All right, good morning, everybody. Joining me next on stage is Parker Hannifin's new—we can still say new, right? Yeah, new CEO, Jenny Parmentier. Jenny, thanks for joining us. Enjoyed our sit down last week to kind of, you know, get acclimated, see what you're focused on in the business, hoping to kind of redo some of that today with the bigger audience. So obviously, a lot of great things going on at Parker. Maybe just to start off here, you know, what are you seeing out there in the market? Obviously, a very dynamic macro environment and, you know, anything that is of a particular focus to you on the strategic side.
Obviously, you know, Meggitt, it's gonna be a big piece of that, so maybe that's sort of the stock answer, but, you know, anything else, I'll call it more day-to-day management that is occupying your attention, and then we'll take it from there.
Well, thanks for having us, Josh. It's great to be here. So, you know, first of all, I would say that in general, you know, underlying demand is positive, right? Obviously, aerospace, very strong for us. Commercial, mid-teens growth, military, mid-single digits, so real, real positive about aerospace. You know, we're enjoying some nice growth in automotive, tied to electric vehicles, so that's very positive. You know, some of what we're seeing, you know, I'll talk about destocking a little bit in a minute, but we are seeing, you know, softness in, HVAC, Semicon, life science. We do think that that is, you know, more temporary in nature because it is, you know, directly tied to some strong secular growth in the future. So, you know, we, we see that that should turn around.
When we talk about destocking, you know, it's been a topic, a lot of questions around destocking, and we've seen that the last couple quarters. You know, we've seen that in the channel. But we feel good about our guide and, you know, mainly because the backlog is different. With our transformed portfolio, we see a difference in the amount of backlog we have. So if you look at where we used to be across Parker, we're about mid-twenties, 20%, 27% backlog. Now we're at 55%. A lot of that driven from aerospace, but if you look at the industrial side of the business, usually mid-teens %, now it's 30%.
So we feel really good about, you know, the guide that we have out there and continuing to have some growth there. When we look into the regions, obviously, some softness in industrial machinery, stationary equipment in the DAC H region. We've seen some softness across Europe. But what we have seen there is a return to summer shutdowns, right? So a lot of the customers have gone back to taking that time off to do maintenance in their factories, something that they hadn't done for quite some time. And in, you know, in China, we're just seeing a slower recovery, right? We're not seeing the stimulus or the response to the stimulus that has been there.
So, you know, when you look to our guide, you know, there's some uncertainty there, and, you know, that's what we're keeping an eye on.
Understood. Now, you touched on something that I think a lot of folks in this room and presumably folks on your team have struggled with as well over the last couple of years, is this whole supply chain ripple effect-
Mm-hmm
... creates a dislocation between, okay, what's underlying demand, what's a function of just longer lead times, what's inventory? You mentioned there was some destocking going on. You mentioned that underlying demand's still good. I guess, how do you tease out some of those points in the context of orders are down in the industrial segment? It's probably gonna be down for a while if I'm just following comps. But is there sort of built into your guide or, you know, even more broadly in the way you're looking at the markets, an expectation that we're kind of at a smooth underlying demand, uh, calculus, or does that, you know, inflect in one way or the other here as you think about it?
Well, you know, I think that, in the industrial side of business, the supply chain has definitely, you know, healed. It's not back to where it was. I don't think that, you know, we're back to where we were from a demand standpoint, in 2019, so we still have a ways to go there. I think that, you know, with the transformation of our portfolio, we are, you know, seeing... Like I said, we're seeing that higher backlog, and we're seeing that the supply chain is moderating, right? That we're being able to analyze that demand, forecast better, schedule our factories better, and really, you know, enjoy some of that normalizing of the supply chain.
I think in aerospace, they're going through what the supply chain went through in the industrial side of business 18-24 months ago.
Sure.
Right? There's a steep climb in demand. There's a lot of folks going through some tough times. You know, chips, for instance, that continues to be a struggle for us, not only in just aerospace, but on the motion system side of the business. So, definitely some healing, but definitely still some challenges. You know, we like to say that we fared better over the last couple of years than others, mainly because of our Local for Local strategy. You know, that really gave us a leg up. We weren't immune to all the challenges, but we fared better. It's one of the reasons that I believe, and I've said, you know, one of my biggest areas of focus is investing in the supply chain.
