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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Todd Leombrun, Chief Financial Officer. Thank you. You may begin.

Thank you, Shelly. We appreciate it so much. Welcome to Parker's fiscal year 2025 second quarter earnings release webcast. This is Todd Leombrun, Chief Financial Officer, speaking. And with me today is Jenny Parmentier, our Chairman and Chief Executive Officer. We appreciate your interest in Parker, and thank you for joining us today. On Slide 2, 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 forecasts. Our press release, this presentation, and all reconciliations for any non-GAAP measures were released this morning and are available under the Investor section on Parker.com. The agenda for the call today has Jenny starting with the highlights of 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'25. I will follow Jenny with more details on our 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, Todd. And thank you to everyone for attending the call today. Our performance this quarter reflects our focus on operational excellence and the strength of our balanced portfolio. 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. Consistent 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, our teams delivered record adjusted segment operating margin across all businesses, as well as record earnings per share. Record year-to-date cash flow from operations, coupled with proceeds from previously announced divestitures allowed us to substantially reduce debt by $1.1 billion this quarter. And finally, we are encouraged to see industrial orders turn positive in our longer cycle businesses. Next slide, please. Our Win strategy. I'm often asked, how do we continue to expand margins, and more importantly, can we continue to do so? I've talked about this several times in the past. It is our business system, the Win strategy, that drives operational excellence. We trust the process. It is a proven strategy, and it works. The next few slides will show you how our teams use the Win strategy to drive performance over the cycle. Next slide, please. Embedded in the Win strategy is the Parker Lean System. It is fundamental to our culture and drives continuous improvement at all 85 divisions. Within the same pillars as the Win strategy are the critical tools used by all of our general managers and their teams to expand margins and drive organic growth. Disciplined execution of the Parker Lean System reduces variation and eliminates waste from the business. This system allows us to keep taking performance to the next level. And it is important to point out here that we are never done improving our business. Next slide, please. On this slide, we have an example of how the Win strategy drives performance through the cycle in one of our North American divisions. This is a division in our filtration group that has diverse exposure across industrial market verticals and a balanced OEM aftermarket mix. This is an engaged team that has utilized our high-performance team structure to execute the Win strategy. Looking at the results on the far right-hand side of the page, they have achieved first quartile safety by bringing attention and ownership to concerns, tracking them to closure, and scheduling audit follow-ups to ensure sustained results. They are utilizing the Parker Lean System, specifically Kaizen, to expand margins and achieve the FY'25 profitability goals for their division even in a negative growth environment. In addition, they have utilized the Simple by Design tools to reduce complexity and cost, as well as increase dual sourcing to strengthen their supply chain. And finally, the use of our zero-defect tools has resulted in a 52% reduction in rejected parts per million, thus providing their customers with a better experience. Next slide, please. Parker is a transformed company today. The chart on the left side of this page shows the strength of our portfolio over the last two and a half years. Order rates increased across all reported businesses in Q2, coming in at 5% for the quarter. Aerospace order strength continued in both aftermarket and OEM. And although we are seeing a continued delay in the expected industrial recovery, we are encouraged to see industrial orders turn positive in our longer cycle businesses. Next slide, please. Taking a look at our updated FY'25 sales forecast by market vertical. We are raising aerospace and defense to 11% on the strength of the aftermarket and gradual OEM rate increases. On the industrial side of the business, although orders have turned positive, there continues to be pressure in many of these markets. We are expecting in-plant and industrial equipment growth to be slightly lower within our low single-digit framework. We are continuing to see delays in recovery while distribution sentiment does remain positive. We are changing our forecast on transportation from low single-digit to neutral, primarily driven by weakness in automotive and higher dealer inventories. The bright spot here is that work truck demand does remain strong. Off-highway steps down to negative mid-teens as OEM de-stocking and production cuts continue, and the weakness in agriculture persists. We expect energy markets to remain neutral as projects and capital expenditure delays continue. Finally, we are increasing HVAC from low single digit to mid-single digit growth, driven by refrigerant changes in the industry. All of this adds up to an organic growth forecast of approximately 2% for fiscal year '25. I will now turn it over to Todd to summarize our Q2 results.

