Q2 2025 Parker-Hannifin Corp Earnings Call
Greetings and welcome to the Parker Hannifin Corporation fiscal 2025 second quarter earnings Conference call and webcast. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Anyone should require operator assistance. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Todd.
Bruno: Bruno Chief Financial Officer. Thank you you may begin.
Speaker Change: Thank you Shelly we appreciate it so much welcome to Parker's fiscal year 2025 second quarter earnings release webcast.
Todd: This is Todd <unk>, our Chief Financial Officer speaking and with me today is Jennifer <unk>, our chairman and Chief Executive Officer. We appreciate your interest in Parker and thank you for joining us today.
Todd: On slide two we will address our disclosures on forward looking projections and all non-GAAP financial measures items listed here could cause actual results to vary from our forecast our press release this presentation and all reconciliations for any non-GAAP measures were released this morning and are available on.
Todd: The investors section on Parker Dot com.
Speaker Change: The agenda for the call today has journey, starting with the highlights to our record second quarter performance. She will also highlight how our business system. The win strategy drives operational excellence in Parker and then she will give an update to our market vertical outlook for the rest of our fiscal year FY 'twenty five I'll fall journey with more details on our <unk>.
Speaker Change: Strong second quarter financial results and provide additional color to our updated guidance. We'll then conclude as usual with the question and answer portion of the call and we will do our best to address as many questions as possible within the hour now I'd like to draw your attention to slide number three and Jenny I will turn it over to you. Thank you Chad.
Jenny: And thank you to everyone for attending the call today.
Jenny: Our performance this quarter reflects our focus on operational excellence and the strength of our balanced portfolio.
Jenny: We produced top quartile safety performance aligned with our goal to be the safest industrial company in the World and saw continued strength from our aerospace aftermarket.
Jenny: <unk> execution of the win strategy delivered 110 basis points of margin expansion, resulting in a Q2 record of 25, 6% adjusted segment operating margin. In addition.
Jenny: Our teams delivered record adjusted segment operating margin across our businesses as well as record earnings per share.
Jenny: Our record year to date cash flow from operation.
Jenny: With proceeds from previously announced divestitures allowed us to substantially reduce debt by $1 $1 billion this quarter.
Jenny: And finally, we are encouraged to see industrial orders turn positive in our longer cycle businesses.
Jenny: Next slide please.
Jenny: So our win strategy I'm, often asked how do we continue to expand margins and more importantly can we continue to do so.
Jenny: I've talked about this several times in the past it is our business system the win strategy that drive operational excellence.
Jenny: We trust the process. It is a proven strategy and it works. The next few slides will show you how our teams used the win strategy to drive performance over the cycle.
Jenny: Slide please.
Jenny: Embedded in the win strategy is the Parker lean system.
Jenny: It's fundamental to our culture and drive continuous improvement at all 85 divisions.
Jenny: Within the same pillars is the win strategy are the critical tools used by all of our general managers and their teams.
Jenny: To expand margins and drive organic growth.
Jenny: Disciplined execution of the Parker lean system reduces variation and eliminates waste from the business.
Jenny: This system allows us to keep taking performance to the next level and important to point out here is that we are never done improving our business.
Jenny: Next slide please.
Jenny: On this slide we have an example of how the win strategy drives performance through the cycle and one of our North American Division.
Jenny: This is a division in our filtration group that has diverse exposure across industrial market vertical and a balanced OEM aftermarket mix.
Jenny: This is an engaged team that is utilized our high performance team structure to execute the win strategy.
Jenny: Looking at the results on the far right hand side of the page.
They have achieved first quartile safety by bringing attention in ownership to concerns.
Jenny: <unk> them to closure and scheduling audit follow ups to ensure sustained results.
Jenny: They are utilizing the Parker lean system, specifically tied that to expand margins and achieve the FY 'twenty five profitability goals for their division, even in a negative growth environment.
Jenny: In addition, they have utilized the simple by design tools to reduce complexity and cost as well as increased dual sourcing to strengthen their supply chain.
Jenny: And finally use of our zero defect tools has resulted in a 52% reduction in rejected parts per million.
Jenny: Thus, providing their customers a better experience.
Jenny: Next slide please.
Jenny: Parker is a transformed company today.
Jenny: The chart on the left side of this page shows the strength of our portfolio over the last two and a half years.
Jenny: Order rates increased across all reported business.
Jenny: In Q2 coming in at 5% for the quarter.
Jenny: Aerospace order strength continued in both aftermarket and OEM and.
Jenny: And although we are seeing a continued delay in the expected industrial recovery. We are encouraged to see industrial orders turned positive in our longer cycle businesses.
Jenny: Next slide please.
Jenny: Taking a look at our updated FY 'twenty five sales forecast by market vertical.
Jenny: We are raising aerospace and defense to 11% on the strength of the aftermarket and gradual OEM rate increases.
Jenny: On the industrial side of the business, although orders have turned positive there continues to be pressure in many of these markets.
Jenny: We are expecting implants, and industrial equipment growth to be slightly lower within our low single digit framework there.
Jenny: We are continuing to see delays the recovery while distributions sentiment does remain positive.
Jenny: We are changing our forecast on transportation from low single digit to neutral primarily driven by weakness in automotive and higher dealer inventories.
Jenny: Right spot here is that work truck demand does remain strong.
Jenny: <unk> highway stepped down to negative mid teens as OEM Destocking and production cuts continue and the weakness in AD persist.
