Parker-Hannifin Q4 2021 Earnings Report

Parker-Hannifin EPS Results

• Actual EPS: $4.38
• Consensus EPS: $4.32
• Beat/Miss: Beat by +$0.06
• One Year Ago EPS: $2.55

Parker-Hannifin Revenue Results

• Actual Revenue: $3.96 billion
• Expected Revenue: $3.93 billion
• Beat/Miss: Beat by +$26.72 million
• YoY Revenue Growth: +25.30%

Parker-Hannifin Announcement Details

• Quarter: Q4 2021
• Date: 8/5/2021
• Time: Before Market Opens
• Conference Call Date: Thursday, August 5, 2021
• Conference Call Time: 1:27PM ET

Parker-Hannifin (NYSE:PH) (NYSE: PH) is a global manufacturer and provider of motion and control technologies and systems. The company designs, manufactures and services a broad range of engineered components and systems used to control the movement and flow of liquids, gases and hydraulic power. Its product portfolio is applied across demanding environments and includes solutions for industrial manufacturing, aerospace, mobile equipment and other engineered applications.

Parker-Hannifin’s product and service offerings span hydraulic and pneumatic components, fittings and fluid connectors, valves, pumps and motors, electromechanical actuators and motion-control systems, filtration and separation products, and seals and sealing systems. In addition to discrete components, the company supplies integrated systems, custom-engineered assemblies and aftermarket services such as repair, remanufacturing, technical support and parts distribution. These capabilities support original equipment manufacturers (OEMs) as well as end users requiring uptime, reliability and regulatory compliance.

Founded in the early 20th century, Parker-Hannifin has grown through a combination of organic development and strategic acquisitions and today operates on a global basis. The company serves customers across North America, Europe, Asia-Pacific and other regions, with particular penetration in aerospace, industrial, mobile (construction and agriculture), transportation and energy markets. Parker emphasizes engineering, product development and quality control to meet industry standards and customer specifications in complex, safety-critical applications.

Parker-Hannifin Q4 2021 Earnings Call Transcript

Key Takeaways

• In Q4 FY 2021 Parker achieved six all-time quarterly records—including 25% sales growth (22% organic), 22.2% adjusted segment margin and 46% EPS growth to $4.38—capping a full year with eight historic records across sales, income, EPS and margins.
• Full year operating cash flow was a record $2.6 billion (17.9% of sales) with free cash flow conversion of 135%, allowing debt pay-down of $3.4 billion over 20 months and margin targets hit two years early.
• FY 2022 guidance calls for 5–9% sales growth (7% midpoint, all organic), 21.6% adjusted segment margin and $16.60 adjusted EPS, with stronger first-half volumes (mid-teens industrial growth) and a gradual aerospace recovery.
• Parker’s pending Meggitt acquisition would nearly double its Aerospace Systems segment, shoring up complementary technologies (70% sole-source) and delivering accretion to sales, margins, EPS and cash flow under UK government commitments.
• Under its purpose-driven “transformational” agenda, Parker highlighted a modular inline dilution system for faster vaccine/drug manufacture and set sustainability targets—50% Scope 1/2 emissions cut by 2030, carbon neutrality by 2040—while expanding clean-tech motion control offerings.

Presentation

[Operator]

Good day, and thank you for standing by. Welcome to the Parker Hannifin Fiscal 2021 fourth quarter and full year earnings conference call and webcast. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Parker's Chief Financial Officer, Todd M. Leombruno.

[Todd Leombruno, EVP and CFO at Parker Hannifin]

Thank you, Dawn. Good morning, everyone. Thanks for joining our FY 2021 Q4 earnings release webcast. As Dawn said, this is Todd M. Leombruno, Chief Financial Officer speaking. I am here today with Thomas L. Williams, our Chairman and Chief Executive Officer, and Lee C. Banks, our President and Chief Operating Officer. If you could focus on slide two, this is the company's safe harbor disclosure statement addressing forward-looking statements and non-GAAP financial measures. Reconciliations for any non-GAAP measures are included in today's materials. Those reconciliations and our presentation are accessible under the Investors section at parker.com and will remain available for one year. As usual, we will start today with Thomas L. Williams providing some highlights of the quarter and our record fiscal year, as well as some color on Parker-Hannifin's transformation.

[Todd Leombruno, EVP and CFO at Parker Hannifin]

Following Thomas L. Williams' comments, I will provide a brief financial summary and provide some details on our FY 2022 guidance that we just released this morning.

[Todd Leombruno, EVP and CFO at Parker Hannifin]

I'll then hand it back to Tom for closing comments, and then Tom, Lee, and I will open the lines for Q&A. Just one reminder, in respect to the announcement we made Monday concerning the Meggitt acquisition, we are still bound by the requirements of the U.K. takeover code. With that, I'll ask you to move to slide 3, and I'll hand it off to Tom.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

Thank you, Todd. Good morning, everybody. Thanks for joining us today. This marks the end of FY 2021 for us, and it was a difficult year personally and professionally for everybody due to COVID-19, but it was a year where the Parker team really shined. We delivered outstanding results and lived up to our purpose in enabling a better tomorrow, and my thanks goes out to the global team for just a great year, great quarter. Let's start with the quarter. It was dynamite. Top quartile safety performance, 29% reduction in reportable incidents. The sales growth in the quarter was 25%, approximately. Organic was almost 22%, and the industrial portion of the company grew at almost 27% in the quarter. We have six all-time quarterly records, sales, net income, EPS, segment margins for total Parker, as well as North America and International.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

The EBITDA margins were very strong at 21.8% as reported, or 22.1% adjusted. That was 190 basis points improvement versus prior. On the segment operating margin on an adjusted basis, if you go to that last row, 22.2% or 230 basis point improvement versus prior. Just a great quarter and a really great team effort by everybody around the world. Go to slide four, we'll move to the full year. It was a year of records. I won't read all these to you, but you can see eight all-time fiscal year records. That's in the history of the company, that's 104 years to put up records with. It speaks to how well the team performed in this last fiscal year. Sales growth came in almost 5% year-over-year.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

Organic was flat, clear momentum building on orders and organic growth in the second half of the year, as you see from our order rates. FY 2023 margin targets, we hit them a full two years early, we'll be announcing new targets once we have Investor Day March of next year. We're going to go out for a new five-year target, we'll be going out to FY 2026. We look for that discussion at that time. Operating cash flow was $2.6 billion, a record. That was almost 18% of sales. Free cash flow conversion rate was 135%, we were very pleased to be able to announce the offer to acquire Meggitt PLC, which greatly enhances our aerospace portfolio, I'll touch on that briefly here in a few minutes.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