Thanks, Jenny. Okay, everyone. I'm going to begin with the results on Slide 10, and then we'll get to some more details on the outlook that Jenny just touched on. As Jenny mentioned, the second quarter was strong, lots of records. It was another quarter of strong margin expansion and EPS growth, despite some real top-line pressure. Sales were down 1.6% versus prior. Most of that decline is the result of the divestitures that we announced. The divestiture impact in the quarter was an unfavorable 1.4%. Currency also flipped on us this quarter. While we were forecasting a slight positive 90 days ago, it turned out to be unfavorable at 0.9. And on a good note, organic growth was positive at almost 1%. If you look at segment operating margins, 25.6% is a Q2 record. That's an increase of 110 basis points versus the prior year. And adjusted EBITDA margins were also a record at 26.8%, which happens to also be an increase of 110 basis points from the prior year. Adjusted net income of 853 or 18% return on sales, both of those are also records. Lastly, adjusted earnings per share were up 6% to a Q2 record of $6.53. Jenny mentioned this also, but the 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. If we could move to Slide 11, this shows the walk for that $0.38 or 6% increase in adjusted EPS. Again, it was just a nice high-quality quarter from an operating standpoint. Segment operating income dollars did increase by $33 million or $0.20, despite the 1.6% lower top line. While strong aerospace performance was the primary driver, the industrial businesses delivered record segment operating margins, despite negative organic growth pressure and foreign exchange pressures as well. In total, interest expense was $0.17 favorable, driven by our continued focus on debt reduction. Income tax and other both contributed $0.03, which was mostly offset by slightly higher corporate admin and share count. So the adjusted EPS of $6.53, as I already said, it's a record, and I really commend our team members around the world for their strong operating performance, really diligent cost actions where necessary, and a focus on cash flow that helped us achieve these results. If we move into the segments, if I look on Slide 12, it really is a testament to the Win strategy that our team members were able to deliver 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 5%. Margin expansion for the entire company was 110 basis points, and another positive sign was that orders moved to plus 5% versus the prior year, mainly off of a longer cycle and market strength. If you look at the diversified industrial North America businesses, sales were $1.9 billion. That equated to an organic growth of negative 5% versus prior. That was lower than our expectations going into the quarter. We continue to see delays in the industrial recovery, specifically in transportation and off-highway markets. A recovery has also yet to materialize in the distribution channel. But if you look at adjusted segment operating margins, we were able to increase those by 40 basis points to a record 24.6, driven by just unbelievable operating execution. A nice positive sign in North America where orders did turn positive after a few quarters of negative, so we were happy to see that, and again, it's specifically driven by some of our longer cycle verticals. If we move to the industrial international businesses, sales were $1.3 billion. Organic growth in international came in at negative 3%. Asia-Pacific was a positive 3%. Latin America, positive at plus 10%, while EMEA remains challenged with organic growth at negative 8%. But if you look at adjusted segment operating margins, the international team achieved a record high of 24.1% and expanded margins by 110 basis points. As Jenny mentioned, it's really just the power of the Win strategy in action. Our international team continues to focus on productivity, cost controls, and all things in the Win strategy to expand margins, and really are operating with unbelievable resiliency in a very tough growth environment. Order rates here also moved further positive from plus 1 last quarter to plus 4. That was mainly driven by improvement out of Asia-Pacific. If we look at aerospace, aerospace continues to outperform. Sales were a record $1.5 billion in aerospace, which is up 14% versus the prior year. That did exceed our expectations for the quarter. All of that growth was organic, 14% organic growth. That was really driven by over 20% growth in the aftermarket area and mid-single-digit positive growth in the OEM markets. 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 top line, favorable aftermarket mix continues to drive this great margin performance, and aerospace orders continue at a positive clip of plus 9. Just a great job across all of our businesses in the quarter. 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 in cash flow from operations and is a record. It's also an increase of 24% versus the prior year. Year-to-date free cash flow increased 17% from the prior year. We finished at $1.5 billion or 15.2% of sales for free cash flow. Jenny mentioned some of that divestiture activity. Divestiture activity in the quarter generated cash proceeds of approximately $620 million and an as-reported post-tax gain of $223 million. We have excluded that gain from our adjusted results in the quarter. One hundred percent of the proceeds from those transactions were used to further reduce debt. As Jenny mentioned, in the quarter, we paid down $1.1 billion. That moves our year-to-date debt reduction to $1.5 billion. Our gross debt to adjusted EBITDA is now $1.7 billion. Good work on cash flow across all elements of the business. Moving to Slide 14 and guidance, let me give you some more details on this. Reported sales growth for the year is now forecasted to be in the range of minus 2 to positive 1, with 0.5 negative at the midpoint. Keep in mind, divestitures are 1.5% of that unfavorable impact, and 100% of that divestiture activity is from the industrial North America businesses. Currency headwinds are now expected to be a 1% negative headwind. That is based on December 31st exchange rates, as we always do. That did flip from what we were expecting 90 days ago, as currency rates continue to show significant volatility. In respect to organic growth, we have raised the aerospace organic growth midpoint by 100 basis points to now 11% for the full year. But the offset is on the industrial segment. The midpoint has been decreased as follows. In Industrial North America, organic growth is now forecasted to be negative 2.5% at the midpoint for the year. The midpoint of the Industrial International organic growth is now forecasted to be flat. For the full year, we expect Parker's organic growth to be a positive 2% at the midpoint. 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 25.8% for the year. That is now a forecasted margin expansion of 90 basis points versus our fiscal year finish last year. The tax rate is now slightly down to approximately 22%. We are modeling 22.5% for the second half of the year. There are more details in the appendix, along with assumptions we're using for corporate G&A interest and others, as we usually provide those. Despite the currency headwinds and the delayed industrial recovery that Jenny talked about, we're maintaining our full-year adjusted EPS midpoint at $26.70. Full-year as-reported EPS is now expected to be $24.76. Adjusted EPS midpoint is expected to be $26.70. Both of those have a range of plus or minus $0.30 on either side. We also remain committed to our free cash flow forecast in the range of $3 billion to $3.3 billion for the full year. If we look specifically at the third quarter for FY '25, our reported sales are expected to be approximately $4.9 billion with organic growth of positive 1.5%. Adjusted segment operating margin is 25.6%, and adjusted EPS for the quarter is expected to be $6.65. So Jenny, that's all I have. I will hand it back to you, and I’ll drive everyone's attention to Slide 15.