Jenny: We expect energy markets to remain neutral as projects and Capex delays continue and.
Jenny: And finally, we are increasing HVAC from low single digit to mid single digit growth driven by refrigerant changes in the industry.
Jenny: All of this adds up to an organic growth forecast of approximately 2% for fiscal year 'twenty five.
Jenny: I will now turn it over to Todd to summarize our Q2 results. Thanks, Jenny Okay, everyone I'm going to begin with results on slide 10.
Jenny: Then we'll get to some more details on the <unk>.
Speaker Change: I would like to Jim you just touched on.
Speaker Change: As Johnny mentioned, the second quarter was a strong quarter lots of records.
Speaker Change: It was another quarter of strong margin expansion and EPS growth. Despite some real topline pressures sales were down one 6% versus prior most of that decline is the result of the divestitures that we announced the divestiture impact in the quarter was an unfavorable one 4% currency also flipped on us this quarter.
Speaker Change: While we were forecasting a slight positive 90 days ago, it turned out to be unfavorable at 0.9.
Speaker Change: And on a good note organic growth was positive at almost 1%.
Speaker Change: If you look at the segment operating margins of $25. Six is a Q2 record that's an increase of 110 basis points versus prior year and.
Speaker Change: And adjusted EBITDA margins was also a record of $26 eight happens to also be an increase of 110 basis points from prior year adjusted net income of $8 53, or 18% a return on sales of both of those are also records and lastly, adjusted earnings per share were up 6% to a Q2 <unk>.
Speaker Change: Record of $6 53.
Speaker Change: Jenny mentioned this also with a strong second quarter performance was consistent across all of our businesses and really just a nice solid finish to the first half of our fiscal year.
Speaker Change: If we could move to slide 11. This shows the walk for that 38 cents, a 6% increase in adjusted EPS and again. It was just a nice high quality quarter from an operating standpoint segment operating income dollars did increase by $33 million or 20.
Speaker Change: Despite the one 6% lower top line and while strong aerospace performance was the primary driver the.
Speaker Change: The industrial businesses delivered record segment operating margins, despite negative organic growth pressure and FX pressures as well.
Speaker Change: And total interest expense was 17 favorable that was driven by our continued focus on debt reduction.
Speaker Change: Income tax and other both contributed <unk>, which was mostly offset by slightly higher corporate admin and share count.
Speaker Change: So the adjusted <unk>.
Speaker Change: EPS of $6 53 already said it its a record.
Speaker Change: And I really commend our team members around the world for strong operating performance really diligent cost actions, where necessary and really a focus on cash flow that helped us achieve these results.
Speaker Change: If we move into the segments, if I look on slide 12.
Speaker Change: It really is a testament to the win strategy.
Speaker Change: That our team members were able to deliver such.
Speaker Change: Such broad based margin expansion, we're so proud of the hard work and all of their efforts every business delivered record segment operating margins, whether they had a positive 14% organic growth or whether they were negative five.
Speaker Change: Margin expansion for the entire company was 110 basis points and another positive sign was that orders move to plus 5% versus prior year, mainly off over a longer cycle.
Speaker Change: And market strength.
Speaker Change: If you look at the diversified industrial North America businesses sales were $1 9 billion.
Speaker Change: Equated to an organic growth of negative five versus prior that was lower than our expectations going into the quarter. We continue to see delays in the industrial recovery specifically in transportation.
Off highway markets. Our recovery is also yet to materialize in the distribution channel.
Speaker Change: But if you look at adjusted segment operating margins, we were able to increase those by 40 basis points to a record $24 six driven by just unbelievable operating execution.
Speaker Change: Nice positive sign in North America, where orders did turn positive after a few quarters of negative. So we are happy to see that and again, it's specifically driven by some of our longer cycle vehicles.
Speaker Change: If we move to the industrial international businesses sales were $1 3 billion.
Speaker Change: Organic growth in international came in at negative three.
Speaker Change: Asia Pac was a positive three.
Speaker Change: That's similar to what we had last quarter Latin America positive at plus 10, while EMEA remains challenged with organic growth at negative eight.
Speaker Change: But if you look at adjusted segment operating margins are the international team achieved a record high of 24, 1% and expanded margins by 110 basis points as Jenny mentioned its really just the power of the win strategy in action.
Speaker Change: Our international team continues to focus on productivity.
Speaker Change: Cost controls.
Speaker Change: All things in the win strategy to expand margins and really our operating with unbelievable resiliency in a very tough growth environment order rates. Here also moved a further positive from plus one last quarter to plus four and that was mainly driven by improvement out of Asia Pacific.
Speaker Change: If we look at aerospace Aerospace continues to outperform sales were a record $1 $5 billion in aerospace that is up 14% versus prior year.
Speaker Change: That did exceed our expectations for the quarter.
Speaker Change: All of that growth was organic 14% organic growth and that was really driven by 20% plus growth in the aftermarket.
Speaker Change: Area and mid single digit positive growth and in the OEM markets.
Speaker Change: Adjusted segment operating margins same story here a record 28, 2% that is an increase of an incredible 170 basis points versus prior just really robust topline favorable aftermarket mix continues to drive this great.
Speaker Change: Margin performance at Aerospace orders continue and a positive clip of plus nine so just great job across all of our businesses in the quarter.
Speaker Change: On slide 13, just to touch on our year to date cash flow performance year to date cash flow from operations was 17, 4% of sales that equates to about $1 $7 billion and CFO.
Speaker Change: That is a record and it's also an increase of 24% versus prior year year.
