Good morning, and welcome to the Parker-Hannathan Corporation's Fiscal 2026 Second Quarter Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. After the prepared remarks, there will be a question and answer session. To ask a question during this period, you will need to press star 1 on your telephone keypad. If you want to remove yourself from the queue, please press star 2. Please be advised that today's conference is being recorded. And if you should need any operator assistance, please press star zero. I would now like to turn the call over to Todd Lambruno, Chief Financial Officer. Please go ahead.

Thank you, Katie. Good morning, everyone, and thank you for joining this release webcast. I'm a Chief Financial Officer speaking, and with me today is Jenny Parmentier, our Chairman and Chief Executive on slide two. All non-gap measure operation, and then I'll follow with some details on our strong, busy day to everyone. So we will see slide number three, and Jenny, I'll hand it over.

And thank you to everyone for attending the call today. Q2 was another great quarter where our team and our strategy demonstrated our ability to compound performance. We achieved top quartile safety performance with an 8% reduction in our recordable incident rate. This performance is aligned with our goal to be the safest industrial company in the world. Our team delivered record Q2 sales of $5.2 billion, organic growth of 6.6%, and 150 basis points of margin expansion, resulting in 27.1% adjusted segment operating margin. Adjusted earnings per share grew 17%, and cash flow from operations was $1.6 billion. Filtration Group Corporate. Moving to slides, our business system. Application engineers provide the technical expertise that creates a competitive advantage, and our distribution network serves global aftermarket and small to midsize OEMs. The interconnected technologies, one position in the $145 billion motion and control industry, a growing space where we continue to gain share. These six market verticals represent greater than 90% of the company's revenue. We have a focused portfolio, creating distinctive solutions, cuts across these market verticals, and gives us a clear competitive advantage. Two-thirds of our revenue comes from customers who buy four or more technologies, come to life, and the off-highway market-leading provider of highly engineered solutions for equipment used in construction, agriculture, and mining applications. Our comprehensive offering of interconnected technologies, deep application expertise, and embedded engineering relationships with OEMs are key to our success. We win with innovative and differentiated product technology, subsystems, and full system capabilities designed to increase the capability and productivity of our. Our global footprint allows for in-region delivery and expertise for OEMs, and our extensive distribution network provides aftermarket support for end users. Now on slide 7. We are making continued progress on the Filtration Group acquisition. Integration planning is underway using our proven integration playbook in 6 to 12 months from our November announcement date. This is a great company with a great culture welcoming everyone to the Parker team. The acquisition of Filtration Group adds complementary and proprietary technologies for critical applications while expanding our presence in life sciences, HVAC and refrigeration, and in-plant industrial market verticals. The combination of Parker Filtration and Filtration Group creates one of the largest global industrial filtration businesses and increases Parker Filtration aftermarket sales. Our business system, the Wynn Strategy, to achieve approximately $220 million in cost synergies to meet our disciplined acquisition criteria of being accreted to organic growth, synergized EBITDA margin, adjusted EPS, and this strategic transaction continues our investment in high-quality businesses that continue to transform our portfolio to slide 8 have been a big part of our transformation. Curtis is still early days, and as I just mentioned, we are very excited about Filtration Group. Over the time period you see on this slide, we have compounded EPS at 16%, and approximately 60% of this has come from the Wynn strategy and our legacy businesses, while approximately 40% has come from the acquisitions. The acquisition of Filtration Group will continue our track record of accretive acquisitions. I'd like to review the second quarter highlights.

Three of the Q2 results. Once again, since we're favorable by one and a half percent, just a note, a single-digit sales resulted in mid delays, the walk on adjusted EPS. You can see it was a clean quarter for EPS growth. 190 million is a record, and it's really driven by Strong. The company that created slightly better than our expectations, 4%, that is up 80 basis points from prior year. North America took a few multi-year errors, secured $1.5 billion. That's up 12% versus prior year. A record was achieved, 26% margins in the international businesses. That's up 190 basis points for international businesses. Plus, adjusted segment operating margin increased by 200. That remains robust, and that's really led by the commercial across all of our business. Cash flow from operations, $1.6 billion, that's 16% of sales. Working capital, only issue, free cash flow conversion for the year, and we'll talk a little bit more on guidance. The details on Q2, and Jenny, I will turn it back over to you on slide 5 to increase the guidance.

