Parker-Hannifin Corp (PH) Q1 2027 Earnings Call Transcript

Thank you. We have to begin.

Good morning, everyone. Welcome to Parker Hannafin Corporation's fiscal 2027 first 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 would like to remove yourself from the queue, please press star 2. Please be advised that today's conference is being recorded. And lastly, if you should need operator assistance today, please press star zero. I would now like to turn the call over to our host, Mr. Todd Liam Bruno, Chief Financial Officer. Please go ahead, sir.

Thank you so much, Beau. Good morning, everyone, and welcome to Parker's Fiscal Year 2027 first quarter earnings release webcast. This is Todd Lee Bruno, Chief Financial Officer, speaking. And as usual, with me today is Jenny Parmentier, our Chairman and Chief Executive Officer. As always, we appreciate your interest in Parker, and we thank you all for joining us today. On slide two, we're going to address our disclosures on forward-looking projections on non-GAAP financial measures. The items we have listed here could cause actual results to vary from what we have forecasted. Our press release, this presentation, and reconciliations for all the non-GAAP measures were released this morning and are available under the Investor Section on our website. We have Jenny starting with an overview of our record FY27 first quarter performance, and she's also going to provide some details on the recently completed acquisition of the filtration group corporation. Following Jenny, I will go a little bit more in-depth on the details for our first quarter financial results, and then we're both going to give a little color on the increase to our FY27 full-year guide that we increased this morning. We will conclude the call with a normal... Question and answer session, and we will try to address as many calls. If I could move your attention to slide three, Jenny, I'll turn it over to you.

Thank you, Todd, and thank you to everyone for attending the call today. Our global teams delivered impressive first quarter performance. We achieved top quartile safety performance with a 9% reduction in our recordable incident rate. Safety is our top priority every day, and we remain focused on being the safest industrial company in the world. Q1 sales increased 18% to a record $6 billion. Organic growth. 11.5%. An adjusted segment operating margin expanded 120 basis points to a record 28.5%. Thank our team members around the world for a great start to fiscal year 2020. Thank you. Greater visibility and backlog, resulting in more consistent growth. We've been looking forward to welcoming the very talented Filtration Group team members to Parker ever since we announced the transaction nearly one year ago. We were thrilled to complete the transaction in Q1 and continue our longstanding practice for a Parker leader to personally welcome the new team at every location. This slide shows pictures from just a few of our day one events held around the world welcoming the Filtration Group team to Parker. This This is a great day for all of us. We are excited to have Filtration Group in the partner portfolio. I'm on slide six. Filtration Group brings a diverse portfolio with strong brands, material science capabilities, highly engineered products, embedded application engineers, and multiple R&D centers. Filtration Group has a global presence with sales split approximately 60% North America And 40% international. And they have a robust aftermarket business. Increasing Parker's overall filtration aftermarket sales by 500 basis points. This acquisition enhances and expands our exposure in markets we know well, including life sciences, HVAC and refrigeration, in-plant and industrial, and transportation. Within life sciences, we have solutions for medical, diagnostic, and test applications that include consumable separation technologies, pharmaceutical protection, Special chemistry and material science solutions. In HVAC and refrigeration, we're adding complementary products and advanced media capabilities that ensure indoor air quality in places like hospitals, schools, museums, and airports. Moving to in-plant and industrial, we're adding proprietary media for liquid air and gas filtration, increasing safety and productivity. And within transportation. Filtration Group brings on-vehicle filters and desiccates engineered to an application-specific form factor, increasing cleanliness and efficiency. With this acquisition, we are creating one of the largest industrial filtration businesses in the world with approximately $5 billion in annual revenue. Much like our previous acquisitions, this is highly complementary, brings new capabilities in existing applications, as well as near adjacencies. That's expanding our addressable market and opportunities to create value. Moving to slide seven. Our dedicated integration team is leveraging the Parker Integration Playbook with Filtration Group. We have a proven process and one that we continuously approve with each acquisition. We know from experience that cultural alignment is key to a successful integration, and we see this once again with the combination of Parker and Filtration Group. Our integration teams are currently focused on the first pillar of the win strategy, engaged people. In less than a quarter, Our teams have already begun Kaizen events focused on safety improvements. This is the first step in building a culture of Kaizen that will later drive lead time reductions, that drive customer experience, and increase productivity. The chart on the right shows for the first time our expected cumulative cost synergies by year. Our fiscal year 27 guidance now includes filtration group and $40 million of synergies this fiscal year. Acquisition integration is a core competency here at Parker. We are confident in delivering $220 million of cost energy as we target taking filtration groups adjusted EBITDA margin to greater than 30%. The caller on the call today has seen this slide before. operating structure, divisions run by general managers with full P&L responsibility, acting like owners, close to their customers, and executing the win strategy every day. Our application engineers provide the expertise that allows us to have a competitive advantage with our interconnected technologies that provide efficient solutions for our customers. Two-thirds of our revenue comes from... Our distribution network is the best in the world. It is truly an extension of our engineering team, providing solutions to all those small to mid-sized OEMs that are participating in capital spending and investments. These partners are experts.