Speaker Change: Year to date free cash flow increased 17% from prior year.
Speaker Change: We finished at $1 5 billion or 15, 2% of sales for free cash flow.
Speaker Change: Jenny mentioned some of that divestiture activity divestiture divestiture activity in the quarter generated cash proceeds of approximately $620 million.
Speaker Change: On an as reported post tax gain of $223 million we have.
Speaker Change: Have excluded that gain from our adjusted results in the quarter and.
Speaker Change: And 100% of the proceeds from those transactions were used to further reduce debt.
Speaker Change: Jenny mentioned in the quarter, we paid down $1 $1 billion that moves our year to date.
Speaker Change: Debt reduction to one $5 billion and our gross debt to adjusted EBITDA is that $1 seven so good work on cash flow.
Speaker Change: Across all elements of the business.
Speaker Change: Okay, moving to slide 14 and guidance, let me give you some more details on this our reported sales growth for the year is now forecasted to be in the range of minus two to positive one with 0.5 negative at the midpoint keep.
Speaker Change: Keep in mind divestitures are one 5% of that unfavorable impact and 100% of that divestiture activity.
Speaker Change: As from the industrial North America businesses.
Speaker Change: Currency headwinds are now expected to be a 1% negative headwind.
Speaker Change: That is based on December 31 exchange rates as we always do that did flip from what we were expecting 90 days ago, just currency rates continue to show significant volatility and.
Speaker Change: With respect to organic growth, we have raised the aerospace organic growth midpoint by 100 basis points to now 11% for the full year.
Speaker Change: But the offset is on industrial.
Speaker Change: Mid point has been decreased as followed and the industrial North America organic growth is now forecasted to be negative two five at the midpoint for the year.
Speaker Change: The midpoint of the industrial international organic growth is now forecasted to be flat for the full year, we expect parkers organic growth to be a positive 2% at the midpoint.
Speaker Change: Despite all of that we are raising our adjusted segment operating margin guidance by an additional 10 basis points for the full year and moving our expectations to $25 eight for the year that is now a forecasted margin expansion of 90 basis points versus our FY.
Speaker Change: Fiscal year finish of last year.
Speaker Change: Tax rate is now slightly down to approximately 22% we are modeling 'twenty, two and a half for the second half of the year.
Speaker Change: Others more details of that in the appendix along with.
Speaker Change: Assumptions, we're using for corporate G&A interest and other.
Speaker Change: As we usually provide those.
Speaker Change: Despite the currency headwinds and the delayed industrial recovery that Johnny talked about we are maintaining our full year adjusted EPS midpoint at $26 70.
Speaker Change: Full year as reported EPS is now expected to be $24 76.
Speaker Change: Like I, just said adjusted EPS midpoint is expected to be 26 70.
Speaker Change: Both of those have a range of plus or minus 30 on either side.
Speaker Change: We also remain committed to our free cash flow forecast in the range of $3 billion to $3 3 billion for the full year.
Speaker Change: If we look specifically at the third quarter for FY 'twenty five rip.
Speaker Change: Our reported sales are expected to be approximately $4 9 billion.
Speaker Change: With organic growth of positive one five.
Speaker Change: Adjusted segment operating margin is 25, six and adjusted EPS for the quarter is expected to be $6 65.
Jenny: So Jenny Thats, all I have I will hand, it back to you and I will drive our attention to slide 15.
Speaker Change: Todd.
Speaker Change: Reminder, unlike drive Parker.
Speaker Change: Safety engagement and ownership by the foundation of our culture.
Speaker Change: Our people and living up to our purpose that drives top quartile performance.
Speaker Change: And we remain committed to being great generators and employers of cash.
Speaker Change: <unk> showed you our cash generation year to date, and we talked about all the great performance across all of the division.
Speaker Change: We are actively focused and extending our track record and deploying capital to deliver the best shareholder value possible.
Speaker Change: As Jenny Chimbley, we are ready to begin the Q&A session. So we'll take.
Speaker Change: We'll take whoever you got first in the queue.
Speaker Change: Thank you.
Speaker Change: I said, we are we would like to.
Speaker Change: We will be conducting a question and answer session if you'd like to ask a question. Please press star one on your telephone keypad.
Speaker Change: This call will indicate your line in your questions.
Speaker Change: You May press star two to remove yourself from the queue for participants using speaker equipment. It may be necessary to pick up the handset before pressing the star.
Speaker Change: <unk>.
Speaker Change: Our first question comes from the line of Jeff Sprague with vertical Research partners. Please proceed with your question.
Speaker Change: Thank you good morning, everyone.
Speaker Change: Hey, Johnny maybe as a start just.
Speaker Change: More complexion on what Youre seeing in the <unk>.
Speaker Change: Dusk real long cycle I guess.
Speaker Change: When you are kind of address pointing to the strength of industrial long cycles as the arrows.
It's inside industrial or maybe you could elaborate on what vertical specifically are looking better on the long cycle side.
Jeff Sprague: Yes, Jeff primarily it is the.
Speaker Change: Our long cycle strength.
Speaker Change: Aerospace and defense is sitting in those industrial businesses, but it's also a positive and HVAC.
Speaker Change: And then semi con so that's really what what's helping nodes orders in Asia Pacific.
Speaker Change: Increase this last quarter.
Speaker Change: And so that kind of sales conversion cycle on that stuff.
Speaker Change: We're talking more six 912 months in your view beyond our fiscal year and more into fiscal year 'twenty six.
