Parker-Hannifin Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 14 speakers on the call.

Operator

Is going to wrap up and then Jenny, Lee and I will take as many questions as we could fit in the hour. And with that, I would ask you to move to slide 3 and Jenny, I'll

Speaker 1

hand over to you.

Speaker 2

Thank you, Todd. Good morning to everyone and thank you for joining our call today. Q1 was a standout quarter, driven by a strong portfolio and our teams executing the win strategy. Starting with safety, a 16% reduction in recordable incidents. Safety has been and will remain will hand.

Speaker 2

EPS growth along with 11.4 percent free cash flow margin. The combination of Parker and Meggitt delivered an outstanding quarter for Aerospace And a strong start to the year. As a result of this performance, we are increasing our FY 'twenty four guidance and Tab will go over this later I'll hand it over to you. Next slide please. Many of you have seen this slide before.

Speaker 2

The transformation of our portfolio over the last 8 years has doubled the size of aerospace, filtration and engineered materials. As a result of this, from FY 'fifteen to FY 'twenty four guidance, You can see the obvious shift to a longer cycle and secular revenue mix. We have high confidence that by fiscal year 'twenty seven, we'll have approximately 85% of the company in long cycle end markets and industrial aftermarket. Next slide, please. I'll hand it over to you.

Speaker 2

7% in fiscal year 2016 to 54% today. And this has been consistent for the last several quarters. Aerospace backlog is extremely robust. This coverage will support high single digit growth well into the future. Industrial backlog coverage I'll hand it back to you.

Speaker 2

Next slide please. I'll hand it over to you. It is a proven strategy and every tool in this system expands margins. Macro CapEx reinvestment is addressing the last decade of underinvestment as well as investments to strengthen and develop the supply chain. This will result in I'll hand it over to you.

Speaker 2

Under innovation, our new product blueprinting tools and simple by design principles have increased our product vitality index, that is the percent of sales from new products, enabling faster growth in support of the secular And as mentioned on the previous slide, the acquisitions we have made are great companies with higher growth rates, Aftermarket and accretive margins. We continue to benefit from the growth related to the secular trends. As previously stated, we expect multiple years of solid growth in aerospace, driven by both commercial and defense. And No matter what the energy source is, from diesel to electric to hybrid, the primary parkour content that we have today increases 1.5 to 2 times With 2 thirds of our portfolio supporting clean technologies, we are well positioned today, even better for I'll hand it over to you. Aerospace is a growth differentiator for Parker and Parker and Meggitt are a powerful combination.

Speaker 2

This team has embraced the Win strategy and is I'll hand it over to you. We couldn't be happier with this acquisition. Next slide please. From nose to tail, we have a comprehensive portfolio of products and services. Parker has a broad product offering for both airframe and engine I'll hand it.

Speaker 2

Meggitt brought new product and system areas including breaking, fire detection and suppression, I'll hand it over to you. Thermal management, avionics and sensors, and electric power. This breadth of technologies is enabling I'll hand it over to you. Next slide please. This slide highlights the favorable aerospace secular trend we are experiencing now and will into the future.

Speaker 2

Taking a look at the sales mix at the top of the page, will hand it over to you in each of these four areas. At the bottom of the page are the macro growth drivers. On the commercial side, We are expecting double digit growth in aircraft deliveries and air traffic. On the military side, for Aerospace. I'll now turn it over to Todd to go through the summary of our Q1 results.

Operator

Thank you, Jenny. I'm going to begin here on slide 11 and just touch on some of the financial results. Jenny mentioned this, our FY20 is off to a very strong start, really speaks to the alignment across our global team. We broke several records this quarter. We set records for sales and on an adjusted basis, segment operating margin, EBITDA margin, net income and earnings per share.

Operator

If you look at the sales growth, it's up 15% versus prior year, obviously strongly impacted by the net of acquisitions and divestitures. You look at that impact, that was a little over 11% positive to our growth. Organic growth remained positive at 2.3% and currency was actually a slight favorable impact in the quarter. When you look at adjusted segment operating margin, it was 24.9%. That is an increase of 220 basis points versus prior year.

Operator

And you look at adjusted EBITDA margin, that was 24.8%, an increase of 150 basis points versus prior year. You look at adjusted net income, we generated $776,000,000 in net income and adjusted EPS was a record of 5.96. If you look at both of those items, it's a 26% improvement versus prior year. And we can't say this enough, it's our portfolio transformation and really consistent a cushion across the global team. Just great work delivering a standout quarter here.

Operator

And I'm really pleased to say that these results are consistent across all of our businesses. If you can move to slide 12, this just kind of details the 26% increase in earnings per share. That's $1.22 of improvement. What I really like about this chart, the main driver continues to be standout operating performance. We increased segment operating margin dollars by nearly $250,000,000 that was $1.46 of our EPS growth.

Operator

And while all segments contributed to growth, really the strength in our aerospace business was a major driver this quarter. If you look at income tax that was $0.17 favorable this year. Really that is solely based off of a few read items that settled in the quarter. We did have some headwinds on the other expense line of $0.27 and also the interest expense line of $0.10 but I will tell you both of those items are simply related to timing with last year's funding of the Mega transaction. We do not expect those to repeat going forward.

