Q4 2020 Parker-Hannifin Corp Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Parker Hannifin fiscal 2024th quarter and full year earnings release Conference call.
At this time, all participant lines on a listen only mode.
The speakers presentation, there will be a question and answer session to ask the question. During the session you wouldn't be the press Star then one on your telephone.
Please be advised that today's conference is being recorded if you acquire any further assistance. Please press Star then zero.
I would now like the hand, the conference over to your Speaker today, Kathy Seaver Chief Financial Officer. Please go ahead.
Thank you Sarah.
Good morning, everyone welcome to our teleconference. This morning.
Joining me today, our chairman and Chief Executive Officer, Tom Williams.
<unk>, President and Chief operating Officer lead Bank.
Today's presentation slides together with the audio webcast replay will be accessible on the company's investor information website at P.H. Sachs Dot com for one year following todays call.
Slide number two you'll find the company's safe Harbor disclosure statements addressing forward looking statements as well as non-GAAP financial measures.
Reconciliations for any reference to non-GAAP financial measures are included in this mornings press release and are also posted on purpose website <unk> ph stuff Dot com.
Today's agenda appears on slide three.
I'll begin with our chairman and Chief Executive Officer, Tom Williams, providing an update on Parkers response to cope with 19.
Tom will then discuss highlights from the fourth quarter and full year.
Following Tom's comments I'll provide a review of our fourth quarter performance together with guidance for fiscal year 2021.
Tom will then provide a few summary comments then we'll open the call for question and answer session. We'll do our best to take all the calls we can today.
Please refer now to slide four and Tom what kind of started.
Thank you Kathy and good morning, everybody couple of comments from me before we start slide or first I hope that everybody listening and that you and their families are safe and healthy I.
I'd like to extend our thoughts to those affected by this crisis and our deepest sympathies go out to those that have lost loved ones, that's where some of the buyers.
Especial. Thank you pulled apart between members are listening and for their hard work.
And our dedication really delivering to the high level accomplishments first we delivered outstanding performance for the unprecedented times as you saw but quarter about a four year results.
And we're living up to our purpose the running products and technologies are hoping.
Side, it's a crisis.
And do our apart to create a better tomorrow for people so.
So on slide four we're talking about our response to the pandemic.
Starting with safety, that's the first call them, one strategy and really when we made a change in 2015. It provided a great foundation for us to respond to this pandemic.
For opening society to the crisis or technologies are essential what was interesting with all the government orders that came out almost every one of those team doses in the central manufacturer.
Our purpose an action is more clearer than ever and I'll give you a few examples.
And our manufacturing capacity to state near normal levels throughout dependent.
The governing principle has really been that take away on this page.
Which is our to save US places that we want people.
People want to be at work at home.
We're doing everything we can deliver.
So on slide five the performance during this health and economic crisis.
Confidence in the results as you saw in Q4 will that come from this listed to see.
I would just touch on the very last bullet to engage people.
This was a big change we made in one shady 2.0.
2017, and we recognized a strong correlation between safety engagement business performance.
We are now talk Portola and safety, Utah portal or engagement and you can see the significant progress, we're making towards being top quartile <unk> financial performance based in the results, which has turned down.
Go to the next page willing to talk about the strength.
Oil and our purpose an action.
Slide seven.
As the unmatched breadth technologies that we have those eight motion control technologies. They are competitive differentiator, it's how we bring value to customers.
Our customers see 60% of our revenue comes from customers and volumes for more of these technologies.
Go to slide eight.
Our capital deployment strategy has been thoughtful.
We've been transforming this already great portfolio through the strategic acquisitions by acquiring CLARCOR load on exotic. This is $3 billion of acquired sales. We bought three great companies, that's three largest in our history.
And they have increased our resilience because of their technologies and because of their aftermarket content.
And you've seen in the results, they're accretive to gross margins and cash and this was especially evident during the crisis that we've been able to.
Equal or beat our synergy goals, despite the macro conditions.
Slide nine as our purpose statement.
Enabling entering breakthroughs that lead to better tomorrow, which is really acted as our compass and our guiding light and provide a lump inspiration to our team.
On slide 10 to some examples as a purpose and action.
On the left hand side as the food supply were basically from the farm all the way to your kitchen table transportation.
