Parker-Hannifin Corp at Robert W Baird Global Industrial Conference Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Mig Dobre - Robert W. Baird & Co. Incorporated - Analyst : All right. Would you mind taking us back to slide 2, just back to your business mix. It would be nice to have in the background as we're getting into our discussion here. Perfect. Thank you so much. Where I'd like to start is perhaps with the most predictable of all questions. In the wake of this election, as you look at your business and do the various scenario and planning and analysis that I'm sure you've done prior to the election, how do you think about the outcome here? And I'm not just referring to the removal of uncertainty, which I would imagine that helps. But the potential for tariffs and how that might impact your cost of goods sold and potentially your manufacturing strategy?

Question: Mig Dobre - Robert W. Baird & Co. Incorporated - Analyst : So to that point of visibility, when you look at your suppliers, Tier 2, Tier 3, and so on, do you sort of have a good grasp if you would, in terms of their cost structures and kind of how they're sourcing on their end?

Question: Mig Dobre - Robert W. Baird & Co. Incorporated - Analyst : From your perspective, is the solution here, pricing and passing this on to the OEM customer or the end user itself? Or is this more Parker-oriented in reshuffling and adjusting the supply chain? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Mig Dobre - Robert W. Baird & Co. Incorporated - Analyst : That's great to hear. Maybe moving on to talking about the business, and I know you've just reported the quarter. The thing that's been talked about again and again in recent quarters has been the relative resilience of your Industrial business. Obviously, we're not growing. We're still having the cyclical struggles. But this cycle has felt different when I'm looking at the various platforms that you have, filtration and engineered materials have certainly been a stabilizing force. Maybe motion systems has behaved more similarly, if you would, to prior cycles. What's different here? What's working?

Question: Mig Dobre - Robert W. Baird & Co. Incorporated - Analyst : So within -- since you brought up motion systems, and yes, that's fair. It's been less cyclical than it's been in the past. Can you talk a little bit about what happened there? Because in some ways, I can understand Filtration, right? It's been a function of M&A. We think about CLARCOR, that's a more stable business. But what about pure motion systems itself?

Question: Mig Dobre - Robert W. Baird & Co. Incorporated - Analyst : There's a question from the audience here that I think pretty much applies to both your Industrial as well as your aerospace business. The switching costs that customers have, and I think it's obviously on the OE side, once you're spec-ed into various platforms. In aerospace, I would imagine the answer is they're extremely high. What about Industrial? How has that changed over time? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Mig Dobre - Robert W. Baird & Co. Incorporated - Analyst : Maybe one last item on industrial demand. Trying to get your view as to how you think we move forward here in 2025 based on what you're hearing from your OEM customers, based on where you see channel inventories? And if there is some geographic color that you want to provide, I think that would be helpful, too.

Question: Mig Dobre - Robert W. Baird & Co. Incorporated - Analyst : The mobile markets are still compressed over there.

Question: Mig Dobre - Robert W. Baird & Co. Incorporated - Analyst : We are having a dinner last night with a group of investors and somebody was asking the PMI question, right? Why is it that there's been this divergence in your trends relative to PMI? And is there a point in time in which this gap kind of closes again, and you're going to have to put a forecasting cap on, I guess. But I'm curious how you'd answer that question for this audience, and I'll have a margin follow-up on that.

Question: Mig Dobre - Robert W. Baird & Co. Incorporated - Analyst : And that leads us into the margin discussion because the margins have been incredibly resilient in your industrial businesses. In a future recovery, whenever that may occur, what's the right way for investors to think about incremental margins?

Question: Mig Dobre - Robert W. Baird & Co. Incorporated - Analyst : Okay. So it's not, I guess, the traditional model of where we're dealing with some sort of volume compression that would, in turn, lead to abnormally high incremental margins when things are recovering. It's more of a, call it, steady state, if you would, maybe mid-30s, I think that's how you typically thought about.

