructuring to take down G&A cost and continue to fuel R&D. The R&D and innovation in that space really drives growth. Put new instruments into electrical engineers' hands, and that drives our growth rate. Last year, we announced eight new products in that space. They've really got the flywheel going. And I expect 2026 to be another great year of innovation in the T&M space.

Nathan McCurran, Head of Investor Relations

And your point was there that the competitive landscape is pretty steady. You know, it's just the market demand that's the issue. You haven't seen any competitors in T&M be particularly aggressive on price or anything like that.

Tammy Newcomb, CEO

I think it's a low end of testing measurements. And you go back to 2018, 2019, when we had some restrictions on shipping to China, it really spawned a whole wave of low-end players in the T&M space, many of them Chinese-headquartered companies that are now expanding into Western Europe and into the U.S. So I think we have a great brand. People come because we're reliable. We've got services. We back it up for years. But it has opened. I think that did open an opportunity at the very low end of T&M for a different set of competitors.

Nathan McCurran, Head of Investor Relations

Well, thanks very much. We'll now pivot to the audience response survey questions, please. So the first question is around sort of current ownership of Rallyant, around sort of 55% opportunity there. Secondly, it's around general bias or attitude to Raliant right now, neutral-ish. Third question is around EPS growth profile, kind of, and that's versus the multi-industry average. It's around middle. Next question is on capital deployment, and we just talked about the accelerated kind of buybacks that have been happening in recent weeks. So generally, buybacks still, the preferred use of cash. Next question is on the warranted valuation on sort of 2026 PE, sort of high teams. And last question is, you know, what's the main kind of anchor or headwind holding the valuation back? So it's kind of execution,

Tammy Newcomb, CEO

just getting those margins out the door.

Nathan McCurran, Head of Investor Relations

So fantastic. Well, thanks so much, Tammy, and also Neil for being with us today. Thank you so much. Thank you, Dylan. Appreciate it.