You know, we always talk about finishing strong. Well, this is a quarter where we started the year strong. As Jay said, I'm on site 10, and I'm just going to go through a real quick review of the first quarter. Resulting in strong margin expansion. 15% of our prior year. We reached $6 billion for the first time in the history of the company. Organic growth, as Jenny mentioned, was 11.5%. Acquisitions all in added 7%. Most of that was from the Filtration Group Corporation, but we do have one last partial quarter of Curtis. Segment operating margins are up 120 basis points from the prior year, finished at 28.6. That obviously is a record. Adjusted EBITDA margin was also a record at 28.5. That's also up 120 basis points from prior year. And adjusted net income was a little bit over a billion dollars, $1.1 billion, which is $8. And that's how we get to 890 in adjusted earnings per share. That is up 23% versus prior. Like I said, it was just a really strong start. Operating income dollars. Tax is also slightly favorable, just a penny. And interest expense, as expected, was higher. That is really related to the newly issued debt that we took out, too. Negative eight, and that was really driven by higher market-based benefits. and adjusted earnings per share. So, really... Thanks to our teams for converting 11.5% organic growth. We're talking about the price of investment performance. Rolling orders on a 12-month basis accelerated for the company to plus 13, first prior year, and as you can see, there's double-digit growth across. Organic growth, like I said, was 11.5%. That did exceed our guide. Margins are up 120 basis points, and that's... If we look at the North American businesses, sales are up 20%. That is a record $2.4 billion. Organic growth in North America was 9.4%. We saw positive growth across the country. And that includes distribution. Margins were up 60 basis points for prior. And we continue to see margin expansion from executing the win strategy and really leveraging higher productivity. Borders in North America also. Jenny said, strengthen. Welcome to the Diversified Industrial International Businesses. 7 billion, that's up 20. 11.6. North and Asia-Pacific was 20. It was also great. In America, it's just a slight drop. 70 basis points of margin expansion. First prior year, the 27.7 is a record for the international businesses. Really seeing results from a lot of restructuring activities over the past year or two, some growth from new business wins, and obviously Thank you very much, everyone, and thank you very much, everyone, and thank you very much. Sequential increases in both- We got a couple metrics from our international team, and they did it. Thank you. 15% versus prior year, all 14% of that is organic, and really strength across. Thank you. We've achieved a new record of 30.7, and that margin performance is really a result of great productivity, those higher volumes, and... 52 million, that's 12.6% of sales. Free cash flow came in at 643, that's 10.7% of sales. That is slightly lower than last year. All of it is related to just bringing in the filtration. If you remember last week, our board approved. The company's 300. 100% conversion for the year. If you remember, our cash flow is second-half weighted. We issued the new debt this quarter to acquire the filtration group. Those interest rates, on average, are just slightly over 4.5%, and that pushed our net debt to adjust the EBITDA to just $200,000. Those are the details on Q1. Jenny, I'll turn it over to you.

