The operator welcomes participants to the Parker-Hannifin Corporation Fiscal 2024 Fourth Quarter and Full Year Earnings Conference Call and Webcast. The conference will include a question-and-answer session and is being recorded. The Chief Financial Officer and Chief Executive Officer will discuss the company's record fiscal year, strong fourth quarter, and future goals. The call will end with a Q&A session.

The speaker, Jennifer Parmentier, is thanking everyone for joining the call and discussing Parker's outstanding performance in fiscal year 2024. They exceeded many of their commitments, had top quartile safety performance, and strong earnings growth. The Aerospace segment had a stellar year, with double-digit sales growth and record-breaking sales. The transformation of their portfolio has led to a larger revenue mix from longer cycle and secular sources, with Aerospace being a major contributor.

The acquisitions of CLARCOR and Lord have helped the company expand its distribution in Europe and Asia, leading to a transformation towards longer cycle secular and aftermarket products. The company has also announced its divestment of the North American composites business as part of its portfolio optimization strategy. At the investor day, the company presented four key messages, including its positioning for growth, demonstration of the win strategy, and confidence in achieving its fiscal year '29 target. The company's culture is driven by safety, engagement, and ownership, which have contributed to its top quartile performance. The following slide discusses the company's outstanding fourth quarter results.

The fourth paragraph highlights the impressive Q4 performance of the company, with record-breaking numbers in sales growth, organic sales, adjusted segment operating margins, and adjusted net income. The company also achieved a 17% return on sales and a 12% increase in adjusted net income compared to the previous year. This strong performance was attributed to the dedication and hard work of the team members. The following slide shows a breakdown of the 11% improvement in adjusted earnings per share, with strong operating execution being the main driver.

The Aerospace system segment was responsible for over 90% of the earnings per share growth, with the rest coming from the diversified industrial North American businesses. Corporate G&A was favorable due to not repeating prior year's expenses, interest expense was lower due to successful debt reduction efforts, and tax was slightly higher. Overall, strong operating execution, margin expansion, and backlog levels were key factors in the segment's performance. In the diversified industrial segment, U.S. sales volume remained strong, with organic growth slightly better than expected but still negative due to softness in off-highway and transportation markets.

In the sixth paragraph, the speaker discusses the company's performance in the North American and International markets. Despite lower volumes, adjusted segment operating margins increased by 150 basis points, driven by operational execution and a focus on delivering for customers. Sales in the International market were slightly over $1.4 billion, with organic growth down 2.5% but still better than forecasted. Margins increased by 60 basis points and order rates improved to flat in North America. In the International market, order rates finished at minus 1%, with positive rates in Asia driving the majority of the improvement. The Aerospace business had a record-breaking quarter with sales reaching $1.5 billion and organic growth of 19%. Operating margins also reached a record high of 27.1%, driven by strong volumes and orders.

The company had a successful year in terms of cash flow and debt reduction, with record levels of cash flow and a reduction of over $3 billion in debt. They also achieved their target of reducing debt by $2 billion for the fiscal year and have improved their leverage ratios. The company is now focusing on their outlook for FY’25, with a forecasted organic growth of 2% to 5% across their six key market verticals.

The company is providing a realistic guide for fiscal year ‘25, with Aerospace at 8.5%, industrial North America at 2%, and industrial International at 1.5%. They are confident in growing EPS, achieving synergies, and expanding margins. The sales forecast is $20.5 billion, with organic growth of 2-5%. The first half is expected to have 48% of sales and the second half 52%. The company is expecting a slight headwind of 0.5% on currency and plans for 50 basis points of margin expansion.

In the upcoming fiscal year, the company plans to continue implementing their successful win strategy, leading to an adjusted segment operating margin guidance of 25.4%. They expect a 40% incremental margin, higher than previous years due to growth in Aerospace and synergies. Other financial details, such as corporate G&A and interest expense, are also provided. The company predicts a 23% tax rate and full year EPS of $23 or adjusted EPS of $26.65. Cash flow is expected to be $3 billion to $3.3 billion, with free cash flow conversion greater than 100%. In the first quarter, sales are forecasted to increase by 1%, with organic growth of 1.5%. The company expects adjusted segment margins of 25.2% and adjusted EPS of $6.05. Overall, segment operating income is the main driver of EPS growth, contributing $1.51.

Parker Hannifin Corporation expects to continue having lower interest expenses due to strong cash flow and efforts to reduce debt. However, they anticipate an unfavorable tax rate and other expenses that will result in a 5% increase in earnings per share. The company is confident in their future growth and plans to celebrate their 60th year on the New York Stock Exchange. During the Q&A session, they will address questions about their first quarter outlook, which includes a slight decrease in organic sales compared to the previous quarter.

The speaker, Todd Leombruno, explains that the company's Q1 sales and earnings are in line with historical trends, with a 1% organic growth expected. Aerospace is expected to have double-digit growth, while industrial businesses are expected to be down. Despite this, the company is still projecting record margins for Q1. The speaker also mentions some below-the-line factors that are normal for the first quarter. He also mentions that the company is experiencing growth in earnings and net income in Q4, which supports their outlook for the rest of the year. The speaker then refers to Slide 15, which provides a breakdown of the company's end-market verticals outlook for the year.

Jennifer Parmentier provides context on the fourth-quarter rates for various end markets. In plant and industrial equipment improved from negative low single digit to neutral in Q4, and is expected to remain neutral in the first half and low single digit in the second half of FY’25. Transportation was mid single digit negative in Q4, but is expected to be low single digit negative in the first half and mid single digit growth in the second half, driven by automotive returning to growth. Off-highway is expected to be high single digit negative in the first half and neutral in the second half, with ag being double digit negative and construction being low single digit positive. Energy is forecasted to be low single digit for fiscal year ‘25, and HVAC is expected to have mid single digit growth in the first half due to a recent regulation change.