Thank you, Todd. And a reminder on what drives Parker: safety, engagement, and ownership are the foundation of our culture. It's our people and living up to our purpose that drives top-quartile performance, and we remain committed to being great generators and deployers of cash. Todd just showed you our cash generation year-to-date, and we talked about all the great performance across all of the divisions. We are actively focused on extending our track record of deploying capital to deliver the best shareholder value possible. Back to you, Todd.

Shimon, we are ready to begin the Q&A session. So we'll take whoever you got first in the queue.

Thank you. We’ll be conducting a question-and-answer session. Our first question comes from the line of Jeff Sprague with Vertical Research Partners. Please proceed with your question.

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 the strength in industrial long cycle, is this the aerospace stuff that sits inside industrial? Or maybe you could elaborate on what verticals specifically are looking better on the long-cycle side.

Yes. Jeff, primarily, it is the long-cycle strength. The aerospace and defense are sitting in those industrial businesses. But it's also positive in HVAC and in semiconductor. So that's really what's helping those orders in Asia-Pacific increase this last quarter.

And so the kind of sales conversion cycle on that stuff is we're talking more 6, 9, 12 months in your view?

Right, right. Beyond our fiscal year and more into fiscal year '26.

Okay. Great. I was hoping Todd could provide more insight into the organic pattern of industrial revenues for Q3 and Q4 as we close out the year. What is included in the $665 million for the industrial sector?

Yes, we did lower our Q3 forecast slightly. Regarding the full year, Jenny, could you provide that information if you have it available?