Whether its truck pair of rail, we're helping them to open the world move products and goods around to various customers in the middle section there on life sciences relevant patients whether it's in the hospital or in the ambulance.
And the probably the poster child for US and then one is really.
It's probably the signature of the purpose and actions over the last quarter was the work we did on the ventilator. So six of those eight technologies that I showed an upper paid or two.
Our written ventilators.
We saw dramatic as you might expect ramp up in production needs based on what was happening society with existing customers and we took on a lot of new customers.
I could not find suppliers that could keep up with this production demand and in some cases, we went from zero to full production and weeks and it was really remarkable job.
Divisions involved on the rights and answered in the upper right. We are in the central manufacturers I mentioned earlier.
Basically if you look at any plant.
World.
Can probably finer Parker, our silver and our plans were in central manufacturer, because where needed everybody else.
And our power generation, whether its traditional renewables.
Were there to help customers will turn for source.
Moving and shifting to really a summary of the quarter and the full year on slide 12.
Was outstanding was.
Local time, probably the most difficult.
In history as a company.
The organic growth came in at 21% decline, so clearly felt that impact.
But $687 million that was on top of what we did in Q3.
When you look at margin on the two different categories, where to look at here. It was just terrific performance.
On operating margins better to look at it without acquisitions, given the acquisitions, we've got it and not and don't have in prior periods. When you look at the adjusted road or 18.1% versus 17.6% 50, Bips increase in Q4.
As a 16% decremental just.
Fantastic absent fantastic job as a relevant groups and divisions around the company.
And then without acquisitions EBITDA was a good way to look at this apples to apples go down to less rose 21, 20.4% hundred 60 basis point, probably the first time at least in recent memory that Weve ellipse, 20% EBITDA margin.
So this is really a combination of the base business performing wells of when strategies or restructuring and bringing on acquisitions that are accretive on margins.
You go to slide 13 quick summary of a four year. We've made continued progress I would just remind people that we've already in industrial session before the pandemic hit so these accomplishments really or upper up against a pretty stiff headwind.
On safety, 35% reduction recordable incidents this puts us in a top quartile and I would just contrast, five years ago, we were in the fourth quartile on safety.
The first quarter, some remarkable progress or.
Cash flow from operations from a dollar standpoint, it's an all time record. So thats, an all time record in the history a company $2.1 billion, if you've got to hit a record cash is a good place to hit a record.
You can see the CFO away margins of 15.1% pre cash flow converting over to 2%.
And then just some debt metrics leverage metrics or you can see that we improved on a gross debt down to 3.63 0.8 times than on a net debt standpoint.
3.3 from 3.5.
We're very proud of is a cumulative debt reduction in the 20 was $1.3 billion approximately 25 or some of the transaction debt, so and just a little over eight months of acquisition ownership, we paid off a quarter that to be took on to core of the company's than just to create jobs.
Teams.
Moving on 14 to the full year again, just great margin performance with us to full year organic was down about 10%.
And again same methodology without acquisitions look at the operating margin that to us if we hold it flat, 17.2%, which is very hard to do on a volume drought.
And came in at a 17% decremental, which is the best in class performance.
The with acquisitions looking at EBITDA adjusted.
Races to 19.3% again show and the combination of when strategy.
The.
Acquiring companies that are accretive on margins to help out the total business.
So if you move to.
The transition here so the Parker transformation, it's happening.
Those numbers that you saw in the prior pages don't happen just by accident or by outlook, So where we've been doing to drive it. So if you go to page 16.
Alright lead to the one strategy.
And I would say, it's a combination of our decentralized divisional structure.
With the wind strategy that drives this unique ownership culture, that's really putting up these kind of results.
Page 17, just to elaborate a little bit more on what's different.
We started off this time, Peter with a major restructuring activity as it relates turn as late 14.
When you look at the cumulative restructuring we did those three years. It was approximately $270 million restructuring so that really set us on a path.
I didn't write kind of cost structure in place we've built upon that weve on simplification 2015.
Immersive publication on on a broad standpoints infrastructure, an organization design on 80 20 and on simple by design, but just from a structure standpoint, you can see that we've reduced one third of the divisions in the company.