As previously mentioned, with strong and broad-based demand, we are raising our midpoint organic growth guidance to 200 basis points. We are raising guidance to approximately 10% organic growth. Commercial aftermarket orders accelerated and OEM continued strong. We are also raising our growth outlook for in-plant and industrial to high single-digit growth. We continue to see demand broadens and strong orders from our distributors. For our transportation vertical, we now forecast high single-digit growth, led by continued strength in heavy-duty trucks, which has been driven by production rate increases. Moving to off-highway, we are guiding mid-single-digit growth. We see continued strong non-residential growth driving construction. Mining strength continues as well, which is supported by commodity prices. We also expect mid-single-digit growth for energy. We see sustained growth from our businesses supporting gas turbine power generation, while we are still expecting oil and gas to be flat this year. Lastly, We are guiding mid-single-digit growth in HVAC and refrigeration. This growth is led by commercial HVAC, followed by refrigeration. So in summary, we are raising the organic growth forecast for our three largest market verticals and still expect positive sales growth across all market verticals, resulting in an organic growth forecast of... Time to share more details on guidance.

Thanks, Jenny. I'm on slide 16. The performance we had in Q1, the robust order levels, and then, of course, including the Range of growth. It's 17.5% at the midpoint. Specifically for the filtration group, we are Given the fact that the market has been an opportunity for the market to be a stub year, that's roughly 10 and a half months of ownership. Um, if you take that 1.85 plus the little bit that's left over from Curtis, acquisitions will account for roughly 9% of the sales change. Um, currency is really just a slight. We're increasing organic growth to a range of 7.5 to 10.5. That's 9% at the time. We're increasing that 150 basis points to now 10 percent at the midpoint. The, uh, industrial North American businesses' organic growth is being raised by also 150 basis points. And the industrial and international businesses are being raised by four. For the full year, adjusted segment margins are... And for the year, and that includes races and all. That would be a $60 billion. A&A is just up slightly. By 10 million, it was 200. We now expect it to be 200. $10 million, it was $100 million. We'll break down a little bit further in the next slide. The range on that is plus or minus 40 cents. We have a range of $3.5 billion to $4 billion. We're forecasted to be nearly 6.2 billion, and it's a 19.5 percent increase versus prior. Organic growth, we expect to be about 10 percent for Q2. For adjusted segment operating margins, we are forecasting 20. And adjusted EPS is now expected. We provided this just to kind of show the increase, just with a couple moving pieces with filtration group coming in. You can see our previous guidance here was $34.75 for the year. We are increasing Thank you. I just want to point out that a dollar Operating income dollars based on higher organic growth. The administration group in FY27, we expect this to be adjusted EPS accrued. One, two, one. The next three quarters works. Lastly, just corporate interest and others, just a slight bit higher, 10 cents higher, and that brings the total. guidance details in the appendix. Just in summary, FY27 is off to a fantastic start. We're excited to welcome the Filtration Group team members to Parker Hannafin. And with that, Jenny, I'll hand it back to you.

Thanks, Doug. I'm on slide 19. Today we are excited to announce our 2027 investor meeting on May 13th, 2027. Similar to our last investor meeting three years ago, this meeting will be in person and webcast from New York City. We'll be hearing more details as we go. And moving to our final slide. This is the foundation of our culture. It is our team members living up to our purpose every day that drives top-portal performance and allows us to be great generators and deployers Thank you, Mr. Liam Bruno.

Ladies and gentlemen, at this time, if you do have any questions, please press star 1. Again, if you do find your question has been addressed, you may remove yourself from the queue by pressing star 2. Additionally, to get to as many questions as time permits, we do ask that you please run yourself to one question and one follow-up. We'll go first this morning to Andrew Obin of Bank of America.

Yes, good morning, guys. Just a question, Jenny. Congratulations. You know, we've been in meetings for, I think, what seems like eternity, where the team was hoping for the industrial recovery that sort of never seemed to come. It does seem, finally seems to be here. What has changed that, you know, we've now seen to have like two quarters of recovery, and how much visibility and comfort do you have going forward? And obviously, you've raised the guide, but maybe expand a little bit. Thank you.

Thank you. Good morning, Andrew, and thank you. Yeah, I feel like I've been saying positive sentiment and gradual recovery for quite some time, and obviously in Q1 what we saw was a broadening recovery across all the markets. I would tell you that it's been robust electronics and semiconductors growth, double-digit growth. We've been able to raise in-plant and transportation market verticals. Obviously, it's just really been great in all aspects of the markets that we raise. So I think that it's just been that the orders that we've seen and the positive sentiment has turned into some momentum here in shipments and increased orders as demonstrated through the quarter. I would tell you that there's nothing that we see right now that would, you know, cause us to be concerned about the outlook. Obviously, we've raised the guide here. We feel confident in this guide, and, you know, we're real pleased with the orders and how the team executed throughout the quarter. We've been talking about all the work we do, no matter what's going on, and the volume really turned into some nice bottom line performance.

