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With more than four dozen locations around the world, the Cleveland technology provider manufactures motion and control devices.

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Parker-Hannifin is the world’s leading manufacturer of motion and control technologies for various mobile, industrial, and aerospace markets in over 40 countries. It operates in two segments: diversified industrial and aerospace systems. Founded in 1917 as Parker Appliance Co., the company initially focused on pneumatic brake systems for trucks and buses. It adopted its current name in 1957 after acquiring Hannifin, a major manufacturer of hydraulic and pneumatic cylinders, valves, and presses.

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Parker-Hannifin (PH): Company Profile, Stock Price, News, Rankings

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Parker-Hannifin

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Good morning and welcome to the Parker-Hannifin Corporation's FY 2026 Q2 Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. After the prepared remarks, there will be a Q&A session. To ask a question during this period, you will need to press Star one on your telephone keypad. If you want to remove yourself from the queue, please press Star two. Please be advised that today's conference is being recorded, and if you should need any operator assistance, please press Star zero. I would now like to turn the call over to Todd Leombruno, Chief Financial Officer. Please go ahead.

Thank you, Katie. Good morning, everyone, and thank you for joining Parker's FY 2026 Q2 Earnings Release Webcast. As Katie said, this is Todd Leombruno, Chief Financial Officer speaking, and with me today is Jenny Parmentier, our Chairman and Chief Executive Officer. We both appreciate your interest in Parker as well as your time today. Before we begin the call, I'd like to call your attention to our disclosures on forward-looking projections and non-GAAP financial measures. That is on Slide 2. Items listed here could cause actual results to vary from our forecast. Our press release, this presentation, and reconciliations for all 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 an overview of our record FY26 Q2 performance. She then will reiterate the strengths of our interconnected technologies.

This quarter, she's going to highlight the distinct value we bring to one of our market verticals. That is the off-highway market. Jenny will also make a few comments on the recently announced agreement to acquire Filtration Group Corporation. Then I'll follow with some details on our strong Q2 financial results. We will both provide some details on the increase to our guidance that we released this morning. Then we'll move on to Q&A, and we'll try to address as many questions as possible within the hour. We know it's a busy day to everyone, so we will stick to the one-hour time slot. Now, I call your attention to Slide 3, and Jenny, I'll hand it over to you.

Thank you, Todd. And thank you to everyone for attending the call today. Q2 was another great quarter where our team and our strategy demonstrated our ability to compound performance. We achieved top quartile safety performance with an 8% reduction in our recordable incident rate. This performance is aligned with our goal to be the safest industrial company in the world. Our team delivered record Q2 sales of $5.2 billion, Organic Growth of 6.6%, and 150 basis points of margin expansion, resulting in 27.1% Adjusted Segment Operating Margin. Adjusted Earnings Per Share grew 17%, and cash flow from operations was $1.6 billion. In the quarter, we announced the acquisition of Filtration Group Corporation. Moving to Slide 4. Many of you on the call today have seen this slide before: Why We Win. The Win Strategy is our business system. We have innovative products that solve customer problems.

Our application engineers provide the technical expertise that creates a competitive advantage. Our distribution network serves global aftermarket and small to mid-size OEMs. Today, I would like to highlight the interconnected technologies that provide efficient solutions for our customers across all of our market verticals. I'm on Slide 5 now. We have the number one position in the $145 billion motion and control industry, a growing space where we continue to gain share. These six market verticals represent greater than 90% of the company's revenue. We have a focused portfolio creating distinct value for our customers. Our powerhouse of interconnected solutions cuts across these market verticals and gives us a clear competitive advantage. Two-thirds of our revenue comes from customers who buy four or more technologies, and our growth is focused on faster-growing, longer-cycle markets and secular trends. Moving to Slide 6.

On this slide, I would like to highlight how our interconnected technologies come to life in the off-highway market vertical. Parker is a market-leading provider of highly engineered solutions for equipment used in construction, agriculture, and mining applications. Our comprehensive offering of interconnected technologies, deep application expertise, and embedded engineering relationships with OEMs are key to our success. We win with innovative and differentiated product technology, subsystems, and full system capabilities designed to increase the capability and productivity of our customers. Our global footprint allows for in-region delivery and expertise for OEMs, and our extensive distribution network provides aftermarket support for end users. I'm now on Slide 7. We are making continued progress on the Filtration Group acquisition. Integration planning is underway using our proven integration playbook. We expect to close in 6-12 months from our November announcement date.