Our updated fiscal year 26 organic sales. We are increasing our forecast from 9.5%. We continue to see strength in commercial OEM and aftermarket. In-plant and industrial remains the same, low single-digit organic growth. Recovery continues, while customer CapEx spending does still remain selective. Distributor inventories are stable, and our distributors are ordering to their demand. In transportation, our forecast stays the same at mid-single-digit organic decline. Demand challenges persist, which is partially offset with some strength in aftermarket. We are raising our outlook in off-highway from neutral to positive low-single-digit. This is based on construction and mining growth, while ag remains under pressure. We are maintaining energy at positive low single-digit growth with robust power gen activity offset by upstream oil and gas, which remains soft. We're maintaining HVAC and refrigeration at positive mid-single-digit growth. We see strength in commercial HVAC refrigeration, filtration, and aftermarket. As a result of these changes, we are increasing our...

to be a favorable 1.5% is based on December shares basically offset each other. They just mentioned this, but we are increasing organic growth 5% at the midpoint. If you look at the business, in the diversified industrial side of businesses, we are in a forecasted increase of 110 billion for the year, down slightly to when we look at EPS, we're raising EPS to 30. That's an increase of 12.3% versus per range on that adjusted expected to be nearly 5.4 billion that And just as a wrap on our guidance, Jenny.

...and ownership are the foundation of our culture. It's our people and living up to our purpose that drives top quartile performance that allows us to be great generators and deployers of cash.

And we'll take a...

Thank you. As a reminder, to ask a question, please press star 1 on your telephone keypad. To withdraw your question, please press star 2. So others can hear your question clearly, we ask that you please pick up your handset for best sound quality. Our first question will come from Jamie Cook with Truist Securities. Your line is open.

Hi, good morning, and congratulations on a nice quarter. I guess two questions, Jenny. You know, first, when I look at your technology platforms, if we look at, you know, the technology platforms within diversified industrial motion systems, flow processing control, and filtration in engineering materials, I think it's the first quarter since June of 2023 where you saw positive organic growth across all three technology platforms. So just wondering, do you think that's something specific to Parker Hannafin? Do you think it's more a function of the cycle? Just very encouraging signs there. And then I guess my second, you know, follow-on question to that is it's, you know, the first quarter, too, that, you know, filtration has seen positive growth. Just wondering how you're thinking about that relative to the acquisition that's coming on Filtration Group. Signs that you bought that at a bottom, or is there any reason why, you know, they wouldn't be seeing understanding the more aftermarket and a little different end market mix, why they wouldn't be seeing, you know, positive momentum there as well?

Well, thanks, Jamie. Thanks for the question. We do think that the organic growth, and the teams have worked very hard for that, and they're performing well. You know, I would say the nation of what we're seeing in some of our short cycle businesses that we've pointed out, while all of them are not returning to positive growth, we did see, you know, some nice improvement. And then, you know, a point which you said, some of this is specific to Parker, and some of it is seeing some of the short cycle business return. You know, our distribution did have low single digit organic growth. The question was a long one.

No, sorry. My comment was just that, you know, interesting timing, maybe a compliment that it's the first quarter we've seen positive growth in your filtration group business, wondering what that implies for the acquisition of the filtration group, you know, implying that potentially you bought that business at a cyclical bottom, understanding there's different and mix because they're aftermarket. I'm just wondering, you know, there's differences between the business, but could their sales also be improving organically, just like we're seeing within your filtration group business?

Yes, we do believe that that will be the case. Now, historically, filtration groups' organic growth from pre-COVID to now has been mid-single-digit CAGR. So this is higher than that. But many of the areas where we have the complementary technologies in the same markets with some of the same customers that we play, we do see that their growth will be increasing just as it is with ours. So, again, we think that this is just Parker because of the complementary and proprietary technologies that it adds and because they play in the markets that we know, where we expect to see growth. And, again, they have this decentralized structure that's very, very similar to Parker. So we see a lot.