Yeah, great to hear. And maybe a follow-up. You highlighted that in aerospace, commercial aftermarket was a positive surprise. I know a lot of concerns about that starting in the summer. Maybe, you know, clearly you talk to your customers. What's driving the upside there? Thank you.

Yeah, I mean, we saw double-digit growth. We saw, you know, plus 14 percent in both OEM and aftermarket. It was really the second highest. And we do expect this strong demand to continue. So we're not seeing a lot of retiring aircraft, right? So aftermarket continues to be strong.

Thank you very much.

We'll go next now to Mick Dobre with Baird.

Yeah, thank you. Good morning, everyone. Appreciate all the commentary on growth and orders. Things seem to be going well, but, you know, just sort of acknowledging what's going on in the capital markets here, especially post-election. There's obviously concerns about the AI infrastructure build-out, and I'm not really asking you to forecast how that's going to go, because who knows, but really, can you help us better understand what your exposure is? As you kind of look at your business, because you obviously have some direct exposure, but there's also probably some indirect exposure. So as you sort of think about this vertical and the risk that that poses on a go-forward basis, it would be great to hear your thoughts. And specifically in your Asia business, where we've seen really very, very strong growth, how much of that do you think is related to this particular vertical?

So just a couple points to make. So data centers does continue to be a high growth driver for us with double digit growth in the quarter. We're continuing to get business in the space and orders and backlog are strong. We have nice exposure and growth, but this is not yet large enough for its own vertical. We finished the fiscal year with data centers making up approximately one and a half percent of Parker sales. So this is a great interconnected technology story. You know, from all the products that have been in the Parker portfolio for quite some time, and we are working with industry leaders. We have the ability to provide the liquid cooling systems and subsystem components, and the Asia-Pacific orders are strong in electronics and Semicon, and that was, you know, just a really strong area for the quarter. So, you know, as I previously mentioned, we feel good about the order. Thank you.

That's helpful. And then my follow-up, just to maybe double-click on your comments on commercial aftermarket, if you want to kind of think about it by region and think about the Middle East specifically, I'm wondering two things, how that specific region has progressed or gone, and, you know, is there potential for some sort of a catch-up if maybe conditions in the Middle East change sometime in 2027?

I think commercial aftermarket has been strong, and it continues to be strong, so I wouldn't know any diff related to anything that we saw with that conflict. You know, we're raising The numbers in Q1, you know, as I mentioned before, we're just not seeing.

We'll go next now to David Rosso with Evercore ISI.

Hi, thank you. I was curious if we can dive into the international guide, the 400 BIPs increase. Which geographies drove that? And obviously, if you can help us a bit, how you think about the geography guide within the total international organic. And also, the margins, they're obviously very high in the first quarter. And while you raised the margin guide, they're still lower than the first quarter. Just curious how you're thinking about that. Why the first quarter would be that much higher than the full-year guide? Thank you.

All right. Well, I'll dive into, you know, what's going on with the international guidance for you. So full-year organic growth is now 9.5%. As Todd said, that's a large increase to the initial guide. And Q2 guidance is approximately 11%. So in EMEA... We have guidance at low single-digit to mid-single-digit growth for the year. That's really mixed market conditions. They have a strong growth in energy, mining and defense, and what we see as a gradual recovery in heavy-duty truck and construction. In Asia Pacific, this has been very strong. We're raising guidance to mid-teens organic growth. This was previously high single-digit, and we're really seeing continued strong electronics and semiconductor demand. In-plant orders and shipments progress. In NQ1, we saw double-digit distribution growth, and we're seeing the orders and the shipments continue to progress. And then mining and energy strength continues in Asia Pacific. Latin America, guidance is at low single-digit organic growth, and we're still seeing a broad-based softness across that region.

