Earnings Call Transcript
Parker-Hannifin Corp (PH)
Earnings Call Transcript - PH Q1 2025
Operator, Operator
Greetings, and welcome to the Parker-Hannifin Fiscal 2025 First Quarter Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. A brief 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 Leombruno, Chief Financial Officer. Thank you. You may begin.
Todd Leombruno, CFO
Thank you, Sachi, and welcome to Parker's fiscal year 2025 first quarter earnings release webcast. As Sachi said, this is Todd Leombruno, Chief Financial Officer speaking. Thank you to everyone for joining us this morning. With me today is Jenny Parmentier, Chairman and Chief Executive Officer. We truly appreciate your interest in Parker. On Slide 2, we address our disclosures on forward-looking projections and non-GAAP financial measures. Items listed here could cause actual results to vary from our forecast. Our press release, this presentation and those reconciliations for all non-GAAP measures were released this morning and are available on the Investors section on our website at parker.com. The agenda for today is Jenny is going to start with highlights for our record first quarter performance. She's also going to reinforce how our key market verticals are positioned for longer-term growth. I'm going to follow Jenny with a more detailed look at our strong first quarter results. Then we're going to address the changes to the fiscal year 2025 guidance that we released and increased this morning. We'll then move to the Q&A session and we're going to try to address as many questions as possible. And with all of that, Jenny, we'll begin with you on Slide 3.
Jenny Parmentier, CEO
Thank you, Todd, and thank you to everyone for attending the call today. We closed our first quarter of fiscal year 2025 with our transformed portfolio driving record performance. We produced top quartile safety performance aligned with our goal to be the safest industrial company in the world. Once again, our balanced and diverse Aerospace Systems segment delivered exceptional performance. We had record Q1 sales of $4.9 billion, organic growth of 1.4%, and consistent execution of the Win Strategy delivered 80 basis points of margin expansion resulting in a 25.7% adjusted segment operating margin. Adjusted earnings per share grew 4% and cash flow from operations increased 14% to $744 million. Another quarter of impressive margin expansion. The team is off to a good start. Next slide please. I want to spend a few minutes reminding everyone why we win. First, the Win Strategy is our business system. We have a decentralized operating structure of 85 divisions run by general managers with full P&L responsibility, all acting like owners close to their customers and executing the Win strategy every day. We have innovative products that solve customer problems, with 85% covered by intellectual property. Our application engineers provide the expertise that allows us to have a competitive advantage with our interconnected technologies that provide solutions for our customers. Finally, our distribution network is the envy of the competition and the best in the world. It took us over 60 years to build it, and it is truly an extension of our engineering teams providing solutions to all of those small to midsized OEMs that are participating in the secular trends in mega CapEx projects. These partners are experts at applying our interconnected technology. Next slide please. We have the number 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. Our interconnected technologies cut across these market verticals and give us a clear competitive advantage. Two-thirds of our revenue comes from customers who buy four or more technologies. Our growth is focused on faster-growing longer cycle markets and secular trends. Next slide please. Both a secular trend and our largest market vertical is Aerospace. Parker has a balanced and diverse portfolio with significant content on leading aerospace programs. We have a comprehensive product offering across our diversified customer base with proprietary design on premier programs. On the upper left-hand side of this page is our sales mix by application. You see a nice balance of commercial and military, as well as business jets, regional transport, and helicopters. This diverse aerospace and defense exposure allows us to have multiple products and technologies on every major aircraft program globally, many of them seen on the bottom of this page. We have a balanced narrow-body/wide-body sales mix and the Meggitt acquisition significantly expanded our aftermarket sales. Today, the aftermarket represents approximately 50% of our total Aerospace sales. All of this adds up to be a compelling value proposition for all of our Aerospace customers. Next slide please. Our second largest market vertical is In-plant & Industrial Equipment. We have a comprehensive suite of motion & control technologies that enable manufacturing all around the world. As depicted on this slide, Parker provides solutions for both Factory Equipment and Factory Infrastructure. Next slide please. Although we are experiencing some near-term pressure right now, this slide highlights how we are positioned for growth in the In-plant & Industrial Market Vertical. Mega CapEx projects, industrial CapEx investment, and demand associated with semiconductor fabs and data centers will continue to drive long-term growth. The chart at the bottom left shows the $1 trillion of mega projects that have been announced since 2021. Our powerhouse of interconnected technologies and independent distribution network are differentiators that allow us to benefit throughout a project's life cycle as depicted in the sales mix chart on the bottom right. We win with new construction, new equipment, retooling, and our aftermarket supports ongoing operations. I will now turn it over to Todd to go through the summary of our Q1 results.
