Conference Transcript - PH 2026-11-10

Mick Dobre, Analyst — Baird

Hello, everyone. My name is Mick Dobre. I'm the Baird analyst covering machinery and diversified industrials. It is my pleasure to introduce today Parker Hannafin Corporation. We have CEO Jenny Parmentier here with us. I know she has a couple of slides that she wants to run through, and then we're going to do some Q&A, so the floor is yours.

Jennifer A. Parmentier, CEO

All right. Great. Thank you, Meg, and thank you, everybody, for being here this morning. Excited to present and have this conversation with Meg today. So just a few slides. Obviously, we have our forward-looking statements and non-GAAP financial measures. We won't expect you to read everything on this slide, but please take note. We do have the number one position in the motion and control industry, and we have a very focused portfolio that is really all about creating distinct value for our customers. Across the market verticals that you see on this slide, our guide for FY27 is $25.3 billion. And as you look at these market verticals, the one thing that I'd like you to think about is the interconnected technologies and solutions that go across all these market verticals. Two-thirds of our sales comes from customers that buy four or more of these technologies. And we are focused, our growth is focused on longer cycle, faster growing markets that follow the secular trends. This is why we win. I talk about this slide quite often on our earnings calls and other presentations, and first of all, it is the win strategy. It is Parker's business system. It is our guide to operational excellence. It is our innovative products that our customers enjoy. We have deep customer relationships. Application engineering expertise, our engineers working with our customers to find solutions and to apply those interconnected technologies across the customer base. And finally, our distribution network, the strongest distributors in the industry, and an extension of our application engineers, serving all those needs with small OEMs and mid-sized customers. And here shows our performance from 2017 through our FY27 guide. And as you've heard us talk about many times in the past, it is our people, our strategy, and our portfolio that drive this top quartile performance. 8% revenue CAGR, almost 1,100 basis points of adjusted operating margin expansion, 15% adjusted EPS CAGR. And 11% free cash flow. Our teams have done an excellent job delivering these results and will continue to well into the future. Here's a look at how we have raised margin targets over time. And just 90 days ago, when we put out our guide, our initial guide for fiscal year 27, we raised our operating margin target to 30% by FY31. We were very proud to be able to hit our last target three years early and felt that it was the right time to raise this once again. We remain committed. To 4% to 6% organic growth over the cycle, 17% free cash flow margin, and 10% plus of adjusted EPS growth. And what drives Parker, a slide that you've probably seen most often and very important, it is the safety, engagement, and ownership of our team members, living up to their purpose every day. Driving top quartile performance and allowing us to be great generators and deployers of cash.

Mick Dobre, Analyst — Baird

All right, that's great. Would you mind maybe going back a couple of slides? Because I think, there we go. No, one more.

Jennifer A. Parmentier, CEO

One more?

Mick Dobre, Analyst — Baird

Yeah.

Jennifer A. Parmentier, CEO

Whoops.

Mick Dobre, Analyst — Baird

I was looking for the one with the historical context in terms of how the business evolved.

Jennifer A. Parmentier, CEO

There you go.

Mick Dobre, Analyst — Baird

I think this is a great slide, and it might inform the conversation here. You talked about the margin journey that the company has been on. We obviously see it on this slide as well. The 30% margin target for fiscal 31, frankly, you're not that far from it coming out of Q1, right? We're only talking about 100 change basis points to get to that. So maybe it would be helpful to provide some context in terms of how we got to where we are and, you know, whatever's left to your stated target, you know, how we actually get there hopefully sooner than the fiscal 31 that you've initially outlined.

Jennifer A. Parmentier, CEO

Yeah, well, it was a phenomenal Q1. You're right. We ended Q1 at 28.6%, so that is very close to the 30, but it was a great, great Q1. We still think that this is the right target for fiscal year 31. How we got there is the win strategy, right, and the transformation of the portfolio, very strategic acquisitions, meeting our synergy targets, and the whole legacy business raising their performance and expanding margins. The win strategy still has plenty of runway in it. We remain committed to being able to continue to expand margins. We have a couple acquisitions here, a filtration group that we closed in August. We're committed to taking that from a low 20%-ish EBITDA to 30%, and we are hoping to close Surcore here in the second quarter. That's the highest profitability acquisition that we've done. It'll be immediately accretive to EPS, margins, cash, all of those things. So really, I think we're in a great position to hit these targets, and we'll continue to execute on the win strategy.

