Parker-Hannifin Corp Q3 2025 Earnings Call Transcript

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

Question: Mig Dobre - Robert W. Baird & Co., Inc. - Analyst : I guess the orders, at least to me, were quite surprising in the quarter. It's been, what, more than three years since we've seen international orders up 14% positive in North America as well. So I guess my question is this. When you talk about longer cycle, can you maybe talk a little bit more about that? How do these orders actually get to convert to revenues? What's the time cycle here? And related to this -- and I recognize that you don't provide fiscal '26 guidance now. But given this inflection that we've seen in orders, is it fair for us to expect positive organic growth in fiscal '26 in your industrial business?

Question: Mig Dobre - Robert W. Baird & Co., Inc. - Analyst : Great. And my follow-up, speaking of backlog, very sizable in Aerospace, more than a year's worth of business in there. And you sized the tariff impact here, but I do wonder how you think about the risks that you might have on the cost side, whether it's tariff or any other costs related to this backlog, and your ability to either manage that through any other mechanisms that you have.

Question: Jamie Cook - Truist Securities - Analyst : Congratulations on another nice quarter. I guess my first question, Jenny, just the strength in margins in Aerospace & Defense. So to what degree are you worried that the aftermarket story and the strength in aftermarket is driving the margins that in 2026, I guess, that becomes a headwind as OEs start to pick up? And if you could just break apart if there's anything more structural there in margins besides just aftermarket, right, improving their associated with Meggitt. I guess. That's my first question. And my second question, understanding you just put out these targets last June. But if we look at your implied adjusted EBITDA margins as we -- for the full year, you're targeting 25.9%, I think, versus the target laid out last year of 27%. And your Industrial businesses are still fairly depressed. So again, just trying to understand why that is conservative? Or again, is the concern that aftermarket -- sorry, Aerospace margins are over earning, you know what I mean, as that normalizes and industrial picks up 27% as really the right target?

Question: Julian Mitchell - Barclays - Analyst : Maybe first off, just wanted to circle back to the the jaws widening between industrial organic orders and sales trends that's been apparent for a couple of quarters. I understand on some level, it's natural if orders are meant to lead sales, that there'd be a delta a lot of the time. I mean you mentioned the longer cycle element boosting the orders growth versus sales. Just wondered if there was any other dynamic to be aware of, perhaps the dollar comps that we don't see from the outside. Is there anything notable there on orders versus sales? And maybe allied to that, is there any color you could give us on how that industrial backlog is moving? I think it was $3.5 billion or so at the end of December.

Question: Julian Mitchell - Barclays - Analyst : It was really just around any color you could give us on, say, the backlog movement at industrial. I think that was $3.5 billion at the end of December.

Question: Julian Mitchell - Barclays - Analyst : That's very helpful. And then just if you could put a finer point on some of the aerospace growth trends in the fourth quarter as you see it, just so we have the jumping off point into 2026 on the OE versus aftermarket dynamics in commercial and military.

Question: Scott Davis - Melius Research - Analyst : And again, congrats on the margins and getting through what's been a slower time in the core industrial stuff. This may be an impossible question to answer, Jenny. But have you guys -- when you think about the margin gains you've made, obviously, mix has got to have a huge part of it. But is there any way to tease out what how much operational improvements have really helped you guys? Even if you can't quantify it, just color around underlying operational improvements, that could really help things snap back outside of aerospace. Let's assume aerospace isn't as much of a tailwind incrementally 26%, 27%. But I don't know. It may just be a possible question, but I'm curious to hear your response.

Question: Scott Davis - Melius Research - Analyst : Makes sense. Just as a totally different follow-on, but M&A -- just again, I know you still talk about having a pretty strong pipeline. But any additional color on what we might expect to see whether larger deals, midsized, small, more bolt-ons? I mean, if you can talk through that pipeline, you're back -- just a little bit of color there, please.

Question: David Raso - Evercore ISI - Analyst : The tariff, 3% of COGS, is that a number that is expected to go up for the new fiscal year? Meaning you would think the first quarter, there's some inventory on the ground. There's some mitigating costs that already landed before tariffs. Or should we think of 3% of COGS as the run rate for fiscal '26 based off the tariffs as they are today?

Question: David Raso - Evercore ISI - Analyst : And how much of the run rate is actually hitting calendar 2Q, fiscal 4Q? I'm just trying to understand. Are we at full speed 3% hit for these three months of this quarter? Or is it more of a -- and it is helpful to say at the peak during this quarter, it's the 3% of COGS? I'm just trying to get a sense of the ramp and if other actions are needed to be taken for, say, July 1 price increases or whatever it may be.

Question: Andrew Obin - BofA Global Research - Analyst : So a question, I guess. About a month ago, people were excited about potential for European recovery. International orders are improving. Can you just tell us what it is you are seeing in Europe? And also, we've been getting a lot of questions about your exposure to European defense budgets. If you could just give us color on, the, what are you seeing in Europe and specifically potential exposure within Aero to European defense?

Question: Andrew Obin - BofA Global Research - Analyst : Yeah. So the second question is just German elections at Hanover, I think nothing yet. People seem to be excited about potential. What are you hearing from your partners in Europe?

Question: Andrew Obin - BofA Global Research - Analyst : Got you. And just a follow-up. How are you guys reconsidering your footprint after the second round of tariffs, if in any way? And are you adjusting CapEx down in the fourth quarter in response to tariffs in any way, shape, or form?

Question: Nicole DeBlase - Deutsche Bank - Analyst : Maybe just first of all, with orders definitely ahead of expectations this quarter, are you guys hearing or seeing any evidence at all of prebuy ahead of tariffs? Or was that not a factor in the strength?