Operator

And finally, our corporate G and A and share count were just slightly unfavorable, dollars 0.02 each and that is really that is in line with what we guided so nothing of concern there. So that's the walk to the record $5.96 in EPS and it really is just has driven off broad based operating improvements. Obviously, the Meggitt results are in there, the synergies are in there. And as you can see, strong record margins across all of businesses. Just great job by the team.

Operator

On slide 13, we'll just talk a little bit about segment performance. Every segment delivered adjusted make margins over 24%. That's the first time in the history of the company that has happened. And it was really again just driven by strong performance, good volumes. Obviously Meggitt Synergy has helped quite a bit and really just the global team is very aligned.

Operator

If you look at incrementals, we did 40% incrementals versus prior year. I'm really proud of that number and orders are positive at plus 2 versus prior year and backlog coverage as Jenny mentioned really remains elevated. And again, aerospace activity remains especially robust on the order line. So just great work there. And then lastly, I would just say as we celebrate that 1 year anniversary with Meggitt, we're really very pleased that those businesses continue to outperform.

Operator

It's been a great addition to the If you look at North America specifically, sales volume is up 4.5%. We generated $2,200,000,000 of sales. Out the thing that we've kind of mentioned throughout the quarter. You look at adjusted operating margins, we did increase operating margins 150 basis points to 24.9% and that was really just great execution and obviously cost controls. So great work there.

Operator

And if you look at orders in North America, they did improve versus last quarter. They are minus 4. They did improve from minus 8 and backlog coverage in North America obviously remains strong as well. So great work to our North America teams. In the international businesses, sales were $1,400,000,000 That is an increase of about 2.5% versus prior year.

Operator

Organic growth in this segment was about negative 2. So that was down. Organic growth in EMEA was positive too, right? So that was a plus. Latin America also very positive at +8.

Operator

The impact of the segment was really driven by Asia Pacific and that was about a negative 8 organic growth and that's really just result of mostly China softness that I think is well documented and also some tough comps that we had in the prior year. However, if you look at operating margins, even with that negative 2 organic growth, we expanded operating margins by 100 basis points and the segment finished at 24.1%. So our team members there are focused on productivity, cost controls. The team really expanded margins in a very, very tough environment. So just great resilient performance across the segment it there.

Operator

Very nice work. Order rates do continue to be choppy. They did decline to minus 8. Really, that is conditions driven really out of Europe and China. The standout for the quarter is our aerospace business, right?

Operator

Just a stellar quarter from aerospace. Sales are $1,200,000,000 that was an increase of 65% 1st prior year organic growth very robust at about 16%. And that was really broad based double digit growth in all of the aerospace market platform. So business is very strong there. Operating margins, unbelievable, a new record increasing 6 10 basis points to 26 percent.

Operator

Really that was driven by healthy margins, rate increases at the airlines, strong aftermarket growth, really all those things contributing to great margin performance. I will note we did benefit from a few small favorable one time contractual settlements in the quarter and we do not expect those to repeat throughout the rest of our fiscal year. Aerospace orders already mentioned this, but plus 24 very robust, great future for the aerospace business. If you move to slide 14, just a quick look at cash flow. Our cash flow from operations increased 42% versus prior year.

Operator

Cash flow from operations was $650,000,000 that's 13.4 percent of sales. Our free cash flow increased even more, 48% increase versus

Speaker 3

all in his

Operator

prior year finished at $552,000,000 for the quarter, that's 11.4% of sales and free cash flow was 85 hand you some. For the full year, we are committed to our strong cash flow generation profile. We are forecasting mid Elkins, cash flow from operations and of course we will extend our record free cash flow conversion of over percent for another year. So great start to the year on cash flow. Moving to slide 15, I just want to touch real quick on our leverage reduction.

Operator

I think everybody knows we are focused on our leverage reduction commitment. We reduced debt in the quarter by $370,000,000 and just since the mega close, we've reduced debt by over $1,800,000,000 and improved our leverage by 1.2 turns. Both of those numbers are ahead of what we originally scheduled. If you look at the schedule. If you look at gross debt to EBITDA, it's now 2.6 and net debt to adjusted EBITDA is now 2.5.

Operator

And of course, we are still committed to forecast over $10,000,000,000 of debt pay down in slide 24. So great work there that concludes. Looking forward on slide 16, just some details on guidance. We are reaffirming our full year organic growth midpoint. We did incorporate September 30 currency rates and we are increasing our margin and EPS expectations for the year.

Operator

Reported sales growth for the year is now forecasted to be in the range of 2.5% to 5.5% or roughly 4% at the midpoint. That split will be just as it always is, 49% in the first half, 51% in the second half. We are raising our aerospace organic growth guidance 200 basis points from 8% in our prior guide to now 10%. So that's great to see that business performing so well. Full year organic growth is tweaked just a little bit.

Operator

The company will remain at 1.5%. Currency is a small offset, which is now expected to be just a slight headwind to our prior guide. Margins, if you look at margins, we're raising our margin expectation to 23.6. At the midpoint, there's a range of 20 basis points on either side of that. And if you look at what we're forecasting on a year over year change, we're increasing that expectation to 70 basis points of margin expansion versus prior year.

Operator

It was 30 basis points in our prior guide. Incremental margins really just based off of the strong on performance. We expect those to be around 40% for the full year. And if you look at the other items, corporate G and A, interest and other are relatively unchanged to what we guided to last quarter. Tax rate for Q2 through Q4, we expect to be 23.5%.