Thanks, and congratulations.

Thank you.

Thank you. Our next question will come from Andy Kapowitz with Citigroup. Your line is open.

Good morning, everyone. Jenny, could you give us a little more color on what you're seeing by region? I think Todd's comments around Europe were very interesting. Do you see that sort of turn as durable? And then, you know, Parkers continue to do very well in APAC. Do you see still a good outlook for that in 26 and beyond?

Yeah, so just let me give you just kind of an overview of some of the market verticals by region. So I mentioned, you know, in North America, we're increasing our full year. Again, industrial air distribution channel continued quoting a collective. It seems like a lot of their customers are prioritizing productivity and automation projects versus large capacity expansion. So we see that increased infrastructure spending will increase in-plant industrial equipment demand in the future. I mentioned transportation. It is most challenged in auto and trucks this fiscal year, but will benefit from some aftermarket. And, again, strength construction while ag still remains. Power Gen varies what we see for North America, usually 1%. Q2, this was pricing single digits. Improvement in transportation there, continued strength in mining and energy, both oil and gas and Power Gen. And then we do see where the proposed stimulus and future defense spending. is a long-term positive, but not seeing the impact. We're increasing our full year mid-single-digit, versus single-digit in the prior guide. We're seeing continued strength with electronic in-plant orders and shipments. There's some progress there, but it still remains a little bit mixed. We're seeing some mining improvements in China. And I would say that there's still some continued uncertainty from what we're seeing in the region.

Very helpful, Jenny. And then, Todd, you've continued to generate over 40% incremental margin. I know you've said, you know, you're still sort of guiding at 30 to 35, but, you know, as you look forward, you know, how long before, you know, after this good performance do you say to yourself, like, you can do over 40, and when you talk about price versus cost, is it better pricing, is it execution, you know, what's sort of driving this performance?

and our team members every day every week every month every quarter see what they've been able uh mentals are really across the company that puts the full company to 40 when you look at what's going on across the environment we're really happy to see the industrial businesses numbers are a little bit muted still it's unchanged when it comes these margins are all-time highs across every business um it is great to see that work and that's generating It's a litany of things. I couldn't even give you, like, you know, a list of the top three because it varies by business.

Appreciate all the color.

Our next question will come from Andrew Obin with Bank of America. Your line is open.

Yes, good morning. Just a question on international growth, and I think you may have answered it, but I think if you sort of do the math, It just seems that sequentially the growth is going to slow down to 2% of midpoint in the third quarter. And then I think the guide sort of implies it stays there in the fourth quarter. And I think you sort of alluded to large projects, but just thinking that the comp is similar from second quarter to third quarter, even easier in a two-year stack, are we being conservative, or is there sort of specific dynamics taking place in international in 3Q and 4Q?

They did benefit in shipments, and that was commercial HVAC filtration, and that was in EMEA. And that, you know, it kind of aligns with the prior year. So those aren't going to repeat in Q3, so we do, you know, a continued gradual industrial recovery.

Now basically to the end of the year, we certainly need to ship.

Also, maybe sort of nitpicking here, but sort of back into growth by end market, you know, you had a race for off-highway and aerospace and defense, but then the other segment sort of implies a big jump in the midpoint of the guy just to make the math work. You know, can you just comment with sort of thinking from plus 10 to, you know, sort of squiggle line 40? Can you comment on that, what's in the other segment, if I'm doing the math right?

The increases continues to be stellar. You know, we have a significant amount of aerospace in the industrial businesses.

Yeah, and here's some of what you see in there. Thanks so much.

Our next question will come from Joe Ritchie with Goldman Sachs. Your line is open.