Mick Dobre, Analyst — Baird

Not to press you too hard on this, but I think there's a perception that when companies expand margins, a lot of it is ripping costs out of the business, which at times, not to name any names, can come at the expense of one's ability to grow. To me, it feels when I'm looking at the financials, certainly when I'm looking at the performance on the top line over the past couple of years, that that's not been the case at Parker. So maybe talk a little bit about this dynamic, investing for growth, while at the same time managing the cost structure to be able to expand margins.

Jennifer A. Parmentier, CEO

Right. Well, first, I would say that, you know, all the leaders of our businesses know that it's not one or the other. It's both, right? And, you know, we've had a very on-purpose strategy over the last seven to 10 years of transforming the portfolio, right? Being longer cycle, following secular trends, faster growing. And I believe that we've demonstrated that. We've demonstrated that through the last industrial downturn prior to what we're, you know, experiencing and enjoying today that Parker grew differently. And we will continue to grow differently. Again, I would just reiterate, we still think we have room to expand margins. But every general manager, every group leader, just is focused on organic growth. One of the newer tools in the WIND strategy is strategic positioning. And strategic positioning is all about each division highlighting what they need to do to grow organically and profitably and investing in those resources and doing what they need to do to make sure that they do their part to fit into this framework and these long-term targets that we've set.

Mick Dobre, Analyst — Baird

Okay, so it's not really just ripping costs.

Jennifer A. Parmentier, CEO

No, it's not just ripping costs out. It's doing the right things for the growth areas of the business, having the best manufacturing processes, having a strong supply chain, having very good visibility on demand and capacity, and being able to leverage volume when you get it and to run your business very responsibly when you don't have the volume.

Mick Dobre, Analyst — Baird

Sure. As you announced with earnings, you're going to have an upcoming investor meeting here. And obviously, I realize that this is not the venue in which you're going to tell us everything about that. But maybe you can give us a little preview in terms of what might be next.

Jennifer A. Parmentier, CEO

Yeah, well, while I'm, you know, not prepared to share the, you know, exact agenda, I would tell you that, you know, we're going to talk about how we have the right portfolio for growth today. And we're going to continue to build on that. And we're going to talk about, you know, the strength of the interconnected technologies and how that is going to help us grow into the future. And we're also going to give everyone an opportunity to meet the leaders of our businesses that have been, you know, making all this performance real. And so we look forward to sharing that with everybody next May.

Mick Dobre, Analyst — Baird

Interesting. So let's see if I can ask this question in a slightly different way. The expectation here for this meeting, is it that it's going to be more of a growth focus and growth discussion, or is it still more of a, here's what we can do with margins, here's what we can do with free cash flow?

Jennifer A. Parmentier, CEO

Yeah, we'll talk about both of those things, right? It'll be three years since we've had an investor day. We used to do these every other year, and this will be three years. So the portfolio has transformed even more. Our performance has gotten higher, and we just really look forward to sharing, you know, more of the story and, you know, how that growth is going to continue to be part of what we do.

Mick Dobre, Analyst — Baird

Okay. To maybe get into the business a bit, in your industrial business, you know, there's been a bit of a change in kind of how you talk about it in the orders themselves. Orders, now we talk about it on a rolling 12-month basis, and they've actually accelerated. We're up 13%, if my memory is correct, in your most recent report. So I guess two things related to that. Why do you think talking about orders on a rolling 12-month basis makes more sense than it did historically? Is there a degree of lumpiness that starts to manifest in your industrial business that maybe we're not fully appreciating? And then, you know, the eternal question of how these trailing orders actually inform the forward organic growth guidance, because we still have a gap, right? We're talking about, you know, 300, 400 basis points of a gap that we still have between orders and organic growth.

Jennifer A. Parmentier, CEO

Well, I would say, first of all, I don't think that either 3 or 12 months is ever going to be a perfect science. I think you're always going to have a gap one way or another. But over the last 20 years, Parker had been reporting orders on the industrial side of the business on a 312. And over that time, the portfolio has changed quite a bit. The longer cycle portion of our business had been 35%. Now it's 65% or better. So that's a profound change in the portfolio. So what we notice and what we think better correlates is doing the 12-month rolling. What we see is more longer cycle business in the industrial segment, and that did cause more lumpiness than we had seen in the past. So while not a perfect science, we see a stronger correlation to the 12-month than the three-month.

Mick Dobre, Analyst — Baird

And the catch-up of organic growth to orders?

Jennifer A. Parmentier, CEO

I mean, I think, again, I think we're always going to have the gap. Some of those orders are more longer cycle than others. But I think what you will find over time is that there's a much tighter correlation than what we've seen in the past.