For our Q4 guidance, the industrial organic sales outlook is 2.5% for North America and 5% for international. This assumes a recovery. Essentially, we've pushed some expectations out by a quarter. This guidance aligns with previous growth periods when comparing Q3 to Q4. In aerospace, we have increased our growth forecast to 11% for the full year. Looking back at Q4 for aerospace last year, we reported a positive 19%. So, while it's a challenging comparison for aerospace, that's our projection for the rest of this year.

Great, thank you. I’ll leave it there.

Thanks, Jeff.

Thank you. Our next question comes from the line of Joe Ritchie with Goldman Sachs. Please proceed with your questions.

Hey, good morning, guys. 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 any discernible differences or changes in trends based on how you exited calendar year 2024?

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, just the best look we have today.

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 weak environment. If the current trends hold through the remainder of your fiscal year, I mean, do you still expect to see some margin expansion coming out of both North America and international? Or does it become a lot harder?

I think we're still going to expand margins. I feel very strongly about the power of The Win Strategy and the tool set that's available to our general managers. I mean, obviously, everybody likes me, right? That's something that is positive. But I don't pull back on my margin expansion story. We have the tools and our teams are doing a great job.

Yes. Joe, I would just add. We do have margin expansion in the guide here for the second half. It is more muted just because there's some currency headwinds and obviously, the top line headwinds. But to Jenny's point, if you look at across all three businesses, we're still showing strong margin expansion across all of those businesses.

All right. Thanks, guys.

Thank you. Our next question comes from the line of Scott Davis with Melius Research. Please proceed with your question.

Hey, good morning, Jenny and Todd. 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 some of the enthusiasm of stuff coming out of private equity. But historically, you guys have had probably tilted a little bit more toward carve-outs. What do you see out there in the M&A environment? And is your enthusiasm or, I should say, confidence in getting deals done higher than it was in '24 or comparable?

So it is an exciting time, and we do have a robust pipeline. We put a lot of stock in the fact that many of the assets in the pipeline are relationships that we've built over many years. Obviously, we've worked really hard and we've done a good job paying down debt. So we're in a position to do that. I don't know if I would comment that it's easier, but it's definitely a focus for us, and we're going to make sure that we continue to keep a close eye on everything. Targets of all sizes in the pipeline, you've heard me say that a couple of times. We still have the same criteria. We want to acquire companies that we are the clear best owner, accretive to growth, resiliency, margins, cash flow, EPS, and synergies. So we're really, really committed to deploying our capital in a way that's going to deliver the shareholder value that we've shown we can deliver in the past.

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 point to? Or was it just pretty much things are getting better, and that's the story?

Yeah. No, I wouldn't say anything at all under those couple of items you just said. I mean we're seeing the strength of aerospace and defense in our industrial businesses, as well as HVAC and semiconductor. So for the longer cycle, nothing strange.

Okay. Congrats and best of luck this year.

Thank you.

Thanks, Scott.

Thank you. Our next question comes from the line of Mig Dobre with Baird. Please proceed with your question.

Thank you. Good morning. 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 are 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?

Certainly. There will be an impact based on what unfolds, but we've managed tariffs in the past. We have clarity on the situation, the necessary tools, and the agility to respond as events occur. Over the last ten years, we have developed a local-for-local model to stay close to our customers. While any changes will have an impact, this model certainly benefits us. We've concentrated on supply chain leadership for several years, implementing various new tools and strategies to strengthen the local-for-local approach and shorten lead times. Therefore, we don’t anticipate needing to realign our supply chain. We don’t expect that. Since we have encountered similar situations before, and our customers are familiar with our past handling of such issues, our teams will be ready to act when required.

Understood. My follow-up is looking at Slide 8 where you kind of talk about your growth forecast by market vertical. I'm wondering a little bit about the 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? Thank you.

I believe there is nothing to highlight that would raise any concerns or alter our outlook on the forecast or our ability to increase margins. In some of the verticals we’ve discussed, like off-highway, agriculture is indeed weaker than construction. However, I don’t see anything that would indicate a mix concern.