Good morning, everyone. So, Jenny, great color is always on the end market. I guess just a broader question, you know, with reshoring and all the investment that's already occurred here in the U.S., like what's your, you know, I know it's hard to have a crystal ball, But, like, what's your take on what's happening with in-plant equipment in the U.S.? And then, you know, what gets it going? What are you guys looking at specifically as kind of leading indicators for the, like, short-cycle inflection?

So, you know, we get a lot of intel from distribution. And, you know, we continue to say that this is gradual. And because the distributors do talk a lot about all of the quoting activity. But, you know, I would say in the recent conversations, and, you know, the customers are prioritizing productivity and automation projects, and you see that in pockets, because you'll see some in different markets. And I think, you know, we're going to continue to see this gradual recovery, and we're going to continue to see some of these markets that we've talked about get this short cycle, some of the noise that really doesn't have anything to do with the business, some of the geopolitical noise.

Yeah, that makes sense. And then I guess maybe just for Todd, just a quick question. The aero business has been doing great. Margins were above 30% in the first half. The guidance implies a step down in the second half. Just anything we need to be aware of from a mixed standpoint and why they would step down in 2H?

Pairs in Q2, we've not put that into our forward guide there. The activity is-

Thank you both.

Thank you. Our next question will come from Scott Davis with Mellius Research. Your line is open.

Hey, good morning, Jenny and Todd and Jeff. Congrats on the great start to the fiscal and calendar year here, a couple quarters in a row. I know you guys don't love to talk about price, but given inflation, like recent commodity prices and some of your input costs, I'm sure even in things that may be derived from things like natural gas and obviously metals. But is it an increasing – are you able to drive price kind of in time? I know in some of your product, it runs through distribution. That's less of a challenge sometimes. But perhaps for a lot of the product that goes through OE, it could be a little bit more of a challenge. Is there some risk mitigation there that's going on at present? Are we being a little too paranoid, or are you guys having to color that?

Yeah, I'm handling this like we have any other inflation or issues that come about. We can handle these things, but we can make sure that they don't impact our EPS.

Yeah, Scott, I would just tell you the –

Fair enough. And then just a quick follow-up, the timeline you give to Closed Filtration Group, kind of six to 12 months, it's that you could drive a bus through that. But what are the major gating factors, just kind of standard antitrust issues that could get pushed or pulled one direction or another? Are there other hurdles? Okay, fair enough. Best of luck. Thank you, guys.

Thank you. Our next question will come from Steve Tusa with J.P. Morgan. Your line is open. Steve, please make sure your phone is not on mute. We are hearing no response. We'll move to our next.

Thank you.

Our next will come from Amit Mehrotra with UBS. Your line is open.

Buddy, I guess I just wanted to ask, I joined a little bit late, so forgive me if I, this is Bordy Burden to ask, but if I want to talk about the 2Q performance, which obviously was better, and then how that corresponds to the full year guidance increase. It doesn't seem like you assume much of the 2Q goodness into the second half. And then also, I'm sure you addressed this, so I apologize again, but talk about the North American margin decline a little bit for the full year and what the reason for that is.

I'll answer that question for you, and then Todd will follow up. So there's nothing about the North American margin other than Q2 mix was not as favorable as Q1. Listen, Q2 is a record for us, 80 basis points of margin expansion, 52% incrementals. The team is performing. For Q3, the margin, you know, we're not reducing the North America margin.

For North America.

Fair. Okay, totally get it. And then just maybe one other kind of bigger picture question, Jenny, related to that, the pricing commentary, I think, to Scott's question. You know, if I just look at Parker's organic growth over the last decade, it's basically averaged a couple percent per year for the entire company. In fact, North American Industrial has been a point and a half. and when you incorporate price, it's just the implied volumes are actually down over the last decade. I guess my first question is, do you agree with that observation? Is that a fair observation? And the second, maybe what explains that lack of volume? Maybe we've been in an industrial recession for a decade. I don't know. But at some point, you know, price and margin get incrementally harder, and we just need to see some through cycle volume growth. So we'd love

to get your perspective on that. Hey, this is Todd. I'll jump in, and Jenny, you could add any color in North America. First of all, it's a decade because the portfolio has changed tremendously. When you look at where are more engineered materials this year, in the industrial markets, the company's never been more aligned and a not so great organic growth. When you look at the conversion standpoint. Got it. Yep. Great. Thank you very

much. Appreciate it. Next question will be from Steve Tusa with Jake P. Morgan. Your line is open.