Mick Dobre, Analyst — Baird

Okay. On this longer cycle point, you know, if I were sitting here with Caterpillar, for instance, and we were talking about them taking orders that will end up being delivered two, three, four years out, sitting in backlog, the natural question would be, How do you manage your business, your cost structure, your pricing relative to that? So I guess I'll ask you the same question, given that your business has been changing as well.

Jennifer A. Parmentier, CEO

Yeah, so I would tell you this much. Obviously, we have an all-time high backlog, higher than we've ever seen in both sides, aerospace and the industrial side of the business. And that backlog is a much higher percentage than it had been in the past. But when it comes to how we plan for capacity and manufacturing, you know, that's more of a shorter-term look. And it's something that we've become very good at with investing in our demand-to-capacity planning and the visibility. And then, obviously, from a pricing standpoint, we're always looking at the environment that we're in. That's another great thing, not only about the strong pricing muscle that we have, but having that very decentralized within the divisions. The divisions watch that for their businesses and their customers, and they work that every day, and they make adjustments as they need to. So I would tell you that I think we have good processes and tools to always stay on top of that, and we make adjustments where we need to.

Mick Dobre, Analyst — Baird

What I think is a little bit counterintuitive to me when I think of the past. Few years, right? You had to deal with tariffs. You had to deal with a late spike in freight and energy costs. I mean, these are very real things for a company that manufactures goods in the real world globally, right? At the same time, your backlog has gone up and you have a longer cycle business. So, once again, you know, the flexibility that you have embedded, I wish you could talk a little bit more. Are you able to reprice some of this backlog? Are there escalators that are in it? Because your margin performance was such that would indicate. You were able to do all of that as conditions on the ground were changing.

Jennifer A. Parmentier, CEO

Yeah, we, you know, in some cases, we were able to reprice backlog. And we were never working on this in arrears, right? We have the tools and the analysis and the skills necessary with our teams to see what's coming and make the adjustments before they're a problem for us. I would say that in the cases where we have longer-term agreements with different customers, we have to, you know, we have to be working closely with them and negotiating with them, but we've been very successful at that. And, you know, right now I would say that we're back to more of a normal pricing environment, but we still have inflationary things that come up. We have material costs now that are inflationary, logistics. But again, I would say that at the division level, they're able to be very surgical about this and make the adjustments as they need to.

Mick Dobre, Analyst — Baird

You made the point of customers buying multiple technologies from you and how the company has evolved. Does that carry an implication for your ability to negotiate with OE customers and negotiate, in some cases, pricing for this more elevated backlog?

Jennifer A. Parmentier, CEO

Yeah, I would say in some cases it does. Obviously, we have global account managers, key account managers working closely with the divisions, organizing a lot of those pricing activities with the larger customers. And yeah, it does give us the ability to do it across different product platforms instead of piecemeal.

Mick Dobre, Analyst — Baird

Sure. From a demand standpoint, maybe, you know, you obviously raised your guidance here and you called out a few end markets. I think it was industrial, transportation. I think it was off-highway as well. I'm kind of curious as to, as you think about the second half of your fiscal year or call it calendar 27, how do you think about the areas where you might see more opportunity for growth or areas where you might be flagging for us as a risk? And I'm really kind of talking about the industrial business rather than aerospace. We'll get to that in a second.

Jennifer A. Parmentier, CEO

Yeah, so we raised three market verticals. One of them was aerospace, took it from 8.5% to approximately 10%.

Mick Dobre, Analyst — Baird

Yeah, we'll get to that.

Jennifer A. Parmentier, CEO

And then we raised in-plant and industrial from mid-single-digit to high-single-digit, and then transportation from mid-single-digit to high-single-digit. And the remaining verticals we left at mid-single-digit, still nice growth. So in-plant and industrial, we saw double-digit orders from distribution and OEMs of like, so seeing some nice growth there. And in transportation, heavy-duty truck, right? So what I would say about heavy-duty truck is it's a little stronger in our first half than our second half, but still very much a growth area for us. When we look at the second half...

Mick Dobre, Analyst — Baird

And your exposure here is predominantly North America in heavy-duty truck?

Jennifer A. Parmentier, CEO

We're seeing some heavy-duty truck growth in Europe as well. It's a higher percentage in North America, but we're seeing that in Europe as well. So when we look at the second half, there'll be a little bit tougher comps. But, you know, we felt good enough about the broadening recovery in all these market verticals to increase the overall guidance for the year by 200 basis points from 7%. to 9%. So we feel really good about the guide we have out there right now on the industrial side.