Speaker Change: Okay, Great and then I was just hoping Todd could give a little bit more color on just the.
Speaker Change: The pattern organic pattern of industrial revenues, Q3, and Q4 to close out the year.
Speaker Change: What's embedded in the 665 for example.
Speaker Change: For the industrial.
Speaker Change: Yes, absolutely Jeff.
Speaker Change: So we did pull down Q3 slightly when you look at what we're looking at for the full year.
Jimmy: Jimmy I may ask you to grab that if you if you've got it so.
Speaker Change: We had.
Speaker Change: <unk>.
Speaker Change: For our Q4 guidance the industrial organic sales.
Speaker Change: Guidance is two 5% for North America, and 5% for international It does assume.
Speaker Change: Our recovery rate so basically what we've done here is pushed things out a quarter.
Speaker Change: This guide is in line with prior growth periods when you look at.
Speaker Change: Sequentially Q3 to Q4, so that's an assumption that we're making in there.
Speaker Change: Aerospace we've raised the growth outlook as Todd mentioned earlier to.
Speaker Change: 11% for the full year.
Speaker Change: And if you look at Q4 for aerospace last year, and we ran a positive 19%.
Speaker Change: It's a tough comp for aerospace and but thats, what we are selling.
Speaker Change: For the rest of this year.
Speaker Change: Great. Thank you I'll leave it there.
Jeff Sprague: Thanks, Jeff.
Jeff Sprague: Thank you.
Speaker Change: Our next question comes from the line of Joe Ritchie with Goldman Sachs. Please proceed with your question.
Joe Ritchie: Hey, good morning, guys.
Speaker Change: Hi, Joe So I know that I know that one month doesn't necessarily make a trend, but I'm just curious.
Joe Ritchie: <unk>.
Joe Ritchie: As we started 2025 have you seen like any discernible differences or changes in trend based on how you exited 2020 in calendar year 2024.
Joe Ritchie: Yes, what we have right now is the best look that we have for this quarter and for the second half. So nothing notable that I would comment on at this point.
Joe Ritchie: Just to add that that's what we have today.
Joe Ritchie: Okay, that's fair.
Joe Ritchie: Fair enough and then I guess the follow.
Joe Ritchie: Questions about any of the growth you guys have done an amazing job.
Joe Ritchie: You described it a little bit earlier.
Joe Ritchie: In your prepared remarks regarding your ability to expand margin and the industrial businesses. Despite the very weak environment.
Joe Ritchie: Yes.
Joe Ritchie: Current trends hold through the remainder of your fiscal year.
Speaker Change: Do you still expect to see margin expansion coming out of both North America and international or does it become a lot harder.
Speaker Change: I think we're still going to expand margins Ci feel I feel very strongly about the power of the win strategy and.
Speaker Change: The tool set that's available to our general managers I mean, obviously everybody likes the volume right.
Speaker Change: Something that is a positive but.
Speaker Change: I don't.
Speaker Change: I don't pull back on our margin expansion story.
Speaker Change: We have the tool then and our teams are doing a great job.
John: Yes, John.
Speaker Change: We do have larger.
John: We do have margin expansion.
John: In the in the guide here for the second half it is more muted just because theres some currency headwinds and obviously the topline headwinds, but to <unk> point if.
John: If you look at across all three businesses were still showing.
John: Strong margin expansion across all three of those businesses.
John: Alright, thanks, guys.
Joe Ritchie: Thanks, Joe.
John: Thank you IRA.
Speaker Change: Our next question comes from the line of Scott Davis.
Speaker Change: <unk> Research. Please proceed with your question.
Scott Davis: Hey, good morning, Jenny and Todd.
Mike Scott: Mike Scott.
Mike Scott: There's not much to pick on there hasnt been for some time for you guys. So I'll kind of add some nuances around M&A.
Mike Scott: We keep hearing about kind of some of the.
Mike Scott: Enthusiasm of stuff coming out of PE, but historically you guys have had.
Mike Scott: Probably tilting a little bit more towards carve outs, but what what do you see out there in the M&A environment and.
Mike Scott: And is your enthusiasm or or I should say confidence in getting deals done in 'twenty five.
Mike Scott: Higher than it was and do you think in 'twenty four or comparable.
Mike Scott: So it is an exciting time and we do have a robust pipeline and we put a lot of stock and the fact that many of the.
Mike Scott: Assets in the pipeline are relationships that we've built over many years and obviously, we've we've worked really hard and we've done a good job paying down debt. So.
Mike Scott: We're in that we're in a position to do that so I don't know if I would comment that it is.
Mike Scott: It's easier, but it's definitely a focus for us and.
Mike Scott: We're going to make sure that we continue to keep a close eye on everything.
Mike Scott: <unk> targets of all sizes in the pipeline you've heard me say that a couple of times.
Mike Scott: We still have the same criteria, we wanted to acquire companies, where we're the clear best owner.
Mike Scott: Accretive to growth resiliency margin cash flow EPS, all with synergy so.
Mike Scott: We're really really committed to deploying our capital in a way that's going to deliver the shareholder shareholder value that we've shown we can deliver in the past.
Yes.
Mike Scott: Makes sense.
Mike Scott: Because I have to ask the question just just because orders were a little better than I would've thought they'd be.
Mike Scott: Any any any kind of weird stuff out there as it relates to either buying ahead of tariffs or buying at a price increases or.
Mike Scott: Yeah.
Mike Scott: 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 that's the story.