Yeah. Mig, the only thing I would tell you, as you know, our distribution channel has a more positive margin profile than the OEM channel, but it's not anything out of line than what we've seen in normal periods at this time. So the margin expansion is really coming from the team working really hard on productivity, managing what they can control.

All right. That's great. Thanks.

Thank you. Our next question comes from the line of David Raso with Evercore ISI. Please proceed with your question.

Hi, thank you for the time. Jenny, earlier you mentioned fourth quarter organic growth rates. I won't go into details about the calculations, but I want to ensure I understand correctly. It seems there was very limited organic growth for aerospace in the third quarter compared to the overall third quarter growth for the company, followed by a significant increase in the fourth quarter. I just want to confirm that I'm interpreting the industrial growth as you outlined it.

So aerospace in the third quarter is projected to be 9.5%. Fourth quarter is 5%. And what I mentioned earlier was fourth quarter last year was 19%, and so still strong aerospace growth but a pretty tough comp there. Total year is 11% for aerospace.

David, I really do think it's just the comps. If we look at the sheer dollars, Q4 would be the highest aerospace shipments we've ever had in the company, and it would be obviously the highest we shipped all year.

Okay. Helpful. And then when you noted you expect some improvement in the fourth quarter, can you highlight where you are 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?

Well, we expect to see some gradual industrial recovery based off of the fact that, as Todd just mentioned, our distributor sentiment is very positive. We've been here at that average time of impact, we're here at five quarters of negative growth, and the average is 6. North America International, we're at six quarters of negative growth, and the average of 6. So we're just expecting that this turn is coming, but it has been pushed out another quarter from what we see right now.

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 as some of your highest-margin business. And that sounds like that may not have 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.

Yes, distribution is still expected to improve in the future. While there is a positive outlook and readiness for a recovery, it has not materialized yet. Distribution represents a higher margin for us, but our margin growth will primarily come from our teams continuing their excellent work in enhancing productivity and reducing costs in our facilities.

Yeah. 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 starting 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. Thank you so much.

We were really happy to see the orders turn positive. I think another quarter would be another great data point to make us feel good about '26.

Thank you.

Thanks, David.

Thank you. Our next question comes from the line of Jamie Cook with Truist Securities. Please proceed with your question.

Hi, good morning. Congratulations on a successful quarter. I have two questions. First, can you provide more details about the Latin America order as a percentage? Also, regarding EMEA, which is down 8%, what insights can you share about that trend? Additionally, Jenny or Todd, in light of the margin discussion and considering your outperformance despite disappointing organic growth this year, how should we anticipate the recovery? When the markets improve, can we expect that the incremental margins post-downturn will be better than average due to the structural enhancements in the Win Strategy that could lead to above-average margins this time around? Thank you.

Yeah, Jamie, let me touch on that margin question first. The incremental margins are a little bit difficult with a muted top line, right? The calculations get a little strange, but the team has unbelievably performed on that. We have clear margin expansion targets out to our longer-term targets. We don't expect FY '26 to be any different. That will be another leg in moving those margins to what we have committed to. But I think if you're looking at a, in general, we really still believe 30% incremental margins are best-in-class. If you're doing that, you're doing all the right things like investing in the business and obviously generating a higher organic growth. So that's what we're pushing the teams to. In respect to Latin America, yeah, they have been fantastic. It is a small piece of the company, but the team down there has been really stellar in growth, in margin performance and really just doing a fantastic job. We tell them all the time when we're in our meetings that we're so impressed with what they've been able to do. It's been broad-based performance across the Latin America businesses. There's a lot of filtration business in Latin America, a lot of Motion Systems business in Latin America, but they touch really all of the verticals that we play in. So I'd say broad-based.

Sorry, on EMEA, I guess, down 8%?

EMEA has just been a really challenging environment. It's across the board there. It's been in a negative environment for a while. I think it's a plus that international orders have turned positive, but we have to see that in our EMEA region. The team, again, is doing everything they can to be ready for a recovery and to do that in the most cost-efficient managed possible. They continue to be able to eke out margin improvement despite the top line pressure.