Todd Leombruno, CFO
Okay. Thanks, Jenny. As Jenny said, I'm on Slide 10. Our team set several records this quarter. Jenny called some of these out, but we set records for sales, adjusted segment operating margin, adjusted EBITDA margin, and adjusted earnings per share. The sales of $4.9 billion was an increase of 1.2% versus prior. Virtually all of that was organic. Organic growth was positive at 1.4%. There was some slight divestiture activity there, which was unfavorable, really just 0.2%, and in the quarter compared to the prior year, currency was flat. Now we look at those segment adjusted segment operating margins; we increased those by 80 basis points. We're really proud of that, on the 1.2% sales growth. EBITDA margins were a record at 24.9%. Net income ROS is 16.5%, with earnings per share at $6.20. Those are both records as well, and both of those are an increase of 4% from prior. It was really a nice start to the fiscal year driven by consistent execution from our global team, really focused on continuing to take costs out and drive margin expansion. If you look at Slide 11, this details the increase in adjusted EPS. Again, if you can see that, outstanding operating performance along with some favorable interest expense really are the main drivers to the growth in EPS. Segment operating income dollars increased by $54 million in the quarter, which was $0.33 of the EPS growth, and that was really driven by strong Aerospace performance, being the main driver of segment operating income. Interest expense was favorable at $0.13, driven through our continued execution on our debt reduction plan. Corporate G&A and income tax were also slightly favorable in the quarter. If you look at other expenses, we did have a headwind of $0.26 in the quarter. This was related primarily to currency losses resulting from the re-measurement of intercompany loans and just some volatility in currency rates within the quarter. We do not expect that to continue for the remainder of the year. There were also some slightly less favorable pension income compared to the prior year that shows up on the other line. Finally, share count was just $0.02 unfavorable. All in, the adjusted EPS of $6.20, already said, it's a record, but it was really driven by strong margin expansion across the company. If we go to Slide 12, looking at the segments, we're proud of that margin expansion. We can't speak to it enough. The team continued to work on executing the Win Strategy. I really believe that our performance reflects how different a company Parker is today. In spite of low organic growth, we still generated 80 basis points of higher segment operating margins. Incrementals are unbelievably solid at 95%, and orders remain positive at plus 1%, driven by continued Aerospace strength. In the Diversified Industrial North American businesses, sales were $2.1 billion, organic growth was negative 5%. That was lower than what our expectations were going into the quarter. We are seeing delays and some near-term pressure in the energy and In-plant & Industrial Equipment verticals, as Jenny mentioned. Transportation and off-highway verticals continue to be soft. On a positive note, HVAC did return to growth in the quarter, so we're happy about that. Even with that organic pressure, adjusted margins in North America increased by 40 basis points to a record of 25.3%, and it's really just great teamwork, resilience, and operating execution. North American orders did take a step back; they were negative 3% in the quarter, and we made sure that our guidance reflects that pressure. Moving on to the international businesses, sales were $1.4 billion. Organic growth was negative 2%, but that's kind of as we expected, so that's right in line with our guidance. Organic growth in Asia Pacific improved to 3.2%; Latin America was really positive at plus 14%, but that was offset by a negative 8% in EMEA. We're really proud of the team. Operating margins matched a record high of 24.1%, even with that negative growth in the international businesses. The international team is really focused on productivity improvements, cost controls, and performing well in a tough environment. On a good note, order rates did move to plus 1%, with Asia moving into positive territory, driving that improvement. If we look at Aerospace Systems, the Aerospace Systems segment continues to lead the way for the company. Again, it delivered an exceptional quarter. Sales were $1.4 billion, which is 18% greater than the prior year. All of that is organic; roughly 17% of that growth was organic and driven by double-digit growth in commercial and defense markets. The adjusted segment operating margin of 27.9% is a record, up 190 basis points over the prior year. All that performance was driven by record top-line sales, a strong aftermarket mix as Jenny mentioned, and continued implementation and integration of the Meggitt businesses. Great work there by our Aerospace team. Aerospace order rates continue to be positive at plus 7%. I just want to remind everyone that we are lapping some very tough comparisons on those, but we're happy that it's plus 7%. If I could draw your attention to Slide 13, cash flow performance for the quarter is also a record. CFOA was $744 million or 15.2%, an increase of 14% versus prior year. Free cash flow increased 17% and finished at $649 million, which is 13.2% of sales. Conversion was strong to start the year at 93%. Within the quarter, we further reduced debt by $370 million, driving our net debt to adjusted EBITDA to now 1.9 times. We're happy about that, and I'm really proud of the team for the way we started the year on cash flow. It's a much better start than the prior year, thanks to a lot of hard work by everyone around the world. So that is a wrap on Q1, and we'll move to the outlook now. Jenny, I'm going to hand it back to you for some comments.