Hey, good morning. Can you hear me now?

Yes, I see.

Thanks a lot. A lot of questions have been answered, and there's a lot of good detail in the materials. Just curious on the construction side, you guys are, like, a little more positive than others. Is that just, like, the data center stuff, or are there other things you guys are seeing out there?

I would say that's a small part of it, but, you know, we're actually seeing, you know.

And then just lastly, on the fourth quarter, being a bit below consensus, anything to call out there mechanically as to why, you know, the fourth quarter is, I guess, just a little bit weaker than what we would have thought?

You know, I don't think there's any quarter of the year. The fourth quarter to be the strongest quarter of the year again. And, you know, I would tell you right now we're focused on Q3 and making sure we deliver our commitments for Q3. but there's nothing that...

Yeah, okay. Thanks a lot.

Thank you. Once again, that is star one if you would like to ask a question. Our next question will come from Julian Mitchell with Barclays. Your line is open.

Hi, good morning. Maybe just to focus on some of the end market trends. So looking at slide 15, just wanted to understand perhaps, You know, when we look at the far right-hand side column of the full-year growth rates, when we look at Q4, sort of which of those growth rates, as you see it, are most different from the full-year numbers, just trying to understand kind of inflections or changes, or if it's easier to explain, you know, any color on how the first half trended for those respective markets beyond A and D?

well i mean when you look at let's just look at our low single digit q1 now to positive low single digits so that just keeps you know just keeps going up so that when you look at but when you look at the industrial markets you know they've remained the same we've seen some bright spots within them that we've pointed out but implant industrial patient negative mixed single digit. Like we said, we're not seeing anything right now that would change our mind about that through this fiscal year. And then the same for energy and HVAC and refrigeration.

We're maintaining those from initial guidance. Got it. Thank you. Maybe within A&D, if you could just refresh us perhaps on the end market outlooks for the various pieces for fiscal 26. you know another company talked about sort of normalization of of outsized commercial era aftermarket growth but i feel people have been guiding for that for sort of three years running

now so uh yeah just any thoughts around the the market pieces of a and d to be around 20 percent growth we previously had that at mid-team commercial aftermarket um to be at low double digit growth so we previously had that at a high single digit so we just had 17 percent in q2 and in Q1 that was 13%. So we still see strong commercial aftermarket. We expect defense OEM to be around mid-single-digit growth, which is the same as last quarter. And defense aftermarket is at low single-digit growth. That was previously at mid-single-digit growth. But still, you know.

Thank you.

Thank you. Our next question will come from Jeff Sprague with Vertical Research Partners. Your line is open.

Hey, thank you. Good morning, everyone. Hey, Jenny. Just want to come back to just kind of orders and sales. Obviously, kind of in the industrial businesses, we've got more long cycle and we've talked about that a lot, including on the call here today. But I'm also just observing that, you know, orders have outpaced sales now for eight quarters, which I've never seen that long of a run. So maybe you could just speak to, you know, is it reasonable to think that those do reconnect at some point in time where there's just that much more long cycle stuff in the backlog? And obviously, at some point, things will cycle and they'll cross over. But in terms of kind of, you know, them coming together during an up cycle, you'd think we can continue to see kind of a persistent gap there?

You know, Jeff, it's a good question. I mean, we're clearly a longer cycle business today than we have been in the past, but it is hard to put a figure on conversion timing as, you know, it really is customer delivery schedule. In the aerospace, we do have, you know, a lot of mold into those buckets, so that definitely has an impact. You know, and from a short cycle standpoint, as I've mentioned a couple times, you know, it's a gradual shift sooner than others. You know, in plant, our distribution business, we think they're going to benefit from both. Again, I pointed out we saw low single-digit positive growth in the quarter, and those long-site businesses, you know, HVAC, energy, they're continuing to really, you know, be strong.

