Parker-Hannifin Corp Q2 2025 Earnings Call Transcript

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

Question: Jeff Sprague - Vertical Research Partners - Analyst : Thank you. Good morning everyone. Jenny, maybe to start, just more complexion on what you're seeing in the industrial long cycle. I guess, when you kind of addressed to the strength in industrial long cycle, is this the aero stuff that sits inside industrial? Or maybe you could elaborate on what verticals specifically are looking better on the long-cycle side.

Question: Jeff Sprague - Vertical Research Partners - Analyst : And so the kind of sales conversion cycle on that stuff is we're talking more 6, 9, 12 months in your view? 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: Jeff Sprague - Vertical Research Partners - Analyst : Okay. Great. And then I was just hoping, Todd could give a little bit more color on just the pattern -- organic pattern of industrial revenues Q3 and Q4 to close out the year. What's embedded in the $6.65, for example, for the industrial?

Question: Jeff Sprague - Vertical Research Partners - Analyst : Great. Thank you. I'll leave it there.

Question: Joe Ritchie - Goldman Sachs - Analyst : So I know that one month doesn't necessarily make a trend, but I'm just curious, as we've started 2025, have you seen like any discernible differences or changes in trends based on how you exited calendar year 2024?

Question: Joe Ritchie - Goldman Sachs - Analyst : Okay. Fair enough. And then, I guess, the follow-on question to that, Jenny, is like, look, you guys have done an amazing job. And you described it a little bit earlier in your prepared remarks regarding your ability to expand margins in the industrial businesses despite this like very weak 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: Joe Ritchie - Goldman Sachs - Analyst : All right, thanks guys.

Question: Scott Davis - Melius Research - Analyst : Hey, good morning. Jenny and Todd.

Question: Scott Davis - Melius Research - Analyst : There's not much to pick on. There hasn't been for some time, guys, so I'll kind of ask some nuances around M&A. We keep hearing about kind of some of the enthusiasm of stuff coming out of PE. But historically, you guys have had kind of probably tilted a little bit more towards carve-outs. But what do you see out there in the M&A environment? And is your enthusiasm or, I should say, confidence in getting deals done in higher than it was in -- do you think in '24 or comparable?

Question: Scott Davis - Melius Research - Analyst : Yeah. That makes sense. And I have to ask a question just because orders are a little better than I would have thought they'd be. Any kind of weird stuff out there as it relates to either buying ahead of tariffs or buying ahead of price increases or anything else that you can kind of point to -- that would have impacted orders a little bit? Or was it just pretty much things are getting better, and that's the story?

Question: Scott Davis - Melius Research - Analyst : Okay. Congrats and best of luck this year.

Question: Mig Dobre - Baird - Analyst : Just to follow up on the tariff discussion, I'm wondering sort of how your own thinking has evolved around this issue. What are you hearing from customers in terms of how they're preparing to deal with tariffs, especially if Canada and Mexico is involved? And again, what Parker's strategy would be around this, whether with your production or anything else that you're planning to do with your business?

Question: Mig Dobre - Baird - Analyst : Understood. My follow-up, looking at Slide 8 where you kind of talk about your growth forecast by market vertical, I'm wondering a little bit about mix. Maybe you can comment on that. I know we talk about it in aerospace and defense, but within your industrial businesses, we're seeing some verticals like off-highway, for instance, more pressure relative to others. Is there anything to call out here in terms of some of these end markets bearing maybe higher margins versus the segment average?

Question: Mig Dobre - Baird - Analyst : All right, that's great. Thanks.

Question: David Raso - Evercore ISI - Analyst : Jenny, earlier, you were mentioning, I believe you said fourth quarter organic growth rates. And I won't bore you with the math right now, but I'm just trying to make sure I understand the cadence seems to have a very light organic growth for aero in the third quarter to foot to the full company third quarter organic, but then a big bounce in the fourth quarter. I'm just trying to make sure I'm reading that correctly, the way you laid out the industrial growth.

Question: David Raso - Evercore ISI - Analyst : Okay. Helpful. And then when you noted you expect some improvement in the fourth quarter, can you highlight where are you seeing that? Are there already conversations, some stocking levels, maybe on some of the short cycle? Just where do you expect to see that improvement?

Question: David Raso - Evercore ISI - Analyst : And when it comes to the mix of what is picking up versus what you expect to pick up, I'm just trying to get a sense of how much should we think about. Is it an accelerator in the margin expansion, all else equal, with what's supposed to pick up in a couple of quarters? I mean, usually, you think of, for example, distribution is some of your highest-margin business. And that sounds like that maybe hasn't necessarily accelerated yet. Is that still on the come? Or maybe you can explain a little bit how to think about the mix of what's starting to recover and what's on the come.

Question: David Raso - Evercore ISI - Analyst : Yes. The spirit of the question is everybody after the next quarter or even after this call start thinking about how do you guide in July or early August. And just trying to think about distribution starts a little more of a lead horse earnings recovery into fiscal '26. Relatively speaking, that should be a positive margin mix. So that was the spirit of it.

Question: David Raso - Evercore ISI - Analyst : Thank you. 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: Jamie Cook - Truist Securities - Analyst : Hi, good morning. Congrats on a nice quarter. I guess just two questions. One, can you give more color on the Lat Am order as a percent and then EMEA, I guess, down 8%, what you're seeing there? And then, I guess, Jenny or Todd, in the spirit of the margin question again and your outperformance given organic growth is disappointed this year. To what degree can we expect -- when the markets turn, is there a reason to believe that incremental margins coming out of this downturn should be better than average because of structural improvements in The Win Strategy that you would point to above-average incremental margins this cycle? Thank you.