Jenny Parmentier, CEO
Thanks, Todd. As we've already alluded to, we've made some changes and updated our FY 2025 organic sales growth forecast for each of these market verticals, and we wanted to share this with you today. We are raising Aerospace and Defense on aftermarket strength. We're now forecasting 10% organic growth at the midpoint versus 8.5% in our initial guidance. Over the last 90 days, macro conditions affecting our industrial market verticals have softened as I previously mentioned, so we expect a delayed gradual recovery on easing comps as we move through the balance of our fiscal year. For In-plant & Industrial, we have a slight reduction to our low single-digit growth outlook for the year. We're seeing some near-term delays in projects and capital spending, but I will tell you we are pleased that the channel sentiment does remain positive. On transportation, we are maintaining our low single-digit outlook, so while the automotive production forecast remains lower, heavy-duty and work truck demand remains positive. We are now expecting a high single-digit decline for off-highway. OEM destocking is continuing, and we are seeing customers continue to reduce production levels, including instances of planned shutdowns. The energy market has also been impacted by uncertainty and delays, and we are updating our forecast to neutral. We are maintaining our HVAC refrigeration outlook of low single-digit growth, as the regulatory changes are driving growth on the HV side of the business, as Todd already mentioned. So guidance now reflects divestiture activity expected to close in the second quarter. Divestitures represent a 1.5% reduction to fiscal year 2025 reported sales versus the prior year. This now results in an overall organic growth of 1.5% to 4.5%. With our transformed portfolio, we remain confident in growing EPS and continuing our track record of expanding margins. I'll give it back to Todd to review the guidance in a little more detail.
Todd Leombruno, CFO
Okay. Thanks, Jenny. I'm on Slide 16, with some more detail, and I'll try not to repeat what Jenny said, but reported sales growth for the year is now forecasted to be in the range of 1.5% to 3.5%, and that's 2% at the midpoint. The dollars work out to be $20.3 billion. Currency, we now expect that to be slightly favorable of 0.5%, and as Jenny mentioned, the divestitures that we expect to close in the second quarter will be a 1.5% headwind. 100% of those divestiture sales will come out of the Diversified Industrial segment in the North American businesses. Organic growth in total is forecasted to be 3% at the midpoint. This is really driven by strong performance in Aerospace. We expect that to continue, and adjusted segment operating margin guidance is raised by 30 basis points for the full year to 25.7%. That now will be a margin expansion of 80 basis points versus the prior year. We're happy to see that. Incremental margins, we expect to be 70%. That is really based on incorporating the Q1 performance into the full year guidance and the anticipated divestiture activity. Corporate G&A is expected to be slightly lower now at $215 million, and other expenses are expected to be $70 million on an as-reported basis or $80 million on an adjusted basis, really reflecting that activity from Q1. Interest expense; we are now forecasting that lower. We're expecting it to be $450 million, which is driven by using the anticipated proceeds from the divestiture activity to further reduce our debt. The full-year tax rate we expect to be 22.5%, which is also incorporating the results of Q1. We're modeling Q2 through Q4 at 23%. Finally, full-year as-reported EPS is now $23.13 and adjusted EPS is $26.70, both of those at the midpoint with a range of plus or minus $0.35 on either side. Adjusted EPS is split 46% first half, 54% second half, and we do remain committed to our free cash flow forecast of a range of $3 billion to $3.3 billion for the year. Looking specifically at the second quarter, Jenny mentioned some of those near-term pressures. Reported sales are expected to be $4.8 billion, with organic growth of 1%. Adjusted segment operating margins are forecasted to be 25.2%, and adjusted EPS is now expected to be $6.15. As usual, we've provided some more specifics in the appendix if anyone is interested in those. If I could draw your attention to Slide 17, we provided a bridge on the major components to our increase in the FY 2025 guidance. Adjusted EPS moves to $26.70 per share. That compares to our previous guidance of $26.65. You can see we exceeded our guidance by $0.15 in the first quarter. We have included that in the full-year guide. The divestiture activity does net out to be $0.15 unfavorable. I do note that that is margin accretive. It's just slightly unfavorable at $0.15. That is a component of $0.25, less segment operating income, but $0.10 less interest expense. That nets out to $0.15. We are confident, as Jenny said, in our ability to continue to drive margin expansion. We are raising the remaining forecast of period by an additional $0.05 for the fiscal year, and that's how we get back to the $26.70. So that is the walk, and Jenny, I will hand it back to you for closing comments.