If you go to slide five, I want to talk about the transformation of the company, give you a little bit of color behind what's driving it and the progress we're making on the results. On slide six speaks to the three drivers, living up to our purpose, being great generators and deployers of cash, and being a top quartile performer. I'm going to touch on each one of these over the next several slides. When it comes to purpose, enabling engineering breakthroughs that lead to a better tomorrow, this is something that really resonates with our people. It represents a higher calling to your work, and it acts as our North Star.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

In the next few slides, I'm going to talk about and highlight our purpose in action, specifically our technologies and how they're helping healthcare, and how they're helping the climate and create a more clean technology world for everybody. On slide eight, we're going to talk about vaccine production, in particular, something that's obviously very pertinent for today, COVID-19 production. On the left-hand side speaks to the challenges that drug manufacturers have today. This is a batch process, typically, with extensive inventories, long lead times to produce these products. They take huge space requirements, large footprints for storage, large footprints for the manufacturing processes, and very difficult changeovers. The cleaning cycles between the batch processes is very complicated. The idea here is a simple concept that most of us can relate to.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

All of us have been in some kind of restaurant with a soda fountain where you can pick your beverage of choice. Of course, the technology behind that is a concentrated syrup and carbonated water, and you get to pick the soft drink of your choice. The idea here is instead of soft drinks, could we deliver sterile vaccine ingredients with a similar type of process? Slide nine is that process. It's our in-line dilution system. It's a proprietary point-of-use process for combining the purified vaccine ingredients. You look at that piece of equipment, you can see it's on wheels, so it's modular, easy to move around, easy to deploy, has mixing and sensing combined. It has two-way communications via the IoT enabled system. It can talk to the manufacturer's enterprise system to enable scheduling just in time.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

It uses, very importantly, intellectual property protected single-use consumables. Instead of these massive batch processes, huge cleaning events for changeovers, this is a giant productivity improvement for the drug manufacturer on the speed of the changeover, but also just reducing contamination tied to the changeover. Our software and automation helps control the amount and the flow of these various ingredients. This applies obviously to COVID-19, it will apply to other vaccines that are being developed, and then we can use this for other drugs as well. This is a really attractive business opportunity for us, but more importantly, it's a great help to customers and to society. It's a great example of our purpose in action. Move to slide 10. Move to the climate and the clean technology portion of our purpose. We just recently announced last month, new sustainability targets.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

You see on the right-hand side of this page is our new sustainability report, which you can reach electronically. We announced a 50% reduction in emissions by 2030, so that'd be Scope 1 and 2 emissions, direct and indirect. By 2040, same thing, Scope 1 and 2 to be carbon neutral. Enabling a more sustainable future with what we do with our plants, our operations, our supply chain. In addition, if you go to slide 11, and actually more importantly, how can we help our customers? How can we help society with the sustainability journey? On this page, you see the eight motion control technologies across the top, and this portfolio, approximately two-thirds of this portfolio is a very much part of the enabling of clean technologies for our customers.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

The exciting part is the expanding bill of material on automobiles, on construction equipment, on forestry, on mining. Basically, almost every piece of equipment, on airplanes, engines, everything's feeling this impact for more electric applications. There's onboard opportunities, but there's also infrastructure opportunities. As the world has to build in infrastructures to support that growth, our technologies can help that infrastructure move. Then I want to move to slide 12, which illustrates the top quartile performance portion of those three drivers. You can see we're using two metrics to illustrate this. Adjusted EPS on the left and adjusted EBITDA margin on the right. It's really been our people, the strategic portfolio changes we made, the capital deployment decisions that we made over the last seven years into One Strategy that's transformed this performance. When you step back and look at this is just remarkable improvement.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

On the left is a more than doubling of our EPS, that's hard to do. I can assure you that's really hard to do, this is fantastic progress. A little less than $7 in FY 2016 and over $15 as we closed last year. The EBITDA margin, which has clearly been propelling that from 14.7 to 21.3, a 660 basis point improvement there. The last part on the transformation and the drivers is cash generation and deployment. We touched on the cash generation piece in my opening comments, clearly in the deployment is how do you deploy capital and buying effective companies. We're very excited to put two high-quality companies together, an aerospace combination that we announced Monday.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

Parker and Meggitt nearly doubles the size of our Aerospace Systems segment with highly complementary technologies, 70% sole source, a strong recurring revenue, excellent growth potential, combination of the commercial aerospace recovery, as well as the synergies, and this will be accretive to our organic sales growth, margins, EPS, and cash flow. This deal makes sense for all stakeholders, the shareholders of Parker and Meggitt, the team members of both of our companies, their pensioners, and of course, both of our customers. Following the announcement on Monday, we've introduced ourselves to the key stakeholders in the U.K., reinforcing why we are the best home for Meggitt.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

Our long, great track record in the U.K., the clear strategic rationale for the deal, including the premium we are offering to the Meggitt shareholders, our shared interest to continue to innovate and invest, and that we are committed to being a responsible steward of Meggitt. That is why we've agreed with Meggitt to offer the U.K. government a number of legally binding commitments about how we will operate going forward. These type of transactions take time, but we are pleased with the reception so far, and we look forward to constructive discussions with the key people in the U.K. government. We'll keep you updated as the process unfolds, and we go to the planned completion of this in approximately 12 months. With that, I'll hand it back to Todd for more details on the quarter.

[Todd Leombruno, EVP and CFO at Parker Hannifin]

Yeah, thanks, Tom. I guess I would like to direct everyone's attention to slide 15, and I'll just real quickly walk through the FY 2021 Q4 results. As Tom mentioned earlier, we have some outstanding results to share here. Sales increased over 25% in Q4 versus prior year and finished at $3.9 billion. As he said, that's an all-time record for the company. We're really particularly proud of this due to the fact that our aerospace markets are still challenged. It really demonstrates the strength of the portfolio additions that we've spoken about with CLARCOR, LORD, and Exotic, and really is driven by strong broad-based demand across all of our industrial businesses. Organic sales are up 22% in the quarter, so basically the majority of that 25% change is all organic. This is the first time organic sales have been positive for the company in over two years.

[Todd Leombruno, EVP and CFO at Parker Hannifin]

Currency also was favorable with a 3.5% impact to total sales. Moving to adjusted segment margins, that 22.2% is an improvement, like Tom said, of 230 basis points from prior year, and it's also 80 basis points improved sequentially from Q3. Just another strong quarter of margin performance as really our teams around the world pivoted to the increased demand levels and managed through a number of challenges. Very proud of our team for that margin performance. Incrementals are also commendable at 31% year-over-year, really impressive considering last year was the depth of the pandemic, and our decrementals last year were fantastic at -13%. If you remember, that included approximately $175 million of temporary savings in that FY 2020 Q4. We're really happy with the 31% incrementals. EBITDA margins also expanded 190 basis points from prior year, finishing the quarter at 22.1%.