Mick Dobre, Analyst — Baird

And, you know, anything that you look at that you would flag as, you know, either a risk or something that you're watching as?

Jennifer A. Parmentier, CEO

No, I don't see any indicators right now with what we've said about the growth in those market verticals that, you know, we would be like, oh, gosh, hope that doesn't turn. We feel very confident about what we have out there for the guide today. I mean, you know, Listen, we still have some areas of those market verticals that aren't showing growth, like ag and auto and areas of oil and gas. So if something turns there, that would be upside.

Mick Dobre, Analyst — Baird

Before I get to aerospace, one last question on industrial. And it's really on the international business where APAC was just quite remarkable in terms of the growth. It delivered more than 23%, if I'm not mistaken. And maybe you can double click on that a little bit in terms of what's been driving it. I mean, but my own perception would be what's really going on in APAC. Well, you know, there's a lot happening in the entire electronics sort of supply chain. So that must be your driver. Correct me if I'm misinterpreting.

Jennifer A. Parmentier, CEO

Yeah, I mean, we obviously are enjoying some electronics and some semi-con, you know, data center business. But we're seeing growth and share gain in other areas on the industrial side of the business that are very nice. So it's not just that electronics and semiconductor data center. We're seeing, you know, nice growth across the board. But a great quarter for Asia Pacific, strong quarter for China in the international segment. But Europe had nice growth as well. You know, like I mentioned, we see heavy-duty truck, mining, double-digit distribution in Asia Pacific. So we've seen some nice broad-based growth, but Asia Pacific, to your point, you know, much higher than Europe.

Mick Dobre, Analyst — Baird

All right. So let's talk about aerospace now. And here you raised guidance as well. And I found quite interesting the commentary around the OE side of the business, right, where there's been obviously some concerns with regards to the actual production schedules of some of your OE customers that did not seem to affect your guidance. So if anything, you raised it. So maybe talk a little bit about that. If we get to the point where production rates normalize on the OE side, What sort of upside could that present for your business?

Jennifer A. Parmentier, CEO

Well, so we raised aerospace from 8.5% to approximately 10% for the year. We left our guide the same for commercial OEM at mid-teens growth. What helped increase aerospace overall was commercial aftermarket came in strong, and defense OEM came in stronger than anticipated. So that's what added to the growth. When you look at the orders dollar-wise, it was the second highest quarter for us in history for aerospace. So this will be at approximately 10% the fifth year of double-digit organic growth. We baked in a 47% aftermarket, 53% OEM for the year. That's a 200 basis points headwind to where we ended at $49.51. First quarter came in at 48.52, stronger aftermarket, as I mentioned. So, you know, the volume on the OEM side is definitely helping us in our manufacturing operations. And the continued strength of aftermarket is, you know, a driver as well. So, you know, increased OEM will help us from a volume standpoint. As I've said many times, volume is our friend. Our aerospace group has just done an excellent job with the supply chain. And demand-to-capacity planning, they've really embraced some of the new tools we've deployed and they have done a really nice job just knowing exactly where the customers are, being right there, knowing what the rates are, what they're going to be, and making sure that we're not a bottleneck and that we're delivering.

Mick Dobre, Analyst — Baird

Yeah, I think your comment on the mix is an important one because I think this is something that I think a lot of investors have wondered about this segment specifically. Do we get to the point where mix is becoming a margin headwind that has to be accounted for? So what's your thought on that?

Jennifer A. Parmentier, CEO

You know, I've said a couple times that, you know, we're committed to expanding margins in aerospace. And we talked about how we'd have headwinds with that OEM mix, but we still feel good that we can expand margins. I would just, again, point to the fact that volume gives us a lot of opportunity to leverage, you know, the manufacturing processes and really deliver higher margins. So we feel very good about. You know, the mix changing and continuing to expand margins.

Mick Dobre, Analyst — Baird

Sure. Maybe this is a good opportunity for you to talk a little bit about CERCOR. We haven't touched on it on the most recent earnings call, but I'm sure you got some updated thoughts here.

Jennifer A. Parmentier, CEO

Yeah. So the plan is to close CERCOR this quarter. Great business, $270 million in revenue, 40% EBITDA. So, you know. Highest, fastest growing, highest profitability acquisition that we've brought into the portfolio.

Mick Dobre, Analyst — Baird

Maybe a quick reminder how it fits within your Aerosmith portfolio.