Jenny Parmentier, CEO
Thank you, Todd. Just 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 allows us to be great generators and deployers of cash.
Todd Leombruno, CFO
Okay. Sachi, we are ready to start the Q&A portion. I will hand the call back to you.
Operator, Operator
Thank you. As mentioned, we will be conducting a question-and-answer session now. The first question is from Jamie Cook from Truist Securities. Please go ahead.
Jamie Cook, Analyst
Hi, good morning, and congrats on a nice quarter. I guess the first question is just on the implied incremental margins for the year, Todd, 70% up from I think 40% before. How much is the divestiture? Just because the implied incremental margins in the back half of the year on the core business also seem to be pretty good. So just wondering is it structural? Is it price? What's going on there? And then I guess my second question on the international orders you talked about Asia turning positive and sales turning positive. How big is that as a percentage of your business? And just any color on which markets or the order growth that you're seeing in Asia? Thank you.
Todd Leombruno, CFO
Jamie, I'll start with the question on the incrementals, and then maybe I'll hand it to Jenny for the market commentary. Really, the Q1 performance, if you look at our Q1 performance, it was 95%. That's really probably the main driver of the performance there. The divestiture is a little bit of it. But if you look at the out quarters, we're expecting to be well above our stated 30% target. A lot of that is driven by Aerospace activity. They've got great growth and nice margin expansion. The industrial businesses are doing a great job controlling costs and doing what's necessary in a low growth environment. That's really how the math is working out on the incrementals.
Jenny Parmentier, CEO
Okay. So Jamie, Asia Pacific represents approximately 11% of our total sales and it's approximately 40% of our total international sales. As Todd mentioned, Asia Pacific Q1 growth came in a little higher than we thought, at 3%. Orders do continue to trend positive across the region. That's what we saw in Q1, but the comp was easier on the growth and I would say that we're seeing some pickup in transportation and semiconductor markets. We're seeing some nice robust growth momentum in India and Southeast Asia, and China's growth was negative low single digits.
Jamie Cook, Analyst
Thank you.
Jenny Parmentier, CEO
You're welcome.
Todd Leombruno, CFO
Thanks, Jamie.
Operator, Operator
The next question is from David Raso from Evercore ISI. Please go ahead.
David Raso, Analyst
Hi, thank you. North America you raised the margins by 50 basis points, but lowered the organic sales, and the buckets are right; the divestiture you're seeing is helpful to margins. The weakness is more OE business; it sounds like, if I'm reading that correctly, kind of factory floor CapEx and some of the big OEs taking their production down. The distribution piece, I assume, right? You didn't comment on it. Can you help us understand where that channel is? I just want to make sure that over 40% of earnings, the distribution business; if that cracks, that's a different level of concern around the margins. So can you help us on that channel? And again anything you can help us with on the margin resiliency the rest of the year for North America?
Jenny Parmentier, CEO
Yeah. So David, you are correct that the destocking comments are about what's happening at the OEM level, and we're just seeing lower production rates and some additional shutdowns, longer shutdowns around the holidays. When we're talking about the channel, the destocking in the channel, as you know, started over a year ago. I mentioned last quarter, and I would say the same thing that we're not seeing restocking just yet. The sentiment, I will tell you, is very positive. Just within the last month, I've spent some time with two of our largest distributors, and they are commenting on a lot of quote activity. They're just saying that they're experiencing delays. There's just project delays out there. I would say that they're still managing their inventory tightly and not doing any stocking orders yet. Some improved lead times have allowed them to operate with a little less product than they have had in the past, but again very, very positive sentiment is still coming from them.
David Raso, Analyst
That's helpful. And can I just follow up with M&A? Can you give us an update on what the lay of the land is, the pipeline?
Jenny Parmentier, CEO
Sure. First, I would say we are very committed to actively deploying our capital. As I've mentioned before, the acquisition pipeline is active with targets of all sizes. We don't feel obligated to make a deal just because leverage is less than two times, as Todd just talked about; it has to be the right deal. We're looking to acquire companies where we are the clear best owner with interconnected technologies building on those secular trends and mega CapEx projects. We're looking for deals that are accretive to growth, they're resilient, they're accretive to margins, cash flow, and EPS. So, I made the comment in the past too, we like all of our technologies and the pipeline is active.