This is a great company with a great culture, and we really look forward to welcoming everyone to the Parker team. The acquisition of Filtration Group adds complementary and proprietary technologies for critical applications while expanding our presence in life sciences, HVAC and refrigeration, and in-plant industrial market verticals. The combination of Parker Filtration and Filtration Group creates one of the largest global industrial filtration businesses and increases Parker Filtration aftermarket sales by 500 basis points. We will leverage our business system, the Win Strategy, to achieve approximately $220 million in cost synergies, and we expect this deal to meet our disciplined acquisition criteria of being accretive to organic growth, synergized EBITDA margin, adjusted EPS, and cash flow. This strategic transaction continues our investment in high-quality businesses that continue to transform our portfolio, accelerate sales growth, improve profitability, and drive shareholder value. Moving to Slide 8.

CLARCOR, LORD, Exotic, and Meggitt have been a big part of our transformation. Curtis is still early days, and as I just mentioned, we are very excited about Filtration Group. Over the time period you see on this slide, we have compounded EPS at 16%, and approximately 60% of this has come from The Win Strategy and our legacy businesses, while approximately 40% has come from the acquisitions. The acquisition of Filtration Group will continue our track record of accretive acquisitions. I'll turn it back to Todd to review the Q2 highlights.

Thank you, Jenny. This was another strong quarter of record performance. I'm on Slide 10, and we'll start with just a summary of the Q2 results. We are proud to have once again set new records for sales, adjusted segment operating margin, EBITDA, net income, and EPS. Sales were up 9% versus prior. Organic growth was positive at nearly 7%. Currency was favorable 2%. Acquisitions were favorable by 1.5%. And divestitures were a 1% headwind. Just to note, it's been now 12 months since we've completed those divestitures. This was the last quarter that we will have a divestiture adjustment going forward. Moving on to margins. Segment operating margin was 27.1%. That is up 150 basis points from prior year. Adjusted EBITDA margin was 27.7%. That's an increase of 90 basis points from prior year. And net income was $980 million. That's 18.9% return on sales. Just fantastic ROS performance.

Lastly, Adjusted Earnings Per Share were $7.65. That's up 17% versus prior year. When you look at the quarter, this was just another quarter in which our team delivered high single-digit sales growth, solid margin expansion, and all of that resulted in mid-teens EPS growth. We do remain confident that we're going to be able to deliver another record FY in 2026. If we move to Slide 11, this just displays the walk on adjusted EPS. You could see it was a clean quarter that delivered that 17% increase in adjusted EPS. Segment operating margin continues to be the main driver of our EPS growth. Dollars increased by $190 million, or 16%. That added $1.15 of our EPS growth. Share count was $0.16 favorable. That was really driven by the discretionary share repurchases that we completed over the last four quarters.

Corporate G&A and income tax were favorable by just $0.01. Other was unfavorable by $0.18. That's really primarily due to foreign currency exchange that happened in the prior year period. That did not happen this year. That was a prior period item. And interest is just slightly unfavorable by $0.03, and that is driven by just slightly higher average debt balance that was offset slightly by lower interest rates. The adjusted EPS of $7.65 is a record, and it's really driven by strong growth and great margin expansion. I really commend our team members around the world for just stellar operating performance across the company. It is a pleasure to be able to share these results. If we go to Slide 12, let's take a look at the segments. Starting with orders for the company, very strong. Orders were +9 versus prior year.

A positive note is order rates were positive in all of our reported businesses. Backlog increased to a record $11.7 billion. This was another quarter of strong incrementals for the company that created the record margins across the board, and that's 150 basis points of margin expansion. Really nice to see. If we look at North America, sales were approximately $2 billion. Organic growth was positive of 2.5%. That was slightly better than our expectations. The slightly better was driven by strength in off-highway and the aerospace and defense verticals in the North American businesses. Adjusted operating margins reached a record 25.4%. That is up 80 basis points from prior year with incrementals of 52%. Orders in North America took a big jump and increased to +7% compared to the prior year.