[Todd Leombruno, EVP and CFO at Parker Hannifin]

If you look at that net income number, $577 million, that's an ROS of 14.6%, and that's an increase of nearly 50% from prior year. All of those great results translated to an adjusted EPS of $4.38. That's an increase of $1.39 per share or 46% compared to the prior year number on this slide of $2.99. Just one point I want to reference to the prior year numbers, and I'm really speaking to net income and the EPS numbers only. We have been planning for some time to convert our remaining U.S. locations that used to use LIFO for inventory valuation to standardize that across the company and move to FIFO inventory valuation purposes. We made that voluntary change in FY 2021 Q4, and we've retrospectively applied that change to prior years, and we've attached the impact of those prior years to this press release in the table section.

[Todd Leombruno, EVP and CFO at Parker Hannifin]

The impact to the previously reported quarter last year was minimal. It was only $0.04 last year. The $2.99 on this page, if you're looking back to prior year, that would've been $3.03 in FY 2020. One other note I want to make, LIFO, we've always booked this at the corporate level. This has no impact to our segment operating margins or the incrementals that I just mentioned to, and now 100% of the company's inventory is valued using the FIFO method. Just one last comment on the quarter, really proud of our team globally. It's just a tremendous effort the team put forth to put up just such a solid quarter to finish really, and it's offset our record year. If we could move to slide 16, this is just a bridge of that $1.39 increase to adjusted EPS that I just mentioned.

[Todd Leombruno, EVP and CFO at Parker Hannifin]

What I love here is the largest bar on the page signals the strong operating performance that the teams put together. Our segment operating income on an adjusted basis increased $250 million or 40% from prior year Q4. That accounts to $1.50 of the increase in EPS that we just put up for the quarter of $1.39. It's really strong execution really everywhere across the company. All the other items you see on the slide, if you net it's $0.11 unfavorable. Corporate G&A income tax and shares were slightly unfavorable, but lower interest and lower other expense partially offset the impact there. Again, most of this is really fantastic due to comparing back to our COVID-impacted quarter of the prior year. If you go to slide 17, just some color on our segment performance.

[Todd Leombruno, EVP and CFO at Parker Hannifin]

Really the message here is our industrial businesses delivered outstanding results across the board. We've spoken in the past about the impact these portfolio changes have had on the company, and you can see it here in these margin numbers. Diversified Industrial North America sales were $1.8 billion in the quarter. Organic sales improved again in this segment sequentially up and are up 26% versus prior year. Operating margins improved an impressive 300 basis points versus prior year and really finished at 22.5% for the quarter. Obviously, volume helped us a little bit there, but really the disciplined operating performance and cost control really continued to drive the sizable increase to margins. Margins in this segment are a record, all-time record, and incrementals also were very healthy at 34%. Again, I keep referencing the comparables back to last year, which is just a very tough comparison.

[Todd Leombruno, EVP and CFO at Parker Hannifin]

If you look at order rates, order rates are robust at +56%. This is up sequentially from last quarter we reported +11% and really just strong across the board. If I move to the international, Diversified International segment, really same story here. A little bit higher organic growth of 28.5%. Sales just reached $1.5 billion in that segment. Again, another story here, adjusted segment operating margins expanded 300 basis points versus prior year and finished at 22.1% in the international segment. Just really, again, strong organic growth in that volume coupled with that cost containment and productivity initiatives really generated this record margin performance in this segment as well. Order rates, again here, tremendous, up a little bit higher than North America at +58%, versus 14% positive in the last quarter. Really just a great performance out of our industrial businesses.

[Todd Leombruno, EVP and CFO at Parker Hannifin]

I'll just touch on Aerospace Systems really slightly. Very sound performance in the current market. Sales here were $603 million for the quarter, and I'm happy to report organic sales have turned positive in this segment. They are up 1%. We saw strength in commercial and military aftermarkets, with strong sequential growth again in Q4. We're happy to start seeing rate increases from OEMs, particularly in the narrow body and business jet platforms. Aerospace orders also got less negative and improved to -7 this quarter on a rolling 12 basis versus -19 last quarter, and further proof that we are seeing signs of recovery in this area. Operating margins also very strong, 21.6. That improved sequentially from Q3 and really finished the year at the highest level they've had in the entire fiscal year. Very proud of our aerospace team there.

[Todd Leombruno, EVP and CFO at Parker Hannifin]

Just looking at the company on whole, we're really pleased with these results. It's a solid finish to the fiscal year. Our total incrementals were 31%. Really proud about that. And really just a comment, if I look at just our industrial businesses, if I go back to pre-pandemic FY 2019, and on a like-for-like basis, if I include LORD in those FY 2019 numbers, in the industrial businesses, our sales volume has surpassed pre-COVID levels. We're really proud about that. Orders you can see in total are +43%, and as Tom mentioned, not only did we achieve our FY 2023 margin targets, but we surpassed them, and we did that two years early. If I go to the next slide 18, cash flow. We're obviously very proud of this. Tom mentioned this earlier. Full year cash flow from operations was $2.6 billion.

[Todd Leombruno, EVP and CFO at Parker Hannifin]

That's an all-time record for the company. 17.9% of sales, just outstanding. Top quartile performance. If you look at that compared to prior year, we generated over $500 million more cash. That's 24% more cash than we did prior year. Like I said, that CFOA of $2.6 billion is a record. Working capital, really solid performance here, and I want to just really thank our teams everywhere around the world for focusing on this. We asked them to focus on this through the pandemic, and they delivered soundly. I want to thank you all for your focus on that. Free cash flow, also fantastic, 16.5%. That's up 310 basis points versus prior year. The free cash flow conversion for the year, 135%.

[Todd Leombruno, EVP and CFO at Parker Hannifin]

With that, this now marks the 20th year that free cash flow conversion has been greater than 100%, and cash flow from operations has been greater than 10%, 20 years running. All of this allowed us to significantly pay down our serviceable debt. We've been vocal about that for the last couple of months. If you look at the last 20 months, we've paid down $3.4 billion of debt, and our gross debt to EBITDA finished the year at 2.1%. Net debt is 1.9%. Again, it's a similar story here. We achieved these leverage levels a full one year sooner than we had originally forecast. It's just an outstanding cash position. It's top quartile execution and really impressive considering the backdrop of the global pandemic. 19, I will ask you to focus on 19, just flipping to FY 2022 and our guidance.