Hey, David, this is Todd. I would just add a little bit, you know, Q1 was stellar, absolutely stellar, and if you look at what we're doing, we have increased the margins, really, for all businesses, North America, the Internet. of the year. We did have a filtration group for In Q1, we're obviously going to have it for three quarters in Q2. Those jumping off margins are lower than our existing businesses, so there's a little bit of a drag there until those synergies really start rolling in there. But if you look at incrementals outside of all of that, you know, we are hyped. So we feel like we're being pretty aggressive here.

And a quick follow-up to the meeting. I know it's many months out, but can you give us a little framework of what prompted calling the meeting and how we should think about, obviously, things are operating pretty well right now. Just curious the reason behind the meeting. We're always happy to meet with you, but just curious what we should expect, broadly speaking, and why we called the meeting.

Well, we usually in the past have done a meeting every two years. This will be three years, and we expect that we're going to be able to share some information with you and some news with you, but it is a ways out yet, so we're really not in a position today to talk too much about the details of that meeting.

All right. Thank you. We'll go next now to Jamie Cook with Truist Securities.

Good morning, and congratulations on another nice quarter. I guess just two questions. One, just given filtration group is closed, and we understand what the implied guide is for 2027, but can you just give us an update on how that business had been performing in terms of, you know, organic growth, you know, margins, and then I guess, you know, any incremental insights you have on potential upside to synergies? And then my second question, Jenny, just relates to obviously industrial demand is very strong. We're seeing that in your numbers. I think people are questioning sort of to the durability of the cycle. So in an environment where potentially industrial demand tempers, how do you think about your ability to, in a less robust market, achieve the 4% to 6% organic growth that you target just given some of the changes in your portfolio with M&A? I, you know, and their portfolio more positioned towards secular growth, just your confidence in the four to six, assuming. Tuesday and industrial demand tempers. Thank you.

Yes. Okay, Jamie. So starting out with filtration group. So their Q1 performance was What we had expected. Historically, they've performed at a positive mid-single-digit growth CAGR. Life Science Business is one of their fastest-growing markets right now. As Todd said, the guide includes $1.85 billion of sales, and Q1 actual was $285 million. We expect this to be accretive, as Todd said, to 10 and a half months, an accretion of $0.50. So this is a good business. It's a business with, you know, complementary technologies to what we have, markets that we know, and we expect that this is going to be a good growth business and fit nicely, especially with the additional 500 basis points of aftermarket. We feel very confident in the $220 million in synergies. That's 11%. $40 million for this fiscal year. The integration team has been working very hard. They've been, you know, they were planning ahead of the close, and they've worked very closely with Filtration Group. And as I mentioned, Kaizen events are in full swing, and we really, really have had success in the past by focusing on that first pillar of the WIND strategy, and we're off and running there. Now, as far as international demand and our confidence about The targets that we put out there, 4% to 6% organic growth. We feel very confident about hitting those. We've transformed this portfolio very, very much on purpose to be able to do that. I think when you look at the durability of the short cycle businesses right now, there's clear signs of positive short cycle demand through orders and shipments. Both OEM and distribution short cycle orders were positive double digits, and this acceleration is just continuing on a broadening recovery. And as I already mentioned, we raised our forecast on in-plant industrial as well as transportation to high single digits. And the rest of the market verticals remain positive. It's very encouraging, as I mentioned at the very beginning, to see the distributor purchases to really increase, and they're driven by strong end demand. And, again, as I said for a long time, the sentiment is very positive, and now it is really supported not only by the orders but by the shipment.

Thank you. Congrats again.

Thank you. Thanks, Jamie.

We'll go next now to Scott Davis with Milius Research.

Hey, good morning, Janine, Todd, Jeff.

Good morning.

Congrats on the good, great start. Not a good start, a great start. There's not a lot to pick on or ask, but frankly, things are so clean. But I'm kind of curious to what extent you're willing to share with us where Filtration Group kind of... Stands today and as it relates to on-time delivery, quality, kind of the key metrics that you guys obviously care about, even if you're not willing to share the exact numbers, some sense of kind of where the opportunity lies, I think, would be helpful for us.