Question: Jamie Cook - Truist Securities - Analyst : Sorry, on (inaudible), down 8%?

Question: Jamie Cook - Truist Securities - Analyst : Sorry, the [EMEA] order is down 8%, EMEA? 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: Jamie Cook - Truist Securities - Analyst : Thank you.

Question: Andrew Obin - BofA Securities - Analyst : Yes, good morning. Just a sort of follow-up on Dave's question, I think, a little bit. Industrial businesses are getting more long cycle within your portfolio. So if you look at history, does it take longer versus history now for positive orders to translate to positive sales growth? Should we just thinking different growth algorithm?

Question: Andrew Obin - BofA Securities - Analyst : No, no, no. I'm asking historically, you are a longer-cycle business, right? So if you get an order, right, should we dial in growth later than we would like looking at Parker 5, 10 years ago?

Question: Andrew Obin - BofA Securities - Analyst : And I guess, I'll ask two questions as a follow-up because I think one of you simply can't answer. Any sense when this off-highway OEM destock will end? And then second question, just granularity maybe on aftermarket for aero military versus commercial because that has been a very nice story?

Question: Andrew Obin - BofA Securities - Analyst : Yes. Just aftermarket, military versus commercial.

Question: Andrew Obin - BofA Securities - Analyst : Makes a lot of sense. Thank you so much.

Question: Julian Mitchell - Barclays Bank - Analyst : Maybe just my first question around trying to understand in the industrial businesses, the sort of difference between North America and international. So if we look at the guidance, you've got worse trends in North America organic sales for the year than international. I think the sort of comps are 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: Julian Mitchell - Barclays Bank - Analyst : Understood. And then just a quick follow-up on the aerospace outlook. I think you mentioned that because of that very difficult comp, the fourth quarter aerospace organic sales are up around mid-single digits. Just when we're thinking about the modeling of that, is it really that military side of things where you may be flattish exiting the year and then you have another sort of quarter of very tough comps, and then you kind of pull out of that at the end of the calendar year on the military side?

Question: Julian Mitchell - Barclays Bank - Analyst : Great. Thanks very much. 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 - Analyst : Thanks, good morning. I'm going to try my pet here a little bit. Just curious, why would HVAC and semi be considered long-cycle orders? Because I think most of us would consider those to be pretty short-cycle book-and-ship types of end market. So just curious why they're long cycle. And then maybe, Jenny, you talked about the recovery pushing to the right, and I think we've all seen that. Obviously, now we've got ISM getting to 50 orders to turn positive. So it seems like the recovery is forming, but just curious what you're hearing from some of your customers, be it major customers, distribution models, et cetera. How is the tone in the field right now?

Question: Nigel Coe - Wolfe Research - Analyst : Yeah --

Question: Nigel Coe - Wolfe Research - Analyst : Got it. Okay. And then just a quick one on SG&A. I mean outstanding SG&A management. I think on an underlying basis, SG&A fell from $678 million down to $651 million, so call it 4%, 5% decline there. I know the aero mix is helping there to a degree, but as we recover just the confidence levels on -- you've said (inaudible) margins, so that's very clear. Just how much of that SG&A reduction is structural versus some temporary cost management and that can in on the recovery?

Question: Nigel Coe - Wolfe Research - Analyst : Okay, great. Thank you. 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: Joe O'Dea - Wells Fargo Securities - Analyst : Hi, good morning, morning. Along similar lines to some of the other questions, just trying to think through kind of typical cycle relationships in looking at the order chart on Slide seven. And I think over the past couple of quarters, you've expressed confidence that the destock headwinds are really done and that's played out. And so now we start thinking about restock. But when you start to see orders get a little bit better and you think about the distributor tone that's been better, what is that typical lag time between some signs of end-market demand are getting better and then that starts to translate to channel inventory reaction?

Question: Joe O'Dea - Wells Fargo Securities - Analyst : And then last quarter in the deck, you put some details on mega projects. In our tracking of that data, we did see some delays from '24 and '25. Right now, it would have a pipeline with some pretty strong activity in 2025 across a number of the verticals that you called out last quarter. But just curious in terms of what you see in conversations you're having, I think, general concerns that maybe there's enough nervousness, this stuff continues to push to the right. Anything you're seeing that's starting to sort of pulse -- now things are going to start hitting construction and demand tied to that?

Question: Joe O'Dea - Wells Fargo Securities - Analyst : Yes, got it. Thank you.

Question: Nicole DeBlase - Deutsche Bank - Analyst : Yeah, thanks. Good morning. So maybe just one on the 3Q outlook. And again, like I have to commend you guys for continued really strong margin performance. But you are modeling segment margins kind of flattish from 2Q to 3Q. And typically, we do see like a bit eventual step-up. So just curious if maybe that's conservatism baked in, maybe something going on from a mix perspective with aerospace. Anything on that?

Question: Nicole DeBlase - Deutsche Bank - Analyst : Got it. That's really helpful. And understand the commentary around the long-cycle end markets picking up within orders. Did you guys actually see short cycle kind of stabilize? Did it get worse? Just curious about the short-cycle order trend during the quarter.

Question: Nicole DeBlase - Deutsche Bank - Analyst : Thank you. I'll pass it on.