[Todd Leombruno, EVP and CFO at Parker Hannifin]

You saw that we released this this morning. As usual, we're going to provide this on an as-reported and an adjusted basis. I'll just start at the top. Sales, we're forecasting sales to increase in the range of 5%-9%, really 7% at the midpoint. Really, the breakdown of that sales growth is essentially all organic. We do not expect the Meggitt transaction to close in FY22. Both LORD and Exotic have anniversaries, those are no longer considered acquisition sales. Therefore, we are forecasting no impact to sales from acquisitions. Currency is just a minimal drag at the 0.2% of sales. Just like we always do, we have calculated the impact of currency to spot rates at the end of June 30th, and we've held those rates steady as we forecast FY22.

[Todd Leombruno, EVP and CFO at Parker Hannifin]

One thing I'll note, the sales split for the guide is 48% first half, 52% second half. The next item I'll talk about is segment operating margin. On an as-reported basis, the guidance for the full year is 19.3% at the midpoint. There's a range of 20 basis points on either side of that. More importantly, on an adjusted basis, segment operating margin guidance for the full year is 21.6% at the midpoint. Same range of 20 basis points on either side of that. This adjusted segment operating margin guide is 50 basis points higher than what we just finished our record FY 2021 at. Just some color on adjustments. At a pre-tax level, business realignment charges are expected to be $35 million for FY 2022. LORD costs to achieve are only $7 million for the forecasted year. Acquisition-related intangible amortization is $320 million.

[Todd Leombruno, EVP and CFO at Parker Hannifin]

Just a note on the split, adjusted segment operating margins, 46% first half, 52% second half. If you look at the corporate G&A interest in other, $480 million is our forecast. That is the same on an adjusted and an as-reported basis. Tax rate, we are forecasting full year to be 23%. Finally, EPS on an as-reported basis, our guidance is $14.48 at the midpoint. There's a $0.40 range on either side of that, and our adjusted EPS guidance is $16.60 at the midpoint, same $0.40 range on either side of that. Adjusted EPS split, first half is 45%, second half is 55%. A little color on Q1, we are forecasting adjusted EPS to be $3.60 at the midpoint. Slide 20 is the bridge, and again, this is very similar to Q4.

[Todd Leombruno, EVP and CFO at Parker Hannifin]

Main driver of the $1.56 or 10% increase to adjusted earnings per share is just our continued strong execution across the enterprise. Segment operating margin is accounting for $1.76 of that change. Just slightly higher corporate G&A, tax, and average shares outstanding are a little bit of a drag, but all in $1.56 increase in earnings per share, increasing earnings per share by 10%. Lastly, I will just talk about capital deployment for FY22. We are committed to our capital deployment strategies. We have a strong 65 year of record of consistently, consecutively increasing the annual dividends paid. We're going to continue with that record. Our payout target is not changed. It remains 30%-35% of the five-year average of net income. We're going to continue to fund organic growth and productivity across our global locations.

[Todd Leombruno, EVP and CFO at Parker Hannifin]

We expect capital expenditures to be 2% for the year. Our 10b5-1 share repurchase program, we reinstated that this year. We are committed to continuing that in FY22. As I mentioned when I was talking about cash flow, we have extinguished all of our serviceable debt, and we are now in a cash building position. Our focus for FY22 will be to continue our record of strong cash flow generation and accumulation in preparation for the closing of the Meggitt transaction. With that, Tom, I'll turn it back to you, and I'll ask the audience to focus on slide 22.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

Thank you, Todd. Just closing messages. What drives these results, the engine behind the companies are people. Highly engaged team, great culture, higher levels of ownership driving this performance, very inspiring results as you've seen. Living up to our purpose, the vaccine production is a classic example of that. Core top performance, the more than doubling of EPS, the 660 basis points improvement in EBITDA margin over the last six years. Hitting the margin targets that we laid out for you two years early. Obviously, we're going to keep improving upon that. The strategic deployment of capital and changing the portfolio, CLARCOR, LORD, Exotic, and now Meggitt. You put that together with The Win Strategy 2.0 and now 3.0. It really spells for a bright future. We'll continue to accelerate the performance.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

With that, I'll turn it over to Don to open up the Q&A.

[Operator]

Thank you. If you wish to ask a question, please press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Scott Davis with Melius Research.

[Scott Davis, Founding Partner, Chairman, and CEO at Melius Research]

Hi. Good morning, guys, and congrats on a great year.

[Todd Leombruno, EVP and CFO at Parker Hannifin]

Oh, thanks, Scott.

[Scott Davis, Founding Partner, Chairman, and CEO at Melius Research]

I don't always say that, but I mean it. Guys, you've had a few days for this to marinate, the Meggitt deal at least. What's been the customer response and feedback to the announcement?

[Thomas Williams, Chairman and CEO at Parker Hannifin]

Scott, it's Tom. We're early days on reaching out to customers. General view is very positive. They like the fact that this is a stronger bill of material opportunity to create more value, the highly complementary technologies, and really the track record of both companies. Both companies have a great reputation, great innovators, great engineering-led companies. The response so far is very positive.

[Scott Davis, Founding Partner, Chairman, and CEO at Melius Research]

Good to hear. Not to get too nitty-gritty here, but you didn't really talk much about some of the challenges out there on the cost side, supply chain disruptions, logistics, all of that. Clearly with 31% incrementals, it couldn't have been too big of a deal for you guys, but perhaps you could help us understand how you've managed through that and how you're thinking about that as it relates to guidance over the next 12 months as well.

[Lee Banks, President and COO at Parker Hannifin]

Hey, Scott, it's Lee. I'll take a shot at answering this. I think the first thing on the supply chain side is just to kind of step back and recognize how we're structured, which is a huge benefit for the company. As you know, we make, sell, and source in the region for the region. It allows us to be close to the customers and get away from a lot of international shipments. Having said that, we're not immune to what's going on in any of the regions, but I would characterize it internally as being manageable, but not without hard work. Now, I would say the biggest challenges we're dealing with is just our customers.

[Lee Banks, President and COO at Parker Hannifin]

I think automotive is very public on what's happening, but I probably don't have a large OEM that hasn't had some kind of disruption where lines have been down, people have been sent home, et cetera. We're working with our customers to work through that. It's just creating a lot of chatter in the channel, and I would say best is a lot of choppy production.

[Scott Davis, Founding Partner, Chairman, and CEO at Melius Research]

Yeah. Makes sense. Okay. Thanks, Lee.

[Lee Banks, President and COO at Parker Hannifin]

Yeah. You bet.

