Parker Hannifin at Bank of America Conference: Strategic Growth Insights

On Wednesday, 19 March 2025, Parker Hannifin (NYSE: PH) shared its strategic vision at the Bank of America Global Industrials Conference 2025. Chairman and CEO Jennifer Promontier highlighted the company’s diversified business model and commitment to operational excellence, while addressing challenges such as tariffs and macroeconomic uncertainties. The company remains optimistic about achieving its targets through organic growth and strategic capital allocation.

Key Takeaways

• Parker Hannifin is committed to a 4% to 6% organic growth target through strategic initiatives and capital allocation.
• The company plans to expand its market share in a $145 billion market, increasing from 14% to 20%.
• A focus on innovation has increased the percentage of sales from new products to the mid-20s over the last decade.
• The Win Strategy is central to Parker Hannifin’s operational excellence, aiming for a 27% adjusted operating margin by FY29.
• The M&A pipeline is strong, with an emphasis on strategic deals to enhance shareholder value.

Financial Results

• FY25 revenue is projected to reach approximately $20 billion, with an 8% revenue CAGR from FY22 to FY25.
• Adjusted operating margin is expected to expand by 350 basis points from FY22 to FY25, targeting 27% by FY29.
• The company anticipates a 13% adjusted EPS CAGR and a 13% free cash flow CAGR from FY22 to FY25.

Operational Updates

• Industrial North America orders have turned positive for the first time in six quarters, with positive distributor sentiment.
• Portfolio transformation includes significant acquisitions like Clarcor and Lord, doubling the size of filtration and engineering materials.
• R&D spending has been optimized, now at 1.5% of revenue, down from 3%, while maintaining product innovation.

Future Outlook

• Parker Hannifin targets 4% to 6% organic growth, driven by trends such as electrification, digitization, and clean tech.
• The company expects continued aftermarket strength, particularly in aerospace, due to rising air traffic demand.
• Broad exposure to key defense programs is anticipated to be a growth driver.

Q&A Highlights

• The company aims to remain margin neutral with tariffs, expecting no significant impact.
• In aerospace, the Meggitt acquisition has increased aftermarket exposure by about 900 basis points.
• While Europe remains soft, there is positive momentum in Asia Pacific, especially from the Semiconductor industry.
• The M&A market is active, with Parker Hannifin committed to deploying capital strategically to enhance shareholder value.

For more detailed insights, refer to the full transcript below.

Full transcript - Bank of America Global Industrials Conference 2025:

Andrew Oben, Bank of America Multinational Analyst, Bank of America: Thanks so much. I’m Andrew Oben, Bank of America Multinational Analyst based in New York. You know, one of the most exciting presentations ahead of us, one of my favorite companies, Park Hannafin. And we have, chairman and CEO, Jennifer Promontier. And we’re just gonna go to We’re just gonna

Jennifer Promontier, Chairman and CEO, Parker Hannifin: go at my slides. Yeah.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: Yeah. We have slides. A couple of slides. Sorry. And then we’re gonna go to q and a.

Yep. That’s good. Being here.

Jennifer Promontier, Chairman and CEO, Parker Hannifin: Thank you, Andrew. And thank you everyone, for your interest in Parker Hannifin for being here today. I just wanna go over a few slides with you to to give you an overview of, Parker. Obviously, first off, we have our forward looking statements and non GAAP financial measures. This is Parker Hannifin, at a glance.

So we’ve been engineering customer success in the motion and control industry for over a hundred years now. And, this year, we’ll come in at approximately $20,000,000,000 worth of revenue. On the left side of this slide, you see our three businesses, our aerospace Systems, it’s now 31% of our business. Diversified Industrial International at 29% or 28%. And Diversified Industrial North America at 41%.

On the right side of the page, you see our four technology platforms, aerospace systems and engineered materials and filtration, now making up about 60% of the business, while our legacy platforms, motion systems and flow and process control, are about 40% of the business. Across the bottom of the page, you’ll see what I’ll talk about in a little more detail in a couple slides. But the wind strategy is our business system. It’s our key to operational excellence. We have a technology powerhouse of interconnected solutions across all of the markets and customers that we serve.

Our global distribution network has taken us seventy years to build that, and it is the envy of our competition. And we strongly believe in our decentralized operating structure that has led us to the performance that we’ve enjoyed over the last several years. We do have the number one position in the motion and control industry, and we consider that to be a hundred and $45,000,000,000 market size. And, about a year ago, we started talking about our business in these six market verticals. 90% of our revenue is in these six market verticals.