Mike Scott: I wouldn't say nothing at all under that under those couple of items that you just said I mean, we're seeing the strength of aerospace and defense and our industrial businesses.
Mike Scott: HVA fee and semicon, so longer cycle nothing strange.
Mike Scott: Okay, Congrats and best of luck this year.
Scott Davis: Thank you thanks Scott.
Speaker Change: Thank you IRA.
Scott Davis: Our next question comes from the line of Mig.
Speaker Change: Albert with Baird. Please proceed with your question.
Speaker Change: Thank you good morning, just to follow up on that and got tariff discussion.
Speaker Change: Wondering sort of how your own thinking has evolved around this issue.
Speaker Change: Are you hearing from customers in terms of how they're preparing to deal with tariffs, especially in Canada, Mexico default, then and again, what Parker strategy, we'd be around basis, whether with your production or anything else that you're planning to do with your business.
Speaker Change: Well.
Obviously, there'll be an impact depending on what actually happens.
Speaker Change: Dealt with tariffs before.
Speaker Change: We have the visibility we have the tools and we have the agility to act when something does happen if and when something happens so.
Speaker Change: I would also say that.
Speaker Change: Over the past decade, we've built a local for local model.
Speaker Change: Because we want to be close to our customer sell.
Speaker Change: If it happens there will be impacts, but that definitely definitely helps us and we've been focused on supply chain leadership now for a couple of couple of years, a lot of new tools and strategies.
Speaker Change: And then put into place.
Speaker Change: Forest that local for local and reduce lead times.
Speaker Change: So we don't see a big need for.
Speaker Change: Our supply chain realignment, we don't we don't foresee any of that.
Speaker Change: And because we've dealt with this before and our customers.
Speaker Change: No how we've handled this before.
Speaker Change: The teams will get to work with any detail.
Speaker Change: Understood.
Speaker Change: Follow up looking at slide eight where you kind of talk about your growth forecast by key end market verticals.
Speaker Change: Wondering a little bit about about mix, maybe you can comment on that I know, we talk about at aerospace and defense, but within your industrial businesses, we're seeing some verticals like off highway prints more pressure relative to others.
Speaker Change: The only thing to call out here in terms of some of these end markets during may be higher margin versus the segment average. Thank you.
Speaker Change: I don't think there's anything to call out here or anything.
Speaker Change: That would be of a concern or change the way that we're looking at the forecast or how we can expand margin.
Speaker Change: Nothing within some of these verticals you know you've heard us talk about <unk>.
Speaker Change: Instance, within off highway.
Speaker Change: AG is that it's weaker than construction, but there is nothing nothing there that I would say, we would point to that to a mixed concern yes. The only thing I would tell you as you notice our distribution channel has.
Speaker Change: A more positive margin profile than the OEM channel, it's not anything out of line.
Speaker Change: What we've seen in normal periods at this time. So the margin expansion is really coming from the team are working really hard on productivity working really hard on cost.
Speaker Change: Managing what they can control.
Speaker Change: Alright, Thank you Greg.
Speaker Change: Thank you IRA.
Our next question comes from the line of David Raso with Evercore ISI. Please proceed with your question.
Hi, Thank you for the time journey early you were mentioning I believe you said fourth quarter organic growth rates.
Speaker Change: 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 arrow.
Speaker Change: In the third quarter.
Speaker Change: It's a 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.
Speaker Change: So aerospace and the third quarter is projected to be nine 5%.
Speaker Change: Third quarter is 5% and what I mentioned earlier was.
Speaker Change: Fourth quarter last year was 19%.
Speaker Change: So still strong aerospace growth that pretty tough comp there.
Speaker Change: Here at 11% for Aerospace David I really do think it's just the comps if we look at the sheer dollars.
Speaker Change: Q4 would be the highest aerospace shipments we've ever had as a company.
Speaker Change: It would be obviously, the highest reshaped all year.
Speaker Change: Okay helpful and then when you.
Speaker Change: Note that you expect some improvement in the fourth quarter can you highlight where are you seeing that or are there already.
Speaker Change: Already conversations some restocking levels, maybe on some of the short cycle, just where do you expect to see that improvement.
Speaker Change: But we expect to see some gradual industrial recovery.
Speaker Change: Based off of the fact that.
Scott Davis: Scott just mentioned our distributor sentiment is very positive and.
Speaker Change: We've been here.
Speaker Change: At that average time.
Speaker Change:
Speaker Change: Impact.
Speaker Change: We're here at five.
Speaker Change: Five quarters of negative growth and the average is thick.
Speaker Change: And that's in North America International we're at six quarters of negative growth in the average SXL.
Speaker Change: We're just expecting that this turn is coming but its been pushed out another quarter from what we see right now.
Speaker Change: 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 as an accelerator in the margin expansion all else equal with what's supposed to pick up in a couple of quarters I'm. Usually you think of for example distribution and some of your highest margin.
Speaker Change: 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 you're thinking about the mix of what's starting to recover and what's on the come. Thanks.
Speaker Change: Distribution that it's still on the comp right I mean, they are positive they are expecting it to happen they are ready for a recovery.
Speaker Change: But it hasn't come yet so yes, obviously distribution is a higher margin for us.
Speaker Change: But again.
Speaker Change: Our margin expansion is going to come from the teams continuing to do all the great work that they do on productivity and driving up costs in our plants as well.
Speaker Change: The spirit of the question as everybody after the next quarter or even up to this call start thinking about how do you guide in July or early August and just trying to think about distribution starts to be a little more of a lead horse on the earnings recovery into fiscal 'twenty six.