David Raso, Analyst
I'm interested in the current market multiples compared to our targets. I'm trying to understand if the delay in making deals is due to pricing concerns or if people are waiting for elections and easing cycles before settling on a price. I'm just looking to gain insights into the ongoing discussions.
Jenny Parmentier, CEO
Yes. A lot of it, I would have to say, is timing. Timing is a big factor.
Todd Leombruno, CFO
That was Jenny, David. She just said it's really timing. It's not really an issue of anything other than just the normal activity of transaction processes, I would say. The one thing I did want to follow up on, David, was your question on margin; your math, as usual, is correct. The total company impact, the favorable impact of the divestiture is about 20 basis points. I mentioned earlier that that's 100% coming out of the Diversified Industrial North American businesses. It's about 40 basis points of favorable impact to that piece of business.
David Raso, Analyst
That's helpful. Okay. So basically, North America margin, the improvement is principally all from the divestiture, but you were still able to keep the core margin maybe even at 10 basis points despite lowering the organic sales, and that's probably a bit...
Jenny Parmentier, CEO
Correct.
David Raso, Analyst
Okay. Thank you so much. I appreciate it.
Jenny Parmentier, CEO
Thank you.
Operator, Operator
The next question is from Julian Mitchell from Barclays. Please go ahead.
Matt Laflash, Analyst
Hi. Good morning. This is Matt Laflash on for Julian Mitchell. My question today is sort of around that $0.15 divestment headwind. Wondering if you could maybe break down how that affects each quarter throughout the rest of the year? Should we kind of assume maybe $0.05 spread out across each quarter? Just how should we be thinking about that?
Todd Leombruno, CFO
Yes, I can answer that for you. We're expecting that to happen sometime in the second quarter. So there's a slight impact in the second quarter, but it bleeds out into the second half of the year. If you look at the $0.15, it's about $0.01 in Q2. It goes to $0.05 in Q3 and then it's about $0.08 in Q4.
Matt Laflash, Analyst
Got it. Thank you, Todd. That's helpful. And just a quick follow-up. If you could maybe dive a little bit deeper into the Q2 segment and below-the-line assumptions for that $6.15 EPS guide for the second quarter?
Todd Leombruno, CFO
Yes. I would say there's nothing unusual there. We did have that one currency issue in Q1. We do not expect that to repeat. I would tell you, both for corporate G&A and other, we are forecasting a pretty normal Q2 through Q4.
Matt Laflash, Analyst
Great. Thank you.
Operator, Operator
The next question is from Nathan Jones from Stifel. Please go ahead.
Nathan Jones, Analyst
Good morning everyone.
Todd Leombruno, CFO
Good morning, Nathan.
Nathan Jones, Analyst
I wonder if we could just go a little bit deeper into some of the headwinds that you're seeing in North America. I mean, In-plant and Industrial is a pretty broad category. So maybe any additional color you can give us on that, and then in off-highway, is this all related to OEM and not related to equipment utilization that we generate aftermarket? Just any more color you can give us on those kinds of things.
Jenny Parmentier, CEO
Let me discuss In-plant first, Nathan. We are currently experiencing some short-term delays in projects and capital expenditure spending, as well as overall uncertainty. For example, tool builders have faced these challenges. However, channel sentiment remains positive, and we believe that future interest rate cuts will be beneficial. There are some positives in the larger capital expenditures, although they are also delayed. We have seen some success, such as a notable win in Asia-Pacific for an electric vehicle battery line. Overall, the situation in In-plant and Industrial feels like a pause right now, but we are optimistic about the potential in the second half of the year. In the off-highway sector, we have adjusted our outlook to a high single-digit negative for the year, down from a mid-single-digit negative, largely due to OEM destocking. Lower crop prices and higher interest rates are putting significant pressure on agriculture. Additionally, production rates and further shutdowns from some customers are key indicators for us, and we are observing these trends. The construction sector is performing better but remains soft, particularly in Asia-Pacific and EMEA compared to North America. That summarizes what we're seeing in those two market verticals.
Nathan Jones, Analyst
Thanks for that, Jenny. I guess my follow-up is probably around the divestitures. I mean, Parker has divested businesses over the years pretty regularly. But this does seem to be a little bit bigger. Can you talk about what area it's in, why you don't consider yourself to be the best owner of this business anymore? Is this more of a one-off on the larger side? Or are there other things that we could see coming out of the portfolio that are a little bit bigger in the size of revenue than you've historically divested?