You know, integrating everything into... You know, indicators. But the thing that we've obviously been most focused on is safety, right? What's very important to us is that people come to work every day and feel safe in their environment and that we have a culture where we're taking care of each other and making sure everyone's safe. That is the foundation for everything. And then obviously, as we know, leads to, you know, taking care of the customer and growing profitably. So safety is a big focus. We're not ready to disclose any specifics. Not those metrics with the acquisitions, but we will be putting them into our metrics. Making sure that we're on time to the customers requesting. Continuously. These are good businesses. But again, And implementing all the tools and the wind strategy.

And thanks for that, Jenny. But my understanding of the filtration group was kind of built, I mean, built over time with a bunch of acquisitions and full times itself. And so how heavy of a lift is it to integrate? I imagine there's a number of different ERP systems, and obviously, you're going to want to integrate it to some extent, I would think. But I'll ask that as part of the question as well. But how heavy of a lift is it overall? And then to what extent do you plan to integrate, I guess, is my question.

Yeah, I mean, obviously, you're correct. That's the way it was built over time. These are very Decentralized, which is a positive, though, because the leaders of these businesses are very used to being held accountable to their P&L statement. So that's a positive, and that feeds right into, you know, to the Parker culture. So we like that about it. But, you know, none of these integrations are... to bring those together and integrate them. And one thing to remember here, too, is that we've taken these filtration businesses and put them into existing parts. the division and bring everybody on board with with All right.

I'll pass it on. Thank you, and best of luck.

We'll go next now to Julian Mitchell with J.P. Morgan.

Hi, good morning. Maybe just my first question around the aerospace segment, organic sales growth outlook for the balance of the year. Maybe just help us understand kind of how you're thinking about commercial, aero, OE, and aftermarket versus the same for defense, and just flesh out sort of how Q1 started for those pieces, please.

Yeah, so if you want to just talk about the guidance for aerospace, so just starting out, the OE aftermarket split for the fiscal year is guided to 53% OE and 47% aftermarket. We did have a mix of 52-48 in Q1, so as we said, you know, stronger commercial aftermarket than we expected. And I would tell you, too, one of the things that is really contributing to our aerospace group's ability to deliver. The team has worked very hard on demanding capacity planning in aerospace, as well as partnering with the supply chain and really investing in the supply chain over the last several years. We're very confident about that, you know, with the initial guide being 8.5%. We are seeing... It remains at mid-teens growth for fiscal year 27. Commercial transport build rates are increasing, and as we all know, aircraft demand is still greater than supply. We are raising guide to positive, high single-digit growth for fiscal year 27. So as I mentioned already, there's an aging fleet driving aftermarket growth. We're not seeing a lot of retirements. Engine repair shop visits and component demand continues. And we're clearly, again, seeing the benefits of our team, really working closely with the customers, Understanding what the demand is, seeing the increases come. You know, knowing about them before they come and making sure that we're able to help them achieve their production rates. On defense OEM, we're raising the guide to high single-digit growth for fiscal year 27. We see strong demand for global fighter jets. The orders continue strong in the quarter, and, you know, we're raising this guide based on firm demand from our customers. Guy remains at mid-single-digit growth for fiscal year 27. We're still seeing fleet upgrades and service extensions, a focus on retrofits and upgrades as the fleet ages. And again, I would say with both of these, this is a long-cycle business, but we're raising guidance on the demand we see today, and we're focused on making sure that we serve these.

That's very helpful. Thank you. And then maybe just a quick follow-up on the second quarter EPS guide. I think it implies a slight, tiny decline sequentially on EPS. You know, normally that number's up sequentially. I understand there'd be some margin effect from filtration group. Is there anything else beyond that? And is there something with filtration group where the margins in international are particularly sort of dilutive to that segment?

No, it's not so much, Julian, the mix between North America and... You know, a full quarter of interest has got a little bit of a drag on EPS there. But, you know, we look at our incrementals, the incrementals, You know, for the total company, it's above 30, if you look at the legacy business.

Great. Thank you.

And we'll go next now to Joe O'Day with Vertical Research.

Hi, good morning. You made a couple of references to seeing some improving demand out of the distribution channel, and so I was looking for a little bit more color there. I think you've talked for quite some time about the indications of interest being better, but actually now it seems like you're seeing that materialize some more. And so just any perspective on the growth rate you saw in North America and international out of that channel, how that compares to some of the recent quarters, just to get a better understanding of acceleration there.