A notable driver there were a few multi-year aerospace and defense orders within those North American businesses. Nice quarter for the North American businesses. International sales were up to a record $1.5 billion. That's up 12% versus prior year. Organic growth for the quarter was 4.6% in the international businesses. In Asia-Pac, organic growth was the strongest at +9%. Europe turned positive in the quarter to +2%. We were really glad to see Europe turn positive. Latin America is just down slightly 3% versus prior year. It was really a positive to see Europe turn to positive organic growth. We were glad for that team to see that finally make the turn. When you look at margins, a record was achieved, 26% margins in the international businesses. That's up 190 basis points from prior year.

That margin expansion came from great improvements in productivity and just solid operational execution across all of those businesses. Orders improved in the international businesses to +6% with positive orders both in Europe and Asia-Pac. Nice quarter for the international team. Lastly, aerospace continues to perform exceptionally well. Sales for the quarter were a record $1.7 billion. That's up 14.5% versus prior year. Organic growth was 13.5%. That was driven by great strength in the commercial markets, both OEM and aftermarket. Margins are up significantly. Adjusted segment operating margin increased by 200 basis points and reached 30.2% for the Aerospace Systems segment. Again, great productivity. The higher volumes actually helped productivity in that business. This was another strong quarter of commercial spares and repairs volume. All of that translated to fantastic performance on the margin line. Order rates remain impressive in aerospace at +14%.

Backlog also increased +14% and reached a record $8 billion for aerospace for the first time in the history of the company. Aerospace and defense remains robust, and that's really led by the commercial markets. Great performance across all of our businesses. Glad to see these results. If we move to Slide 13, you can see our year-to-date cash flow performance. Cash flow from operations, $1.6 billion. That's 16% of sales. Free cash flow came in at $1.5 billion. That's 14.2% of sales. Just to note here, the H1, there's a slight drag from working capital and the timing of some tax payments. We expect that to be a first-half-only issue. I think everyone knows this, but as a reminder, our free cash flow is second-half weighted. We remain committed to free cash flow conversion of greater than 100% for the year.

We'll talk a little bit more in guidance. We are increasing our guidance on cash flow for the year. Okay. That's the details on Q2. And Jenny, I will turn it back over to you on Slide 15 to talk about our increase to guidance.

Thanks, Todd. This slide shows our updated FY 2026 organic sales growth forecast by market vertical. So in aerospace, we are increasing our forecast from 9.5%-11% organic growth. We continue to see strength in commercial OEM and aftermarket. In-plant and industrial remains the same at positive low single-digit organic growth. Recovery continues while customer CapEx spending does still remain selective. Distributor inventories are stable, and our distributors are ordering to their demand. In transportation, our forecast stays the same at mid-single-digit organic decline. Demand challenges persist in both truck and auto, which is partially offset with some strength in aftermarket. We are raising our outlook in off-highway from neutral to positive low single digit. This is based on construction and mining growth while ag remains under pressure.

We are maintaining energy at positive low single-digit growth with robust power gen activity offset by upstream oil and gas, which remains soft. We are maintaining HVAC and refrigeration at positive mid-single-digit growth. We see strength in commercial HVAC, refrigeration, filtration, and aftermarket. As a result of these changes, we are increasing our organic sales growth guidance from 4%-5% at the midpoint. Back to Todd for some more guidance details.

Okay. Thanks, Jenny. If you turn to Slide 16, you'll see some of the details that we're talking about. Based on what we've done in the H1, strong orders, we are raising our full-year guidance really across the board here. Reported sales are going up to the range of 5.5%-7.5%, or 6.5% at the midpoint. We expect currency to be a favorable 1.5%. That is based on December 31 spot rates. Previously completed acquisitions and divestitures basically offset each other at 1%. Jenny just mentioned this, but we are increasing organic growth to the range of 4%-6%. That is 5% at the midpoint. If you look at the businesses, Aerospace is being increased to organic growth of 11%. In the Diversified Industrial segment, in the North America businesses, we are increasing organic growth to 2.5%.