Speaker Change: We'll be speaking that should be a positive margin mix. So that that was the spirit of it. Thank you so much.
Speaker Change: Really we were really happy to see the orders turned positive I think another quarter would be another great data point to make us feel good about 'twenty six.
Speaker Change: Thank you.
Speaker Change: Thanks, Dave Thank you.
Speaker Change: Thank you. Our next question comes from the line of Jamie Cook with <unk> Securities. Please proceed with your question.
Speaker Change: Hi, good morning, and congrats on a nice quarter I guess, just two questions. One can you give more color on the Lat am orders up 10% and then I guess down 8% what Youre seeing there and then I guess Jenny your time in the spirit of.
Speaker Change: The margin question again, and your outperformance given organic growth has disappointed this year to what degree.
Speaker Change: Can we expect.
Speaker Change: When the markets turn is there a reason to believe that incremental margins coming out of this downturn should be better.
Speaker Change: Than average because of structural improvements in the win strategy that you would point to you about the average incremental margins. This cycle. Thank you.
Speaker Change: Yes, Jimmy maybe let me touch on that margin question first.
Speaker Change: The incremental margins.
Speaker Change: Or a little bit difficult with a muted top line rate calculations get a little.
Speaker Change: Strange, but the team is unbelievably performed on that we have a clear margin expansion targets out too.
Speaker Change: Longer term targets, where you don't expect FY 'twenty six to be any different that will be another leg in moving those margins to what we have committed to.
Speaker Change: But I think if youre looking at.
Speaker Change: In general, we really still believe 30% incremental margins are best in class and if youre doing that youre doing all the right things like investing in the business and obviously Jeff.
Speaker Change: Generating higher organic growth. So that's what we're kind of pushing the teams to.
Speaker Change: In respect to Latin America, yes, they have been fantastic.
Speaker Change: It is a small piece of the company, but the team down there has been.
Speaker Change: Really stellar.
Speaker Change: Growth and margin performance and really just doing a fantastic job and we tell them all the time and we're in our meetings that over so.
Speaker Change: Transfer with what they've been able to do it it's pretty much been broad based.
Speaker Change: Performance across the Latin America business is Theres, a lot of filtration business in Latin America, a lot of motion systems business in Latin America, but they do touch really all of the verticals that we play in so let's.
Speaker Change: I'd say broad based.
Speaker Change: Sorry, non aimed down eight.
Speaker Change: I'm, sorry, what was that Jamie.
Speaker Change: Sorry, the <unk> orders down eight.
Speaker Change: EMEA has just been a really challenging environment.
Speaker Change: It's across the board there it's been in a negative environment for a while.
Speaker Change: I think it's a plus that.
Speaker Change: International orders have turned positive we have yet to see that in <unk>.
Speaker Change: EMEA region, but I will tell you. The team again is doing everything they can to be ready for a recovery and to do that in the most cost efficient manager managed possible.
Speaker Change: Continue to be able to eke out margin improvement despite the topline pressure.
Speaker Change: Yes, Jamie I would just add onto that that I would consider it broad based.
Speaker Change: And plant transportation.
Speaker Change: Off highway.
Speaker Change: Just really a challenging demand environment there.
Speaker Change: Thank you.
Speaker Change: Thanks, Jamie.
Speaker Change: Thank you. Our next question comes from the line of Andrew <unk> with Bank of America. Please proceed with your question Hi.
Andrew: Hi, guys good morning good.
Speaker Change: Good morning.
Speaker Change: Just sort of follow up on Daves question, I think a little bit industrial businesses are getting more long cycle would there be a portfolio.
Speaker Change: So if you look at our history does it take longer versus history now for positive waters to translate to positive sales growth should be just thinking different growth algorithm.
Speaker Change: Oh.
Speaker Change: It's been seven quarters and the average was six.
Speaker Change: It's one quarter longer than in the past so.
Speaker Change: No no no I'm I'm, asking I'm asking historically you are a longer cycle business right. So if you get an order right should we dial in Grove later than we would like look at Parker 510 years ago, Yes, Yes, I think I think on the longer cycle businesses.
Speaker Change: Andrew that's for sure.
Speaker Change: I think the real challenges that some of those shorter cycle businesses are the ones that are under the most pressure right now.
Speaker Change: So when we see that come back I wouldn't expect any change in that cadence, but if you look at the mix of the whole company.
Speaker Change: Leaning more longer cycle for us that means a little bit longer.
Speaker Change: Translation into organic growth.
Speaker Change: And I guess I'll ask two questions as a follow up because I think one of you just simply can't answer.
Speaker Change: Any sense when this off highway.
Speaker Change: Destock will end and then second question just granularity maybe on the aftermarket for Aero military versus commercial because that has been a very nice story. Thank you.
Speaker Change: Yes.
Speaker Change: Thank.
Speaker Change: Off highway is going to be challenged for the rest of the calendar year.
Speaker Change: Especially especially act so that that would be my best estimate right now.
Speaker Change: <unk>.
Speaker Change: And you want some color on.
Speaker Change: Aero mix is that what you asked Andrew Yeah, just aftermarket military versus commercial.
Speaker Change: So.
Speaker Change: Aftermarket.
Speaker Change: Let me just let me go through the.
Speaker Change: Let me go through the sales force with you and then just to remind you of our guidance. So total aerospace was 14% growth commercial OEM was 5%.