Jenny Parmentier, CEO
This serves as an excellent illustration of our annual owner playbook process. We review our businesses to ensure we remain the best owners and that these businesses align with our expected growth and margin profiles. In evaluating this particular business, which is indeed larger than some of our recent divestitures, we concluded that we are not the best owner. It is a solid business, and we believe it will thrive under new ownership, but it doesn't qualify as a core technology for Parker, despite our strong interest in Aerospace. That is why we made this decision. We have a great team in place, and I am confident they will succeed.
Nathan Jones, Analyst
Thanks very much for taking my questions.
Operator, Operator
The next question is from Joe O'Dea from Wells Fargo. Please go ahead.
Joe O'Dea, Analyst
Hi, good morning. Thanks for taking my question. I wanted to ask about sort of labor flexibility and just agility of the model to understand an environment when you've got kind of Boeing strikes to contend with and slowing kind of end market expectations over the course of the quarter. Just the levers that you can pull and how quickly you can pull them when we see kind of the margin outcome. Just sort of looking for a little bit more color on sort of agility advantages at Parker?
Jenny Parmentier, CEO
Well, I would say that we have the ability to flex our workforce across the whole company. But we definitely have the ability to flex the Aerospace workforce and production from OEM to aftermarket and vice versa. So, we do have that flexibility. That's not a concern for us.
Todd Leombruno, CFO
Joe, Jenny mentioned it in the earlier comments; it's really a testament to the decentralized nature of the way the company runs. With 85-some businesses and general managers that have full P&L responsibility, we've never had better data across the enterprise. What we've learned over this journey is that you're never too soon to act, and we don't wait for signs from above. Those businesses take those decisions immediately when necessary, depending on what markets they're exposed to.
Jenny Parmentier, CEO
That's the beauty of all of the tools and the Win Strategy. Some of the best tools for the shop floor are not only driving out the waste but ensuring that we can be flexible and agile to meet our customers' needs.
Joe O'Dea, Analyst
Got it. And then I also wanted to touch on mega projects. Two things really. One, in terms of timing. When you think about these multiyear projects, at what stage would you start to see orders for those? And then two, based on kind of what we track, it seems like chemicals and power generation have the biggest growth potential next year. So just anything in terms of your exposure to those markets as well as what you hear from the customers and those delays, and confidence that those projects break ground in 2025?
Jenny Parmentier, CEO
Yes. Looking at the earlier slide, we are up to $1 trillion, which is the figure we reported from a compilation of announced projects. While there have certainly been some delays and deferrals, new projects have also been announced. The timelines for the start and completion of these projects appear to have been adjusted a bit. Based on our current insights, we anticipate that some will commence in calendar year 2025, and we intend to engage in those projects. As previously stated, our distribution network will be involved, and in certain instances, we will be directly involved. We thrive on new construction, new equipment, and factory retooling. Our distributor partners will subsequently support the ongoing operations. Therefore, we foresee a very promising future in this regard. Additionally, we recently achieved a significant success by supporting an EV battery line, and we expect to see similar projects, both large and small, that will greatly benefit us this fiscal year.
Joe O'Dea, Analyst
Great. Thank you.
Todd Leombruno, CFO
Thanks, Joe.
Operator, Operator
The next question is from Joe Ritchie from Goldman Sachs. Please go ahead.
Vivek Srivastava, Analyst
This is Vivek Srivastav on for Joe. Thanks for the question. Maybe just starting with order trends. Can you talk about how these trends were exiting September? And as we exited 3Q, did you see any end markets getting better or worse? Any color there would be very helpful.
Jenny Parmentier, CEO
So this is Jenny. When we look at the orders, on average, what we've seen in the past, and we've talked about this a lot over the last year. But on average, we've seen about 5 to 7 quarters negative before it turns. So if you look at where we're at today, we had 5 negative, and we had 1 at 0 at the end of Q4, and I'm speaking about North America now. Now we have Q1 at negative 3. That makes this first quarter of FY 2025 the seventh quarter where we haven't seen orders turn positive yet. Again, that's what history has shown us, so we feel like this should turn soon. As I mentioned, what weakened during the quarter in North America was transportation, off-highway, and energy, but we did see aerospace orders very strong. We saw international orders turn positive on Asia improvement, and most of that was semiconductor and transportation.
Vivek Srivastava, Analyst
Very helpful color. One thing I also wanted to get a sense of was your backlog. Last we checked your backlog coverage in the industrial business specifically has become high 20s compared to like 15% back in 2015. So is this still the case in the first quarter? And how much of this current backlog coverage levels do you think is more structural versus areas where you think backlog still needs to come down in parts of the industrial business?