Aerospace and defense coming in at 33%, a few percentage points higher than the previous page I just showed you, but that’s because we have about 3% to 5% of our aerospace business sitting in our industrial groups. In plant and industrial automation, equipment coming in at 20%, transportation at 15, off highway, energy, and HVAC round out the six market verticals. What is unique about Parker Hannifin is that we have those interconnected technologies that cut across these market verticals. Two thirds of our revenue comes from customers who buy four or more of those technologies. And our growth, as we transform the portfolio, is focused on faster growing, longer cycle businesses and the secular trends, electrification, digitization, clean technologies, and, of course, aerospace.

So why we win? Diving in a little deeper here. As I mentioned, the win strategy is our business system. I mentioned that we strongly believe in that decentralized operating structure. We have 85 divisions around the world.

Those are run by general managers who have full p and l responsibility. They’re working closely with our customers. They’re executing the win strategy every day. We have innovative products, deep customer relationships that allow us to use our application engineering expertise, which I think is one of the one of the secret sauces of Parker Hannifin is our our engineers. And they’re able to use their expertise to apply those interconnected technologies to what our customers need.

And as previously mentioned, the distribution channel, over 50% of our revenue, serves all of those mid to to, small to midsize OEMs that are participating in the secular trends along with us and some of those mega CapEx projects that you hear us talk about. And here’s how we’ve done. This is the result of implementing and executing the win strategy just looking at over the last three years. If you look at the revenue CAGR, 8% from f y twenty two to our current f y twenty five guide, 350 basis points of adjusted operating margin expansion, 13% adjusted EPS CAGR, and 13% free cash flow CAGR, all on the heels of the Win Strategy and our people. As the top of this slide says, it is our people and our strategy and our portfolio that drive this performance.

And last May, at our Investor Day, we released these f y twenty nine targets. Organic growth of four to 6% was a target that we had previously had out there, but we increased all of our margin targets in the center. 200 basis points increased to adjusted operating margin at 27%, three hundred basis points on adjusted EBITDA to 28%, and free cash flow margin, a hundred basis point increase in that target to 17%. We’re very confident in hitting these targets, by FY twenty nine and look forward to the discussion here today.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: Well, Jenny, as I said, thanks so much. So maybe we will start with macro. Parker reported its first quarter with positive orders in Industrial North America in eight quarters. In fiscal second quarter, I think half this audience probably is convinced that we’re in a recession already. So at this stage, how are you feeling about the macro?

What are you hearing from your distributors? Maybe we can start that.

Jennifer Promontier, Chairman and CEO, Parker Hannifin: Yeah. So as, as we talked about during the q two earnings call back in early early February, end of January, Industrial North America orders did turn positive for the first time in six quarters, and they turned positive on some of the longer cycle business, some that I was, you know, just mentioning. So some of the aerospace business sitting inside of the industrial groups. We saw some strength at Asia Pacific in Semicon and we saw some strength in our HVAC business. So usually once they turn positive, they stay positive, but this is definitely longer cycle driven.

What we also commented on at the time is that distribution sentiment still positive.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: Yep.

Jennifer Promontier, Chairman and CEO, Parker Hannifin: You know, feeling good about a lot of quoting activity, but admittedly saying that there had been some project delays and, you know, fit in line with what we’ve said about having a a gradual recovery on the industrial side, things shifting to the right a bit.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: Right. But all of that, you’ve you’ve stated that already. Mhmm. Okay. Yep.

But but how much of, in terms of, this is the follow-up, I guess, and you have said some these are longer term projects. You also said the longer term projects will remain on this path. So how do you how do we reconcile positive water growth with a lower fiscal year ’25, organic guide?

Jennifer Promontier, Chairman and CEO, Parker Hannifin: So, you know, we think we’re gonna grow differently over time. Right? We’ve we’ve done a lot with the portfolio. We’ve transformed the portfolio quite a bit. Just as a reminder, we’ve doubled the size of filtration with our Clarkor acquisition, higher aftermarket.

We doubled the size of engineering materials with our Lord acquisition, longer cycle business. And then, obviously, Exotic and Meggitt, really benefiting obviously from the the aerospace market right now. And again, I would point to the core technologies that we have and the way we’re able to apply those across all the markets with the customers that we have. And if you take that and you look at the secular trends that I mentioned, electrification, digitization, clean tech, aerospace, again, reasons we’re going to grow differently. We have growth enablers built into the wind strategy and our processes.

We have strategic positioning that is done at the division level. That’s something we’ve done for about four years now. So that’s every general manager looking at their business and saying how am I going to grow with the customers I have and the markets I’m in and how am I going to run my business. Along with that, we have a metric we’ve talked about in the past a little bit, product vitality, and that measures the percentage of sales that come from new products. So just for instance, ten years ago, we were at about 10% and now we’re in the mid-20s.

So it shows that we’re focusing on the right things, the right innovative products, solving our customers’ problems and making sure that we’re using our resources in the right area. We also have a tool called Simple by Design. You’ve probably heard us talk about that. That really helps us drive complexity and cost out of the product, but it also helps us really solve the customer’s problems by making the right product for them and, giving them the enhancements that they need.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: No. I saw the impact when I visited the facility, like the solenoid valves and how now they’ve been standardized.