Operator

So if you look at the full year, that will equate to about 23% on the tax line. And EPS on an as reported basis is now 19.13 at the midpoint and adjusted EPS is $23 and the range on both of those items is $0.40 plus or minus. NPS is now expected to be $5.17 at the midpoint. And as usual, if needed, we have more guidance specifics that are included in the appendix. And that's all I had.

Operator

Jenny, I'll turn it back to you. Slide 17.

Speaker 2

Thank you, Chad. And now I would like to recognize our colleague and friend Lee Banks during his last Parker earnings call. Lee will be retiring as Vice Chairman and President effective December 31, 2023. He joined Parker in 1991, has been an officer of the company since 2006 and a director since 2015. During Lee's tenure, sales grew at a 7% I'll hand it over to nearly $20,000,000,000 EPS grew from $0.36 per share in fiscal year 'ninety one to I'll hand it over to you.

Speaker 2

$21.55 adjusted per share in fiscal year 'twenty three. Since 2015, As if all of this isn't enough, I'd like to repeat a few of my comments from last week's shareholder meeting will hand it over to you when we announce Lee's retirement. It's obviously not possible to overstate the tremendous positive impact Lee has had on our company, our businesses and our team members around the world. His legacy and track record is nothing short of extraordinary. From leading our largest businesses to growing our global distribution network, to championing and driving operational excellence, To co creating the recent versions of the Win Strategy and probably most importantly and what he's proud of is to recruiting, leading and developing Many of our most talented leaders and beyond.

Speaker 2

Lee set the bar for all of us for what good looks like and was a key leader in the transformation of Parker's performance And portfolio. Lee, on behalf of all of us, we can't thank you enough. We will miss you and we wish you and your family nothing but great Health and happiness in your retirement.

Operator

Thank you, Jenny. Thank you, Todd.

Speaker 3

Lee, we know you're going

Operator

to crush retirement just like you I've got a plan.

Speaker 2

All right. Next slide please. A few key messages to close this out before Q and A. I'll

Operator

hand it over to

Speaker 3

you. Q1 was a great start to fiscal year 'twenty four.

Speaker 2

Our focus on safety and engagement will continue to drive positive results in our business. We have a proven track record and we're going to continue to accelerate our performance with the Win Strategy 3.0. It's been a successful 1st year with Meggitt And the transformation of the portfolio is delivering a longer cycle and more resilient revenue mix, allowing us to achieve our FY 'twenty seven goals And continue to be great generators and deployers of catch. We have a very promising future ahead of us. Back to you, Ted.

Speaker 3

I'll hand it over to you.

Operator

Diego, we're going to open the call for Q and A. So we'll take whoever is first in the queue. Thank you.

Speaker 4

Thank you. And just a note to the audience, if you'd like to ask a question, I'll hand it over to you. And our first question, we have Andrew Obin with Bank of America. Please state your question.

Speaker 5

Hi, yes. Good morning.

Speaker 2

Good morning, Andrew.

Speaker 5

Lee, congratulations. We'll definitely miss you. But these EPS numbers I'll

Speaker 3

hand

Speaker 5

it. Yes, just a question in terms of guidance. If I take the midpoint of your EPS guidance and you give us the first half, second half split And then just subtract what you've printed in the Q1. There seems to be sort of sequential decline in EPS that would be quite a bit more Then what the history would suggest. And I'm just trying to understand is that given that you do have Meggitt now, Is that just different seasonal pattern that Parker is going to have or other one time items in the second quarter Versus the Q1 that sort of the implied numbers are driving?

Speaker 5

Thank you.

Operator

Andrew, I'll take a stab at that and then Jenny or Lee has got some color, I'll let add. Q2 for us has obviously got some seasonality in it. It is our lowest volume quarter of the year. But really, I would call out just stellar performance in Q1. Every number that we talked about was a record.

Operator

It's kind of hard to keep that going to your lowest volume quarter. You're right, we do anniversary Meggitt, so that from a year over year standpoint it's now in the base or it will be in the base for you to, so that is it. But there's no other one time items that are abnormal that we would expect to see in you to it's really just volume and seasonality around the business. I think that's covered.

Speaker 5

That's a good answer. I'll take it. And the other question just North American orders, Could you just provide a little bit more visibility by key verticals? I think they're holding in a bit better I'll hand it. Than I would have expected what's coming in better than expected, what's weaker and maybe a lot of focus on orders this quarter, maybe just talk a little bit about the cadence of orders throughout the quarter.

Speaker 5

Thanks so much.

Operator

Hi, Andrew. It's Lee. I'll take this and maybe I'll just take a step back. I'll hand it. I think all the reports that I've read, I think the narrative is right.

Operator

If you look at it globally and I'll get into North America here in a second. But underlying demand in North America is still fairly positive. There is definitely some inventory balancing taking place Not only through the distribution channel, but I would also argue at OEM levels too with their customers, dealership dealers, etcetera. And I think that's going to continue to play out through the second half of this into calendar 2024. But there's a lot of I mean, just look at all the infrastructure spending taking place, there's been a lot of money flooded into the economy in North America.

Operator

And I would still say it's good. When you look at the rest of the world, really the story is China. China, not only tough comps, but it just hasn't rebounded like I thought it would have rebounded maybe 3 or 4 quarters ago. And that's got a It's probably got a bigger impact on what's happening in Europe right now, especially in Germany would be a key market. So that's soft.