Jenny Parmentier, CEO
Yes. The industrial backlog from a dollar standpoint held steady at $4.2 billion, so no dollar degradation there. It is still in the mid- to high 20s as a percent, and I think that it's a mix. I think it's structural from the standpoint that customers have changed the way that they order. I don't think anybody wants to go through what we went through a couple of years ago and have to really have a lot of weight for the product. I also think it speaks mostly to the transformation of our portfolio. With the acquisitions that we've done, we have a longer cycle and higher aftermarket business out there, and that longer cycle gives us more visibility and orders further out on the demand horizon. I think that's really the biggest driver of why this is almost double of what it used to be under the old Parker.
Vivek Srivastava, Analyst
That's great. Thank you.
Jenny Parmentier, CEO
You're welcome.
Operator, Operator
The next question is from Andrew Obin from Bank of America. Please go ahead.
Andrew Obin, Analyst
Yes, good morning. I have a question. We've been hearing a lot from corporations, and I joined the call a bit late, so I apologize if this has already been addressed. There seems to be a lot of discussion about uncertainty regarding the election, and I'm curious what you are hearing from your customers, given your close relationships with them and your distributors. How much do you think things will change after November 6? Additionally, considering self-lending, higher interest rates, and ongoing inflation, from your perspective, how significant will the election results be for year-end and moving into 2025? Thank you.
Jenny Parmentier, CEO
So Andrew, I would tell you, as I mentioned, I've been out in the field a bit this quarter and have talked to distributors, some of our largest distributors, and Andy Ross has also. We don't have any of them telling us election, right? I mean, they are focused on making sure that they meet what they consider to be still a very high demand of quoting, and that they're ready. They talk about their customers just delaying. Some of it may be interest rates, but I can't tell you that I have customers that are telling me, hey, I'm going to wait until after November 6, to see what happens. Obviously, you read that a lot. You hear that a lot of people think another rate cut and getting past the election is maybe something that's going to change things. But I think we'll have to see what happens, right? What we have in the guidance for Q2 is based off of the orders that we saw in Q1 based off of what we see rolling up from our divisions. And like I said, we'll just have to wait and see what happens.
Andrew Obin, Analyst
And no, I really appreciate it. And just a follow-up on aerospace and defense; your aftermarket, particularly there's public-private partnerships on the defense aftermarket that have been very successful, but I assume eventually comps will matter. Can you just talk about what's driving the market outperformance there and how sustainable it is? Thank you.
Jenny Parmentier, CEO
Yeah. I mean, you said it exactly correct. If you just look at Q1 growth in defense MRO, it was 47%. You're absolutely right; comps are going to get harder. Our previous guidance on that segment of Aerospace was high single digits, and now we're saying low double digits. It is really based off of just tremendous success with those public-private partnerships. Our teams have done a really great job leveraging the Meggitt portfolio and growing that business even more than we had in the past. I do think it's going to continue to be a great growth area for us, but the comps will get harder; you're right.
Andrew Obin, Analyst
Really appreciate it. Congratulations. Thanks.
Jenny Parmentier, CEO
Thanks, Andrew.
Operator, Operator
The next question is from Nigel Coe from Wolfe Research. Please go ahead.
Nigel Coe, Analyst
Thanks. Good morning, everyone. Thank you for the questions. Todd, could you clarify the 25% impact from the divestments? Is that for the whole second quarter? Additionally, can you provide more specific details regarding the revenue and EBITDA impact?
Todd Leombruno, CFO
That $0.25 of segment operating income and that $0.10 of lower interest expense; we are forecasting that for the remainder of our FY 2025. So that will start in Q2 and remain with the business for Q3 and Q4. It's about $300 million of sales. All of that is coming out of the North American businesses, and we talked earlier. It's going to have a favorable margin impact for the company. It will be 20 basis points for the full company, and it's roughly 40 basis points for the North American business. So that's the details on the divestiture. If you need more follow-up, we can take that offline.
Nigel Coe, Analyst
Okay. And second, it appears that the EBITDA margin is in the mid-teens, correct?
Todd Leombruno, CFO
Correct.
Nigel Coe, Analyst
Okay. I mean, look, I think I cut off, but just the other expense of $0.26, it just seems very discrete in nature. Any thoughts on why that was excluded from the line?
Todd Leombruno, CFO
Well, we talked about that. It is based on just our normal activity. It was larger than it has been in the past so we chose not to adjust it out. It was based on just volatility around currency rates from all the central banks' cuts throughout the quarter. We do not expect that to continue. We didn't forecast it to continue, and that's the story on that. I think we may have lost Nigel. So Sachi, maybe if we can go to the next person in line?