Yeah. Jamie, I would just add that I would consider a broad-based, in-plant transportation off-highway, just really a challenging demand environment there.

Thank you.

Thanks, Jamie.

Thank you. Our next question comes from the line of Andrew Obin with Bank of America. Please proceed with your question.

Hi, guys. Good morning.

Hi, Andrew.

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 be thinking different growth algorithm?

Yeah.

Yeah. I think on the longer-cycle businesses, Andrew, that's for sure. I think the real challenges are some of those shorter-cycle businesses are the ones that are under the most pressure right now. 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, leaning more toward longer cycle for us. That means a little bit longer translation into organic growth.

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? Thank you.

Yeah. I think off-highway is going to be challenged for the rest of the calendar year, especially. So that would be my best estimate right now. And you want some color on aero mix? Was that what you asked, Andrew?

Yeah, just aftermarket, military versus commercial.

So let me go through the sales and remind you of our guidance. Total aerospace saw a 14% growth. Commercial OEM grew by 5%, and Defense OEM increased by 8%. Commercial aftermarket grew by 21%, while defense aftermarket rose by 25%. We continue to see strong performance in this area as we anticipate rate increases. Our strong defense depot partnerships are significantly benefiting the defense aftermarket. Looking ahead, we are raising our projections for commercial OEM to mid-single-digit growth, up from low single-digit. We are also increasing our forecast for commercial MRO to high-teens growth from mid-teens and raising defense MRO to high-teens growth from low double digits. Overall, the strength in aerospace remains robust.

How about that, Andrew, we've got both of them for you.

Makes a lot of sense. Thanks so much.

Okay, thanks.

Thank you. Our next question comes from the line of Julian Mitchell with Barclays.

Good morning. My first question is about understanding the differences between North America and international in the industrial businesses. The guidance indicates that North America has worse trends in organic sales for the year compared to international, although the comparisons for 2024 performance seem quite similar. Generally, there seems to be a more positive tone or customer sentiment among U.S.-based distributors over the last month or two. I’m trying to grasp why the outlook is less favorable for North America. You mentioned HVAC and A&D strength, which should benefit North America as much as international. Could it be that the greater focus on North America's off-highway and travel sectors is negatively impacting the results, overshadowing the improved sentiment from domestic distributors?

I think you nailed it. Yeah. I think that's exactly it. It's the greater weighting of the industrial business in North America.

The other thing, Julian, you've got to go back a couple of quarters here, but international decline started before the North America decline. So a little bit of this is year-over-year comparisons. It feels like international started a quarter or two before North America got negative. So I think a little bit of that is just comps.

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?

I don't think it's just military. It's just an overall tough comp because of how strong Q4 was last year. I wouldn't call out anything specific in military.

Yeah. I think we are expecting just a gradual recovery on commercial OEM. That might be some of it if you're modeling, Julian.

Great. Thanks very much.

Thank you. Our next question comes from the line of Nigel Coe with Wolfe Research. Please proceed with your question.

Hi, good morning. I'm going to try my best here. I'm curious why HVAC and semiconductor are considered long-cycle orders. Many of us would view those as short-cycle book-and-ship markets. So I’d like to know why they're seen as long-cycle. Additionally, Jenny, you mentioned that the recovery is being pushed to the right, and we’ve all noticed that. Now that ISM is reaching 50, indicating a potential positive shift, it appears the recovery is taking shape. I’m interested in what you’re hearing from your customers, including major clients and distribution models. What is the current sentiment in the field?

The tone with distribution is very positive. They're ready for the recovery, and they're expecting the recovery. So they've been bullish for several quarters now. So no change there. If anything, I think as more time goes by, they know it's coming in and they're making sure that they're ready for it. And the first part of your question again?

The tone with distribution is very positive. They're ready for the recovery, and they're expecting the recovery. So they've been bullish for several quarters now. So no change there. If anything, I think as more time goes by, they know it's coming in and they're making sure that they're ready for it. And the first part of your question again?

We are considering these areas because they provide us with visibility from an order perspective. We have a long demand horizon, and these both align with the secular trends we frequently discuss. We view this as a longer cycle.