Operator

If I look at the rest of Asia, the rest of Asia, Southeast Asia, India are still strong. But if you look at Japan and Korea, they're pretty soft too, I think, tied to China. When I think about the North American markets and I'll lump I'll hand it. Aerospace in there, I mean, you can't find any weakness what's going on in aerospace, commercial, military, OEM, will hit. All really strong and I don't see that stopping for some time.

Operator

If you look at those three indicators that Jenny talked about, I'll hand it. You're hard pressed to find at the time in history where you've had all those 3 indicators, available sea kilometers, DoD spend and then aircraft coming into service where they've all lined up that well. Land based oil and gas in North America is still really strong. I'll hand it over to you.

Speaker 3

There's less rig count, but there's a lot of MRR activity taking place,

Operator

which is keeping people busy. And again, our distribution, if you look at all their end markets, yes, they're balancing on inventory, but Things are not falling off a cliff. It's still real good. So, it's a short way of telling you, I feel pretty positive about North America end markets. We've just got a little bit of a balancing taking place right now.

Speaker 5

Excellent. Thanks so much.

Operator

Thanks, Andrew.

Speaker 4

Our next question comes from Joe Ritchie with Goldman Sachs. Please state your question.

Speaker 6

Hi. Good morning, everyone. Congrats on a great I'll hand it over to the year and then Lee trips to Cleveland won't be as fun. We miss you. It's been really paramount.

Operator

Thanks.

Speaker 6

So I'll hand it over to you. Maybe following up on Andrew's question, if you had to think if you had to look across your industrial end markets today, What portion of those end markets do you think are continuing to decelerate? And then as you kind of think about I'll hand it over to the destocking commentary. Just any color on like how long you think certain end markets will continue to destock for you guys?

Operator

I'll take a stab at this and maybe I'll let Jenny and Todd pile on. But I think In North America, you've got things like automotive are somewhat flat, heavy duty trucks is flat. Agriculture is flat. Construction in North America is really kind of flat for the most part. Again.

Operator

I think there's some dealer inventory that people are working through, but it's still good overall demand there. I think things that were tied to COVID production, life sciences, there's still some big overhang from the ramp up we had during that period of time. So that's just tough comps and the demand's I'll hand it out a little bit. Yes, I'll leave it at that. Material handling is still really strong.

Speaker 1

Yeah. I got it. Go ahead, Jenny.

Speaker 2

I'd just echo Lee's comments to Andrew's question and yours. I think with this backlog as strong as it is, although that we see this destocking continuing, we see a bit of supply chain normalizing And that's helping things. And as that heals, we'll start to see, I think a bit of a better environment, but just echo all

Operator

of Lee's comments. One other thing I meant to say when I was talking, Joe, is I think what everybody forgets about, everybody's focused on aerospace and Meggitt, which have been huge positives. But don't forget about that we bought LORD and we bought CLARCOR. And we bought those to kind of we knew they would not be as cyclical as the core legacy The Parker business and I think you're seeing that in the numbers, it's panning out that way to be true.

Speaker 6

Okay, great. That's helpful. And then, look, big focus this quarter on mega projects, Timing of orders. Just Jenny, maybe just talk a little bit about how you see things kind of playing out with all the investment that's happening in the I'll hand it. Do you think Parker is well positioned to see an inflection in orders when you start to see a lot more equipment and the stuff that's going inside of factory come through.

Speaker 2

Absolutely. I mean, when you think about, as I mentioned earlier, the underinvestment that's happened the last decade hand it. And what will happen in the next decade. I mean, we are in a great position to participate. We've I said a couple of times, it's still early days, but speaking with some of our channel partners where there's some factories going in for semi will hit.

Speaker 2

And some of these other big projects, they're starting to participate in that. We've said we're there when the land is prepped, it. When the walls go up and when the equipment goes inside the factory and some of our distributors have been able to talk to us about how they're already enjoying that business. So we're in a really good position with those as well as the secular trends that I mentioned earlier.

Speaker 6

Great. Thank you.

Operator

Thanks, Joe.

Speaker 4

Our next question comes from Mig Dobre with Baird. Please state your question.

Speaker 7

Thank you. Good morning and congratulations Lee I'll hand it. All the best to you going forward. My question going back to the industrial backlog hand the discussion. I'm sort of curious as to how you think about this elevated level of backlog.

Speaker 7

Is this Sort of a function of a change in the way your customers are ordering or is this more of I'll hand it. A function of really what we've been going through over the past couple of years with supply chains and so on and so forth and safety stock being built up.

Speaker 2

Mig, this is Jenny. I think it's all of the things you mentioned, but as Lee just stated, with the acquisitions that we've made, We're getting longer cycle business here. So, we see a longer demand sense, a longer demand horizon than we've seen in the past. So, The transformation of the portfolio is definitely impacting the backlog. And I do think that what we've been through the last couple of years, Of course, you're going to see some people just kind of sharpening their pencils on how they order and making sure that I'll hand it over to you.

Speaker 2

They have the right lead times out there. So I think that's part of it. But more of it is really about the shift of our I'll hand it. I've said many times, we know from the past that backlog isn't bulletproof, but I'll hand it. We've seen this now for the last several quarters in a declining order environment.