Question: Nicole DeBlase - Deutsche Bank - Analyst : Okay. Got it. And then the margins have been a real bright spot in fiscal '25 despite a challenging volume environment. Super impressive performance from Parker. Do you guys think you can continue to target like 30% to 35% incrementals as we flip the calendar to 2026? Or at some point, does it become tougher to expand margins to that extent?

Question: Joe O'Dea - Wells Fargo Securities, LLC - Analyst : Jenny, I'm sure you anticipated a question on '26, and so encouraging in terms of your comments around industrial and potential for growth. I think my question is really around, as you've seen some of that recovery push out this year, what it is that you're seeing that gives you confidence in seeing that growth next year in particular in light of an elevated uncertainty macro backdrop.

Question: Joe O'Dea - Wells Fargo Securities, LLC - Analyst : And that waiting for it next quarter dynamic, is that a matter of -- are there things like with the adjustment to guide, it's -- I guess the question is, are there demand trends that you're seeing soften sequentially? Or is it more a matter of things that you thought would get better sequentially, just didn't happen? And that's probably (technical difficulty) maybe there's a little bit of everything, but any color there would be helpful.

Question: Jeff Sprague - Vertical Research Partners - Analyst : Jenny, just back to the footprint and the like. maybe I misinterpreted what you said. But it sounds like you're not really looking at making any significant footprint changes. That just surprises me, right? Like, I wouldn't think you want to eat $375 million in tariffs. I get you've got plans to action it. But are you basically saying that you can handle it with dual sourcing? And then that leaves open the option to flip back maybe to China at some point in the future, probably oversimplifying a complex question. But just your view on really mitigating this maybe permanently as opposed to temporarily. 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 : So are the pricing actions actually smaller than the WIN and sourcing actions collectively?

Question: Jeff Sprague - Vertical Research Partners - Analyst : And then just maybe a little follow-on that. Is the $375 million just simply tariffs? I assume there's other just inflation that might not be directly care of, but perhaps is indirect. I'm sure it's included in your guide. But just curious if that $375 million is just a mathematical tariff gross number.

Question: Joe Ritchie - Goldman Sachs - Analyst : Jenny, can you just double-click a little bit on the in-plant project delays and what you're seeing there? I guess the disconnect a little bit with the order rates that you're seeing, but be curious -- maybe if you can just tell us a little bit more about that bidding activity and how you see it playing out in the coming quarters. 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 : Okay. That's helpful. And if I can maybe just ask a follow-up on that. As you think about the type of work that you're bidding on and what that pipeline looks like, there's a lot of activity that's happening in the US that's already been started from a mega project standpoint. I'm just curious, how much of this is like new construction versus what you would normally see as like maintenance or renovation repair type projects?

Question: Andy Kaplowitz - Citi - Analyst : So Jenny, I know you talked about Europe a bit more, but Asia seems to be holding up well for Parker. And specifically, China seems to be holding up. Maybe you can give us a little more color on what you're seeing there. And Latin America has continued to be strength of Parkers. How sustainable is that growth going into '26?

Question: Andy Kaplowitz - Citi - Analyst : And Todd, I just want to ask you about the corporate G&A, the bridge on slide 10, the $0.08 positive. I think you talked about relatively significant cost containment in your prepared remarks. Is any of that temporary? Should we think about any of it coming back? How does that line item moving forward?

Question: Stephen Volkmann - Jefferies - Analyst : Two follow-ups for me. One, I guess, I want to turn this whole tariff thing completely around. And I feel like if I was a North American manufacturer trying to figure out how to have a more local supply chain, you guys might be my first call, given you're local for local. So I'm curious if you're seeing more inquiries as other manufacturers try to rejigger their supply chains?

Question: Stephen Volkmann - Jefferies - Analyst : No, more reaching out to you for product -- sorry to interrupt. But given that a lot of your competitors are international and you're not as much, I wonder if there's an opportunity for you there.

Question: Stephen Volkmann - Jefferies - Analyst : Okay, fine. And then maybe for you, Todd. I'm curious, again, you stepped up the repo here. It feels like this may be a period where it's a little tougher to get deals done in general. I'm not really speaking for you. But there's a lot of uncertainty around outlooks and cost basis and recessions and so forth. So is the fact that you stepped up on repo maybe telling us that the M&A is a little maybe further out and we should factor in a little more repo near term?

Question: Tim Thein - Raymond James - Analyst : Maybe the first one for Jenny. I'm curious as to the the tenor of conversations that you're having with customers. And as we've gone from hopes of animal spirits being unleashed after the US election to now fears of recession and concerns around trade policy, I'm curious if you think the damage is done for the year in terms of of customers pulling the trigger on those more discretionary capital decisions? Or if we're having this conversation in three months and you're looking at your FY26, is there a potential that that -- those reverse and there's more optimism. Just curious as to what you hear from your big customers.

Question: Tim Thein - Raymond James - Analyst : Okay. And then just on tariffs. And the question is just in terms of the pricing flexibility that you have in aerospace, specifically, just given, typically, you have more longer-term agreements. So I'm just curious your ability to react and adjust there. I know we've seen some suppliers announce force majeure clauses. But anyway, just the -- as you think about the tariff ability to offset that industrial versus aero, if there's any notable difference between the two segments. 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: Brett Linzey - Mizuho Securities USA - Analyst : Yeah. So I guess maybe just -- yeah, just one more on M&A. And I understand it's just an episodic process. But I am surprised there hasn't been at least a smaller bolt-on type deal given you've been on your front foot. I guess is it fair to say you're really targeting something larger, more medium-sized type assets? And then have there been any priority assets that have actually just fallen out of the funnel completely?