Jennifer Promontier, Chairman and CEO, Parker Hannifin: Right.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: And you can just automate the process. Right. It’s quite incredible to see that in action.

Jennifer Promontier, Chairman and CEO, Parker Hannifin: And then I would tell you too, you know, we’ve we’ve, I think, always been really good at, running our businesses and in operations, you know, even though you’ll hear us say

Andrew Oben, Bank of America Multinational Analyst, Bank of America: we still think we have improvement we can make.

Jennifer Promontier, Chairman and CEO, Parker Hannifin: You know, we’re we’re getting everyone aligned. We’ve been getting everybody aligned to this 4% to 6% organic growth. And one of the things that had to be done was, you know, looking at the compensation structure and making sure that, you know, almost all 62,000, 60 three thousand of our employees were focused on the right thing. So we changed our compensation structure for almost all those people. We’re on year three of that, and it’s it’s a very simple formula.

It’s sales, earnings, and cash. So that helps, you know, every team member, no matter where they work in Parker, understand how what they do every day impacts those numbers and how it winds up in their compensation.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: And just sort of this 4% to 6% that you’ve mentioned, so will there be a catch up, right? Because given where we are in 25% in terms of the guidance, does that imply that sort of 26% would be above the trend just to catch up to be on target?

Jennifer Promontier, Chairman and CEO, Parker Hannifin: Yeah. I mean, that’s why we set it over the cycle, right, 4% to 6% over the cycle. And, you know, with all those things I mentioned about us growing differently, we think we’re gonna benefit different businesses will benefit at different times in the cycle.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: And this 4% to 6%, how much of it is predicated on sort of better CapEx cycle and how much of it is predicated on you outgrowing the market in any of your key businesses? How much is the outgrowth and how much of it is good end market?

Jennifer Promontier, Chairman and CEO, Parker Hannifin: I would say that it’s a mix, that it’ll be us doing everything with those tools that I mentioned to grow organically. So we’re going to benefit from changes in the market and we’re going to benefit from the tools that we use for share gain.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: Yes. And maybe just think about the tariffs. Mhmm. So how should I think about your exposure to let’s just start. What is your exposure to the key region that have been announced in terms of the tariffs?

Jennifer Promontier, Chairman and CEO, Parker Hannifin: Well, it’s we know how to do tariffs. Right? We’ve been here before. You know, we have exposure, but we have the tools we need to make sure that they, that they don’t impact our our margin. Our goal is to remain margin neutral, and we’ll be able to take care of it.

We don’t expect it to be a material impact to the company.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: And so from that perspective, does 25 guidance embed any impact related to the tariffs or it’s just the idea is that whatever happens is just gonna be a wash towards that?

Jennifer Promontier, Chairman and CEO, Parker Hannifin: The current the current the last guide does not have anything because that was before a lot of the discussion that’s going on now. But again, we we know how to deal with tariffs. We can handle it, and we don’t expect it to be an impact.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: And have you seen any pre buy ahead of the tariffs?

Jennifer Promontier, Chairman and CEO, Parker Hannifin: No. Somebody asked me that question during the last call, and and we really haven’t we haven’t recognized anything like that.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: And then how fast would the pricing would those be surcharges? Have you already announced the surcharge? What happens with the backlog? Maybe can you just describe the dynamic, you know, assuming nothing happens on April 2? What happens at 12:01AM?

Jennifer Promontier, Chairman and CEO, Parker Hannifin: Yeah. Well, we’re we’re able to quickly implement based on, you know, the knowledge that we have about, what’s going on. And we use a mix of different pricing mechanisms depending on the customer and how we’ve dealt with them in the past.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: And do you have the ability to reprice the backlog?

Jennifer Promontier, Chairman and CEO, Parker Hannifin: In some cases we do.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: Okay. And would it take a quarter to work it through or multiple quarters?

Jennifer Promontier, Chairman and CEO, Parker Hannifin: I would say that it’s different based on the customer. So some would be shorter and some would be longer.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: Okay. And in terms of sort of margin impact, is it margin neutral?

Jennifer Promontier, Chairman and CEO, Parker Hannifin: Margin neutral is Oh, margin neutral. Margin neutral is our goal.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: Okay. Okay.

Jennifer Promontier, Chairman and CEO, Parker Hannifin: Yeah. I mean, we, you know, we have good relationships with our customers. And even though these are tough discussions, our customers understand what needs to be done and, you know, it’s not an area for us to take advantage of.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: And and, you know, I think you’ve done quite well on margins historically. You know, I think the margin target, well, it is 27%. Mhmm. You know, so I think for ’25, the guide is 25.8. So at the midpoint, so what’s the main driver to get 27?