[Operator]

I'm sorry. Your next question comes from the line of Jamie Cook with Credit Suisse.

[Jamie Cook, Managing Director of Equity Research at Credit Suisse]

Hi, good morning, and nice quarter. I guess, just a couple questions. Can you help us understand what you assume for organic growth in the first half versus the second half, and what you're assuming sort of price versus volume? I guess the Aerospace, like the top line guide to me seemed like with what's going on, understanding we have the Delta variant, but there could be some level of conservatism there as we think about sort of the top line. If you can just help me understand what your assumptions are on the Aerospace guide? Thank you.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

Jamie Cook, it's Tom. I'm going to take the guide, and I'll take a few minutes to describe that. I'll go through the Aerospace piece, so I'll let Lee C. Banks touch on the price-cost aspect. This is probably the question that is on everybody's mind. How do we come up with the guidance and some of the context behind it? First of all, there's a number of tailwinds, and I'll highlight some of the headwinds. On the tailwind side, clearly the order trends, the macro environment, I think there's a CapEx underspend that happened for a number of years, so I think there's some CapEx demand that's coming back from manufacturing companies. Clearly, governments being more prone to put in stimuli. The rebound from the Great Shutdown and, of course, the rebound of activity.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

The commercial aerospace recovery, which I'll touch on to answer your question here in a minute, Jamie. Low interest rates, the climate investment, which with our clean technology portfolio, is a very attractive positive for us in the future. On the headwind side is the Delta variant and COVID-19. It hasn't gone away and is creating uncertainties throughout the world. The supply chain disruptions, in particular our customers and how that might impact demand patterns, which Lee touched on, and inflation, both on the material side and with wages. We've built a pretty sophisticated AI model over the last 18 months. It's not perfect. Nothing is when you come to forecasting. In my time at the company, it's the best tool we've had to date, and we factored in all these inputs and came up with what the best forecast is.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

I'll give you a little more detail behind it. The first half that we're looking at is up a little over 9% organically, and the second half up mid-single digits. That's how you get to the 7% overall. An important part, though, if you look at the industrial piece, both North American industrial, approximately the same, up 11% the first half and up mid-single digits the second half. When you think about Aerospace, and several of the pre-reports that came out didn't have the insight that I'm going to share with you right now. We have Aerospace with a gradual recovery up 3% the first half, up 5% the second half. That's where you get the 4% at the midpoint. What's underneath that, and I'll help give you some context as to why that number is what it is.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

On the commercial side, both OEM and MRO, that's going to grow low teens, nice recovery there. Military MRO is growing mid-single digits. What is down is military OEM. It's down mid-single digits. The reason for that, thankfully our customers thought of this, our customers accelerated deliveries last year. We were up 19% as an example. They did this to protect the supply chain, to protect supplier health, because a lot of suppliers have commercial exposure as well as military exposure, they accelerated the military exposure to help everybody. This year that we're in now, 2022, is a reset of the inventory through that supply chain. We will be down, of course, we'll go back to more normal levels in FY 2023.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

If you were to take out that acceleration in the prior period, our FY22 military OEM would be about a plus three. When you would factor that in, aerospace growth would be more like 8%. That 4% is being weighted down by the military OEM segment that reset inventory. Hopefully that helps everybody with why the aerospace number is what it is. Comparing that growth rate to 7% to GIPI, Global Industrial Production Index, that's going to be within our FY22. That's a 4.8% forecast. You've heard us talk externally, we want to grow 150 basis points faster than that, our number at 7% should do that. While I've got kind of talking about guidance, I want to just touch for a second on operating margin, and I'll let Lee comment about price cost.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

Our operating margin guide's at 21.6% at the midpoint. It's an approximate 30% MROS for the full year. If you were to take out the discretionaries in the prior period and made this an apples to apples, the underlying MROS is a positive 50%. A good indicator is that what we did in Q4, we did over 50% in Q4, that was actual results. The reason why I mention that is that underlying MROS is being hidden because of the year-over-year comparisons being awkward, and it really speaks to the operational excellence from the team, just because it's hard to do an underlying 50% MROS. I think everybody can appreciate that. Lee, if you want to comment on the price cost.

[Lee Banks, President and COO at Parker Hannifin]

Yeah, Jamie, I'll just add on and finish up here with price cost. Last earnings call, the question came up, and I talked about how we track all the commodities on quarterly trends and then year-over-year trends, and I said back then it was a sea of red. In other words, everything was up. I would tell you here a quarter later, it's still a sea of red. Having said that, we're able to see this coming very well because of the processes we have internally by measuring what we call our purchase price index, and then also maintaining margin neutrality by our selling price index. We're on top of it, and our goal, as we've always said, is to be margin neutral. We're actively working price, both with direct customers and distribution.

[Lee Banks, President and COO at Parker Hannifin]

There is a lot of inflation on the commodity side right now, no doubt about it.

[Jamie Cook, Managing Director of Equity Research at Credit Suisse]

Okay, thank you. I appreciate the color.

[Lee Banks, President and COO at Parker Hannifin]

Thanks, Jamie.

[Operator]

Your next question comes from the line of Mircea Dobre with Baird.

[Lee Banks, President and COO at Parker Hannifin]

Good morning, Mig.

[Mircea Dobre, Associate Director of Research at Baird]

Good morning, everyone. Thank you for taking the question. Tom, I guess I'm looking for a little more context from you vis-a-vis industrial order strength, both North America and international. I don't know what your expectations were for the quarter, but I'll tell you versus ours, these orders were much stronger. I'm also looking to understand what backlog must look like at this point, because obviously your order intake was higher than organic growth. Are there any challenges with regards to converting this backlog to actual revenues, either on your side or maybe potentially your customers? Let's start with that, maybe.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

Mig, let me talk about orders, Tom. I think just to maybe help clarify things for people. People, you're doing two-year stacks, you might say, "Hey, geez, it seems like the organic growth might be light compared to the two-year stack." The one thing that you have to look at is in current period, we have acquisitions. In the prior period, we did not have Lord and Exotic. We go all the way back to 2019. When you do apples to apples on orders 2019 to 2021 and exclude the acquisitions, our industrial orders are up low teens. I just mentioned as I was answering Jamie's question, our forecast for the first half on industrial is low teens, 11% organic growth. There's clear correlation between what we're seeing versus 2019 in apples to apples on order entry.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

That's how we, in addition to the AI model, how we laid out the year. The backlogs are increasing. Again, you got to remember the prior periods has uniquely low comps, so it's probably an inflated number that you can't get too excited about. Our on-time delivery is holding up nicely. Obviously, my customers would like to see us do better on that. It's holding up very well compared to comparable times. I'd say the impact that we've seen has been more on customer pushouts of schedules, particularly in automotive, where the automobile OEMs are having trouble with chips, as everybody knows, and they're taking really targeted shutdowns, and that will push out our various orders, and that impacted North America a little bit in Q4. As Todd had mentioned, our Q4 sales were up about 10% industrially versus Q4 of FY 2019.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

Everything's kind of coalescing between orders and sales when you compare to 2019 around that low teens type of growth rate.