And we made two major updates to the Parker business system, which is the one strategy.
Moving on the success of the original one strategy. We did 2.0 in 2015 and of course 3.0, just recently and we're very excited about that because we have a ton of potential were just launched it and as a lot of runway in front of it.
Talked about the power that companies that we acquire and you see that resilience coming through in the business segment I'm going to give you two slides coming up.
I show you that.
Zillions objective really looking at both margins and growth.
But don't underestimate that take we're going to purpose statement.
It really provided create alignment and inspiration.
And there's a big difference between being at work.
And being inspired by your work and purpose doesn't that's one.
People feel Atlanta.
So on slide 18 talk about the margin side I showed you this last quarter.
And this is looking at the last five manufacturers sessions and I would argue roughly 20 is actually got two separate recessions and at the industrial recession, we were already in.
In the pandemic that came in.
In March but you can see whether you look at it on an as reported basis or adjusted.
We see the significant.
Step change in performance Overdues manufacturing recessions time here something we're very proud of.
Something that we intend to keep doing.
And if you go to 19.
This is a look at topline resilience.
And.
Good night.
Okay.
So I recognize it's a great recession cobot 19 is not the same.
But these are two examples a significant shocks to the system.
My view Cobot 19 is worse, you look at GDP reduction across the world and the last quarter at ores and in kind of GDP reduction have another great recession.
Lets just say for the sake argument that the organic.
It was the site.
And we took the worst period have another great recession.
And to be Q4 as well.
Oil nine was down 32%.
What did we do last quarter, we did minus 21, hopefully that will be our worst quarter time will tell.
But we think it's going to be the worst quarter. So why is it better person distinct structural reasons was better first the corporate acquisitions now part of our organic.
Performance and it has 80% aftermarket so that more resilient.
<unk> percent revenue that we get from innovative products and we calculate that as a percent of under this new the world.
Target divided by our total revenue.
That over the last five years that has more than doubled over this period of time innovative production more resilient to grow faster better margins.
You've heard us talk about how we move change the mix and international distribution by raising that by 500 Fips over this period time.
And we've had better customer experience, we're not there we have lots more to do a customer insurance, but doesn't put a number.
Contributor so the top line, we're not immune to the cycle, we felt it obviously, but it is better than we were before and there is distinct reasons, why it's better and Italy and get better in the future because lord and exotic not yet in our organic numbers and you can see by the results. We showed some for their performance of the legacy.
FERC.
Moving to slide 20.
Something we're very proud of our cash generation history, I mentioned, the CFO at record at 2.1 billion.
And then just which has been very very consistent the tons of bad times, you've seen 19 consecutive years.
Double digit see if away and created 100% free cash flow conversion.
So I want to move to slide 21.
Outlook, and we decided to reinstate guidance.
And you can make good arguments as to why not to give guidance.
Serving.
And we're not trying to pretend that working smarter than anybody else.
Because we're not.
However were for much smarter than we were.
The last earnings call.
We've proven that we can operate safely and with strong results and what the future is uncertain. We felt we earned a best position to communicate to shareholders provide Dundee insight as to where we're building.
And as that's why we decided to guidance.
Of course, it's an opportunity we will have every quarter certainly get smarter as order entry comes in and we'll update your thoughts as we go through and certain will go through this in more detail in Q and a portion of the call, but I wanted to give you the context as to why we decided to guide before Kathy execution. Some specific numbers. So then you go to 22.
A big part of our success in Q4 was our actions on costs.
The combination as I mentioned in prior periods restructuring.
When strategy and all the things we've been doing peers and those speed and agility of our pandemic response, but what you see here in contrast between what we did in Q4 and what we're going to do enough. What 21 is a strategic shift in the cost to a more permanent.
Cost action basis. So you can see that a little donut churn in Q4 of effluent 20, 12% permanent and that's going to move to 55% permanent and avoid 21. If you look underneath that don't have for Q4 you see.
Permanent actions. These are all savings were 25 million it up a spot on what we're told you last quarter and exceed 175 million savings that was less than what we told you. We told you at range to 5300.
And it was lower because our volume was better which was a good thing.
We didnt does that give you specific guidance.
Last quarter.
And our own internal planning, we're we're projecting at 30% decline in.
