Bill Lacey: Yes. And Rob, I think it’s going to be hard for me to split that out. For sure, we have — the margin expansion has benefited greatly from our focus on price, but also our operational excellence has allowed us to improve our output, and we are getting margin expansion because of our ability to deliver on that in the volume and getting that levered through. I think on lean, as Chip mentioned, we’re in the process, and I think that there’s a lot more opportunities for that in the coming years. But great execution and good price and volume flowing through has really contributed to our margin expansion.
Robert Spingarn: I know that people like to say lean is this never-ending journey, but based on what you both just said, is there a way — I think, Chip, you said, two or three years to get all of this fairly mature. Is there a way to characterize what inning we are in with lean?
Chip Blankenship: I think we’re in the early innings. So it’s kind in two or three year — we’ve got a lot of things to work with in terms of our ability to improve and get more out of our production system.
Robert Spingarn: Okay. And then just one more quick thing. What would typically spend about 6% of sales on R&D, and you’re a bit below that lately, 4% or 4s. Longer term, what’s the right — the appropriate amount to spend and where are you focusing the R&D efforts. Thanks so much.
Chip Blankenship: Sure. As you probably know, that these are long-cycle businesses we’re in, both the industrial and the Aerospace. And when new product opportunities come along for us to participate in, whether it’s the launch of a new industrial engine or industrial gas turbine or a new airplane, our R&D expenditure goes up when one of those programs comes in because there’s just so much involved in designing, developing and testing and certifying those new products. Right now, we don’t have a lot of that activity going on. We’ve got a few components here and there on missiles and space. We’ve got a few P2X new renewable fuel type of opportunities underway in industrial. And then we’ve got this really large Zero E Airbus fuel cell demonstrators.
We’ve got a few of these more technology development and smaller customer product development going on. We don’t have any really big platforms underway with the customers. So that’s what’s allowing some of the R&D to be a little bit lower. And quite frankly, our net engineering expenses are up. So we’ve deployed engineers to help with the production and productivity and what we’re trying to do with lean. So I think it’s not as much about we’re investing less in our products, people and the future. It’s just taking some different color of money and putting it in different places right now where the needs are.
Robert Spingarn: Thank you.
Chip Blankenship: Sure.
Operator: And we will take our next question from Gavin Parsons with UBS. Your line is open.
Gavin Parsons: Thanks. Good afternoon.
Chip Blankenship: Hey, Gavin.
Bill Lacey: Good afternoon, Gavin.
Gavin Parsons: Guys, on the industrial guidance revision, can you parse out how much of that was China truck versus non-China truck?
Bill Lacey: Yes, I’ll just say in general, Gavin, it is, as we talked about, recognizing that China on-highway third quarter volume — and we did see, based on our non-OH performance in the first half that we are expecting that to stay consistent throughout — and the combination of those two is what led to us increasing our industrial guide.
Gavin Parsons: Okay. I think non-OH might have had some mix or pull forward in the first quarter. Is that to your point, still going to be a sequentially stable margin in the back half?
Bill Lacey: Yes. We believe that, that will be sequentially stable.
Chip Blankenship: Yes, we’re working with our customers, that was our — what we said we saw in the future based on customer input, but that pull forward rent mix first half or second half actually didn’t materialize. So, that’s a piece of the change to the guide as well.
Gavin Parsons: Okay, that’s helpful. And then maybe just in China on-highway going out to 2026, the guide doesn’t have much in there. Is there a way to either expand the geographic base of that technology or maybe expand that technology into different engine types or any way to think about dampening the revenue unpredictability?
Chip Blankenship: We’re really evaluating a lot of different ideas to dampen the revenue volatility, Gavin. So, we’re looking at different regions. We’re looking at like how much we want to invest, how much do we want to have that be a part of our portfolio from that standpoint. If we grow it, it might be more volatile. So we’re in the strategic planning phase, looking at the next three years right now and that team is actively bringing forth different scenarios or ways to grow that business, but also to potentially as you’re saying, make it less volatile by spreading the customer base, the regional base, and other plays like that. So, early days on, you’ll hear more from us later on it.
Gavin Parsons: Okay, great. No, it’s a small but significant piece of the business. So, I appreciate all the color. Thanks guys.
Chip Blankenship: Indeed. Yes.
Operator: And we will take next question from Louis Raffetto with Wolfe Research. Your line is open.
Louis Raffetto: Hey, good afternoon.
Chip Blankenship: Afternoon.
Louis Raffetto: Maybe just quickly, I think you said that oil and gas is up 7% sequentially. You have that for either end or both the other businesses in industrial?
Chip Blankenship: So transportation is flattish sequentially, if I’m looking at the right thing.
Bill Lacey: You’re right. Yes, you’re right.
Chip Blankenship: And then power generation is up, say 7%, 8% maybe high single-digits.
Louis Raffetto: Okay, great. Thank you for that. And then, Bill, maybe just for you here. Was there anything in the aerospace a great performance, so anything sort of a one-time nature there? I’m just trying to sort of square what you did in the second quarter with sort of the guide for the rest of the year. It almost looks like margins are going to step down like 100 basis points. Is there any reason for that or conservatism?