Speaker 2

In North America, orders have been negative 3 quarters, but this backlog has remained resilient. And we believe that while it might go down a little bit, Our portfolio is going to drive us to have this kind of backlog going forward.

Speaker 7

Right. Understood. And my follow-up I'll hand it over to you. Can you be a little more specific on that contractual settlement and the benefit in the quarter? Hand it over to you.

Speaker 7

And then in terms of the guidance raise, talk a little bit maybe about that as well, the organic as well as the market. I mean, is this A function of aftermarket really driving that guidance raise or is there something else in there? Thank you.

Operator

Hey, Mig, this is Todd. On the guidance rates, you obviously can see the orders. Activity across all of those platforms has been extremely strong. Aftermarket was a big standout in the quarter. That is a big driver of the growth and it was a big driver of the margin performance.

Operator

So we just feel a little bit more confident with another quarter in there that we feel were able to raise that. So we moved to 200 basis points from 8 to 10 for the full year and we feel pretty confident about that. I don't want to make a big deal about those things. I said they were small and minor, those one time items. I just wanted to call it out so that it would make a little bit more if you look at our margin guide going forward for the rest of the year.

Operator

So it's as little as that.

Speaker 2

I'll hand it. And just a little more color on aerospace. Like Todd said, very strong aftermarket, Commercial and military. And if we look forward in this guidance, we've said it a couple of times already, but just to look at Commercial MRO is in the mid teens. The narrow body aircraft are almost at pre pandemic levels.

Speaker 2

There's a lot of engine repair and component restocking going on, so very positive there. And then military OEM, mid single digit As demand for legacy programs continue. And then military MRO mid to high single digit. Near term, we have tailwind with some of our Department of Defense repair depots. We continue to really enjoy I'll hand it over to you.

Speaker 2

Public private partnerships, they're growing. And there's fleet upgrades and service extensions. So just all in all, just a great environment across all four of these

Speaker 1

areas. Thank you.

Speaker 4

Thank you, Edna. And our next question comes from David Raso with Evercore ISI. Please state your question.

Speaker 8

Hi, thank you very much and obviously congratulations Lee.

Operator

I'll hand it

Speaker 8

over to you. When it comes to the North American orders, just given 2 quarters ago, right down 8, hand it over to you. Now some second derivative improvement we just saw. Given the comps are starting to ease, I'm just curious if you'd be willing to say, do you think we've I'll hand it over to you. And then I have a question about the organic sales cadence.

Speaker 8

Can you just update us on how we get from here to the full year 1.5% and I'm particularly interested also what do you have for organic in Europe in the guide? Thank you.

Speaker 2

Hi, David. This is Jenny. I don't think any of us Really have that good of a crystal ball. But I will restate that I'll hand it. The backlog is strong.

Speaker 2

And as you said, orders were at negative 8 and they went to negative 4. So We feel good about that. There's some uncertainty out there. And all in all, if you look at North America, we have the first half slightly lower at about 1%, but full year mostly unchanged at slightly positive. So, I can't give you an exact will answer on that, but we feel good about where we're at right now.

Speaker 8

Can you help with the organic cadence a little bit though, maybe for the whole company just to get a sense of the 1.5%, if you can take us through that a little bit detail and again maybe a little color on Europe in particular what's in the guide. I thought the Q1 was a little stronger than expected. So just trying to get a sense.

Operator

Yes, David, I agree with you. Europe did outperform in the Q1. I think we called out on the call, Europe did plus 2. The total company did plus do. Obviously, Aerospace was fantastic at 16.

Operator

If you look at the cadence, it's really not that much different than what we guided to initially. It is not second half weighted. We expect the comps to kind of moderate a little bit, but if you look at Europe specifically, they did 2 in Q1. We're expecting about 1 in Q2 and then it turns a little bit negative just again based on comps in the second half. I would say for the second half, it's probably about minus 3.

Speaker 3

I'll hand it over.

Speaker 9

I appreciate it. Thank you.

Speaker 4

Our next question comes from Scott Davis with Melius Research. Please state your question.

Speaker 10

Hey, good morning everybody and also congrats Lee. Great run. It's been nothing but a pleasure indeed. But Good luck in the future. I have a tough time picturing you retired.

Operator

So do we Scott, so do we. He's got a plan. He's got a plan.

Speaker 10

Yes. I'm guessing we'll see you around on boards and such even more so. But anyways, a lot of the Questions about inventories and stuff have been asked. So I just wanted to go back to big picture 1 on Slide 4. Jenny, you kind of show where you want to be in 'twenty seven.

Speaker 10

Can you get there with I mean is the plan kind of further tweaking With the portfolio and a longer cycle M and A or do you get there just on the growth rates, the will help outsized growth rates in aero and some of your longer cycle businesses.

Speaker 2

Yes, it's the latter. These illustrations are with the portfolio that we have today and the tailwind that we see not just from aerospace, but from the macro CapEx investment and the secular trends.

Speaker 1

Okay.

Speaker 10

Here. The distribution levels and like Parker stores, you guys have great visibility. But are they Is there a new normal above pre COVID levels? I know this has been asked in a different way, but I'm trying to really narrow down whether in this new world everybody holds a little bit more inventory Or whether supply chains are so healed up and people are so comfortable that they're back down to kind of what was more of the long term averages pre COVID. Obviously, the cost of carrying inventory has risen too with higher rates.