And then, I guess, on the destocking front, you know, a few different kind of target areas for that come to mind for me. Certainly, there's distribution. You have some visibility into that, in particular, in North America, I think, in terms of their sell-through, but there's the OEMs and, you know, the OEMs' finished products, their customers as well.
Right.
So a few different constituents that to be named here. Where do you feel like that's most acute or, you know, where the inventory situation in those lists is maybe healthier?
Yeah. So we, we've been, you know, we've been experiencing destocking for the last couple quarters, and we have that forecasted to continue into the first half, with our distribution channel and those, some of those markets that I mentioned earlier, that we are seeing some weakness. So we feel like, you know, again, that the sentiment from the channel is still very positive about growth. It's just at a lower rate than it has been in the past. So they're still very positive about it, and they're, you know, I think more of a moderating of their inventory than, you know, something to signal a big drop in demand.
Understood. And maybe putting all that in the context of your key priorities as CEO, I mean, not a ton of what I would call very squeaky wheels right now. Obviously, you know, there's still a lot of lifting to be done around Meggitt and recognizing the synergies there. But as you said, we're through the worst of supply chain. Demand feels sort of stable, plenty of things to watch, but where are you spending your time?
Yeah. So I, you know, I would tell you that my, my number one priority is the safety of our team members, and it is the very first thing and the very first pillar on the Win Strategy. Safety is number one. It's the safety, the top quartile safety, and the engagement of our team members that delivers the performance that you've been seeing and will continue to deliver the performance into the future. So Win Strategy 3.0, still very early days for us. It's a big area of focus for me. It's been there prior to me sitting in this chair, but I like to say my fingerprints are all over it because I've been part of the team for, for some time, so really big focus.
And then, like you said, it's making sure that we stay focused on the Meggitt integration, which is going very well. We're very happy with that, and we're committed to hitting our $300 million in synergies by FY 2026. I mentioned supply chain, investment in the supply chain, making sure that we can serve our customers at a very high level for what we see to be, you know, a period of great investment and demand. So that's a focus. And really continuing the continuous improvement culture that we enjoy. It is something that is the foundation of who we are, and it will help us continue to expand margins.
You mentioned supply chain as an area of focus and the benefits of Local for Local, which I think has been a hallmark of Parker for some time.
Right.
Probably helped you during the supply chain crunch, but with things like nearshoring becoming a lot more popular, does it make you reconsider some of your plant base? Presumably, you benefited those customers invest, invest, of course, but do you need to reshuffle where you're at?
No, I don't, I don't believe so. I mean, we're in region for region, Local for Local. We enjoy those businesses in every region. We have very, you know, experienced team members in those regions, and we'll be there. We'll continue to be there for our customers.
Understood. On the backlog side for industrial, where we've kind of seen the biggest dislocation, it's not a business I think most people would think of as carrying a lot of backlog, given that a lot of, you know, more components, things you can hold in your hand. How should we think about... Does that ultimately mean revert to where it was before, you know, the pandemic, or have customers kind of rewired their thinking to say, "Maybe I want to have a little bit more on order at any given point in time?" How is that psychology going?
You know, I definitely think there's some new behaviors as a result of what we went through, you know, coming out of the pandemic. But I think the bigger story really is around our portfolio and how it has changed. I mean, we are in longer cycle and higher aftermarket businesses. We're gonna see that longer demand horizon, as I like to call it. And while I think it will come down a little bit, I don't think we're gonna go back to where we were. I think we're gonna see that stronger backlog as part of our transformed portfolio.
Understood. And I guess the punchline of this, it all rolls up to margins have been excellent the last several years. Every target that's been out there has been exceeded pretty early and impressively, despite some macro headwinds. How should we think about the big drivers from here of that next milestone, the 25% adjusted segment operating margin target?
Yeah. So the beauty of it is, and you know, I always seem to have this with me, is you know, our Win Strategy, every strategy on this business system expands margins, right? So it's never just one. If you look at our performance over the last several years, if you just look and see where we got the improvement, we have 3 times EPS, you know, almost 900 basis points of adjusted EBITDA. And through FY 2022, 80% of that came from the base business. So a lot of work using the Win Strategy. When you look forward, we have this higher aftermarket mix, right?