Is that simply just getting a little bit of volume?

Jennifer Promontier, Chairman and CEO, Parker Hannifin: Well, we’re really proud of

Andrew Oben, Bank of America Multinational Analyst, Bank of America: how far we’ve come. Right? We’re we’re proud

Jennifer Promontier, Chairman and CEO, Parker Hannifin: of the teams. We’re proud of the work they’ve done around margin expansion. And, you know, it’s the win strategy. It’s all of the tools in the win strategy. It’s from, the very first pillar, keeping people safe and engaged and then using all of our tools inside of our lean system, Kaizen, Simple by Design, all the tools that we have out there for margin expansion.

Every general manager understands what their targets are and has the plans to make sure that they hit those targets. If you think about it, over the last ten years, we’ve increased those margin targets four times after sitting at 15% for over a decade. So it’s part of what we do.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: Maybe moving to long cycle, Aerospace has scaled to be a third of the business. Is aerospace different in terms as an end market? Does that require different playbook or evolution of a different playbook relative to the rest of the company?

Jennifer Promontier, Chairman and CEO, Parker Hannifin: No. The the wind strategy if you think we’ve had we’ve had aerospace business, you know, for a long time, but we had that long cycle business. And we’ve had pockets of long cycle business on the industrial side too. So the wind strategy works, no matter what the length of the cycle is. And, you know, I think Meggitt’s a good example of, you know, how it how it works, the integration of Meggitt bringing it into the company and, being very successful with it.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: And you have the chart, you know, sort of that shows the evolution of the portfolio, how much of it is early cycle, mid cycle, late cycle. Mhmm. And over time, the company is just becoming more and more balanced, more and more late cycle. As, you know, this happens, you know, how does increased visibility change the way you manage, the business?

Jennifer Promontier, Chairman and CEO, Parker Hannifin: Well, I would say that it it really it it doesn’t drastically change the way we manage the business. Right? We, it goes back to the to the comments about, about having that longer cycle business and being able to use all the same tools for that business. We we have, the ability to analyze demand in our capacity inside of of all of those businesses. So it it doesn’t really change things.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: And, you know, I think wind strategy has been with Parker for a long, long time. But for those in the audience that may be not as familiar with Parker, what are the key KPIs that you track as part of the wind strategy? And, yeah, maybe maybe we can start there.

Jennifer Promontier, Chairman and CEO, Parker Hannifin: Yeah. So I would I would say that the two most important KPIs are safety and engagement. If you look across the way the win strategy is designed, those two sit inside of the very first pillar, which is engaged people. And the next pillar is customer experience and then profitable growth and then financial performance. If you don’t get the first pillar right, you won’t be able to sustain any of the performance in the next three pillars.

So we take safety very seriously, and we take the engagement of our team members very seriously. Those are both measured, at all levels of the organization. And then after that, it it would be, you know, the the the metrics that you would that you would think. You know, it’s sales, earnings and cash flow. And we track margin expansion through all of the tools that I’ve mentioned a couple of times today.

Right? We we track it through what we get through Kaizen, through Simple by Design, through our zero defect initiatives. And each general manager and their team is well versed not only in the tools but in where they sit with those margin expansion targets.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: So maybe we can just talk about simple by design and specifically new product blueprinting. So can you just talk about shifts in your R and D strategy? Well, A, let’s just start with design and how does what does it do to your R and D spending? What do you spend money on R and D? Let’s maybe expand on that because I think that’s a big focus internally.

Jennifer Promontier, Chairman and CEO, Parker Hannifin: So market driven innovation is on the win strategy, and one of the tools used there is new product blueprinting. And another tool that is used when we’re innovating products or working with customers on next generation products is is simple by design. So new product blueprinting, we started doing this, you know, over a decade ago. And it it’s the process of not just partnering with your customers, but really understanding what their customers, the end users’ pain points are. What do we need to do to improve this product to make it more efficient?

And that allows us to be much more efficient with our engineering resources and and any r and d spend that needs to happen. Simple by Design drives complexity and cost out. So that’s the process of bringing together a multidisciplinary team to look and see how we make the product, the components of the product, and how we can just make it that much more efficient and and take the cost out easier to manufacture. So those those tools combined have really helped us, again, be more efficient with our resources. And if you look, you know, in the past, our r and d was about 3%, you know, especially during the aerospace supercycle, but but now we’re running at about 1.5%.

We’re just much more efficient.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: And for a company, you know, as I think about Parco, I sort of think about decentralized structure. Right? 80 plus units. I think I was one of the units where the guy was making a decision whether or not he was gonna serve coffee, like cappuccinos, to focus on. He was not going to put on his p and l.

But,

Jennifer Promontier, Chairman and CEO, Parker Hannifin: Glad to hear that.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: Yeah. No. No. No. No.

