Parker-Hannifin Corp Q4 2024 Earnings Call Summary

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

Question: Julian Mitchell - Barclays - Analyst : Hi, good morning. Maybe just a first question around the first-quarter outlook. So I think -- first off, maybe to talk about the organic sales guide a little bit, I think you're dialing in a bit of a deceleration from the June quarter year on year, even with better orders. So maybe just any commentary around very recent demand trends, any big movement month to month. And then on the firm-wide P&L for Q1, you're basically saying flat EPS dollars year on year, but sales growth and margin's up. So is there something below the line moving around?

Question: Julian Mitchell - Barclays - Analyst : That's helpful. Thank you. And then maybe just my follow-up would be around slide 15. So you have that very helpful color on the end-market verticals outlook for the year. Maybe just any context you could give around maybe fourth-quarter rates in some of those end markets. And I suppose implant and industrial, I'm particularly focused on. Seems like the CapEx environment is getting a little bit worse out there, just wondered what you're seeing in that implant and industrial piece, please.

Question: Julian Mitchell - Barclays - Analyst : That's great. Thank you.

Question: David Raso - Evercore ISI - Analyst : Hi, thank you. My questions are on your comfort with the organic sales guide, right? We have 1.5% in the first quarter. We can back into 2Q, right? It's 3.5%. So that 2% faster growth in 2Q from 1Q, the impression I get, that's coming from industrial going from, say, down 1.5%, 2% in the first quarter to going slightly positive. And I just wanted to get some color on why do we see that turning flat to positive in 2Q. The comps get a little easier in North America. But just any color around that, particularly the mix of orders. Are you seeing it more from distributors? Is it the lack of destocks maybe from a year ago with the manufacturers? Just trying to get more comfortable with that delta on year-over-year growth for industrial 1Q and then getting essentially slightly positive for 2Q. 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: David Raso - Evercore ISI - Analyst : The reason I asked is it doesn't seem like there's much pricing -- new pricing for July 1. So I'm just trying to figure out what's the incremental bump may be. You're saying there's a little bit of comp and, obviously -- maybe some pickup --

Question: David Raso - Evercore ISI - Analyst : And follow-up, if you could indulge me with one question, you don't have to answer it. But I'm curious, the verticals that we're now breaking out. We know the margins in aerospace, obviously, they're highlighted separately. But the other five verticals, would you give us a sense of force rank, highest to lowest the margins, between those five just so we get a sense of the mix looking at it in this format?

Question: David Raso - Evercore ISI - Analyst : I tried. All right. 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: Scott Davis - Melius Research - Analyst : Hey. Good morning, Jenny and Todd, and congrats on another great year.

Question: Scott Davis - Melius Research - Analyst : I know it probably hasn't -- the answer probably hasn't changed much since the Analyst Day, but perhaps you could give us a little bit of an update on M&A and what you're seeing. I think you clearly have the balance sheet space to probably step up and get a little bit more aggressive. So just a little bit of an update would be helpful, I think. Thanks.

Question: Scott Davis - Melius Research - Analyst : Okay. And Jenny, the portfolio optimization and the small divestiture, is the lens here that you guys are looking at -- the slide 15 lens that -- the key market vertical stuff that's outside of that vertical? Or is there a -- or is it more a function of margin growth potential and more traditional metrics?

Question: Scott Davis - Melius Research - Analyst : Okay. That makes ton of sense. Thank you. I'll pass it on. Appreciate it.

Question: Mig Dobre - Baird - Analyst : Thank you. Good morning. I guess one of the things that stood out to me over the past couple of quarters within your industrial technology platforms is that motion systems and low-end process control behave the way we would expect them to in the industrial downturn we're experiencing, this whole down high single-digit revenue type. But your filtration, engineered materials platform has been pretty remarkably stable. So I guess my question is, looking back, why has that been the case? Is this different than what you've seen in prior downturns? And is there an impact on margin from a mix standpoint within your industrial business from this filtration business hanging in there a little bit better?

Question: Mig Dobre - Baird - Analyst : And the margin impact?

Question: Mig Dobre - Baird - Analyst : Thanks for the color. I'll pass it on.

Question: Jamie Cook - Truist Securities - Analyst : Hi. Good morning and congratulations on a nice quarter and guide. I guess my first question, Todd or Jenny, just looking at the implied incrementals for the year, the 40%-ish, it's a very good incremental margin above your targeted range on lower organic growth relative to your longer-term guide. So is there anything unusual in your -- in the mix this year that would allow you to have above-average incrementals on a low organic growth versus your targeted range? And then I guess the follow-up question is, once you get to the 4% to 6% organic growth, like why should your incremental margins be better than that just given what we're seeing already today? And then, Jenny, you're probably not going to want to answer this, but I'm going to ask it anyway. The order surprised me both on industrial North America and on international. Anything you can do to talk to like the cadence of what you saw since April? And where were there -- did the orders outperformed your expectations as well? Thank you.

Question: Jamie Cook - Truist Securities - Analyst : Okay. Thank you. Nice job.

Question: Joseph Ritchie - Goldman Sachs - Analyst : Hi. Good morning, Jenny and Todd. A terrific year. Not just the quarters; it was a great year.