We have with the addition of Meggitt, Aerospace Aftermarket has grown 900 basis points to 45%, so that's really an indicator of higher margins. We have all of our simplification tools and our continuous improvement tools, which, you know, a lot of that has tremendous upside yet. We have our Zero Defect initiative, which drives costs out of the business while really improving the customer experience. So a lot of levers to pull on margin expansion, and it's one of the reasons why you hear us speak, you know, confidently about hitting those targets for FY 2027.
One of the areas there that I find particularly fascinating is Simple by Design. You have, you know, thousands and thousands of SKUs where I would imagine every, you know, every engineer in every region wants to put their fingerprints on, you know, on their version of it. Where are we in that journey? What could that ultimately provide in terms of a benefit to margins as, you know, you're able to do some of that SKU rationalization or standardization?
Yeah. So we have about three years of Simple by Design under our belt. So I would say that it's still early days, right? I mean, that tool was really an expansion of our overall simplification initiative, and it's really powerful because it's not just existing products, it's using that lens to design new products as well. So all the principles of Simple by Design go into all of the new products. You know, it's really thinking about designing with forward thinking, designing to reuse, not redesign, another component, designing to reduce the complexity and reduce the bill of material, and reduce the stocking locations, reduce the amount of times you touch material, how you manufacture it.
It's not just an engineering activity. It's an activity that goes across the enterprise and all the functions, and that's how you get the cost reduction and, you know, provide the value to your customer.
What's been the experience of that over time? I mean, when it was originally announced, it sounded very interesting, certainly ambitious. In practice, has that met your expectations?
Yes, it has. You know, we use the term business fundamental when we feel like we've fully operationalized an initiative, and we do consider Simple by Design a business fundamental, but still early days and still, you know, a lot that we can get from it.
Understood. I wanna pivot over to the demand side for a bit, if we could. If I think about some of the bigger trends that have been talked about on the stage this week, certainly mega projects and, you know, whether it's nearshoring or energy transition or, you know, kind of other things in that vein, clearly a lot of buzz around that. Parker's diversity probably says that it's hard to really zero in on one of those. I would imagine that, you know, you guys are most excited about Aero, just given the visibility there. But on sort of this generational moment for CapEx, what are you focused on? Where's sort of the biggest opportunity as it relates to where your business is exposed today?
Yeah. So we believe that there is a lot of opportunity there. You know, when you think about everything that's been announced from business and government to build, to update, to automate, there's just a tremendous opportunity, all organic growth drivers for Parker. I mean, there's gonna be not only just a demand for construction and transportation, but energy and factory automation. So a lot of upside. You're right, it is at this point, it's early days, it's difficult to tie it out, but we are seeing examples of it.
We're seeing, you know, in some discussions with distributors, I was just visiting one, last month who happens to be located near one of the chip factories that's, that's going to be stood up, and, he has already, been working with a local contractor who's working on, you know, some of the prepping of the job site and some of the initial construction. So. And he's very excited about their ability to continue to work with other local contractors and the general contractors on those projects. So, you know, our channel is starting to see it. Our divisions will start to see some of that as well. But it's early days. Early days.
I would imagine it's hard to generalize, given the breadth of the portfolio, but it sort of seems like you participate in every phase-
We do
... from, you know, pouring the concrete all the way out to filling out the factory floor. I would wager that the factory floor piece is probably the richest content. How should we think about when that could start to kick in? I mean, maybe there's historical context that you could share, but is that something that, you know, doesn't really show up until maybe a year out from when these projects really get going?
Yeah. So you're right. I mean, we are in every phase. We're there when the job site is prepped, when the walls are stood up, when they're building the factory, and then the machinery that goes inside. And I would say it depends on what factory it is, where we participate more, but obviously, the machinery going in the factory is a good position for us. You know, I think with a lot of this, it's, you know, it's not gonna be, like a hockey stick. It's gonna be nice, steady growth over time. If you think about a you know semiconductor chip, it takes time to stand those factories up, right? So, you know, it's, again, I keep using the term early days, but it is.
