Parker-Hannifin Corp Q2 FY2025 earnings call

• Focused on operational excellence and balanced portfolio, achieving top quartile safety performance and strong aerospace aftermarket. - Execution of the Win strategy led to 110 basis points of margin expansion, resulting in a Q2 record adjusted segment operating margin of 25.6%. - Record adjusted segment operating margins across all businesses and record earnings per share. - Substantially reduced debt by $1.1 billion through strong cash flow from operations and divestitures. - Industrial orders turned positive in longer cycle businesses. - The Win strategy includes the Parker Lean System for continuous improvement, used by divisions to expand margins and drive growth, as seen in examples like a North American filtration division achieving first quartile safety and margin expansion using Kaizen and other tools.

Diversified Industrial North America: Sales were $1.9 billion with organic growth of negative 5%, adjusted segment operating margin increased 40 basis points to a record 24.6%. Industrial International: Sales were $1.3 billion, organic growth negative 3% (Asia-Pac +3%, Latin America +10%, EMEA -8%), adjusted segment operating margin was a record high of 24.1% (expanded 110 basis points). Aerospace: Sales were a record $1.5 billion, up 14% organic growth, adjusted segment operating margin was a record 28.2% (increased 170 basis points).

• Reported sales growth forecast for FY'25 is in the range of -2% to +1% with a midpoint of -0.5%, impacted by divestitures (1.5%) and currency (1% negative headwind). - Organic growth forecast for FY'25 is approximately 2%. - Raised aerospace and defense organic growth midpoint to 11%, and adjusted segment operating margin guidance to 25.8% (90 basis points expansion). - Full year adjusted EPS midpoint is $26.70, reported EPS expected to be $24.76. - Free cash flow forecast for FY'25 is in the range of $3 billion to $3.3 billion. - Q3 FY'25: Reported sales expected to be approximately $4.9 billion, organic growth positive 1.5%, adjusted segment operating margin 25.6%, adjusted EPS $6.65.

• Currency volatility which can impact financial results. - Delayed industrial recovery affecting some market verticals. - Potential impact of trade tariffs, though the company has strategies in place like the local-for-local model and supply chain leadership to handle such situations.

Q: More complexion on what you're seeing in the industrial long cycle.

A: Primarily, it is the long-cycle strength. The aerospace and defense is sitting in those industrial businesses. But it's also positive in HVAC and semicon. So that's really what's helping those orders in Asia Pacific increase this last quarter.

Q: Discernible differences or changes in trends based on how you exited calendar year 2024.

A: Nothing notable that I would comment on at this point, just the best look we have today.

Q: Nuances around M&A.

A: It is an exciting time, and we do have a robust pipeline. And we put a lot of stock in the fact that many of the assets in the pipeline or relationships that we've built over many years. And obviously, we've worked really hard and we've done a good job paying down debt. So we're in a position to do that. So I don't know if I would comment that it's easier, but it's definitely a focus for us, and we're going to make sure that we continue to keep a close eye on everything. Targets of all sizes in the pipeline, you've heard me say that a couple of times. We still have the same criteria. We want to acquire companies. We're the clear best owner, accretive to growth, resiliency, margins cash flow, EPS, synergies.

Q: Tariff discussion and strategy.

A: Yeah. Well, I mean, Mig, obviously, there'll be an impact depending on what actually happens. But we've dealt with tariffs before. We have the visibility, we have the tools, and we have the agility to act when something does happen -- if and when something happens. So I would also say that over the past decade, we've built a local-for-local model because we want to be close to our customers. So if it happens, there will be impact, but that definitely helps us. And we've been focused on supply chain leadership now for a couple of years. A lot of new tools and strategies have been put into place to enforce that local-for-local and reduce lead times. So we don't see a big need for a supply chain realignment. We don't foresee any of that. And because we've dealt with this before and our customers know how we've handled this before, the teams will get to work when they need to.

Q: Growth forecast by market vertical mix.

A: I don't think there's anything to call out here, anything that would be of a concern or change the way that we're looking at the forecast or how we can expand margins. So nothing -- within some of these verticals, you've heard us talk, for instance, within off-highway, ag is weaker than construction. But there's nothing there that I would think we would point to a mix concern.

Q: LatAm order and EM performance.

A: Latin America has been fantastic. It is a small piece of the company, but the team down there has been really stellar in growth, in margin performance and really just doing a fantastic job. We tell them all the time when we're in our meetings that we're so impressed with what they've been able to do. It's pretty much been broad-based performance across the Latin America businesses. EMEA has just been a really challenging environment. It's across the board there. It's been in a negative environment for a while. I think it's a plus that international orders have turned positive. We you have to see that in our EMEA region. But I will tell you, the team, again, is doing everything they can to be ready for a recovery and to do that in the most cost-efficient managed possible. They continue to be able to eke out margin improvement despite the top line pressure.

Q: Industrial businesses North America vs international.

A: I think you nailed it. Yeah, I think that's exactly it. It's the greater weighting of the industrial business in North America. The other thing, you got to go back a couple of quarters here, but international decline started before the North America decline. So a little bit of this is year-over-year comparisons. It feels like international started a quarter or two before North America got negative. So I think a little bit of that is just comps.