The paragraph discusses the forecast for growth in the second half of the year, which is expected to be at low single digits. This is dependent on manufacturers ramping up production under new regulations. The full year forecast is also at low single digit growth. The next question is about the comfort level with the organic sales guide, which is expected to be 1.5% in the first quarter and 3.5% in the second quarter. This increase is attributed to improved order rates in the industrial sector, particularly in North America and Asia-Pacific. The destocking trend in the channel has likely played out and distributors are expected to start adding inventory.

The company's backlog remains strong and Q4 is expected to be flat with Q3. The organic growth numbers in the first half are based on this and the fact that comps are 2% easier in Q2. There hasn't been much new pricing for July 1, but the company is back to a normal pricing environment. The growth uptick in the second half is mainly due to easier comps. The company will not disclose the margins of the 5 verticals, but the Diversified Industrial segment has record levels and the International businesses are not far off from the North America businesses.

In this paragraph, Jennifer Parmentier and Todd Kallman discuss the performance of the company's various verticals and their focus on margin expansion. They also mention their strong balance sheet and their ongoing efforts to pay down debt. They provide an update on their M&A strategy, stating that they are always looking for opportunities that align with their core technologies and are accretive to growth, resiliency, margins, cash flow, and EPS. They clarify that size is not a determining factor for potential acquisitions.

The speaker, Jennifer Parmentier, is responding to a question about the stability of the filtration and engineered materials platform in the current industrial downturn. She explains that this platform has remained stable due to the company's strategic acquisitions in the past and their focus on core technologies and product offerings. The speaker also mentions that there may be an impact on margins from the mix of this business within the overall industrial segment.

The company has seen success in the aftermarket exposure in filtration and longer cycle business in engineered materials, resulting in a margin impact that is accretive. All of the company's businesses have contributed to margin expansion and stellar cash flow generation, making the portfolio strong. The company's technologies are important and participate in secular trends. The company's record numbers are a result of the mix of businesses.

The speaker asks about the company's higher than expected incrementals for the year and the potential for even better margins in the future. They also inquire about the unexpected order numbers for Industrial North America and International, prompting the speaker to explain that the strong growth in Aerospace and the company's commitment to achieving synergies with Meggitt are driving the higher incrementals. They also mention that the Industrial businesses are still expected to see margin expansion despite a low-growth top line.

Joe Ritchie asks about the margins for the Industrial businesses, which were strong in the fourth quarter. He wonders why they won't be even better, given the company's history of expanding margins even in a no-growth environment. Todd Leombruno responds that the margins are on track with the company's FY '29 targets, with Aerospace expected to expand 100 basis points off of an all-time record.

In this paragraph, the speaker discusses the company's positive performance in terms of margin expansion and low growth top line numbers in their Industrial businesses. They express confidence in their ability to continue expanding margins and mention that their guide is realistic and not easy to achieve. The speaker also mentions their plans to continue paying down debt and their target of operating at a 2 net debt to adjusted EBITDA leverage. The team has worked hard to achieve this target and the company's debt is structured until 2026.

The company plans to use its cash to pay down debt and potentially make deals that will grow the top line, improve margins, and generate cash. If no suitable deals are available, the company will continue to buy back shares and maintain its dividend. The Meggitt synergies are expected to reach $300 million by FY '26, with $200 million already achieved by FY '24. Aerospace is performing well, particularly in the aftermarket sector.

During the earnings call, Parker Hannifin executives discussed the strong margins in their Aerospace business, with a forecast for further expansion in FY '25. Analysts questioned the potential impact of a shift in aftermarket and OE mix on margins, but the Parker Hannifin team expressed confidence in their forecasting tools and positive outlook for air traffic growth. They also addressed the company's revenue guidance, noting a historically consistent split of 58% in the first half and 42% in the second half. With a larger backlog, they have better visibility into the second half and are confident in their macroeconomic assumptions.

The company has a positive outlook for Aerospace with high backlog and good visibility. They expect gradual recovery in North America and International markets in the second half, with easier comps and improved order rates. They also anticipate a gradual industrial recovery and neutral growth in Europe. The company does not anticipate needing interest rate cuts to spur this recovery.

Jeffrey Sprague asked about the recent divestiture and whether it was part of the company's normal process of reviewing its portfolio. Jenny and Todd stated that it was part of this process and that they will continue to trim around the portfolio, but not make any significant changes. They also mentioned that every year they analyze their businesses to determine if they are performing well and if they are a good fit for the company.

During a recent conference call, Jennifer Parmentier and Jeffrey Sprague discussed the outlook for Aero in 2025. Parmentier shared that they are forecasting high single digit growth for commercial OE and low double digit growth for commercial aftermarket. She also mentioned mid-single digit growth for defense OE and high single digit growth for defense aftermarket, citing an increasing defense budget and public-private partnerships as factors. Sprague asked for clarification on whether the divestiture will be accretive to margins and Parmentier confirmed that it will be and that it will come from the Industrial North America segment. They expect the divestiture to close in Q2.

The speaker discusses the sale of a business and the expected gain from it. They also mention their outlook for international markets, with Europe expected to continue to be weak and China showing some improvement. The speaker also mentions a projected increase in gross margins for the following year.

The speaker, Jennifer Parmentier, was unable to provide a clear picture of the outlook for the off-highway sector, including OE, distribution, and inventories. The moderator, Brett Linzey, ended the question-and-answer session without further comments. The floor was then turned over for closing remarks. The speaker thanked everyone for joining and encouraged follow-up questions to be directed to the VP and Director of Investor Relations. The operator then concluded the teleconference and webcast.

This summary was generated with AI and may contain some inaccuracies.