No cappuccino machine. But, you know, from that perspective, how do you run sort of a centralized r and d organization with a business that has 80 plus units. Mhmm. And, you know, maybe you can describe, you know, just sort of global product platforms. How do they fall into the regional product platforms?

And how does it translate sort of into country specific offerings? Because there does seem to be you know, there’s the global matrix, you know, that overlays into regional it’s it’s quite intricate, but it seems to work, actually.

Jennifer Promontier, Chairman and CEO, Parker Hannifin: Right. Right. Well, like, on on my previous slide, on one of my slides, we talked about the four technology platforms. Right? But we have we have five operating groups.

Right? And those operating groups, you know, house those technologies, those similar technologies. Actually, a filtration, engineering materials, motion systems, fluid connectors, and aerospace. So you can you would look at those and and then see the the the platform the product platforms that that sit underneath those. So, those those products are made in different divisions.

And in those divisions, they decide what they need to do through their strategic positioning When it comes to, r and d spend sometimes, capital investment, right, to produce the product. But we will, with certain initiatives like electrification, we’ll lift that up a level to make sure that we are able to leverage not only, all of our existing technologies, but our engineering expertise. So electrification initiatives and r and d that need to happen, in that in this case, led by the motion systems group with, involvement of the Engineered Materials Group and the Filtration Group. So some of those initiatives will lift to a higher level, but still very much have to be, you know, led by the divisions. They ultimately land in the division.

That’s where the product’s gonna be made. That’s where the customer interaction’s going to happen.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: So maybe, we can sort of switch, to industrial and, you know, I just sort of maybe talk about mega projects. Mhmm. If you look at the industrial starts, right, they spiked a couple of years ago. If you look at the manufacturing construction activity in North America, I think it’s an all time peak right now. At the same time, you’re sort of talking about CapEx, being pushed out.

How do I reconcile the manufacturing starts data with the manufacturing construction, with the fact that stuff is being pushed out to the right. Right? Because I think there was a fear that, you know, some of these projects would just never the company was just put up walls Mhmm. And just sort of sit and wait. You know, if there’s business, they’ll fill them up.

But there is no business. People sort of highlighted that there’s a risk that some of these mega projects would never really be at capacity or anywhere close to capacity. What are you seeing? And as I said, I would have thought that there was definite lag between starts and construction. That was as Mhmm.

Given what the construction is, you would think, over the next twelve to eighteen months, you know, you would start putting equipment into these facilities, yet no company will commit to the fact that there’s any visibility over the next twelve to eighteen months exactly when this equipment goes into these factories. And, frankly, over the past couple of years, I think, sort of the confidence that there will be equipment going to these factories seems to have diminished. Yeah. So may maybe can you just sort of square the circle?

Jennifer Promontier, Chairman and CEO, Parker Hannifin: Well, I I I wish I had the the perfect answer for you. I think that, you know, everybody has their own comfort level with what’s gonna make them pull the trigger or, you know, release release the capital and and get some of these things off the ground or get them to the next stage. Yep. You know, we’ve we’ve gotten some of the best information on some of these projects, you know, from our distribution channel who, you know, often partners with general contractors and local contractors to prepare the land, stand up the walls, get them ready to get that equipment inside. And, you know, I think there’s been a lot of starts and stops and delays.

So I think it’s a comfort level. Right? And it’s a dynamic environment right now. So I think there are people, as we stated, you know, a couple months ago, with a gradual recovery comment. I think there’s just some people that are that are waiting for what stability feels like for them.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: Right.

Jennifer Promontier, Chairman and CEO, Parker Hannifin: But, you know, I I would say, like I mentioned earlier, you know, distribution does talk still about a lot of quote activity

Andrew Oben, Bank of America Multinational Analyst, Bank of America: Right.

Jennifer Promontier, Chairman and CEO, Parker Hannifin: Right out there. So if you look at these list of mega CapEx projects, depending on which one you look at, you know, you see cancellations. But every time you see a cancellation, you see another one pop up on there. So Right. I think it’s, you know, it’s it’s getting pushed out a little bit, but there’s just been

Andrew Oben, Bank of America Multinational Analyst, Bank of America: Is it supply chain? Is it labor? Can you attribute any of it to that, or it’s just level of confidence?

Jennifer Promontier, Chairman and CEO, Parker Hannifin: I think it’s more level of confidence. I haven’t heard of any supply chain issues.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: And this is not just to make it clear, this is not a calendar Q1 commentary. No. This is more over the past nine to twelve months.

Jennifer Promontier, Chairman and CEO, Parker Hannifin: This is, you know, this is no new comment from anything we’ve made at the last earnings call. It’s just, you know, just waiting for the right time.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: And specifically on semiconductor spending in North America, you have highlighted semiconductors, but it sounds like it’s more of a global commentary, because semiconductor spending is such a big part, and there is visibility there, actually.

