Parker-Hannifin Corporation

Greetings and welcome to the Parker Hannafin Corporation Fiscal 2025 Second Quarter Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Todd Liam Bruno, Chief Financial Officer. Thank you. You may begin.

Thank you, Shalini. We appreciate it so much. Welcome to Parker's Fiscal Year 2025 Second Quarter Earnings Release Webcast. This is Todd Lee and Bruno, Chief Financial Officer speaking, and with me today is Jenny Parmentier, our Chairman and Chief Executive Officer. We appreciate your interest in Parker and thank you for joining us today. On slide two, we will address our disclosures on forward-looking projections and all non-GAAP financial measures. Items listed here could cause actual results to vary from our forecast. Our press release, this presentation, and all reconciliations for any non-GAAP measures were released this morning and are available under the investor section on Parker.com. The agenda for the call today has Jenny starting with the highlights to our record second quarter performance. She will also highlight how our business system, the wind strategy, drives operational excellence in Parker. And then she will give an update to our market vertical outlook for the rest of our fiscal year, FY25. I will follow Jenny with more details on our strong second quarter financial results and provide additional color to our updated guidance. We'll then conclude, as usual, with the question and answer portion of the call, and we will do our best to address as many questions as possible within the hour. Now I'd like to draw your attention to slide number three, and Jenny, I will turn it over to you.

Thank you, Ted. And thank you to everyone for attending the call today. Our performance this quarter reflects our focus on operational excellence and the strength of our balanced portfolio. We produced top quartile safety performance aligned with our goal to be the safest industrial company in the world and saw continued strength from our aerospace aftermarket. Consistent execution of the wind strategy delivered 110 basis points of margin expansion resulting in a Q2 record of 25.6% adjusted segment operating margin. In addition, our teams delivered record adjusted segment operating margin across all businesses as well as record earnings per share. Record year-to-date cash flow from operations coupled with proceeds from previously announced divestitures allowed us to substantially reduce debt by $1.1 billion this quarter. And finally, We are encouraged to see industrial orders turn positive in our longer cycle businesses. Next slide, please. Our wind strategy. I'm often asked, how do we continue to expand margins, and more importantly, can we continue to do so? I've talked about this several times in the past. It is our business system, the wind strategy, that drives operational excellence. We trust the process. It is a proven strategy, and it works. The next few slides will show you how our teams use the WIN Strategy to drive performance over the cycle. Next slide, please. Embedded in the WIN Strategy is the Parker Lean System. It is fundamental to our culture and drives continuous improvement at all 85 divisions. Within the same pillars as the WIN Strategy are the critical tools used by all of our general managers and their teams to expand margins and drive organic growth. Disciplined execution of the Parker Lean system reduces variation and eliminates waste from the business. This system allows us to keep taking performance to the next level. And important to point out here is that we are never done improving our business. Next slide, please. On this slide, we have an example of how the wind strategy drives performance through the cycle in one of our North American divisions. This is a division in our filtration group. that has diverse exposure across industrial market verticals and a balanced OEM aftermarket mix. This is an engaged team that has utilized our high-performance team structure to execute the WINS strategy. Looking at the results on the far right-hand side of the page, they have achieved first quartile safety by bringing attention and ownership to concerns, tracking them to closure, and scheduling audit follow-ups to ensure sustained results. They are utilizing the Parker Lean System, specifically Kaizen, to expand margins and achieve the FY25 profitability goals for their division, even in a negative growth environment. In addition, they have utilized the SimpleBuy design tools to reduce complexity and cost, as well as increase dual sourcing to strengthen their supply chain. And finally, use of our zero defect tools has resulted in a 52% reduction in rejected parts per million. thus providing their customers a better experience. Next slide, please. Parker is a transformed company today. The chart on the left side of this page shows the strength of our portfolio over the last two and a half years. Order rates increased across all reported business in Q2, coming in at 5% for the quarter. Aerospace order strength continued in both aftermarket and OEM, And although we are seeing a continued delay in the expected industrial recovery, we are encouraged to see industrial orders turn positive in our longer cycle businesses. Next slide, please. Taking a look at our updated FY25 sales forecast by market vertical, we are raising aerospace and defense to 11% on the strength of the aftermarket and gradual OEM rate increases. On the industrial side of the business, Although orders have turned positive, there continues to be pressure in many of these markets. We are expecting in-plant and industrial equipment growth to be slightly lower within our low single-digit framework. We are continuing to see delays in recovery, while distribution sentiment does remain positive. We are changing our forecast on transportation from low single-digit to neutral, primarily driven by weakness in automotive and higher dealer inventories. The bright spot here is that work truck demand does remain strong. Off-highway steps down to negative mid-teens as OEM destocking and production cuts continue and the weakness in ag persists. We expect energy markets to remain neutral as projects and CapEx delays continue. And finally, we are increasing HVAC from low single-digit to mid-single-digit growth, driven by refrigerant changes in the industry. All of this adds up to an organic growth forecast of approximately 2% for fiscal year 25. I will now turn it over to Todd to summarize our Q2 results.