[Mircea Dobre, Associate Director of Research at Baird]

Okay. I guess I want to follow up on Jamie's question on pricing and trying to see if we can get maybe a more specific answer. When I'm looking at various PPIs of some of the product categories that you guys are involved with, it's pretty common that I'm seeing these PPIs somewhere in the plus 4.5% year-over-year. I'm just sort of wondering if you're seeing a similar level of price increases in your industrial business and if there are differences at all in terms of OE versus your distributor partners. Thank you.

[Lee Banks, President and COO at Parker Hannifin]

I would say it's a range, some lower and some higher. Whether it averages out to that or not, I can't really say. With our OEM customers, we've got direct contracts with many of them, and what we're benefiting from is a lot of them have material clauses in them. It allows us to capture that pricing as we go forward. On the distribution side, that's typically just a list price increase. What you're seeing is kind of our best guess, and it's all in the guide right now.

[Mircea Dobre, Associate Director of Research at Baird]

Thank you.

[Lee Banks, President and COO at Parker Hannifin]

Thanks, Mig.

[Operator]

Your next question comes from the line of Nicole DeBlase with Deutsche Bank.

[Lee Banks, President and COO at Parker Hannifin]

Good morning, Nicole.

[Nicole DeBlase, Analyst at Deutsche Bank]

Thanks. Good morning, guys. Can we just I know you went through the one-half dynamics, Tom, but can you just narrow that view a little bit to what's baked into 1Q, both with respect to organic growth and incremental margin? Thanks.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

Nicole, it's Tom. First quarter would be a kind of low to mid-teens for industrials. Aerospace, low single digits. Really, our first half from an MROS is going to be in that upper 20s. Again, I would just point to the comparison, if you did apples to apples, would still be in that 50% range. It's really outstanding performance by the operating team being masked by the prior period, all the discretionary cost savings that we had.

[Nicole DeBlase, Analyst at Deutsche Bank]

Got it. Okay. Thanks, Tom. Can we just clarify on the change to FIFO accounting in the U.S.? I guess what was the impetus to do this now, and is there any benefit to the 2022 guidance related to the FIFO change?

[Todd Leombruno, EVP and CFO at Parker Hannifin]

Yeah, Nicole, I'll take that. This is Todd. We've been talking about this internally for quite some time, and it really started with the recent acquisitions, CLARCOR, Lord, and Exotic. Those companies always used the FIFO valuation method. We do not use it in our Aerospace Systems business. We really only used it in our traditional U.S. locations. All of our international locations, by rule, had to use the FIFO valuation method. We took a look at it and said, "Hey, maybe this year is an opportunity to convert," and that's essentially what we did. We converted early in the quarter. We worked tirelessly across our teams and with our external auditors, and we felt that was the best time to do it. There really is no impact to the quarter since we converted. We essentially reported the quarter in the FIFO method.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

We did go back and restate prior years just to show you what the impact was. I just want to make sure everybody realizes that if you look at this historically, it's a penny or two per quarter. It's a very immaterial impact. We always book that at corporate, it had no impact to our segment margins or any of our incrementals, it really just now standardizes our inventory valuation across the entire company. We're happy with the results. In respect to FY 2022, there's nothing in the guidance for a benefit for converting to FIFO.

[Nicole DeBlase, Analyst at Deutsche Bank]

Okay. Thanks for clarifying that, Tom. I'll pass it on.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

Okay. Thank you.

[Operator]

Your next question comes from the line of Nathan with Stifel.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

Hi, Nathan.

[Nathan Jones, Analyst at Stifel]

Good morning, everyone.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

Morning.

[Nathan Jones, Analyst at Stifel]

I wanted to follow up on the MROS comment, Tom, of 50% if you'd normalized both years for all of the discrete costs and charges and benefits. Which I think is, you would normally see a high MROS in the first real year of a recovery here, which would then glide back down to something more normalized. I think the 50 was probably higher than you would normally get in the first year. Can you talk about what you think that MROS kind of progression would be over time, and what a normalized average kind of incremental margin MROS would be for you guys?

[Thomas Williams, Chairman and CEO at Parker Hannifin]

Nathan, it's Tom. You're right. I think this underlying MROS of 50% for a whole year, and it would be also counting Q4 and probably Q3 of last year, so 18 months, will be higher and longer than we would normally expect. I think what speaks to the changes from the One Strategy and the fixed cost changes we've made and then maybe the efficiencies on top of those changes that came out of the pandemic, just a more efficient way of working. I think going forward, especially when we get to FY 2023, you won't have these anniversaries to worry about with the discretionary one year, not in the next year. I think, I would just use for people modeling 30%.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

As we've looked at it and benchmarked it, that continues to be a best-in-class number, and I think with all the changes we've made, I think that's a good number to use over a cycle, to use 30%.

[Nathan Jones, Analyst at Stifel]

All right. Thanks for that. I did want to ask a question on the ESG report that you guys put out the other day. It's clearly some very significant reductions that Parker's made over the last decade or so and some good aggressive targets over the next 10-20 years. Can you talk just a little bit about, it's probably a very long answer, some of the mechanisms that you're going to use, some of the main initiatives that you're going to use to achieve those goals?

[Thomas Williams, Chairman and CEO at Parker Hannifin]

It's going to be a combination. We've been working this already, and we've had since 2010, a 44% reduction. I've got the report actually in front of me. I have to go find various. We use different time periods. There's 50% in the report, since 2010. We've been on this for a while, and it's energy things that we do within the plants, renewables, different lighting. Some of this will happen from indirect emissions as the various utility companies change over to using renewables. We automatically get credit for that as well. We're going to be working with our suppliers on what they can do to reduce it. All the Kaizen work we do where we just utilize the equipment better, smaller footprints, better flow, less distances traveled, all those kind of things help in this reduction. We have every group signed up.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

They have their respective greenhouse targets that they're working on. They know exactly where they are, that gets cascaded down plant by plant. You envision every group having a list of greenhouse gas emissions, reductions, water things they're doing, recycling things they're doing. That's the only way we know how to do it. We drive it down to the respective divisions. At the group level, we have each group on their technology roadmap develop their clean technology portfolio and how it needs to change for more EVs, more fuel cell EVs, more hydrogen, et cetera. The groups have been actively doing this.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