Jennifer Promontier, Chairman and CEO, Parker Hannifin: Right. Right.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: How should we think about Parker’s level of participation, in these projects? Like, can you give us example, what would you do in a semiconductor facility?

Jennifer Promontier, Chairman and CEO, Parker Hannifin: I mean, we could if it’s a greenfield, we could be right?

Andrew Oben, Bank of America Multinational Analyst, Bank of America: Yeah. Like, we

Jennifer Promontier, Chairman and CEO, Parker Hannifin: could be there from when they’re prepping the land, again, putting up the walls. Right. You know, putting That

Andrew Oben, Bank of America Multinational Analyst, Bank of America: would be on the mobile side.

Jennifer Promontier, Chairman and CEO, Parker Hannifin: Right. Putting different equipment on the inside, filtration, a lot of, you know, the industrial implant will go go into those. So there’s a we have a slide from our, Investor Day presentation that shows, you know, just how much we we play in that area. So it it’s it’s good for us, good participation for us.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: And, you know, if if you look at their if you look at your if you look at your filings, right, you can actually tease out your workforce reduction. And, you know, sort of, I think, the calculation we made show that, you know, part of the answer to magical incrementals is, you know, you guys being laser focused on cost control.

Jennifer Promontier, Chairman and CEO, Parker Hannifin: Right.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: Right? If you pull those out and, you know, decrementals look fairly normal.

Jennifer Promontier, Chairman and CEO, Parker Hannifin: Right.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: But the question we often get from investors, so you’ve achieved fantastic decrementals. So what does that mean on the way up, right? Are these cost steakhouse, are they structural? Or will we basically have to go rehire people as if and when volumes come back and that diminishes, you know, sort of this your cyclical leverage. So Not cyclical.

You will get cyclical leverage. Operational leverage to cycle.

Jennifer Promontier, Chairman and CEO, Parker Hannifin: Right. So it’s a combination of of structural and, just being very focused on demand and how we staff the operations.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: Yeah.

Jennifer Promontier, Chairman and CEO, Parker Hannifin: So first of all, I would say we’re never waiting for a crisis. We’re never waiting for a downturn.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: Yeah.

Jennifer Promontier, Chairman and CEO, Parker Hannifin: We’ve implemented a lot of new demand and capacity tools over the last couple years to make sure that we are not only able to meet what our customers expect of us, but that we’re staffing the most efficiently. So, that’s something that I think we’re really good at. That’s something that we expect our general managers, our plant managers to do. So they will, based on demand that’s coming in, based on, you know, machine capacity, they will pull levers when there’s changes, and that can be adding or taking away overtime. It can be adding or taking away temporary staffing or then making adjustments to full time staffing.

So that’s ongoing.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: And and that’s the p and l. Right? Because we’ve met we we’ve met with your business units and clearly folks are aware. But if you grow, right, our sense, if you grow, you get the resources. Mhmm.

Right? That that’s for that that that is business unit by business unit. This is not a blunt instrument.

Jennifer Promontier, Chairman and CEO, Parker Hannifin: No. Right. Right. Right. I mean, performance is key.

Right? I mean, that there’s no doubt about that. And but like I started out saying, we we don’t wait for something to happen. We’re always part of that continuous improvement culture is always looking at the organization and at the structure and and having that that lean mentality and that mindset, to optimize.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: But generally, we should think that when the volumes come back, you will get your due incremental should be healthy on the way up.

Jennifer Promontier, Chairman and CEO, Parker Hannifin: Volume makes us efficient. Okay.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: And maybe just a little bit more color on distributors. Maybe it sounds like inventory in the channel you’re comfortable with?

Jennifer Promontier, Chairman and CEO, Parker Hannifin: I think inventory is appropriate for the demand right now. I think that’s the way that, the distributors are running their inventory. Again, they’ve, you know, they’ve been positive as we said last quarter, but it’s, it’s right for the time we’re in.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: But is there room to restock if demand go

Jennifer Promontier, Chairman and CEO, Parker Hannifin: We think destocking is is over, but we don’t think they’ve started restocking yet.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: And what are their what are their primary concern? You know, you sort of stated that, generally, they continue to be fairly optimistic. But what’s the key concern in the channel right now?

Jennifer Promontier, Chairman and CEO, Parker Hannifin: Well, I think they’re managing all of their projects and all of their customers’ demand much like we do. So, they become very, very smart with their their cash and their inventory levels. And I think, when the demand starts hitting hitting their order books, that’s when we’ll feel it.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: And, you know, sort of maybe you talk about market share. You you do have a market share. Maybe the way I want to ask, is there a big difference in your market share across your portfolio? Like maybe specifically on the forget about it, ex aerospace.