Volume and hence that's why we gave you that range in discretionary came in at minus 21, which we were grateful for and we didnt need to do as many discretionary actions, we need to people to work more hours, which was a good.
Revenue move to 21.
You see discretionary at $200 million, there will be mostly in the first half a little gradually wean off of that.
As we go to the first half the will be some in the second half there'll be more local driven by what the general manager needs based on local conditions and predict predominantly and help belting plant.
Powers to demand, but then you see the permit action rising $250 million.
And if you look at one cobot hit you take the second half of what 20.
And at for all that but 21 and look at our restructuring costs. So we did $65 million.
Opposing timely dollars and restructuring of by 21, we did 60 million in the second half way 20, So thats, a 125 lenders, but I would call kogut related restructuring, that's going to generate as $250 million of saving so that might seem a little more efficient than normal and the reason for that as it's going to be an asset light.
Restructuring plan very few plant closures as facilitates void.
A lot more efficient.
So with that on one hand, it back to Kathy for more details on that.
Okay. Thanks, Tom I'd like you to now refer to slide 24, and I'll summarize the fourth quarter financial results.
This slide presents as reported and adjusted earnings per share for the fourth quarter.
Current year adjusted earnings per share of $2.55 compared to $3.31 last year.
Adjustments from the 2020 as reported results netted to 28 cents, including business realignment expenses of 37 cents and lowered acquisition integration and transaction expenses of five cents.
So were offset by the tax effective these adjustments of nine cents and the result of a favorable tax settlement at five cents.
Prior year fourth quarter earnings per share had been adjusted by 14 cents.
The details of which are included in the reconciliation tables for non-GAAP financial measures.
Moving to slide 25, you'll find the significant component of that 76 cents walk from prior year fourth quarter adjusted earnings per share to $2.55 for this year.
With organic sales were down 21% adjusted segment operating income decreased the equivalent of 61 cents per share or $99 million.
Decremental margin on a year over year basis for 19%.
Decremental margins without the impact of acquisitions, we're just 16% demonstrating excellent cost containment and productivity by the teams.
Offsetting this decline we gained seven cents from lower corporate DNA as a result of salary reductions taken during the quarter and tight cost controls on discretionary spending.
Interest expense cost an additional 15 cents of earnings per share as debt is currently at a higher level because of the acquisitions.
Income taxes accounted for an additional eight cents at the expense because we had fewer favorable discrete tax credits in the current quarter.
Slide 26 shows total Parkers segment sales and total Parker sales and segment operating margin for the fourth quarter.
Fourth quarter organic sales decreased year over year by 21.1% and currency had a negative impact of 1.1%.
Acquisition impact of 8.1%, partially offset these declines.
Total adjusted segment operating margins were 17.4% compared to 17.6% last year.
The 20 basis point decline is net of the company's ability to absorb approximately 100 basis points or $33 million of incremental amortization expense from the acquisitions.
Slide 27, we're showing the impact Lord and exotic had on fourth quarter fiscal year 20 on both an as reported and adjusted basis.
Sales from the acquisitions for 298 million and operating income on an adjusted basis were $32 million.
The operating income for Lord and exotic includes $35 million in amortization expense.
I'd like to point out that the improvement a 50 basis points in legacy Parker operating income despite the $818 million drop in sales.
The great work the teams did on controlling costs resulted in a 16% decremental margins for the quarter within the legacy businesses.
Moving to slide 28, I'll discuss the business segments, starting with diversified industrial North America.
For the fourth quarter, North America organic sales were down 24.7%, while acquisitions contributed 7.6%.
Operating margin for the fourth quarter on an adjusted basis was 16.5% of sales versus 18.4% last year.
This 190 basis point decline include absorbing approximately 60 basis points or $9 million of incremental amortization.
North America legacy businesses generated an impressive detrimental margin of 24%, reflecting the hard work of diligent cost containment and productivity improvements.
Favorable sales mix together with the impact if I went strategy initiatives.
I will continue with the diversified industrial international segment on Slide 29.
Organic sales for the fourth quarter in the industrial International segment decreased by 15.4% acquisitions contributed 5.4% and currency had a negative impact of 2.9%.
Operating margin for the fourth quarter on an adjusted basis increased to 16.8% of sales versus 16.4% last year.