Speaker Change: Defense OEM was 8%.
Speaker Change: Commercial aftermarket, 21% and defense aftermarket, 25%. So we are working.
Speaker Change: Yes.
Speaker Change: To see that strength there.
Speaker Change: And they are waiting for those.
Speaker Change: Rate increases to go up and then also we just have really strong defense depo partnerships with it's just helping the defense aftermarket.
Speaker Change: And then if you look at the outlook.
Speaker Change: We are raising commercial OEM to mid single digit growth. It was previously low single digit.
Speaker Change: We're raising commercial MRO to high teens growth. It was previously mid teen.
Speaker Change: And we're raising defense MRO to high teens growth previously low double digit so really just overall great strength here on aerospace continues.
Speaker Change: Makes a lot of sense. Thanks, so much.
Speaker Change: About that Andrew we've got both of Victoria.
Speaker Change: Thank you.
Speaker Change: Good day.
Speaker Change: Thank you IRA.
Speaker Change: Question comes from the line of Julian Mitchell with Barclays. Please proceed with your question.
Speaker Change: Hi, good morning.
Julian Mitchell: Maybe just my first question around.
Julian Mitchell: I'm trying to understand in the industrial businesses.
Julian Mitchell: Difference between north.
Speaker Change: Erica and.
Speaker Change: International So if we look at the guidance you've got.
Speaker Change: Trends in North America organic sales for the year in international.
Speaker Change: This sort of comps are pretty similar in terms of the 2020 for performance.
Speaker Change: And I think in general people would say, there's been a bit of tone or customer sentiment or what have you. Among U S based distributors at least in the last month or two.
Speaker Change: So just trying to understand.
Speaker Change: Why there is that worse outlook in North America or is it is it because you talk about the HVAC and A&D strength on slide eight, which I think would help north America or at least as much is international. So is it just perhaps the greater weighting of North America to off highway and transport.
Speaker Change: Really hurting it in that's offsetting whatever that's a domestic distributor sentiment there is.
Speaker Change: I think you nailed it yeah, I think that's exactly the greater weighting of the of the industrial business in North America, Yes. The other thing Julien you got to go back a couple quarters here, but.
Speaker Change: The international decline started before the North America decline, so a little bit of this is.
Speaker Change: Year over year comparisons it feels like.
Speaker Change: International started a quarter or two before quarter before North North America got negative. So I think a little bit of that is just is just comps.
Speaker Change: Understood. Thanks, and then just a quick follow up on the <unk>.
Speaker Change: Aerospace outlook I think you mentioned that because of that very difficult comp for the fourth quarter aerospace organic sales are up around mid single digits.
Speaker Change: Just when we're thinking about the modeling of that is it really that military side of things where it may be.
Speaker Change: Flattish.
Speaker Change: Exiting the year and then you have another sort of quarter of very tough comps.
Speaker Change: And then you kind of pull out of that at the end of the calendar year on the military side.
Speaker Change: I don't think.
Speaker Change: Just.
Speaker Change: Military it's just an over overall tough comp because of how strong Q4 was last year I wouldn't call out anything specific in military.
Speaker Change: Yes, I think we are expecting just a gradual recovery on commercial OEM.
Speaker Change: That might be some of it.
Julian Mitchell: If youre modeling Julien.
Speaker Change: Great. Thanks very much.
Speaker Change: Thank you. Our next question comes from the line of Nigel Coe with Wolfe Research. Please proceed with your question.
Nigel Coe: Thanks, Good morning.
Speaker Change: I'm going to probably create must be good morning, I'm going to trade Bhakti Peter here.
Nigel Coe: A little bit.
Nigel Coe: Curious why woods HVAC.
Nigel Coe: And semi.
Nigel Coe: He considered long cycle orders, because I think most of us.
Nigel Coe: Those would be pretty short cycle book.
Nigel Coe: Book and ship type sand market. So just curious why they had long cycle and then maybe Jenny you talked about the recovery pushing to the right side of it I think we've all seen that.
Speaker Change: Obviously now we've got I'd say I'm getting some 50 orders it's been positive.
Speaker Change: It seems like the recovery is forming but just curious what you're hearing from some of your customers to be basic customers. This be some pause et cetera, how is the tone in the field right now.
Speaker Change: So Tom with distribution is very positive.
Speaker Change: They're they're ready for the recovery and they are expecting a recovery so.
Speaker Change: They've.
Speaker Change: <unk> been bullish for several quarters now.
Speaker Change: So no change there if anything I think as more time goes by they know what's coming in and.
Speaker Change: And they're making sure that they are ready for it.
Speaker Change: And the first part of your question again.
Speaker Change: Yeah.
Speaker Change: In Oman, and Bahrain considering those.
Julian Mitchell: Julian first of all if we get the visibility from an order standpoint from those areas.
Julian Mitchell: We get that long demand horizon, but these both follow the secular trends that you hear us talk about and we consider that longer cycle.
Speaker Change: Got it Okay, and then just a quick one on.
Julian Mitchell: SG&A.
Julian Mitchell: Standing SG&A management.
I think on online online basis, SG&A fell from six down to 651, so call it four 5% decline.
Julian Mitchell: I know the Aero mix is helping that to a degree but you know.
Julian Mitchell: As we recover just the confidence levels on.
Speaker Change: <unk> said they tend to grow margins. So that's that's very clear.
Speaker Change: How much of that SG&A reduction is structural.
Speaker Change: Is there some temporary cost managements and that comes back in on the recovery.
