Parker-Hannifin Corp Q1 2025 Earnings Call Summary

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

Question: Jamie Cook - Truist Securities, Inc. - Analyst : Congrats on a nice quarter. I guess, first question, just on the implied incremental margins for the year, Todd, 70%, up from, I think, 40% before. How much is the divestiture just because the implied incremental margins in the back half of the year on the core business also seemed to be pretty good. So just wondering, is it structural, is it price, what's going on there? And then I guess my second -- my second question on the international orders, you talked about Asia turning positive and sales turning positive. How big is that as a percentage of your business? And just any color on which markets or the order growth that you're seeing in Asia? 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: David Raso - Evercore ISI - Analyst : North America, you raised the margins 50 bps, but lowered the organic sales, and the buckets are, right, the divestiture you're seeing is helpful to margins. The weakness is more OE business, it sounds like, if I'm reading that correctly, kind of factory floor CapEx and some of the big OEs taking their production down. The distribution piece, I assume, right, you didn't comment on it. Can you help us understand where that channel is? I just want to make sure that over 40% of earnings the distribution business, if that cracks, that's a different level of concern around the margins. So can you help us on that channel? And again, anything you can help us with on the margin resiliency the rest of the year for North America?

Question: David Raso - Evercore ISI - Analyst : That's helpful. And can I just follow up with M&A. Can you give us an update on what the lay of the land is, the pipeline?

Question: David Raso - Evercore ISI - Analyst : I'm sorry to follow up with them. Yes, I'm just curious about the multiples out there versus the target. I'm just trying to get a sense of I know the strategy, but just any pulse of the candidates are out there now it's more a matter of price or people sort of holding on, waiting for elections, Fed easing cycles to agree on a price. Just curious more of the kind of conversations out there.

Question: David Raso - Evercore ISI - Analyst : I'm sorry, Todd, please?

Question: David Raso - Evercore ISI - Analyst : That's helpful. Okay. So basically, North America margin, the improvement is principally all from the divestiture but you were still able to keep the core margin, maybe even at 10 bps despite lowering the organic sales, and that's probably a bit.

Question: Matthew Laflash - Barclays PLC - Analyst : This is Matt Laflash on for Julian Mitchell. My question today is sort of around that $0.15 divestment headwind. Wondering if you could maybe break down how that affects each quarter throughout the rest of the year? Should we kind of assume maybe $0.05 spread out across each quarter? Just how should we be thinking about that?

Question: Matthew Laflash - Barclays PLC - Analyst : Got it. Todd, that's helpful. And just a quick follow-up. If you could maybe dive a little bit deeper into the maybe Q2 segment and

Question: Nathan Jones - Stifel Nicolaus & Co., Inc. - Analyst : I wonder if we could just go a little bit deeper into some of the headwinds that you're seeing in North America, I mean, in-plant and industrial is a pretty broad category. So maybe any additional color you can give us on that kind of thing. And then in off-highway, is this all related to OEM and not related to equipment utilization that we generate aftermarket? Just any more color you can give us on those kinds of things.

Question: Nathan Jones - Stifel Nicolaus & Co., Inc. - Analyst : I guess my follow-up, probably around the divestitures. I mean, Parker has divested businesses over the years pretty regularly. But this does seem to be a little bit bigger. Can you talk about kind of what area it's in, why you don't consider yourself to be the best owner of this business anymore. Is this more of a one-off on the larger side? Or are there other things that we could see coming out of the portfolio that are a little bit bigger in the size of revenue than you've historically divested?

Question: Joseph O'Dea - Wells Fargo & Co. - Analyst : I wanted to ask about sort of labor flexibility and just agility of the model to understand an environment when you've got kind of Boeing strikes to contend with and slowing kind of end market expectations over the course of the quarter. Just the levers that you can pull and how quickly you can pull them when we see kind of the margin outcome just sort of looking for a little bit more color on sort of agility advantages at Parker. 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: Joseph O'Dea - Wells Fargo & Co. - Analyst : Got it. And then I also wanted to touch on mega projects. Two things really. One, in terms of timing. So when you think about these multiyear projects, at what stage you would start to see orders for those? And then two, based on kind of what we track, it seems like chemicals and power gen have the biggest growth potential next year. And so just anything in terms of your exposure to those markets as well as what you hear from the customers and those delays, confidence that those projects break ground in '25?