So we're in a good position, but it is businesses. Not as much credit is given to the transformation of the portfolio. Patrick, we watch it every day, as a matter of fact.

Yeah, and we don't have the industrial backlog. I don't think if you could share it, that would be interesting. But, yeah, industrial backlog was down in Q1, right? But it looks to me if it was even flat sequentially here in Q2, then we're starting to get to backlog in industrial also inflecting higher. Is that sort of what you see in the business?

Remains in the mid-20s.

Yeah, which means then it's nicely up versus last year, which reflects the order versus sales gap. Great. No, I appreciate that color. Thanks a lot.

Thank you. Our next question will come from Joe O'Day with Wells Fargo. Your line is open.

Hi, good morning. I wanted to circle back to the in-plant comments and just customer kind of prioritization of spend around productivity and automation over some of the capacity expansion. I think we've been in that kind of environment for some time at this point. um maybe just uh spend a little bit of time on on what that means for you know their spend like the wallet that goes to parker and and when we think about it on the productivity and automation side versus the the capacity expansion side and if we were to see a pivot toward capacity

expansion what what that would mean for you well you know the good news is is we participate in both scenarios right i mean when you know and then you know some of the examples we've given in the past is when there is – it is just still a gradual –

And then just on your own CapEx plans, you'd raised the guide a little bit last quarter, maintained it this quarter. It's up about $100 million year over year, so some nice growth there. Maybe just elaborate on that and whether there's anything on the capacity expansion side. Is any of that targeted around? As you're starting to highlight off-highway a little bit and then some of the activity you're seeing there. just to understand where that higher spend is going.

In our businesses, it's important to us to be able to, you know, keep up the level.

Thank you. Our next question will come from Chris Snyder with Morgan Stanley. Your line is open.

Thank you. So I kind of wanted to follow up on some of the earlier conversation around cycle trends. You know, you guys have as broad exposure as anybody, both on an end market but also a geographic basis. So just kind of maybe simply, when you look across all this exposure, is there anything that you think will be worse a year from now where you're seeing signs that there's pointing to next 12-month deterioration?

I don't see anything now, or I'm not hearing anything, or I don't see any indicators that for these market verticals is going to get worse.

Yeah, no, no, absolutely. Just wondering if there was anything that wasn't, like, stable to improving. And then I guess maybe just following up on that, it seemed like at least a good chunk of the North America order pickup was some of the longer cycle businesses. But did the shorter cycle businesses also see positive rate of change on orders in any color on the specific end marks? I would imagine, you know, construction in some of them were seeing momentum.

Yeah, yeah, we definitely saw.

Thank you. I appreciate that.

Hey, Katie, this is Todd. I think we have time for maybe one more question.

Thank you. Our last question will come from Brett Lindsey with Mizuho. Your line is open.

Hey, good morning, all. One of the follow-up on filtration group, I imagine the teams are already getting a running start on some of the integration and pre-planning. Any early observations on confidence around cost synergies? And then as you've been mapping the combination, any early view on the sales synergy side?

So to deliver that $220 million in synergies by the end of year three. You know, part of our diligence process is, and that's what gives us that. The team, you know, relationships, we're getting that integration integration group side. We didn't model any revenue synergies, but we feel that there's opportunities. Acquisition just like we have.

And then just a quick follow-up. So just close the loop on tariffs, so calendar 25 in the books. Can you update us on what the annualized tariff expense that you absorbed? and as you progress through the mitigation measures, is it fair to think that as you get into the second half of calendar 26 that you do have the potential to drive better than normal

incrementals as you're lapping some of that expense pain? You know, the predictions on what's going to happen with tariffs or what has happened with tariffs, I would just tell you rest assured that we haven't covered any negative impact from tariffs. Your lubrications are a stucky kind of follow-up that's needed thank you everyone and have a thank you this

concludes today's call we appreciate your time and participation you may now disconnect