And finally, we are increasing international organic growth to +2%. Adjusted segment operating margins, we're raising guidance there by 20 basis points to 27.2% for the full year. That will now be a forecasted increase of 110 basis points versus prior year. The forecast for incrementals for the full year is 40%, full-year incrementals. A few other items just to note. Corporate G&A remains unchanged at $200 million. Interest expense slightly tweaked down by $5 million. We're now expecting that to be $415 million for the year. Other expenses down slightly to $85 million. On tax rate, the guide for the H2 is forecasted to be 22.5%. The full-year tax rate is expected to be 22.1%. That's with a H2 of 22.5%. And finally, when we look at EPS, we're raising EPS to $30.70 at the midpoint. That's an increase of 12.3% versus prior.

The range on that adjusted EPS is ±30 cents. I mentioned it earlier, but we are raising our full-year free cash flow guide to a range of $3.2 billion-$3.6 billion. That is about $3.5 billion at the midpoint with conversion greater than 100%. Looking specifically at Q3, reported sales are expected to be nearly $5.4 billion. That is approximately 8.5% up. Organic sales growth, we are expecting 5%. Segment operating margins, we are expecting 27%. And adjusted EPS for the quarter is expected to be $7.75. Each one of those is an increase to our prior guide. As usual, additional details can be found in the appendix here. And that is a wrap on our guidance. Jenny, I'll hand it back to you for Slide 17.

Thanks, Todd. Just a reminder on what drives Parker. Safety, engagement, and ownership are the foundation of our culture. It's our people and living up to our purpose that drives top quartile performance that allows us to be great generators and deployers of cash.

Okay. Katie, we are ready for the Q&A portion of the call, and we'll take first one in queue.

Thank you. As a reminder, to ask a question, please press star one on your telephone keypad. To withdraw your question, please press star two. Others can hear your question clearly. We ask that you please pick up your handset for best sound quality. Our first question will come from Jamie Cook with Truist Securities. Your line is open.

Hi. Good morning and congratulations on a nice quarter. I guess two questions, Jenny. First, when I look at your technology platforms, if we look at the technology platforms within Diversified Industrial, Motion Systems, Flow Process Control, and Filtration and Engineered Materials, I think it's the Q1 since June of 2023 where you saw positive organic growth across all three technology platforms. So just wondering, do you think that's something specific to Parker-Hannifin? Do you think it's more a function of the cycle? Just very encouraging signs there. And then I guess my second follow-on question to that is it's the Q1 too that Filtration has seen positive growth. Just wondering how you're thinking about that relative to the acquisition that's coming on Filtration Group.

Since you bought that at a bottom, or is there any reason why they wouldn't be seeing, understanding the more aftermarket and a little different end market mix why they wouldn't be seeing positive momentum there as well? Thank you.

Thanks, Jamie. Thanks for the question. So first of all, we do think that obviously you're right. Those businesses did see positive organic growth, and it's great to see. The teams have worked very hard for that, and they're performing well. I would say that it's a combination of what we're seeing in some of our short-cycle businesses that we've pointed out. While all of them are not returning to positive growth, we did see some nice improvement in off-highway. And then I would say the aerospace business that sits inside of these industrial businesses is performing very well. So to that point, what you said, some of this is specific to Parker, and some of it is seeing some of the short-cycle business return. Our distribution did have low single-digit organic growth in the quarter.

So we're encouraged by what we see, encouraged by the orders. So I think that's part of it. Your Filtration Group question was a long one, so I'm going to ask you to repeat that for me.

No, sorry. My comment was just that interesting timing, maybe a compliment, that it's the Q1 we've seen positive growth in your Filtration Group business. Wondering what that implies for the acquisition of the Filtration Group, implying that potentially you bought that business at a cyclical bottom, understanding there's different in mix because they're aftermarket. I'm just wondering, there's differences between the business, but could their sales also be improving organically just like we're seeing within your Filtration Group business? Thank you.

Yes. We do believe that that will be the case. Now, historically, Filtration Group's organic growth from pre-COVID to now has been mid-single-digit CAGR. So this is higher than Parker's Filtration Group. But many of the areas where we have the complementary technologies in the same markets with some of the same customers that we play, we do see that their growth will be increasing just as it is with ours. So again, we think that this is just a great fit for Parker because of the complementary and proprietary technologies that it adds and because they play in the markets that we know where we expect to see growth. And again, they have this decentralized structure that's very, very similar to Parker. So we see upside here.