But we'll continue to participate, and we'll participate more in the future as those really get off the ground.
So I think one of the things that, all of us are probably struggling with to some extent is, this has been a weird cycle. Doesn't look like it's gonna get any less weird anytime soon. But if I take a step back, it doesn't really look like, at least in the macro indicators, that volumes are materially above 2019 levels. Like, if you look at the industrial universe as a whole, obviously, price is up a lot. But in Parker's businesses, how do you see sort of that, you know, cycle-to-cycle benchmarking? Are most of the areas, you know, still within kind of last cycles, you know—I guess 2019 wasn't even highs in some cases, but how do you feel about, you know, that progression cyclically?
Do we still have runway here, or does it feel like we've grown enough cycle to cycle?
No, I think we still have runway. I mean, if you look in industrial over the last 10 years, it's, you know, it's a challenged environment. I think the next 10 years are gonna be much better. I mean, I think the supply chain getting better, so supply chain healing is helping, but I don't think we're at 2019 levels yet. You know, I think there's still room there. You know, if you just look at aerospace, and you look at where we were at in 2019 on the 737 MAX, we were building 51 a month.
Right.
We were supporting to build a 51 a month, and now it's 38, right? So that's just one example in one of our areas where, you know, there's still room.
... So I'd like to stick with aerospace there. I think that's one of the areas that folks have kind of squared up the guide, where there's probably the most head-scratching going on in terms of that second half outlook, more of a mid-single digit. Seems like Aero is almost sold out through, like, the end of the decade.
Yeah.
What would give you the pause there on what could drive you more within the range or below the range? 'Cause it seems like you're primed to perform, you're in the right spots, but I get that there's always a desire to be conservative. But is there anything specific in forcing that?
Well, you know, if you look at our guide, I mean, full year is 8%. First half is 12%, second half is 5%. You know, last year was the tale of two halves, right? So we had some tough comps out there, right? You know, the first half last year was 6%. The second half that we just came off of was mid-teens. So, you know, some tough comps there. But you're correct, we are positioned well. We will perform and, you know, we're very excited about the aerospace trend.
And you, you mentioned earlier that supply is certainly a constraint there, kind of living the moment that some other industries lived last year. Where do you see kind of the most risk relative to your business? And maybe the ecosystem is so intertwined that it's all the same, but some folks would say, "Okay, labor for some of the more specialized applications or shop visits are more problematic." Others would say, "It's material, it's, you know, the forgings, castings." Where would you be most focused in terms of, you know, kind of the current supply chain risks going on?
Yeah. Depending on the business, you know, there's still some labor shortages in pockets, so we still experience that. But, you know, I think supply chain is our biggest opportunity to improve. And, you know, I've mentioned before that, I think the aerospace supply chain is going through what the industrial did 18-24 months ago. So it's tough out there, right? And it's, you know, definitely a risk or can be a constraint in some areas. So it's something that we're spending a lot of time making sure that our demand, our schedules that we're putting out are well understood, as well as the customer's future demand.
Understood. And obviously, you know, using kind of that comparison to the last supply chain shock that industrial went through, inventory probably grows somewhere. I can't imagine people are double ordering, but is there anything where folks are trying to just hoard material as much as they can?
I mean, I don't, I don't think anybody's in, in that mode. I think, you know, that, in aerospace, you see the airlines, you know, you know, trying to build inventory on, on spares, right? Making sure that they can, they can handle what's in front of them. But I, I don't believe there's any double ordering going on. I think there may have been some of that early on in the industrial, increase in demand, but, as I mentioned earlier, we, we, constantly analyzing and pressure testing, what's out there, the orders and, and the backlog, and, what our customers are doing and what their schedules are. So I think right now, what's out there is, is pretty reliable.
Understood. And how should we think about pricing power in those businesses? Obviously, a lot more customer consolidation than you would have in the industrial side, but demand's very strong. Obviously, supply is limited. Does that afford you maybe a bit more precision on pricing than you would have had in the past?