Jennifer A. Parmentier, CEO

Yeah, so, you know, critical flight products, critical to. To the flight safety and products that fit in, complementary technologies to what we do, you know, sensing technologies, just a really solid growth business. It is 80% OEM, 20% aftermarket, but on well-established platforms that we're, you know, we're very familiar with, customers we know, obviously, and platforms that we know. Great culture, great people, great leadership that's run that business, and we'll be off and running on day one here very soon. So we see the opportunity for synergies. We've talked about that, but we'll be immediately accretive to cash flow EPS margins. So we look forward to bringing it into the portfolio here real soon.

Mick Dobre, Analyst — Baird

That's a good segue here to talk about M&A more broadly. Obviously, there's a lot that you have to work through between Filtration Group and the CERCOR. But conceptually, once you are to the point that you feel operationally and the balance sheet has digested these acquisitions, where are you looking next? What's next for the portfolio?

Jennifer A. Parmentier, CEO

Well, as I've said many times, even right after you announce a deal or right after you close a deal, the M&A pipeline is alive and well. It's strong. It's robust. We never stop working on the pipeline. There are targets in all of our technologies, our businesses, some bolt-ons, some larger deals. So we're going to continue to work those relationships and be ready when they're ready or make a move when it's the right time. The good news is, is we're going to pay down this debt faster than we have in the past. We closed Filtration Group in August, so our leverage is at 2.7 right now. When we close Circor, we won't quite touch 3. So, we'll be able to pay this down to, you know, right around two times within six quarters, but we have some flexibility, you know, within that time frame if something comes up and we, you know, we want to do a deal. So, we're going to do the right thing and stick to our criteria for acquisitions, a very disciplined, you know, process for that and do the right thing for Parker and the shareholders.

Mick Dobre, Analyst — Baird

With the four minutes that we have here, and maybe this kind of ties back to the conversation about the evolution of the win strategy and what we're going to hear at the investor meeting, but I'm curious your thoughts on deploying AI within your business. Where are you doing that, and how is it actually getting implemented and getting done? Is this a centrally led? Um, effort? Is it, you know, bottom, bottoms up? Tell us where you are in that journey.

Jennifer A. Parmentier, CEO

I would tell you that it's, it's much like, um, The tools that are already in the Parker Toolbox and in the win strategy. There's some that are centrally led that we want to deploy across the enterprise, and there's some that are bottoms up at the division where the division sees a need, and they're doing what they need to do for their division. I talk about AI as being an extremely efficient assistant that allows our team members to serve the customers better. We're using it a lot in customer service. We're using it in our manufacturing. For different types of automation, for vision systems, for, you know, any type of defect monitoring. So we're using it in several applications. I would tell you we're investing more every year. Some things are internally developed. Some are products that sit on top of platforms that we already use. But just like any tool that we use, it has to provide value. It has to drive efficiency and productivity, help the team member, help us improve the customer experience. It has to have a business case. It's not just something we do because it's the latest thing that we do, but a definite benefit using it in engineering. One of the examples that we have is something that we call Product GPT, and that is a tool that is available to all of our team members, but widely used by our customer service team members. And you just think about every bit of information about any Parker product available at their fingertips to better serve the customer, to ask questions, to really increase that time. Or decrease the time to respond so we can make sure that the customers are getting the answers that they need. So think product specs, material compatibility, drawings, application information. So really a nice tool that we've deployed and has helped customer service quite a bit. So we'll continue to invest responsibly. And we actually have an internal steering committee that looks at some of the larger enterprise projects. And we want to make sure we're putting good tools out there, but we found it to be very helpful.

Mick Dobre, Analyst — Baird

So to that effect, how do you know if the investment is actually generating the appropriate return?

Jennifer A. Parmentier, CEO

We measure it. We're not putting dollars to it. We're not talking about, oh, we have to save this much, or this is your AI target. But we measure the use of it, and we measure the efficiency of it, different tools across, you know, across the enterprise that we're using. And, you know, we've had feedback on some tools where, you know, the team members say this really isn't getting us what we need. But then in other cases, we have people raising their hand and saying this is fantastic. This just cut this time down by a certain percentage. So we're staying on top of it. We're making sure that we're deploying it responsibly and that it's something that's helping us in our business.

Mick Dobre, Analyst — Baird

Our time is up. We could go on for another 30 minutes, but we do have a breakout session, so hopefully you can join us there. Thank you, Jenny.

Jennifer A. Parmentier, CEO

Yeah, thank you very much.