This 40 basis point improvement is net of the additional burden of approximately 110 basis points or $12 million, that's incremental amortization expense.
The legacy businesses generated a very good decremental margin of just 9.8% again, reflecting diligent cost containment favorable mix and the impact of the win strategy.
Ill now move to slide 30 to review the Aerospace systems segment.
Organic sales decreased 22.3% for the fourth quarter, partially offset by acquisitions contributing 14.3%.
Declines in commercial OEM and aftermarket volumes were partially offset by higher sales in both military OEM and aftermarket.
Operating margins for the current fourth quarter increased to 20.4% of sales versus 17.9% last year.
This is net of the incremental amortization expense impact of approximately 190 basis points or $12 million.
A favorable mix.
Proactive realignment actions cost containment and lower engineering development costs contributed nicely to the 400.
Good margin performance from exotic and hard work by the teams on cost containment productivity improvements helped contribute to this solid performance in the quarter.
On slide 31, we're showing the impact Lord and exotic has had during fiscal year, Tony on both an as reported and adjusted basis.
Sales from the acquisition for the year totaled 949 million in operating income on an adjusted basis contributed 114 million.
The lower team was able to pull forward synergy savings, reaching a run rate of $40 million by the end of the year.
These savings plus a great deal of hard work by the teams on integration productivity and adjusting to lower volumes due to the pandemic helped the acquisitions be four cents per share accretive for the year after absorbing $100 million of amortization expense.
Adjusted EBITDA from board and exotic is 26.3%.
With this meaningful contribution from acquisitions fiscal year, Tony total Parker adjusted EBITDA has increased to 19.3% as compared to 18.2% for fiscal year 2019.
Note that the legacy Parker business was able to improve EBITDA margins 60 basis points to 18.8% despite lower sales of nearly $1.6 billion.
On Slide 32, we report cash flow from operating activities.
We had strong cash flow this year, resulting in record cash flow from operating activities of $2.1 billion or 15.1% of sale.
This compares to 13.5% of sales for the same period last year. After last year's number is adjusted for 200 million dollar discretionary pension contribution.
Free cash flow for the current year is 13.4% sales and the conversion rate to net income is 152%.
Moving to slide 33, I'd like to discuss our current leverage and liquidity position.
Based on that continued strong free cash flow generation and effective working capital management, we've made a sizeable $687 million reduction to our debt during the quarter, which brought our full year debt reduction to $1.3 billion, which is approximately 25% of the debt issued for the Lord and exotic metals acquisition.
I apologize for a title on the slide the second bullet should be on point 3 billion, rather than 1.3 million.
With this reduction our gross debt to EBITDA leverage metrics at the end the quarter with 3.6 times down from 3.8 times at March 31st despite the drop in EBITDA.
Our net debt to EBITDA reduced to 3.3 times from 3.5 times at March 31st.
We've continued to suspend our tenbfive one share repurchase program and we remain committed to paying our shareholders that dividend and we intend to uphold our record of annually increasing the dividend paid.
Moving to slide 34, we show the details of current order rates by segment.
Total orders decreased by 22% as of the quarter ending June.
This year over year decline as the consolidation of minus 29% within diversified industrial North America.
Minus 21% within diversified industrial international and minus 5% within Aerospace systems orders. Just a reminder, that we report the aerospace systems orders on a 12 month rolling average.
The full year earnings guidance for fiscal year 21 is outlined on slide 35.
Guidance is being provided on both an as reported and adjusted basis.
Beginning with this fiscal year 21 guidance as we've previously announced we're revising our disclosures for adjusted segment operating earnings and adjusted earnings per share.
With this guidance, we will now start to include acquisition related intangible asset amortization expense in our adjustments. We think these adjusted results will provide a better representation of our core operating earnings year over year.
In the appendix of today's slides you can find the impact of the acquisition related asset amortization expense on fiscal year 19 and fiscal year 20.
In today's pandemic environment total sales for fiscal year 21 are expected to decrease between 10.7% and 6.7% compared to the prior year.
Anticipated organic decline for the full year is forecasted at a midpoint of 11.3%.
Acquisitions are expected to benefit growth at the midpoint of 2.7%.