Speaker 10

We haven't had that in quite some time. So any comments there on how that plays into would interesting too. Thanks.

Operator

Yes, Scott, it's Lee. I would think it's the latter. The cost of carrying inventory is way up from where it's been. I think the insanity of supply chains have started to quiet down.

Speaker 3

I'll hand it over

Operator

to you. I don't expect there to be a huge difference as we go forward about how some of those core industrial products or inventory versus where they were before pre COVID.

Speaker 1

Okay, helpful. Thank you. I'll pass it on.

Speaker 4

Our next question comes from Jeffrey Sprague with Vertical Research. Please state your question.

Speaker 3

I'll hand it over to you.

Speaker 11

Thank you. Good day, everyone. Lee, congrats and thanks for all the help over the years. If we just maybe kind of come back to the margins which are really stood out here. I'll hand it over.

Speaker 11

I think it's probably pretty clear from just other companies we follow that price cost spreads were pretty favorable this quarter. I know you I'll hand it. I want to talk about price in isolation, but can you give us some sense of kind of where you're tracking on a price cost basis, how that might differ I'll hand it over to you. From what you saw in fiscal 'twenty three and how it's progressing through the year embedded in your guide?

Speaker 2

Good morning, Jeff. So, if you recall, we went out early and often With price. And we are now back to more of a, what we would call, a normal pricing environment, Where we are going out in July January. So, we don't disclose the specifics this. Obviously, but price cost management is a core element of the Win Strategy and what we did do is we expanded from Just material inflation to total cost of inflation.

Speaker 2

So, we feel good about what we have covered and we're back to more of a normal environment.

Speaker 11

But you are getting some cost relief. Is that fair or not so much? You've got some metals relief, but other inflation, maybe just a little perspective on the cost side of the equation.

Speaker 2

Where we have some of those Commodities index, which is very few, there's adjustments, and where we have agreements with customers, there's adjustments, but that's already built in.

Speaker 11

And then just back to Meggitt And Aero, when I saw the margins this morning, I thought, okay, you're going to be talking up the synergies or you. You've accelerated them into 2024. Really no comment about that. So I'm sure you're capturing the synergies, But it sounds like the margins are a little one offs that Todd mentioned, but mostly aftermarket mix. But maybe just a little bit of color on the synergy pace and is there scope for that to go up and is any of that actually embedded in these results you in the quarter.

Speaker 2

So, if you recall, in fiscal year 'twenty three, we increased the synergies from $60,000,000 to $75,000,000 and then we committed to another 75 I'll hand it over to you. So, as Todd mentioned, the synergies are in there. The team is doing a great job. We're Committed to the $300,000,000 and we're just confident we're going to get there. Hand it.

Speaker 2

And 2 strong aftermarket, right? That is just a very favorable mix, really helped boost the margin in the quarter.

Speaker 11

Great. Yes, it felt like you're getting after that additional 75 faster, but I'll leave it there. Thanks a lot.

Operator

No, Jenny. It really is a combination of obviously the volumes have helped on the efficiency side, but Jenny has mentioned supply chain has eased. I think that has taken a lot of noise out of a lot of our operations. It's not totally gone yet, but if you look back to a year or year and a half ago, it is a lot more efficiencies that we're see across all the businesses.

Speaker 2

Yes.

Speaker 11

Great. Thank you.

Speaker 4

Our next question comes from Julian Mitchell with Barclays. Please state your question.

Speaker 12

Hi, good morning and I wish Lee all the best. Just wanted to circle back to my you. First question on the international sort of demand picture. So I guess if you look at the last Six quarters, you've had orders down in 5 of those 6. When you think about inventory levels and it's an it.

Speaker 12

Extremely disparate set of countries and markets. That down 8 on orders you saw in the most recent quarter, When you think about the duration of this order's downturn, just wondered any perspectives on when you think we start to sort of pull out of that over to you.

Speaker 2

Well, you know, Julian, orders, like you said, it's been choppy for a while. You know, in international, you know, Q1 I'll hand it. Q1 organic growth was in line with our prior forecast at that segment level. As Lee mentioned, in Europe, destocking continues, Softness in some broad based end markets, low recovery in China is impacting that region. And there's Eurozone macroeconomic indicators that remain in contraction territory.

Speaker 2

So, I would say hard to tell there, but 2, again, China, if you look at Asia Pacific, China recovery remains slow. There's continued softness in Construction and semicon and automotive. As we mentioned earlier, there is a bit of a tough comp from last year I'll hand it. Q1 because they were rebounding from the Q4 shutdown. So, in the guide, no big change This is the best view we have today.

Speaker 12

Thanks very much. And then, on the North America business, hand it. I think a lot of investors still get concerned when they see some of those big sort of mobile OEM customers talk about backlog down and what does that mean for their inventories I'll hand it over to you. So maybe just remind us of the scale of that kind of the mobile piece within North America. And how do you gauge or what's your assessment of that Inventory level at some of those big machine or mobile customers.

Speaker 2

So, as Lee mentioned, there's a Certain amount of rebalancing going on there as well as dealers are starting to get some inventory. But it kind of goes in line with I'll hand you over to the hand it over to you. And in discussion with some of our big OE mobile customers, they are adamant That the orders, the backlog are real. And some have even commented that if they happen to get A cancellation from one customer. They have another customer who will take that slot right away.