Thank you. Our next question will come from Andy Kaplowitz with Citi. Your line is open.

Jenny, could you give us a little more color on what you're seeing by region? I think Todd's comments around Europe were very interesting. Do you see that sort of turn as durable? And then Parker's continued to do very well in the APAC. Do you see still a good outlook for that in 2026 and beyond?

So just let me give you just kind of an overview of some of the market verticals by region. So as Todd mentioned, in North America, we're increasing our full-year organic growth to 2.5% versus the prior guide of 2%. So again, industrial, aerospace, and defense growth is very strong. Gradual in-plant industrial recovery, positive sentiment from our distribution channel, continued quoting activity. As I mentioned, CapEx remains selective. It seems like a lot of their customers are prioritizing productivity and automation projects versus large capacity expansion. So we see that increased infrastructure spending will increase in-plant industrial equipment demand in the future. I mentioned transportation is most challenged in auto and trucks. Truck OEM recovery not expected this FY, but will benefit from some aftermarket. And again, strength in construction, off-highway construction while ag still remains slow. Energy, power gen, very robust.

Oil and gas is weak with upstream, but midstream is benefiting from some capital spending. HVAC is coming off of a strong FY 2025. Residential is down, but is more than offset with commercial HVAC and refrigeration. So this is what we see for North America. So international, we are increasing full-year organic growth to 2%, and that was previously 1%. So they did have a fantastic Q2. This was primarily from some large project shipments that went out, which really helped them. But we are increasing full-year FY26 organic growth for AMEA to low single digits. It was flat in our prior guide. Again, we see gradual improvement in transportation there, primarily on the truck side. We see continued strength in mining and energy, both oil and gas and power gen.

Then we do see where the proposed stimulus in future defense spending is a long-term positive, but not seeing the impact of that this FY. In Asia-Pacific, we're increasing our full-year organic growth to positive mid-single digit versus positive low single digit in the prior guide. We're seeing continued strength with electronics and semiconductor demand. In-plant orders and shipments, there's some progress there, but it still remains a little bit mixed. We're seeing some mining improvements in China. I would say that there's still some continued uncertainty from tariffs across these markets. That's really a kind of a recap of what we're seeing in the region.

Very helpful, Jenny. And then, Todd, you've continued to generate over 40% incremental margin. I know you've said you still sort of guide that 30%-35%. But as you look forward, how long before after this good performance do you say to yourself, "You can do over 40%"? And when you talk about price versus cost, is it better pricing? Is it execution? What's sort of driving this performance?

Hey, Andy, thanks for noticing that. I'll tell you, it's not easy. It's a lot of hard work from our team members every day, every week, every month, every quarter. We are really proud to see what they've been able to put up there. We are guiding the H2 at 35% incrementals really across the company. That puts the full company to 40% for the full year. We still think that that's best in class when you look at what's going on across the environment. We're really happy to see the industrial businesses pivot to positive organic growth. Those numbers are a little bit muted still. So I think our guide is unchanged when it comes to what we think is best in class on incrementals. You look at these margins, these margins are all-time highs across every business.

It is great to see that work, and that's generating these results.

It's a litany of things. I couldn't even give you a list of the top three because it varies by business, and it depends on what opportunities exist across each and every business.

Thank you. Our next question will come from Andrew Obin with Bank of America. Your line is open.

Just a question on international growth. I think you may have answered it, but I think if you sort of do the math, it just seems that sequentially the growth is going to slow down to 2% at midpoint in the Q3. Then I think the guide sort of implies it stays there in the Q4. I think it's sort of alluded to large projects, but just thinking that the comp is similar from Q2 to Q3, even easier in a two-year stack, we're being conservative, or is there sort of specific dynamics taking place in international in 3Q and 4Q?

Andrew, it was really they did benefit in Q2 from the timing of some large project shipments, and that was primarily power gen and commercial HVAC filtration, and that was in AMEA. And that it kind of aligns with some of the choppiness of the orders from the prior year. So those aren't going to repeat in Q3. So we do forecast 2%, and that's based on a continued gradual industrial recovery.