Currency is projected to have a marginal negative 0.1% impact.
With calculated the impact of currency to spot rates as at the quarter ended June 32020, and we have held those rates steady as we estimate the resulting year over year impact for fiscal year 21.
You can see the forecasted as reported an adjusted operating margins by segment.
At the midpoint total Parker adjusted margins are forecasted to decrease approximately 80 basis points from prior year.
For guidance, we are estimating adjusted margins in a range of 17.8% to 18.4% for the full fiscal year.
The full year effective tax rate is projected to be 23%.
For the full year the guidance range on an as reported earnings per share basis is 7041 cents to $8.41 or $7, a 91 cents at the midpoint.
On an adjusted earnings per share basis, the guidance range is $9, an 80 cents to $10, an 80 cents for $10.30 at the midpoint.
The adjustments to the as reported forecast made in this guidance at a pre tax level include business realignment expenses of approximately $65 million for the full year fiscal 2021 with the associated savings projected to be $120 million in the current year.
We anticipate integration costs to achieve of $19 million synergy savings for Lord are projected to hit a run rate of 80 million and for exotic a run rate of 2 million by the end of the year.
And in addition acquisition related intangible asset amortization expense of 321 million will be included in our adjustments.
Some additional key assumptions for full year 2021 guidance at the midpoint are.
Sales will be divided 47% first half 53% second half.
Adjusted segment operating income is divided 43% first half 57% second half.
Adjusted earnings per share first half second half is divided 40% 60%.
First quarter fiscal 2021 adjusted earnings per share is projected to be $2.15 per share at the midpoint.
And this excludes 57 cents per share or $115 million up projected acquisition related amortization expense business realignment expenses and integration cost to achieve.
On slide 36, you'll find a reconciliation of the major components of fiscal year 2020, adjusted earnings per share compared to the adjusted fiscal year 21 guidance of $10 in 30 cents at the midpoint.
Fiscal year 20, adjusted earnings per share was reported at $10 in 79 cents to make it comparable to the fiscal year 21 guidance, which includes an adjusted for acquisition, which includes an adjustment for acquisition related asset amortization expense, we show the adjustment of $1.68 to get to a comparable.
$12.47.
With organic sales down over 11% adjusted segment operating income is expected to drop approximately $1.95 cents.
This would result in decremental margins of 27% on a year over year basis.
Corporate DNA and other expense is projected to negatively impact earnings per share by 36 cents because of gains achieved in fiscal year 20 that are not anticipated to repeat.
Offsetting these declines interest expense is projected to be 29 cents lower in fiscal year 21.
Income tax rate of 23% will reduce earnings per share by 10 cents year over year.
On the assumption of a full year of suspending share buybacks is projected to result in a five cents dilution due to an increase in average shares outstanding.
We ask that you continue to publish your estimates using adjusted guidance, which should now include adjusting for acquisition related amortization expense.
This concludes my prepared comments, please turn to slide 37, I'll turn it back over to Tom. Thank you Kathy I thought we would close with what is probably an obvious question on most People's minds is how do you feel about deployed 23 targets that you just outlined in IR day.
Given the the pandemic and what is done.
On a short answers we're still committed to that we've made tremendous progress on margins in our topline is quickly becoming more resilient.
While the topline revenue the Kathy articulated in IR day was 16.4 billion.
That will be very hard.
But we can still grow fast in the market, which is our touch. So these targets as soon as base growing faster than global industrial production next margin targets of 21% of the op margin EBITDA free cash flow conversions GPS.
Barring a recession and avoid 23 and recognize that we had three full fiscal years left to get here and provided we get some modest growth is going up by 20 to 23, we believe these numbers.
So again I want as close by saying Thank goodness Parker team, especially thank thank you for keeping each other season, what you've been doing on all of our safety protocols and for the create results and that's what 20.
And I'll turn it over to serve to start to Q.
Thank you.
As a reminder to ask the question you will need to press Star then one on your telephone to withdraw your question. Please press the pound key.
Our first question comes on the line of Nicole Deblase with Deutsche Bank. Your line is now open.
Yeah. Thanks, good morning, guys.
Nicole.