Speaker 2

So, we still feel pretty positive about that. But again, as the supply chain is improving, hand it. It's helping us. So I think we're in a pretty good position there.

Operator

Yes, Julien, I would just add, you know, Lee brought this up earlier, but you know, you think about the North America portfolio that does include Lord, that does include of the CLARCOR businesses, there's a significant amount of aftermarket that we benefit from in the North America business and I think that's helped offsetting some those larger OEM callouts. Longer cycle.

Speaker 12

That's great. Thank you.

Speaker 4

Our next question comes from Joe O'Dea with Wells Fargo. Please state your question.

Speaker 9

Hi, good morning.

Operator

Good morning.

Speaker 9

First question is just related to field inventory. I think some of the corrections have been going on for several quarters now. And I'll hand it over to you. So what your views are both at an OEM level and a distributor level and maybe even if you take it by region, But just how far along that process is? Are those headwinds actually starting to abate a bit?

Speaker 2

Well, I think as we've gone through the regions, what we've talked about here is that I'll hand it over to you. First, again, backlog coverage remains strong. Destocking is continuing. Hand it. We probably saw a little more of that in North America in Q1 than we had anticipated and it's continuing.

Speaker 2

But as Lee pointed out, the overall channel Sentiment is very positive. As I was just mentioning before, international too, I mean, backlog is strong you. There, but the orders have been choppy. So to try and say where that's going I'll hand it. That's going to wind up in the next quarter or 2.

Speaker 2

We'll have a better update for you in February. But as Lee mentioned, I'll hand it. This is and international is really a story about China recovery remaining slow and the impact that it has on Europe. So continued softness there in the industrial markets and destocking is continuing.

Speaker 9

I'll hand it over to you. Thanks. And then Jenny wanted to ask on investment spend and just strategic focus as you think about I'll hand it over the next 1 to 2 years and really in particular on the industrial side of the business. But across the regions, across technologies, you where you're trying to direct the most emphasis right now because of the biggest opportunities that you see for returns on some of that

Speaker 2

Well, our CapEx goal has increased from 1.5% to 2%. We were at 2%, a little bit above in fiscal year 'twenty three and we're forecasting 2% for fiscal year 'twenty four. Hand it. It's a pretty big increase from our 10 year average and our focus is on safety, automation, robotics, Some AI tools on AI driven inspection. So things that are really going to help us increase our efficiency And our productivity, we're investing in the supply chain and then we're investing in specific divisions where we have hand.

Speaker 2

We need to support secular growth. So, for instance, electrification projects with our customers. So, I'll hand it over. When we look at this, the investing in the supply chain is something that we think will help us well into the future will make sure that we have not only those local for local strategies intact, but dual sourcing strategies. It.

Speaker 2

So that investment, we expect that to pay dividends well into the future.

Speaker 9

I appreciate it. Thank you.

Speaker 10

Thanks, Joe.

Speaker 4

Our next question comes from Brett Linzey with Mizuho. Please state your question.

Operator

Hey, good morning. Yes, and congrats to Lee. I appreciate all the insight over the years. Wanted to come back to some of the market choppiness and the destock. I guess what is Parker doing from a cost containment standpoint in the quarter international volumes down, margins up.

Operator

Is this just simply throttling back on discretionary? Are you Taking more structural simplification actions and how that positions you.

Speaker 2

Yes. I'll hand it. We always say that we're planning for the next recession, right? So What is evident with our Q1 performance is that executing the Win Strategy in a slower growth environment works, Right. So every tool and I say this because I've used the Win Strategy to run Parker Divisions and Parker Groups.

Speaker 2

Every tool in that win strategy helps to expand margins. So it can be anywhere from Adjusting your discretionary spending, changing the way you staff the operation I'll hand it. To how you order material for your production. So there's a lot of levers that our general managers can pull. And they've become very agile and flexible, and they have learned how to look around corners and I'll hand it over to you.

Speaker 2

We see demand changes coming. So, we're very proud of what they do on the downside as well as the upside To make sure that we get the best return.

Speaker 1

Yes, that's

Operator

great. And then just one more on orders. I'll hand it. Just curious how the sequential evolution of orders played out through the quarter into October. Any discernible pattern that might give you a confidence that we will hand it.

Operator

It could

Speaker 3

be some semblance of

Speaker 2

a bottom here. We'll give you an update on that

Speaker 3

in February. I'll hand it over to you.

Operator

Hey, Brent. Hey, great. Thanks. I wanted to just touch on that restructuring comment. There's been no change to our restructuring plans for the fiscal year.

Operator

We do this all the time. This is not something that we wait for. I think we have $70,000,000 of restructuring cost in the guide for the year. And that's the beauty of the decentralization of all the markets. Our businesses are doing what they need to do depending on what's happening in their businesses all around the world.

Operator

So we're not waiting for any kind of you know high sign to do restructuring. We constantly do that. To Jenny's point, it's part of the strategy and it's part of what we do every day. Helpful color. Thanks a lot, Ben.

Speaker 1

Thanks.

Speaker 4

Our next question comes from Nathan Jones with Stifel. Please state your question.

Speaker 1

Good morning, everyone. Good morning. I'll I'll

Speaker 3

hand it.