Jennifer Promontier, Chairman and CEO, Parker Hannifin: Different businesses, there is, different levels of market share. Our expectation is that we have the number one number one or number two position in the market. That’s what we want our general managers to strive for. So we say it’s a hundred and $45,000,000,000 market space.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: Right.

Jennifer Promontier, Chairman and CEO, Parker Hannifin: We’re about $20,000,000,000 That’s about 14% right now. We wanna get to 20.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: Right.

Jennifer Promontier, Chairman and CEO, Parker Hannifin: We haven’t put a specific time on that. Right. But we we want them to with their strategic positioning and everything that they do to run their businesses, target to be number one or number two in their business.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: But to get to 20, clearly, capital allocation is is part of it.

Jennifer Promontier, Chairman and CEO, Parker Hannifin: Absolutely.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: And you haven’t told us how much is organic, how much is we we we don’t know from the outside, right, this to get the six percentage points of share. Right?

Jennifer Promontier, Chairman and CEO, Parker Hannifin: The the 4% to 6% over the cycle. We’ve said that those targets don’t require, an acquisition, but obviously we,

Andrew Oben, Bank of America Multinational Analyst, Bank of America: yeah,

Jennifer Promontier, Chairman and CEO, Parker Hannifin: we we wanna do deals.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: Maybe, on aerospace and specifically, I think aftermarket and aerospace has been such a great story, you know, both military and commercial. What’s driving the outgrowth on both military aftermarket and commercial aftermarket? And how sustainable is it?

Jennifer Promontier, Chairman and CEO, Parker Hannifin: Yes. So we are, at the end of q two, we were at 51% aftermarket in aerospace. So that’s, you know, one of the highest percentages we’ve seen. I think it’s important to note that the, the Meggitt acquisition came with a significant amount of aftermarket and increased our aftermarket about 900 basis points. I would say, obviously, air traffic demand has has increased, and it’s projected to continue to increase.

The big the big air, aircraft framers will hit their rates. Right? They will they will get, to their rates eventually, but a lot of the planes are flying longer, so we’re benefiting from that in the aftermarket, on the commercial side. And on the military side, I would say that we’ve been very successful with, public private partnerships

Andrew Oben, Bank of America Multinational Analyst, Bank of America: Mhmm.

Jennifer Promontier, Chairman and CEO, Parker Hannifin: And our ability to, do, fleet retrofits and upgrades. The combination of the Meggitt and the Parker aftermarket organizations has proved to be very strong. So we’re able to leverage the technologies and the products from both businesses. And, we see, foreseeable into the foreseeable future, we see aftermarket strength.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: And on the defense side, clearly, European defense, big, big focus. How should we think about within your defense? What’s your direct exposure to European defense?

Jennifer Promontier, Chairman and CEO, Parker Hannifin: So we have broad based exposure on a lot of the key defense programs, and we have a good a good bit of that is international. So we think that, that will be even further strength for us, further growth for us.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: But you have not I don’t think you’ve disclosed the specific European defense exposure.

Jennifer Promontier, Chairman and CEO, Parker Hannifin: We have not. No. No. A third of our aerospace business is defense. Yep.

And that’s about a 60% OEM, 40% aftermarket mix

Andrew Oben, Bank of America Multinational Analyst, Bank of America: right now. Well, I guess the question people always ask, right, Meggitt is UK it was a UK based company, but Meggitt actually had a lot more DOD business than they had MOD business.

Jennifer Promontier, Chairman and CEO, Parker Hannifin: Right.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: Right. So that’s what I get that’s what people are trying to get.

Jennifer Promontier, Chairman and CEO, Parker Hannifin: We we have good exposure. It it will be good for us.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: And how long would it take for you to start seeing if,

Jennifer Promontier, Chairman and CEO, Parker Hannifin: Well, that’s longer cycle business. Right? But, you know, I’m sure we we would expect to see those orders.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: And maybe going to Airframers, you know, from your perspective, other inventory issues at Boeing still, your commercial OE grew 5.5% in second quarter ’20 ’5 percent, accelerating from 3.5%, is supply chain improving, right, big debate what’s happening, can you just from your perspective?

Jennifer Promontier, Chairman and CEO, Parker Hannifin: Yeah. Well, I I would tell you that we we do have very, close relationships and collaboration with the, airframe manufacturers. So we have a very clear picture of what their demand is and and what they’re running to and what we’re supplying. So we feel very good about being able to continue to see see them to success. We we think that the supply chain is gradually improving, not as much of a bottleneck as it has been in the past.

But, like I said, we’re we’re gonna make sure that we’re doing our part to see them be successful, and the more we can help the whole supply chain and improve ourselves, we’re going to get there.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: Excellent. And maybe this is a global conference, so I’ve been asked to ask a question. You know, what are you seeing in Europe generally? What are you seeing in China?