The good thing about this is we formed the Motion Technology Center about three years ago, and for people who aren't familiar with it, this was taking the best and brightest that we could between aerospace and our motion systems groups. Taking all the motion-related technology in the company and having a center of excellence for that, in particular, focusing on electrification. A lot of the technologies that we developed in the '90s on the F-35, the flight surfaces on the F-35 fighter are electro-hydraulically actuated. We've taken a lot of those learnings and applied it into the industrial portion of the company and developed a suite of motors and motor controllers and software that we're offering on the industrial companies, for OEMs in particular, for their platform changes as they look at more electric.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

When you add in acquisitions like LORD on top of the engineer materials applications that we have from legacy Parker, we have a really strong material science portfolio to help with that transformation as well. Our sustainability message is twofold. Things we're going to do internally, which we have good line of sight to, and we put out two major targets, 2030 and 2040, but we're looking for year-over-year things to get there. What we're doing to help our customers. Because our customers at Scope 3, that's us helping our customers, and we'll be all over doing that.

[Nathan Jones, Analyst at Stifel]

Great. Thanks for taking my questions.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

Thanks, Nathan.

[Operator]

Your next question comes from the line of Joe Ritchie with Goldman Sachs.

[Joe Ritchie, Managing Director at Goldman Sachs]

Thanks. Good morning, everyone.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

Good morning, Joe.

[Joe Ritchie, Managing Director at Goldman Sachs]

Todd, maybe first question on free cash flow? Clearly, really nice job this year at 16.5% of sales. I guess, as you think about the free cash flow margin going forward, should we be thinking that there's going to be a little bit more of a working capital train going forward, just given that growth is inflecting here on the industrial side?

[Todd Leombruno, EVP and CFO at Parker Hannifin]

Well, yeah, absolutely, Joe. There's been a step change in our cash flow performance, and I think everyone has seen that over the last couple of years. It's always a little bit tougher in a growth environment, so we'll be ready for that. I still think there's some opportunity across our enterprise. Some of the recent acquisitions, I think we've got some upside on inventory. Really, on receivables and payables throughout the last 20 months. I still think we've got room to grow here, so we're not expecting much of an impact.

[Joe Ritchie, Managing Director at Goldman Sachs]

Okay, great to hear. My one follow-up, Tom. Obviously, clearly, big announcement this week. I'm curious, maybe on the flip side of things, are you thinking maybe a little bit more aggressively around the portfolio divestiture side to help with the potential de-leveraging from this large acquisition and how you're thinking about divestitures and holistically, that'd be helpful?

[Thomas Williams, Chairman and CEO at Parker Hannifin]

Yeah, Joe, it's Tom. We look at that all the time, not just when we have a large acquisition, but this is something we have a standard work around that we look at the Office of the Chief Executive, so Lee, Todd and myself, as well as we do it annually with the board. I would characterize it, I've used this visual for people. I think the portfolio of the company has been very thoughtfully put together. Think of it as a tree trunk with the various branches. Two-thirds of our revenue comes from customers who buy from four or more of the eight technologies we have. My predecessors and everybody that built this company did a very thoughtful job of putting together interconnected pieces that makes sense. When we do that portfolio analysis, there's very little that we see that we'd want to divest.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

It's something we look at all the time. Doesn't mean that we wouldn't divest anything, but if you use the tree analogy, it would be a small branch. There's going to be no major trunks that gets lopped off. We look at it all the time, but I wouldn't see any big announcements from us regarding divestitures.

[Joe Ritchie, Managing Director at Goldman Sachs]

Okay, thanks. Take my questions.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

Appreciate it, Joe.

[Operator]

Your next question comes from the line of Joel Tiss with BMO.

[Joel Tiss, Managing Director at BMO Capital Markets]

Hey, guys.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

Hello, Joel.

[Joel Tiss, Managing Director at BMO Capital Markets]

Just a different angle on that last question. Are there any internal actions you guys can take or that would really help you to get ready for the Meggitt acquisition, or that's not how you work?

[Thomas Williams, Chairman and CEO at Parker Hannifin]

Well, I would characterize, Joel, it's Tom. Those internal actions have been happening every day since I joined the company and every day that everybody else that works here. We're all about continuous improvement. I think the slide we showed earlier on, those 660 basis points improvement in EBITDA margin, is what's positioned us to be able to do a deal this size. If you think about a couple things regarding Meggitt, and just using that as an example. The multiples that we're going to do are very similar or less than what we did with CLARCOR. The synergies, while the dollars are big, the percent synergies are very similar to what we did with CLARCOR and Lord.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

What's interesting is we're going to do a deal that has over 2x the purchase price of our largest transaction, but our starting leverage will be about the same point that we were when we did Lord and Exotic. The question might be, well, how? The reason for that is because EBITDA has grown dramatically. The cash flow generation of the company, the EBITDA margins have grown so dramatically that we can take this size, and it looks very similar to what we did in the past. We've been getting ready every day, and as we keep getting ready, we'll probably be ready to do something even better as we go into the future. When we update you on our FY 2026 targets, they're going to be higher than what we are today.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

One Parker-Hannifin just started, and it has tremendous firepower behind it to continue to propel the company. We're preparing for the future every day, and I think what we did really the last 10 years is what's positioned us to do the Meggitt acquisition.

[Joel Tiss, Managing Director at BMO Capital Markets]

Does that take away your kind of potential, as we get to Investor Day, to have some kind of bigger levers that really drive margin forward? Is it really just a series of small things? Can you give us a couple of examples of some of the things you're working on that could really continue to transform this company? Then I'm finished. Thank you.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

Well, there's a couple things I've talked about on the top line. It would be the portfolio changes we've made, but there's also things organic that we're doing differently, the whole strategic positioning, which I'll try to give more color on that on IR Day and how our divisions are taking a real step change in ownership of how they position themselves versus the competitors. The innovation changes we've made on PVI and new product blueprinting, Simple by Design, which is a growth propellant as well as a margin engine. International distribution growth, digital leadership, and the new incentive plan change, ASIP replacing RONA. All those things are going to help on the top line, but several of those help on the margin side as well.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

As the portfolio becomes more innovative, and it has over the last number of years, those carry a higher margin. Simple by Design, as some of you maybe heard me talk about, will be the single largest margin enhancement the company's ever done, and it's just starting. International distribution, as we move that mix, that's a margin enhancement. We found with digital leadership that we continue to get more efficient with the use of AI. Probably last, but not least, and the most important, the things we've done around engagement. If I had to pick one single thing that's propelled the company, it's been the engagement of our team members, the engagement scores, the ownership. It's hard to put a number to that.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

You know when you have people that think and act like an owner, that use lean and Kaizen, it's just part of their normal thinking. That spirit of continuous improvement is a big part of what's driven our success to date. You can plot our Kaizen activity and our engagement scores, and they're working hand in hand. They're like on a parallel path, driving success. It's not one single thing, Joel. It's a number of things. I guess that one slide that we showed you earlier showed the compounding effect of improvement year-over-year, the compounding on EPS, doubling it, the compounding on margins, and that's going to keep going. We're not going to stop.