Nigel Coe: Yes Nigel.
Nigel Coe: Always been a very focused and frugal when it comes to SG&A.
Nigel Coe: If I had to make a guess I'd say almost all of it is structural.
Nigel Coe:
Nigel Coe: There will be a.
Nigel Coe: Increase in aerospace RMB.
Nigel Coe: But that's going to be a ways off and that's going to depend on new programs coming so we don't see that in the near term that's not in our guide for the rest of this fiscal year.
Nigel Coe: I don't think Youll see us having a step up in SG&A costs.
Speaker Change: Okay, great. Thank you.
Nigel Coe: Yep.
Speaker Change: Thank you. Our next question comes from the line of Joe O'dea with Wells Fargo. Please proceed with your question.
Joe O'dea: Hi, good morning.
Nigel Coe: Sure.
Nigel Coe: Good morning, along.
Speaker Change: Similar lines as some of the other questions just trying to think through kind of a typical cycle relationships and looking at the the order chart on slide seven.
Speaker Change: 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.
Speaker Change: When you start to see orders get a little bit better or do you think about the distributor town thats been better what is the typical lag time between some signs of end market demand are getting better and then that starts to translate to.
Speaker Change: Channel inventory reaction.
Speaker Change: I don't know that I have a specific timeframe that I can call out for you I think there's just a lot of them.
Speaker Change: Our distributors that have gotten really good at controlling their cash and keeping a close eye on their inventory levels. So they are waiting.
Speaker Change: For the orders to hit them, they've all commented that there's been a lot of quoting activity.
Speaker Change: So that's why I think they're very bullish on the future and expecting the recovery.
Speaker Change: But we'll just have to wait and see what happens here as.
Speaker Change: As we've already talked about.
Speaker Change: Nearing that point, where we're going to crossover the average of when they should recover so.
Speaker Change: We're all going to be ready.
Speaker Change: And then.
Speaker Change: Last quarter in the deck you put some details on mega projects.
Speaker Change: And our tracking of that data, we did see some delays from from 24% to 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 Youre, having I think general concerns that maybe there's enough nervousness. This stuff continues to push to the right anything youre seeing that starting to sort of pulse with no things things are going to start hitting construction and demand tied to that.
Speaker Change: No no no major changes I mean this.
Speaker Change: It's still a growth driver for implant in industrial market, especially.
Speaker Change: As you know Theres just been a massive amount out there thats been.
Speaker Change: Announced we're going to benefit at every stage.
Some cases, some examples I've given in the past about.
Speaker Change: Where our distributors are quoting business with local and national contractors.
Speaker Change: There's still.
Speaker Change: Some of that going on but I would say that some of those projects R. R.
Speaker Change: Are being delayed.
Speaker Change: But whenever we might hear about a delay or cancellation. The number goes up again so.
Speaker Change: It's still coming.
Speaker Change: It just hasn't hit yet.
Speaker Change: Yes.
Speaker Change: Got it thank you.
Speaker Change: Thanks, Joe Thank you Jeff.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Nick who these days I'm sorry with Deutsche Bank. Please proceed with your question.
Speaker Change: Yes, Thanks, Good morning, Hi, Nicole learning Hello, So maybe just one on the <unk> outlook and again like have to commend you guys for continued really strong margin performance, but you are modeling segment margins kind of flattish from Q2 to <unk> and typically we do see like a bit of a sequential step up so just curious if maybe that some.
Speaker Change: Conservatism baked and maybe there's something going on from a mixed perspective with aerospace.
Speaker Change: Anything on that.
Speaker Change: You know you're right. Your math is right Nicole I would tell you $28 two in Q2 for aerospace.
Speaker Change: As an all time record obviously, the aftermarket mix was very very favorable.
Speaker Change: We do not have that sort of mix in the guide so that's a little bit.
Speaker Change: Of the flattish newness is the aerospace not expected to be as high and then the currency impact really is impacting the international side of the business. So we've got slightly lower than Q2 margins.
Speaker Change: Forecasted for.
Speaker Change: The international businesses, but that is really <unk>.
Speaker Change: Volume and currency related if you look at North America, we're actually expanding margins.
Speaker Change: Q3 from Q2.
Speaker Change: Got it that's really helpful. Thanks, Todd and then just on.
Speaker Change: Understand the commentary around the long cycle.
Speaker Change: And 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.
Speaker Change: I would say with the same as it has been.
Speaker Change: So no no real change there Nicole.
Speaker Change: Thank you I'll pass it on.
Speaker Change: Great. Thank you Okay I can't believe this but we've got through the entire Q I think that might be the first time ever so.
Speaker Change: This is the conclusion of our FY 'twenty five Q2 earnings release webcast.
Speaker Change: Miller, our VP of Investor Relations and yet for our director of Investor Relations.
Speaker Change: We will be available for any follow ups needed today and tomorrow and just one last note for everyone on the call. This will be the last time that <unk> will be available for follow ups.
Speaker Change: We need to congratulate you and Ive taken a new role within the company as group Vice President controller for our motion systems.
Speaker Change: Groups, So yeah and we thank you for all your great work you've done for the company, we will Miss you in the Investor Relations space, but we know youre going to be a wonderful addition to the motion systems team. So congrats you're correct.
Speaker Change: Okay for everyone else on the call. We appreciate your time and your attention. Thank.
Thank you for joining us today I hope everyone has a wonderful afternoon. Thank you.
Speaker Change: Yeah.
Speaker Change: Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.
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