I would say that, you know, we started to see this in Q4. We talked about it during the last call about, you know, seeing increased orders from distribution. And, you know, what we saw in Q2 was, you know, positive double digits, right? So we saw stronger orders in Q2. Now, I wouldn't, you know, I wouldn't call this a restock. That's not what we're hearing from the channel. But obviously, the orders have increased, and they're increasing to real demand. You know, they're participating in a lot of capital investments, a lot of infrastructure, automation. So I would say that, you know, it truly is a broadening recovery, and distribution is playing very well in it.

And then on the inflationary side of things, when we think about the 200 basis point increase in organic growth guidance, any contribution to that from pricing that you've had to do, and then as you think about the full year, is the anticipation that price cost is both dollar and margin positive?

Yeah, so, you know, on inflation, we definitely are still seeing increases, you know, across a range of material cost inputs as well as logistics. But, you know, this is a strong muscle for us. We're experts at managing this. You know, our wind strategy supply chain tools, they're the best. We work closely with, you know, everybody in the organization is working closely with our pricing team, and, you know, we've taken some action where we needed to. We'll do that in the future, if needed, but we are really, for the most part, back to a very normal pricing environment on the industrial side of the business.

Yeah, Joe, I would say the increase in the organic growth is really demand-related. It's not up.

Got it. It's helpful. Thank you.

We'll go next now to Brett Lindsey with Mizuho.

Hey, good day, y'all. I wanted to come back to the industrial margins, obviously moved structurally higher here. As volume recovers and orders are picking up, you're generating these new project wins. Is there any additional required capacity investment or reallocations in some of those divisions that would influence the path to those long-term targets?

You know, we have done a really nice job over the last couple of years of increasing capacity where we needed to. We have been able to generate additional capacity through use of Kaizen and the Parker Link system. That's a very strong muscle for us as well. So there is not what I would call any significant investment that will need to be made. We will continue to increase our productivity. We'll continue to use all these tools, and, you know, on the higher volume in Q1, obviously the teams were able to deliver that, and we see that that will be the case for the rest of the fiscal year in the foreseeable future.

That's great. And then just one more on OE within aerospace. So on Boeing and Airbus, just wanted to better understand how much of the production rate normalization is actually in the plan versus maybe upside to the guide. What are the build rate cadence that you're thinking about or effectively assuming in the framework?

Well, as I mentioned before, listen, our teams are working, you know, very closely with these big customers and the production rates that they're sharing with us and the demand and capacity planning we're doing, that's what's in our guidance. So, you know, we don't specifically talk about customer build rates, but we don't expect any surprises there. And we know what their plans are.

That's great. Congrats on the quarter.

Thank you.

We'll go next now to Andy Kapowicz with Citigroup.

Hey, good morning, everyone.

Good morning, Andy.

John, you're talking to me just focusing on the energy piece of your portfolio. It's one of the slower-growing portions of your portfolio, even with that power-gen business in there. So maybe just are you seeing any signs of life in oil and gas, given the higher sustained energy prices, and what seems like energy security-type work? And could you talk about the underlying strength of your power-gen business at this point?

You know, it is positive mid-single-digit growth, and as you know, energy, the vertical is about 7% of our sales, so we see robust long-cycle power gen demand. That's been very strong. But with oil and gas, the forecast is flat. Upstream remains constrained. There's some benefit in midstream from some infrastructure build-outs, but right now, you know, the best view we have is that mid-single-digit growth.

Tough one. I think, Jenny, one of the main reasons why you bought Solitration Group was it's aftermarket business, so it's obviously early days in terms of your ownership, but what did they do if at all differently than Parker that could help you? And then I think just you mentioned Life Sciences, their biggest business. Are they seeing any improvements in that business, or can you see above mid-digit growth in that business going forward?

Yeah, well, there's many reasons. It's very nice to have a higher aftermarket, right? That is something that plays right into Parker's success. But, you know, really the complementary and proprietary technologies is really one of those things that, you know, we look for in an acquisition. And it does expand our presence in life science. Life science is an area that is growing. Higher than the rest for them right now, but it also brings a lot of proprietary media for markets that we already play in. So this is, you know, Andy, this is just a good performing business that we're going to just improve upon, and we think that there's plenty to learn here. I would say it's still early days about learning all of how they go to market and how They handled Their channels, but we think that we can learn from that, and we also think that, you know, there's some things that we do that might fit well within filtration group.