[Joel Tiss, Managing Director at BMO Capital Markets]

That's great. Thank you.

[Todd Leombruno, EVP and CFO at Parker Hannifin]

Thanks, Joel. Hey, Don, I think we have time for one more question. Whoever's next in queue, we'll take one more question.

[Operator]

Okay, we have a question from the line of David Raso with Evercore ISI.

[David Raso, Senior Managing Director and Partner at Evercore ISI]

Hi. Thank you very much. I apologize. I didn't follow the order commentary. You said that the current quarter orders were running, I think you said 17%. Can you first clarify that? Was that industrial? Was it the whole company? I'm just trying to understand that comment.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

David, this is Tom. The comment I mentioned on orders was contrasting 2019 to 2021, where we were, if you made it apples for apples, because we didn't have acquisitions, two of the last acquisitions in 2019. That has orders growing versus 2019 at around low teens. I was just making that correlation, that we got order entry coming in low teens versus 2019, and we've got sales growth in Q4 was right around 10% versus 2019. Our forecast for organic growth in the first half for the industrial piece of the company was around 11%. They're all kind of coalescing around that 10%-11%, low teen type of level.

[David Raso, Senior Managing Director and Partner at Evercore ISI]

I appreciate that. We're not really comparing it versus 2019. Your guide is 2022 versus 2021. If the orders were over 50% industrially in last quarter, if you look at the more challenging comps, single stack, maybe it's 17%, so the orders would be up like 40. You want to double stack it's even less of a degradation. I'm just trying to understand what are the actual order trends right now versus a year ago, just so we understand. Are you seeing a slowdown, or are we just confusing the commentary about versus 2019? Just to be clear, because the first half industrial growth is the correlation's breaking significantly versus orders leading sales and how you're guiding.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

Right.

[David Raso, Senior Managing Director and Partner at Evercore ISI]

What are you finding in industrial orders?

[Thomas Williams, Chairman and CEO at Parker Hannifin]

I was trying to give you back to something that was more normalized activity because the year-over-year is what we've announced. It was over 50+% for International and -7% for Aerospace Systems and +43%. You can't extrapolate that as against normal conditions because that was against a quarter ago, which is one when the great shutdown happened. You can't take that number and extrapolate it into organic growth. You got to come back to some other benchmark. We went back to when activity was more normalized, and that's the data they came up with. This is what our-

[David Raso, Senior Managing Director and Partner at Evercore ISI]

I appreciate that.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

all the various inputs that we put into that. There's a lot of science that went into this number, and I'm just trying to contrast why you can't take a 43% order entry and say you're going to have a 43% organic growth.

[David Raso, Senior Managing Director and Partner at Evercore ISI]

Would you be able to help us with how the orders are trending currently versus a year ago?

[Thomas Williams, Chairman and CEO at Parker Hannifin]

Well, orders continued to grow through the quarter. If I take North America, it was 11% at Q3, and it went to 56%, and it sequentially got better every month through the quarter. Same thing happened international. We saw momentum building through the quarter. Things were definitely not slowing down, David. I don't want anybody to take that thought process. Things built through the quarter.

[David Raso, Senior Managing Director and Partner at Evercore ISI]

That's why I want to be clear. Tom, if you've got 50% in this past quarter, that usually is somewhat of a correlation for the next quarter, the comp's not exactly a normal comp. The fact is, if you look at the comps, this current quarter, the industrial orders should still be up north of 30% or so. When you have two quarters running 50%, then 30%, it doesn't make a lot of sense to be thinking a 1st half industrial is kind of low teens. I know it's a little tricky on the conversion. Maybe some things are taking a little longer to ship. I'm just making sure we don't walk away thinking that's a pretty dramatic slowdown. You're just saying you're not seeing a slowdown, end of the day.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

I want to be very clear. There's absolutely no slowdown.

[David Raso, Senior Managing Director and Partner at Evercore ISI]

Just making sure.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

You can't take a 50% order entry rate and draw a linear curve there and say it's a 50% organic growth.

[David Raso, Senior Managing Director and Partner at Evercore ISI]

I hear you.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

That's not how it works.

[David Raso, Senior Managing Director and Partner at Evercore ISI]

I hear you. Lastly, to the March meeting, when we think about the comment about Simple by Design, still you feel pretty early in the journey. Any way you can frame for us how you perceive margin improvement from here versus the journey we've been on the last five years? Just to frame it a little bit for us given Simple by Design.

[Thomas Williams, Chairman and CEO at Parker Hannifin]

Well, I'm not going to do that yet. I want to do that in full context, going through all the strategies and how we're going to do it and giving you a fully baked explanation. I would just say that we're going to continue to get better. If the past is an indicator, you can draw that into the future.

[David Raso, Senior Managing Director and Partner at Evercore ISI]

No, I appreciate that. Okay, thank you very much.

[Todd Leombruno, EVP and CFO at Parker Hannifin]

Appreciate it, David. All right. I just would want to say thank you to everyone for joining us today. This does conclude our FY 2021 Q4 earnings webcast. Again, just consistent with the comments made on Monday regarding the requirements of the U.K. Takeover Code and our pending Meggitt transaction, a representative of Citibank will continue to participate on all of our analyst and investor calls for the foreseeable future. Robin and Jeff are obviously available here all day if you have further questions or need any further clarification. Always thank you for your interest in Parker, and I hope everyone has a great day and a great weekend. Take care.

Participants

Executives

• Lee Banks, President and COO
• Thomas Williams, Chairman and CEO
• Todd Leombruno, EVP and CFO

Analysts

• David Raso, Senior Managing Director and Partner at Evercore ISI
• Jamie Cook, Managing Director of Equity Research at Credit Suisse
• Joe Ritchie, Managing Director at Goldman Sachs
• Joel Tiss, Managing Director at BMO Capital Markets
• Mircea Dobre, Associate Director of Research at Baird
• Nathan Jones, Analyst at Stifel
• Nicole DeBlase, Analyst at Deutsche Bank
• Scott Davis, Founding Partner, Chairman, and CEO at Melius Research