Got it. Okay. And then just a quick one on SG&A. Outstanding SG&A management. I think on an underlying basis, SG&A fell from 678 down to 651, so that's about a 4% to 5% decline. I know the aerospace mix is contributing to that, but as we recover and the confidence levels improve regarding margins, how much of that SG&A reduction is structural versus temporary cost management that could change with the recovery?

Yeah. Nigel, we've always been very focused and frugal when it comes to SG&A. If I had to make a guess, I'd say almost all of it is structural. There will be an increase in aerospace R&D, 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. I don't think you'll see us have a step-up in SG&A cost.

Okay. Great. Thank you.

Thank you. Our next question comes from the line of Joe O'Dea with Wells Fargo. Please proceed with your question.

Hi, good 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 7. I think over the past couple of quarters, you've expressed confidence that the destock headwinds are really done, and that's played out. 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?

I don't have a specific time frame to share. Many of our distributors have become adept at managing their cash flow and carefully monitoring their inventory levels. They are currently waiting for orders to come in, and there's been significant quoting activity. This gives me confidence that they are optimistic about the future and anticipating a recovery. However, we will have to wait and see what unfolds. As mentioned earlier, we are approaching the point where we expect to see the average time for recovery. So we are all preparing for that.

Last quarter, you provided some insights on mega projects. In our analysis, we noticed some delays from 2024 and 2025. Currently, we have a pipeline with strong activity anticipated in 2025 across several sectors mentioned last quarter. I'm curious about your discussions, as there seem to be general concerns about ongoing delays. Are you seeing signs that construction will begin soon, along with demand related to that?

No major changes. I mean this is still a growth driver for in-plant and industrial markets especially. As you know, there's just been a massive amount out there that's been announced. We're going to benefit at every stage. In some cases, examples I've given in the past about where our distributors are quoting business with local and national contractors, there's still some of that going on. But I would say that some of those projects are being delayed. Whenever we might hear about a delay or a cancellation, the number goes up again. So it's still coming, just hasn't hit yet.

Yeah, got it. Thank you.

Thanks, Joe.

Thank you, Joe.

Thank you. Our next question comes from the line of Nicole DeBlase with Deutsche Bank. Please proceed with your question.

Yeah, thanks. Good morning.

Hi, Nicole.

Hello. So maybe just one on the 3Q outlook. And again, 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 of a step-up. So just curious if maybe that's conservatism baked in, or maybe something going on from a mix perspective with aerospace. Anything on that?

You're right. Your math is right, Nicole. I would tell you, 28.2% in Q2 for was an all-time record. Obviously, the aftermarket mix was very, very favorable. We do not have that sort of mix in the guide. So that's a little bit of the flattishness is aerospace is not expected to be as high. The currency impact really is impacting the international side of the business. We've got slightly lower than Q2 margins forecasted for the international businesses, but that is really volume and currency-related. If you look at North America, we're actually expanding margins Q3 from Q2.

Got it. That's really helpful. Thanks, Todd. I understand the commentary about the long-cycle end markets picking up within orders. Did you see the short-cycle stabilize or did it get worse? I'm curious about the short-cycle order trend during the quarter.

I would say, it's the same as it has been. So no real change there, Nicole.

Thank you. I’ll pass it on.

Thank you.

Great. Okay. I can't believe this, but we've gotten through the entire queue. I think that might be the first time ever. This is the conclusion of our FY '25 Q2 earnings release webcast. Jeff Miller, our VP of Investor Relations; and Yan Huo, our Director of Investor Relations, will be available for any follow-ups needed today and tomorrow. Just one last note for everyone on the call, this will be the last time that Yan will be available for follow-ups. We need to congratulate Yan on taking a new role within the company as Group Vice President and Controller for our Motion Systems Group. So Yan, 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 you're going to be a wonderful addition to the Motion Systems team. So congratulations.

Great.

Okay. For everyone else on the call, we appreciate your time and your attention. Thank you for joining us today. I hope everyone has a wonderful afternoon. Thank you.

Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.