Andrew, we basically doubled the guide there. We were one. We're now basically two. You look at that from what we thought would happen at the beginning of the year, we're pretty happy with what's going on there. The orders are also very impressive, but like we've kept saying, there are a number of longer-cycle businesses that just don't necessarily need to ship in the H2 of our FY. We'll see those in the out months.

And also maybe sort of nitpicking here, but if you sort of back into growth by end market, you had a raise for off-highway and aerospace and defense, but then the other segment sort of implies a big jump in the midpoint of the guide just to make the math work. Can you just comment? We're sort of thinking from +10 to sort of ~40. Can you comment on that? What's in the other segment if I'm doing the math right?

I don't know if I'm following your math there. Andrew, Jenny went through the logic behind the increases that we've seen by market vertical. Obviously, aerospace continues to be stellar. We have a significant amount of aerospace in the industrial businesses. That was a driver, and we bumped up off-highway a bit.

One other thing to add. Some of what sits in the other, obviously, is electronics, and what you see in there is some data center, which is still less than 1% of our sales, but it's been very strong. It's been some nice growth for us. That may be part of what you're not seeing in our numbers.

Sounds like a great answer. Thanks so much.

Thank you. Our next question will come from Joe Ritchie with Goldman Sachs. Your line is open.

So Jenny, great color is always on the end markets. I guess just a broader question with reshoring and all the investment that's already occurred here in the U.S. What's your-I know it's hard to have a crystal ball, but what's your take on what's happening with in-plant equipment in the U.S.? And then what gets it going? What are you guys looking at specifically as kind of leading indicators for the short-cycle inflection?

So we get a lot of intel from distribution, and we continue to say that this is gradual. But the sentiment is still positive, and I've been saying that for quite some time because the distributors do talk a lot about all of the quoting activity. But I would say in the recent conversations, the CapEx remains selective, and the customers are prioritizing productivity and automation projects versus large-scale capacity expansion. And you see that in pockets, and that's why we consider it gradual because you'll see some in different markets. And I think we're going to continue to see this gradual recovery, and we're going to continue to see better numbers in some of these markets that we've talked about. But I don't know that there's just one catalyst to get this short cycle going.

It's really, I think, a matter of taking out some of the noise that really doesn't have anything to do with the business, some of the geopolitical noise, tariffs, and maybe possibly interest rates as well.

That makes sense. I guess maybe just for Todd, just a quick question. The aero business has been doing great. Margins were above 30% in the H1. The guidance implies a step down in the H2. Just anything we need to be aware of from a mixed standpoint and why they would step down in 2H?

No. We called out high spares and repairs in Q2. Those are great. The business is high. It's hard to predict that going forward, so we've not put that into our forward guide there. But I would tell you the activity is robust. The team is doing a great job converting, serving our customers. And you look at those margins that we're forecasting, it's still showing 60 basis points improvement from prior year, and it's high 29, mid 29.5-type range. So we feel pretty good about giving you a guide with those numbers.

Thank you. Our next question will come from Scott Davis with Melius Research. Your line is open.

Hey. Good morning, Jenny and Todd and Jeff. Congrats on the great start to the FY and calendar year here, a couple of quarters in a row.

I know you guys don't love to talk about price, but given inflation, like recent commodity prices and some of your input costs, I'm sure even in things that may be derived from things like natural gas and obviously metals, but is it an increasing, are you able to drive price kind of in time? I know in some of your product, it runs through distribution. That's less of a challenge sometimes, but perhaps for a lot of the product that goes through OE, it could be a little bit more of a challenge. Is there some risk mitigation there that's going on at present? Are we being a little too paranoid, or are you guys have any color that would be helpful? Thanks.

With some of these commodity prices, Scott, we're handling this like we have any other inflation or issues that come about. That pricing muscle is strong, and we've had a long history here of being able to handle these things, but it's ongoing, and I would say that it's nonstop, right? We have to respond to these things and make sure that they don't impact our EPS, and they haven't, and they won't.

Scott, I would just, you obviously are a follower of our margins. You can see our margins. Every one of the businesses posted a record margin number for the quarter. And I would tell you the eyes on cost and the eyes on price, that's a muscle that never goes out of style here at Parker. So we're all over it.