Jennifer Promontier, Chairman and CEO, Parker Hannifin: So, comment Not

Andrew Oben, Bank of America Multinational Analyst, Bank of America: aerospace as I just

Jennifer Promontier, Chairman and CEO, Parker Hannifin: Yeah. Comments that, you know, we made during the, during the last call was that we saw, you know, we saw some positivity coming out of, Asia Pacific. I mentioned earlier that that, Semicon, we saw some positive positive there. But, again, easier comps. It was easier comps, but still, it it was, looked better than it had.

But Europe still still very soft.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: Okay.

Jennifer Promontier, Chairman and CEO, Parker Hannifin: Very soft for us.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: Okay. And a commentary out of Asia is very semi comp specific. It’s not a China recovery comp. Right.

Jennifer Promontier, Chairman and CEO, Parker Hannifin: Exactly.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: Okay. Maybe look. I mean, I I know that sort of I left it today because I don’t expect it to say much. But, you know, portfolio and M and A, what’s the latest message on M and A? Should we be thinking bolt ons?

Should we be thinking larger acquisitions? Clearly, you’ve been one of the best capital allocators in the industry for a decade now. So you clearly have a very strong record, but it’s such a key part, I think, a value creation for you. Just what’s the latest call that you’re willing to share?

Jennifer Promontier, Chairman and CEO, Parker Hannifin: Yeah. I I would tell you probably the same thing that I’ve that I’ve said in the past is that the the pipeline, we have a process that is very disciplined. You know, we never stop working on the pipeline. That cadence stays in place, so it’s very strong. It has small deals.

It has big deals in it. A lot of times, it’s about the timing, right, about, if we can make the timing work. What’s really important to us is making sure that we have those strong relationships with who we’ve targeted in the pipeline. That’s proved to be very beneficial to us. Meggitt, over a ten year relationship, really helps us understand the business, understand the culture, the products.

And, then when it is time, when the time is right, it really helps us, you know, if there’s a competitive process. So we are very committed to deploying capital to continue to really increase shareholder value, and we we wanna do deals. So when the timing’s right and it has to be the right deal. Right. That’s the the the thing I always end with.

It has to be the right deal. If you look at the success of the last four acquisitions, it’s because we had all those things I just mentioned, and we could see a path to margin accretion with synergies. We could see that we were going to grow with the secular trends, the technology fit, and, you know, not only margin accretion, but EPS, cash flow, all very important to us.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: So high interest rates was supposed to help strategics because it was supposed to sort of flush out private equity. I think it’s like a year and a half later, and it’s still supposed to help strategics and flush out private equity, but we haven’t seen much. What’s just a general M and A environment? What’s available? You know, what has what from your perspective, how has the market evolved over the past twelve months twelve to eighteen months?

Jennifer Promontier, Chairman and CEO, Parker Hannifin: I I would say that it’s opened up. Right? I think it’s it’s, it’s a good time right now, and we’ll we’ll see what happens. It’s like I said, many times it’s all about timing. It’s not about some of those those macro indicators, but the timing.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: And, but but is it fair to say that it sounds actually you do sound more constructive about ability to do something versus twelve months ago. Is that a fair statement?

Jennifer Promontier, Chairman and CEO, Parker Hannifin: Well, obviously, we’ve paid down a lot of debt. Right. Right? So, we’ve we’ve paid down quite a bit of debt over the last couple of years, and and our leverage is at that point now where we get this question a lot because a lot of people see us, you know, pull the pull the lever on a deal when we get, you know, around two. Right?

So we’re there, but, again, has to be the right deal. We’re not gonna do it just because our balance sheet says it’s the right time.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: And and and just to go back, and I I you know, we sort of talked about the evolution of, Parker’s, you know, how you sort of cultivate deals, what it takes for deal to move through. So I appreciate that. But, you know, today, you’re a $75,000,000,000 market cap company. And I think, literally, I think ten years ago, you were, like, more like 15 Mhmm. Billion market cap.

What’s different about doing deals that move the needle at 75,000,000,000, versus 15,000,000,000. Just maybe talk about that a little bit.

Jennifer Promontier, Chairman and CEO, Parker Hannifin: Well, ten years ago, we couldn’t have done MEG it. Right? And the way we’ve transformed the portfolio, you know, we’re we’re on track to generate $5,000,000,000 of, cash EBITDA this year. So, you know, it’s, it gives us opportunities to deploy capital in different ways.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: Do you think it’s easier to do it at 75?

Jennifer Promontier, Chairman and CEO, Parker Hannifin: Integrations are always a lot of work, work that’s worth it. Right. Right? But, when you’re generating this much, cash, you have the ability to demonstrate. You can you can make the deal and you can pay down debt.

And, you know, with our integration playbook, I have a lot of confidence in our ability to keep doing that.

Andrew Oben, Bank of America Multinational Analyst, Bank of America: Terrific. Thanks so

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