Speaker 1

I'll add my congratulations on retirement to Lee and go Brown. I'm going to ask David and Julian's question a little bit of a different way. Park has been through many order downturns over the years. And while every downturn is different, the math always tends will be the same. You see 3 to 5, maybe 6 quarters of negative order rates.

Speaker 1

The magnitude of those declines are either a mid cycle pause or a I'll hand it. As we've got to the point where we're now 3 to 5 quarters of negative order rates, Is this starting to feel more like a mid cycle pause than the recession we've been trying to talk ourselves into for the last 18 months? I'll hand it over. Maybe just any comments around the feelings you guys have about this downturn relative to the downturns that you've seen previously?

Speaker 2

Well, I'll start off just by saying that I think as evidenced by past performance, We're able to handle these downturns and we just weather them better each time, right? So with the transformation of the portfolio, hand it. Again, I think we're going to continue to see a longer cycle I'll hand you. View of the backlog and we're going to be less susceptible to the dips. So I think we're just in a really good position going forward to be able to achieve our organic growth targets And really perform at a higher level.

Speaker 2

We're going to keep expanding margins in a slower growth environment and be very well positioned for when some of this returns on the industrial side.

Operator

Nathan too, we've said this a couple of times, but we've never had as high a percentage of aerospace exposure across the whole portfolio. So it's over 30% of the portfolio and that part of the business is extremely strong right now. So, we're benefiting from that as well.

Speaker 1

Yes, I was just talking about the industrial will help. And then just one on Meggitt. You guys have talked about that outperforming. I think it's will. Clearly seeing better growth, the market seeing better growth, likely leading to some better margin.

Speaker 1

You had targeted year 5 high I'll hand it. Double digit ROI, is the double digit ROI on this business with the outperformance now within reach in year 5?

Operator

You know, Nathan, we couldn't be more happy with the way that business is performing. It still is early days. We just had the 1 year anniversary. Growth is robust. The margin performance has been good.

Operator

And if you remember, we had a 3 year plan here on synergies and our focus execute that. It's kind of performing better than our expectations. So we're happy with it.

Speaker 1

Okay. We'll wait for the upgrade of that target. But thanks very much for taking my question.

Operator

Yes. Thanks, I'll hand it over. Diego, I think we got time for one more question.

Speaker 4

Okay. And that question comes from Nigel Coe with Wolfe Research. Please state your question.

Speaker 13

I'll hand it over to you. Thanks guys. Thanks for me. Lee, you've had a lot of call outs, but we will I'll hand it. I dream of walking off on a high and that's certainly what you're doing.

Speaker 13

So congrats and enjoy the rest of the year before you retire. So backlog, I got to say I'm surprised you didn't consume more backlog based on what we're hearing elsewhere. I'll hand it. Maybe you could confirm, Todd, I'm calculating maybe $100,000,000 of sequential backlog consumption in industrial in that kind of range. I'm just wondering, are you seeing more like longer cycle lumpier orders coming through the backlog here?

Speaker 13

I mean, just any color there would be helpful.

Operator

Nigel, you're saying specifically on aerospace?

Speaker 13

Industrial. Oh,

Operator

excuse me, industrial. I'll hand it. I think you're about right on the number that you're talking about. And again, Jenny and Lee have talked about this. We think it's really just kind of more rebalancing, nothing overly concerning at this point in the cycle yet.

Operator

I'll hand. I can't say that we're seeing anything more lumpiness from the industrial orders. There are some project based things in there, but it's nothing I'll hand you those significant comparison to the total.

Speaker 13

Okay, great. And as a last question, I guess it's the cleanup questions here, I'll hand it. I'm getting when I bridge the current guide to the previous guide for FY 'twenty four, I'm getting $0.40 from the margin uplift, About $0.10 from taxes, dollars 0.10 to $0.15 from taxes, about $0.10 from interest. Is that right? That gets me to $0.60 or thereabouts, which is the increase.

Speaker 13

And there's nothing really in for FX, is that right?

Operator

The only thing we did for FX was updated the currency rates to September 30. So there's a little bit of a headwind on the sales line that translates throughout the P and L, but it's really just an update, it's not anything major.

Speaker 13

It. Okay, great. Well, I'm sorry for the low level questions there, but thanks a lot.

Operator

No worries, no worries. Yes. And we can follow-up with you if

Speaker 10

you need more.

Operator

I think we're almost at

Speaker 10

the end here. I'm going

Operator

to pass it back to Todd. This is Lee. I just want to say thank you for all the nice call outs from everybody. It's 32 years has been a long run. During that 32 years, I've worked for 4 CEOs, 3 of them directly.

Operator

Every CEO has taken the baton from their predecessor and run the race faster. And I've got no doubt in my mind that Jenny and his team is going to do the same thing. So thank you and hopefully we'll see you around. Lee, you're definitely going to see us around. Congratulations to you and Elizabeth and your family, I know they're going to enjoy more lead times and we are going to miss it.

Operator

So congratulations again. The call. Thank you to everyone for joining us today. This does conclude our FY 'twenty four Q1 webcast. As usual, Jeff Miller, our VP of Investor Relations and Yan Hua, our Director of Investor Relations will be available if anyone needs any kind of follow ups.

Operator

Thank you all for joining and everyone have a great day. Thanks.

Speaker 4

Thank you. And that concludes today's call. All participants disconnect. Have a good

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Earnings Conference Call
Parker-Hannifin Q1 2024
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