Appreciate that, Jenny.

We'll go next now to Steve Tusa with Wells Fargo.

Hey, thanks for being in. Appreciate it. Just on this, I guess, any sort of color on, I know you don't disclose price, but any directional color on how that may have impacted the incrementals? I mean, is it a neutral margin to just any kind of high-level color on the price-cost situation?

Yes, Steve, I'll start. If Jay has anything to add, I'll let it go. You know, this is something, Jenny mentioned earlier, this is something we do all the time. We try to remain margin neutral so there's no, like, levers that we're pulling. Okay. And then...

Yep. Yep. And then just on the meeting, Jenny, I think you said, I mean, you said expect some news. Obviously, you guys seem like the long-term targets can be reset. Is there any thought or consideration to a more holistic portfolio evaluation from that perspective?

I would say, hey, you know, it's a few months out from now. We obviously just closed the filtration group. We will have closed SIRCOR by the time that comes. You know, the company will be over $25 billion. We're going to give you some color on what the company looks like today and what we're planning on doing over the next five years. Well said.

Okay, perfect. Had to ask. Thanks a lot.

Thank you. We'll go next now to Varun Govindaraj with Bernstein.

Good morning, everyone. Thank you for the question. Link a little bit to what we just talked about. I mean, as you continue to get larger, do you see a big enough pipeline of complementary M&A assets out there that can materially move the needle, like Megat has infiltration group is expected to? Or should we think about this as more bolt-ons going into the future?

Varun, there are deals, assets of all sizes in the acquisition pipeline, right? And one of the things that we often talk about is making sure that that pipeline stays active and healthy, and that's something that we've done for quite some time. So we think, you know, a lot of times, we're not, most of the time, we're not in control of the timing of those, but we do believe that the pipeline is still robust and that there are, There are some assets out there that we are interested in.

Perfect. Appreciate the color. And then, just as a follow-up, could you remind us on backlog conversion in general, how much of that tends to convert to revenue over the course of the next 12 months, and should we expect any changes there, just given the shift and mix of the business?

You know, we don't expect any dramatic change to that conversion rate over the next year or so. It's roughly 75% of the backlog converts to sales in a 12-month period. But, you know, there's always a lot of move-ins and moves out of there, so that's not something that we really look at when we're looking at, you know, forecasting, but it's roughly 75 percent.

Appreciate the cover. Thank you. I'll talk it on.

Thank you. Hey, Bo, this is Todd. I think we maybe have time for one more today.

Understood, Mr. Liam Bruno. We'll take that final question today from Jeff Hammond of KeyBank.

Hey, good morning, everyone.

Good morning, Jeff.

Maybe just last one on filtration group. A lot of good color there, Jenny. And I know you don't include revenue synergies, but as you look at the portfolio early on, just any clear opportunities, whether it be distribution complements, market complements, geographic, where there's some clear, you know, revenue synergies to think about. Thanks.

And Jeff, you're right. We don't model any revenue synergies, but we are definitely seeing areas of opportunity, areas where we can leverage Parker technologies to filtration group customers, and then leverage filtration group technologies to Parker customers. So we are, you know, the integration team, although they're focused on obviously integrating the businesses and achieving the synergies. Our sales and marketing teams are working closely together to identify those opportunities, and we definitely believe that there are some there.

Yeah, Jeff, we also have real early days here, but we've found some capacity opportunities. Filtration capacity within our legacy businesses to help some of those filtration group businesses.

That was discovered early on.

The team's working hard.

Great, thanks.

Thank you all for joining us today. As usual, our team of Investor Relations, Jeff Miller and Jen Stuckey, will be available for any follow-ups or clarifications if anyone has any.

Thank you, Mr. Liam Bruno, and thank you, Ms. Parmentier. Again, ladies and gentlemen, that will conclude Parker-Hanniff Incorporation's earnings conference call. We'd like to thank you all so much for joining us today and wish you all a great remainder of your day.

Good morning, everyone.