Question: Mig Dobre - Robert W. Baird & Co. Incorporated - Analyst : The last question on Industrial for me is around your distribution strategy. Maybe we can talk about that a little bit. I'm curious, are you seeing any M&A within your distributor base? And how is that sort of changing and maybe changing like your relationship with your distributors? And then conversely, what are some of the things that you're doing to expand your reach, especially globally from a distribution standpoint? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Mig Dobre - Robert W. Baird & Co. Incorporated - Analyst : Understood. Before I move to aerospace, I did want to ask a question on backlog, your industrial backlog. It's just running higher than where it has historically. By my math, you're running about a month of production in excess of where you typically did before. So I'm curious as to why that is. Is that a function of structural change in your business? Or am I to interpret that, hey, we've got maybe 6 points or 7 points of growth that could come out of that backlog as it gets converted to something that's more normalized.

Question: Mig Dobre - Robert W. Baird & Co. Incorporated - Analyst : So it's fair for us to expect backlog to continue to run in?

Question: Mig Dobre - Robert W. Baird & Co. Incorporated - Analyst : Okay. So let's move on to aerospace here. I personally found it interesting that you were able to raise guidance a bit in this segment even though, obviously, the sector, especially on the commercial side has been -- some of your OEMs have been struggling. So talk a little bit about that. I mean, is there a point in time where some of these disruptions on the commercial OE space come to bite us, for a lack of a better term.

Question: Mig Dobre - Robert W. Baird & Co. Incorporated - Analyst : What about the military side of the business?

Question: Mig Dobre - Robert W. Baird & Co. Incorporated - Analyst : Yeah, that would carry into calendar '25?

Question: Mig Dobre - Robert W. Baird & Co. Incorporated - Analyst : Aftermarket has also been a big contributor here. How do you think about that part of the business?

Question: Mig Dobre - Robert W. Baird & Co. Incorporated - Analyst : And can you talk about your aftermarket capture, how happy are you with that at this point? And is there any room for improvement?

Question: Mig Dobre - Robert W. Baird & Co. Incorporated - Analyst : Speaking of Meggitt, you've had now quite a bit of runway in understanding that business, delivering synergies. I'm curious, what do you learned that surprised you either positively or negatively looking back. Things seem to have worked out quite well. So I would imagine that you're going to say there's a lot of good things, but yeah.

Question: Mig Dobre - Robert W. Baird & Co. Incorporated - Analyst : This question doesn't just apply to Aerospace, it's more broadly, I guess, for your company, research and development, new product development in general. As a percentage of sales, that has declined, and it's frankly a little bit lower than what I'm typically accustomed to seeing. I think it's running, what, 1.3%.

Question: Mig Dobre - Robert W. Baird & Co. Incorporated - Analyst : 1.4%. Is that sustainable? Is that enough in a world in which, obviously, technology is evolving very, very rapidly?

Question: Mig Dobre - Robert W. Baird & Co. Incorporated - Analyst : Understood. Your stock has performed incredibly well over the past year. I'm sure all the Parker team is happy with that. But as you talk to investors, I mean, I can tell you my perspective, people now do appreciate that your business mix is different, right? They do appreciate that you have lower cyclicality. They do appreciate what aerospace is bringing. Is there anything left about the business that you think maybe it's not fully understood at this point?

Question: Mig Dobre - Robert W. Baird & Co. Incorporated - Analyst : So to translate it to things that all of us with spreadsheets care about, is it fair to say that you think organic growth potential of the company is perhaps misunderstood? We get the cyclicality, but maybe we don't appreciate the growth potential.

Question: Mig Dobre - Robert W. Baird & Co. Incorporated - Analyst : We have one minute left, and I want to squeeze the M&A question in here. Higher margins, right, the technology aspect that you talked about. I'm curious how that changes the way you think about M&A?

Question: Mig Dobre - Robert W. Baird & Co. Incorporated - Analyst : Perfect place to end. Everyone, please join me in thanking Jenny.