Fair enough. And then just a quick follow-up. The timeline you give to closing Filtration Group, kind of 6-12 months, it's that you could drive a bus through that. But what are the major, are the major gating factors just kind of standard antitrust issues that could get pushed or pulled one direction or another? Are there other hurdles?

No. Just the standard regulatory filings and the process that we have to go through.

Okay. Fair enough. Best of luck. Thank you, guys.

Thank you. Our next question will come from Steve Tusa with JPMorgan. Your line is open. Steve, please make sure your phone is not on mute. We are hearing no response. We'll move to our next.

Our next will come from Amit Mehrotra with UBS. Your line is open.

I guess I just wanted to ask, I joined a little bit late, so forgive me if I, this is Amit Mehrotra asking, but if I want to talk about the 2Q performance, which obviously was better, and then how that corresponds to the full year guidance increase, it doesn't seem like you assume much of the 2Q goodness into the H2. And then also, I'm sure you addressed this, so I apologize again, but talk about the North American margin decline a little bit for the full year and what the reason for that is.

I'll answer that question for you, and then Todd will follow up. So there's nothing about the North American margin other than Q2 mix was not as favorable as Q1. That's all that's there. Listen, Q2 is a record for us, 80 basis points of margin expansion, 52% incrementals. The team is performing very well. And for Q3, we increased the margin to 26%, so we took that up. And for the H2, we're not reducing the North America margin.

If you look at the H2, as Jenny said, we're basically 26.5 for the H2 for North America. That would be an all-time record for North America, and that would put the full year up by 80 basis points. So I just reiterate what Jenny said. Q1 was exceptional. Q2 was a record, right?

Fair. Totally get it. And then just maybe one other kind of bigger picture question, Jenny, related to that, the pricing commentary, I think, to Scott's question. If I just look at Parker's organic growth over the last decade, it's basically averaged a couple% per year for the entire company. In fact, North American Industrial has been 1.5. And when you incorporate price, it's just the implied volumes are actually down over the last decade. I guess my first question is, do you agree with that observation? Is that a fair observation? And then second, maybe what explains that lack of volume? But maybe we've been in an industrial recession for a decade. I don't know. But at some point, price and margin get incrementally harder, and we just need to see some through cycle volume growth.

So I would love to get your perspective on that.

Amit, hey, this is Todd. I'll jump in, and Jenny, you could add any color if you like. When we look at what we are doing in North America, first of all, it's hard to look at the company over the last decade because the portfolio has changed tremendously. When you look at the three acquisitions, when you look at where our growth has been, way more Engineering Materials, way more Filtration, and a heck of a lot more aerospace and defense within those industrial businesses, both in North America and International. The company's never been more focused on organic growth. We have a long-term target of 4-6. We are guiding 4-6 this year, so we were right at our target. It has been 2+ years of choppiness in the industrial markets.

So I would tell you the company's never been more aligned on organic growth, and I'm really proud that we're able to generate these record margins in a not-so-great organic growth environment. So I don't think there's too much to read in there. When you look at what we are doing from a margin and a conversion standpoint, the team is really much driving great performance here.

Got it. Yep. Agreed. Thank you very much. Appreciate it.

Our next question will be from Stephen Tusa with JPMorgan. Your line is open.

Great. Thanks a lot. A lot of questions have been answered, and there's a lot of good detail in the materials. Just curious on the construction side, you guys are a little more positive than others. Is that just the data center stuff, or are there other things you guys are seeing out there?

I would say that's a small part of it, but we're actually seeing an increase in the construction equipment.

Okay. And then just lastly, on the Q4, being a bit below consensus, anything to call out there mechanically as to why the Q4 is, I guess, just a little bit weaker than what we would have thought?

I don't think there's anything, Steve, this is Todd. I don't think there's anything specific that we called out there. When I look at what we have laid out here for the Q4, every single number is an all-time record. The Q4 is normally our strongest quarter of the year. We are forecasting the Q4 to be the strongest quarter of the year again. I would tell you right now we're focused on Q3 and making sure we deliver our commitments for Q3, but there's nothing that has us concerned about Q4.

Parker-Hannifin (PH) Q2 2026 Earnings Call Transcript

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