Well, we use the same pricing tools in every business, right? So the same, strategic pricing that goes on, on the industrial side of the business that we've used the last couple of years, we've used the last 20 years, is what we use in aerospace as well. So, we're using those tools. We're having those, in some cases, those tough conversations with customers. But it's, you know, it's a muscle that we have. It's a strength that we have, and we'll continue to do so. The industrial side of the business is back to more of the normal pricing schedule. So, you know, we don't, we don't see, you know, right now, a return to where we've been in the last 24 months.
And then, obviously, we're gonna go through a mixed transition here over the next couple of years. It'll continue further as OE just ramps up more and more and more. Now, Parker doesn't have the issue that, say, some other folks have, where OE is loss-making or super low margin, but how should I think about the influence of that higher OE mix impacting overall margins? And does it make some of those margin targets a little bit more difficult, even if the dollars are higher, just the percentage ends up being lower, given the growth difference?
Yeah. So even with this year's guide, we have that higher OE mix built into the guide, and we still feel confident about our ability to expand the margins through some of the tools that I was talking about earlier. So obviously, the mix, you know, when it shifts, we have a shift in margin, but you know, to counter that, we have a lot of the tools and the processes that we use to make sure we get that margin expansion.
Understood. And then, I guess, maybe just as a status check on Meggitt, big observations thus far, obviously, deal very well timed, and, you know, market's very attractive. But within the organization itself, whether it's what you've learned about them or how the two businesses have come together, you know, anything that you'd point out or particularly, you know, proud of, concerned about, et cetera?
Yeah. Great business. Couldn't be happier with the acquisition. The team, the team is just a you know, highly experienced team, great technologies, great complementary technologies for the portfolio. Just couldn't, couldn't be happier with how quickly the team has embraced the Win Strategy. I recently was at the Ansty Park location in the U.K., which used to be the headquarters for Meggitt, and I walked in the front door and was greeted by a full wall of the Win Strategy. So, a high-performance team culture before, before Parker and, really fitting nicely, fitting nicely into our culture. So again, increase the synergies year one from $60 million-$75 million. Feel really good about the $75 million this year and the $300 million in total.
We've been able to really, you know, take a look at the structure, remove some of those spans and layers of, of SG&A. So that, that is something that, really helped us increase those synergies. So really, great acquisition. Going really well.
So I guess M&A, more broadly, has become a bigger part of Parker's DNA over the past 7, 8 years. You've done a lot in aero recently, obviously, including Meggitt, but not just Meggitt. But how do we think about future priorities? I mean, motion and control, as you define it, as I see it in the slide decks, is this enormous market. I would imagine not every niche is interesting, but how do you think about, you know, what the priorities could be or should be from here, whether it's aero relative to industrial or maybe in motion and control, just given how fragmented it is and, and how much the world is changing around some of these, you know, bigger secular trends?
Right. So we had an on-purpose strategy to, you know, make acquisitions that would double the size of, aerospace, filtration, and engineered materials. And we've done that with Clarcor, LORD, Exotic, and now Meggitt. So going forward, first of all, it doesn't have to be as big a deal as Meggitt. It doesn't have to be in those three areas. We like all the technologies. It really has to be the right deal that's, you know, focused on creating shareholder value, accretive to EPS margins, growth tied to the secular trends, higher aftermarket. So that could be in any of the areas, but really has to be the right deal at the right time. And, you know, we keep our acquisition pipeline healthy and robust, and we keep those relationships going.
That's what it looks like for future acquisitions.
And then, I guess, on the core portfolio or the portfolio as it stands today, any pruning that needs to be done? I know there's some common technologies and, you know, areas of expertise where it's not just, you know, one particular market that you could get rid of wholesale, but are there areas of the business that do need a little bit of, you know, call it, you know, disposal hygiene, or are you pretty satisfied with everything you have?
We're pretty satisfied with what we have. You know, there's been some small pruning along the way, but every year we go through a process of, you know, who's the best owner of this business? And, you know, all of our businesses, the expectation for margin expansion and margin targets is the same. So, you know, if we don't see a line of sight to that, you know, we address it, but we're happy with it right today.
Excellent. Jenny, appreciate the time. It's great having you up here.
Thank you.
It certainly sounds like things are going great with Parker, so best of luck.
Thanks for having me.