Operator, Operator
Sounds good. The next question is from Jeff Sprague from Vertical Research Partners. Please go ahead.
Jeff Sprague, Analyst
Hi, good morning. Thank you. I have a couple of questions. First, Jenny, thank you for the insight on defense MRO. Could you, or Todd, provide us with the details on the other three segments of Aero if you haven't already mentioned them? I apologize if I missed that earlier in the call; I would like to know about commercial OE versus aftermarket and defense OE.
Jenny Parmentier, CEO
Yes. You bet, Jeff. You didn't miss it. That was the only one I talked about so far. So, commercial OEM Q1 came in at 3% growth. Our previous guidance there was high single digits, and now our revised guidance is low single digits. We expect that based on the slower pace of production and rate increases. Defense OEM came in slightly negative, but we think that was just a matter of timing, and we remain with the guidance we had out of mid-single-digit growth. Commercial MRO came in at 32%, and again, much like my defense MRO comments, the comps are going to get harder. It was strong, but the comps are going to get harder. We think that air traffic growth is going to continue to grow as forecasted, and we're going to see an increase in spare parts purchases with everything that's going on with OEM production. Defense MRO high single digits was initial guidance; now it's low double digits. Again, really a lot of growth comes from those public-private partnerships.
Jeff Sprague, Analyst
And just on the commercial MRO, obviously, over the broader stroke of time, less OE is good for aftermarket. Directionally, we all get that. But do you see any sort of risk in the handoff between the two? If the strike persists, maybe not everything just kind of automatically shifts over to that aftermarket. Maybe how are you managing that in the factories? Are there absorption issues you're trying to work through? Any other color there would be interesting.
Jenny Parmentier, CEO
I believe we all anticipate returning to previous conditions. However, our diverse customer base allows us to remain agile and flexible, enabling us to effectively navigate challenges. Therefore, we do not anticipate any immediate concerns in that regard.
Todd Leombruno, CFO
Yes, Jeff. I do agree with your comment. The only thing would be that that divestiture activity is expected to come out in North America.
Jeff Sprague, Analyst
With the divestiture noted. Yes. Okay. Thank you.
Todd Leombruno, CFO
Very good. Okay. Sachi, I think we have time for one more question here.
Operator, Operator
Sounds good. The next question is from Joe Giordano from TD Cowen. Please go ahead.
Joe Giordano, Analyst
Hey, guys. Thanks for fitting me in here. Just a question when we think about the order; sometimes it's tough like on the comps and what that's doing to the rates that we're seeing in the current quarter. Can you comment at all on North America international orders in dollars relative to last quarter?
Jenny Parmentier, CEO
About the same industrial. Yes. $4.2 billion.
Joe Giordano, Analyst
Orders this quarter are quite similar to last quarter in terms of dollars.
Jenny Parmentier, CEO
Yes.
Joe Giordano, Analyst
Okay. And then to your point on delays, I mean, I guess it's kind of a tough question, but like I guess every cancellation in history started as a delay at some point. So like if you look back and think about prior cycles when things ultimately were canceled, like what are the things that you're on the lookout to see like all right, these delays are going to like extend indefinitely and become something else? What do you kind of tend to look for to see if that's happening?
Jenny Parmentier, CEO
We continuously assess the backlog and monitor incoming orders and weekly changes. Our divisions are becoming more adept at this process. In the past, during prolonged periods like this, we would have anticipated cancellations; however, currently, we are only experiencing delays. Previously, we hadn’t seen major delays before the last quarter, so it feels more like a temporary pause. Additionally, the overall backlog remains stable. In response to your question about what we monitor, we pay attention to any extra plant shutdowns and changes in production schedules, as these factors allow us to gauge whether reductions might be significant. We anticipated these additional shutdowns and lower order rates, which are factored into our guidance. We'll have clearer insights after the start of the new year.
Joe Giordano, Analyst
Thanks, guys.
Todd Leombruno, CFO
Thanks, Joe. Okay. That worked out perfectly. We have no more questions in the queue. This concludes our FY 2025 Q1 earnings release webcast. We appreciate your time, attention, and confidence in Parker, and I thank you for joining us today. Jeff Miller, our VP of Investor Relations, and Yan Huo, our Director of Investor Relations will be available if anyone has any follow-ups throughout the rest of the day. I hope everyone has a great day. Thank you.
Operator, Operator
This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.