Question: Joseph Ritchie - Goldman Sachs - Analyst : I'm going to tackle the margin question maybe slightly differently. And so, look, the exit rate for the industrial businesses were really strong, right, both in North America and international. If you take a look at the 25% North America and the 23.9% in international, squarely either at the high end of your guidance for this year or the midpoint for the international segment. I guess why isn't it going to be better than that? If we're going to expect some growth, and typically, you guys have shown that you could expand margins even in a no-growth environment.

Question: Joseph Ritchie - Goldman Sachs - Analyst : Okay, got it. I'm sure you'll make it look easy. But the follow-up question is the --

Question: Joseph Ritchie - Goldman Sachs - Analyst : Yeah. So you mentioned that you're still planning to continue to pay down debt. You got your leverage ratio, your net leverage down to two turns, so congrats on that. I know there was a question earlier around M&A. So just talk to us a little bit about what's the right leverage ratio that you want to get to before you get a little bit more front-footed with capital deployment on the M&A side. And then is there an opportunity to continue to buy back shares as well? Like how are you thinking about that priority going forward?

Question: Joseph Ritchie - Goldman Sachs - Analyst : Great. Thank you both. 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: Stephen Volkmann - Jefferies - Analyst : Great. Thanks for taking the question. Todd, I just missed it when you said the Meggitt synergies in FY24.

Question: Stephen Volkmann - Jefferies - Analyst : Got it. Thank you. And then I'm trying to think, just mentally, if I back that out, how much did mix add relative to other drivers for the margin in aerospace?

Question: Stephen Volkmann - Jefferies - Analyst : Great. I guess what I'm trying to think about is, assuming that the aftermarket OE mix normalizes at some point -- maybe that's a big assumption, I don't know. But if it does, should we be worried about potential margin headwinds in that scenario?

Question: Stephen Volkmann - Jefferies - Analyst : Great. Thank you so 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: Nathan Jones - Stifel Nicolaus and Company, Incorporated - Analyst : Good morning, everyone.

Question: Nathan Jones - Stifel Nicolaus and Company, Incorporated - Analyst : I'm going to go back to the revenue guide. For as long as I can remember, Parker has been guiding for a revenue split, 1H to 2H of 58% to 42%. So I wanted to ask, you've got a much larger backlog now than you've had historically. So potentially some better visibility out into that. So I'm just interested on what you're visibility into that second half revenue guidance is based on where the backlog is. And what macroeconomic assumptions that you've got baked in there? A lot of peers and competitors have been talking about lower CapEx spending going forward, but it's -- maybe that you guys went into the downturn first, you're coming out of it first. But just any color you can give us there.

Question: Nathan Jones - Stifel Nicolaus and Company, Incorporated - Analyst : Do you need things like interest rate cuts to spur some of that recovery that you're looking for in the second half in various parts of the industrial economy? Kind of what are the underlying assumptions that you've got that inform that expectation?

Question: Nathan Jones - Stifel Nicolaus and Company, Incorporated - Analyst : Awesome. Thanks for taking my questions.

Question: Jeffrey Sprague - Vertical Research Partners - Analyst : Thank you. Good morning, everyone. A lot of ground covered here. A couple of things from me. First, just on the divestiture, Jenny or Todd. I think it sounds like it's part and parcel to your normal process of reviewing the portfolio and assets. But should we view this as largely a one-off? And obviously, it just came with something you recently acquired? Or there's other pieces here and there that could be methodically coming out as your margin structure has moved up, right, and your threshold for what's good enough rises, does that cause some additional things to shake out of the portfolio? 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: Jeffrey Sprague - Vertical Research Partners - Analyst : And could you also just share with us your view on Aero for 2025 in terms of the big buckets, commercial OE versus aftermarket -- military OE versus aftermarket?

Question: Jeffrey Sprague - Vertical Research Partners - Analyst : Right. I'll leave it there. Thanks a lot. .

Question: Nicole DeBlase - Deutsche Bank - Analyst : Yeah, thanks. Good morning, guys. 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: Nicole DeBlase - Deutsche Bank - Analyst : I just wanted to ask another question on the divestiture. And we all have the revenue number that was in the press release. But I guess, any color on whether the divestiture will be accretive to margins? And can you just confirm that that's all coming out of the industrial North America segment?

Question: Nicole DeBlase - Deutsche Bank - Analyst : Got it. That's really helpful. Thanks, Todd. And then on the outlook for international, it sounds like you guys are expecting Europe to be down again. If you could confirm your thoughts there. And I know it's small for you, but any color on what you're seeing in China. Thank you.

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

Question: Brett Linzey - Mizuho Securities USA - Analyst : Hey, good morning. Congratulations.

Question: Brett Linzey - Mizuho Securities USA - Analyst : Just a question on the margin outlook, but specifically gross margins. So another strong year in '24, but you're now seeing a better mix of secular in these applications. Are you embedding a higher-than-normal gross margin lift in the '25 outlook as you're seeing some traction here?

Question: Brett Linzey - Mizuho Securities USA - Analyst : Okay. Got it. Great. And then I apologize if I missed it, on off-highway, so I appreciate the color on adverse construction, but I was wondering if you could dimension the outlook between OE, the distribution business in Off-Highway, and what's your level of visibility is on some of the OE inventories. Thanks.