Question: Vivek Srivastava - Goldman Sachs Financial, Inc. - Analyst : This is Vivek Srivastava on for Joe. Maybe just starting with order trends. Can you talk about how these trends were exiting September. And as we like exited 3Q, did you see any end markets getting better or worse? Any color there would be very helpful.

Question: Vivek Srivastava - Goldman Sachs Financial, Inc. - Analyst : Very helpful color. One thing I also wanted to get a sense of your backlog, last we checked your backlog coverage in the Industrial business specifically has become high 20s compared to like 15% back in 2015. So is this still the case in first quarter? And how much of this current backlog coverage levels do you think is more structural versus areas where you think backlog still needs to come down in parts of the industrial business?

Question: Andrew Obin - BofA Global Research - Analyst : Just a question. We've been hearing a lot from corporates, and I got on a little bit late, so I apologize if this was answered. But we hear a lot of sort of narrative about uncertainty about the election and I was just wondering, obviously, very close to your distributors, very close to your customers. What are you hearing from your customers? And how much will really change on November 6, right? Because we also sort of have self-lending. We have higher interest rates. We still have inflation. From your perspective, how much of a change will the results of the election make into the year-end and into '25?

Question: Andrew Obin - BofA Global Research - Analyst : And no, I really appreciate it. And just a follow-up on aerospace and defense, your aftermarket, and particularly there's public private partnerships on the defense aftermarket that has been very successful, but I assume eventually comps will matter. Can you just talk about what's driving the market outperformance there? And how sustainable it is?

Question: Nigel Coe - Wolfe Research LLC - Analyst : I guess just maybe, Todd, I mean, if you answered that, please cut me off, but that help on the 25% impact from the divestments. Is that for the entire second quarter? And maybe just be a bit more kind of specific on the sort of the revenue and EBITDA impact. Todd Leombruno 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: Nigel Coe - Wolfe Research LLC - Analyst : Okay. And it's like a mid-teens EBITDA margin, right?

Question: Nigel Coe - Wolfe Research LLC - Analyst : Okay. I mean, look, I think I cut off but just the other expense of $0.26, it just seems very discrete in nature. I mean any thoughts on why that was excluded from the line?

Question: Jeffrey Sprague - Vertical Research Partners - Analyst : Just a couple of things. First, Jenny, thanks for the comment on defense MRO, Jenny can have it or Todd, can you just give us the other 3 pieces of Aero if you haven't already I'm sorry if I missed it earlier in the call, commercial OE versus aftermarket and defense OE?

Question: Jeffrey Sprague - Vertical Research Partners - Analyst : And just on the commercial MRO, obviously, over the broader stroke of time, less OE is good for aftermarket. Directionally, we all get that. But do you see any sort of kind of risk in the handoff between the 2? If the strike persists, maybe not everything just kind of automatically shifts over that aftermarket. Maybe how are you managing that in the factories? Is there absorption issues you're trying to work through? Any other color there would be interesting.

Question: Jeffrey Sprague - Vertical Research Partners - Analyst : And maybe just a really quick one for Todd. Todd, obviously, North American industrial starting off a little slower than expected. It sort of looks like your guide for the year would kind of imply normal sequentials from here off this a little bit slower starting point. Would you agree with that? Or any other color you would share in just terms of trying to get the complexion of the year, right?

Question: Jeffrey Sprague - Vertical Research Partners - Analyst : With the divestiture noted, yes.

Question: Joseph Giordano - TD Cowen - Analyst : Just a question when we think about the order, sometimes it's tough like on the comps and what that's doing to the rates that we're seeing in the current quarter. Can you comment at all on North America international orders in dollars relative to last quarter?

Question: Joseph Giordano - TD Cowen - Analyst : So orders in this quarter pretty similar to last quarter in dollars?

Question: Joseph Giordano - TD Cowen - Analyst : Okay. And then to your point on delays, I mean, I guess it's kind of a tough question, but like I guess every cancellation in history started as a delay at some point. So like if you look back and think about like prior cycles when things ultimately were canceled, like what are the things that you're on the lookout to see like, all right, these delays are going to like extend indefinitely and get like become something else? Like what do you kind of tend to look for to see if that's happening?