So maybe starting with the expectation for decremental margins fall on the flight that you guys are anticipating 30% Decrementals I think that's inclusive of the cost savings plan you laid out so I guess, just maybe frame for us why decrementals should step up from care since the performance.
This quarter was so impressive.
Nicole as Tom So I'll start our Decrementals, if you look at the quarters for a foot 21, our projection.
Flowed in a range of 25% to 30% of still best in class type of performance. The difference between say, where we were in Q4 and that as a couple of things one and Q4.
Little bit of hope with mix.
We had a lot less mobile business.
Than we had in the past.
And that business is typically significantly lower margins and distributions industrial so the distribution industrial portion of the company's revenue in Q4 was disproportionately higher than it normally so that is not going to sustain a soap it's going to go back to more normal levels as mobile comes back because of this year, so that will become a headwind.
So far in Q4 as we head as you saw from results a terrific performance by aerospace.
Which was help with some seasonal.
Help on the international military MRO, where we had a very sharp increase versus prior periods and thats very high margins that comes with it. So those would be the two key reasons, but even with that I would suggest to that with these kind of volume drops a 25% to 30% decremental.
Looked at all of our peers before we came into those so put us in the top quartile position.
Yeah, absolutely thanks for that Tom and just as my second question.
I know you guys had said that you didn't see a ton of improvement from April to May when you spoke previously but can you maybe characterize what you guys call in June in anything quarter to date in July.
Yes, so I'll continue on the coal so through the quarter, we saw industrial North America in the National.
Bottom in May.
Improved in June and July orders are indicative of what I'll give you kind of how we feel what the first and second half splits for our guide and then aerospace weakened through the quarter not unreasonable color on aerospace here second so when you go to the full year.
You saw our guide at minus 11.
Minus 11 is made up of a first half of minus 19.
Second have a minus three so what was our thinking as we thought to that so if you look at it by segment North America and I'll start with our Q4 ended kind of parlay that into how our thinking about the first hub. So Q4 North America ended at minus 25 based on the orders we saw in June and July we see some modest improvement.
Going into the first half.
Forecast of minus 21 for the first half than it gets to flat for the second half.
International came in at minus 15 organically and again based on order entry in June and July we have that go into a minus 12 modest improvement and going to almost flat.
Second half as well an aerospace was minus 22.
Helped a little bit because of that hi international military MRO, we see that weakening a little bit in the first half at minus 26, and improves but still been tough environment and longer cycle months 15. So again you get the first half minus 19 second haven't minus three but we get to Q4 when we anniversary.
Free as a pandemic and we show high single digit positives things that I would point our view on this.
And our thinking behind the whole guidance is that the industry recovery is started but it's going to be uneven under is going to be a fair amount of demand uncertainty and I think.
That improvement is going to follow more or less lag behind held a virus improves and as hence why we forecasted a modest improvement in the first half and.
And we still at aerospace declining as it's a longer cycle ticking while to adjust out those orders.
Second half, we see things from small is starting to build what I would say is positioning for a really good Q4, but really positioning ourselves for an excellent roughly 22.
Industrials are obviously going to outpace aerospace here as far as performance and Asia is going to out it's going to run faster than North America.
So thats just a little color, so far and what we think for things that guide.
Got it that's really helpful. I'll pass on him let someone else asked thanks Tom.
Thanks Nicole.
Thank you. Our next question comes on the line of Jeff Sprague with vertical research. Your line is now open.
Thank you good day everyone.
Also a maybe a little clarification on how the cost actions work through if we could tolmar Kathy.
It's the nature of my question first just looking at slide 22.
So should we think a discretionary actions then as a headwind.
In the first quarter of roughly 125 million so we're going from.
175 in Q4 to 50 in Q1, and running 50, a quarter through 21 to get to that 200.
Jeff as Tom, though most of the of discretionary things will continue in Q1, and we will start to slowly meta them off.
In Q2, and I was so most of its going to happen. So Q1 will look a lot like Q4 or less and Q2 will have a small amount and then you'll have just very little value might trickle into.
The second half of 21 that portion is hard to predict because it will be very much sensitive to demand just like you saw what we did in Q4, our flex based on demand it will flex based on what happens on demand as we go forward, but we're going to continue the discretionary pretty much full steam for Q1, but the.
And that started to compensate for that based on what we did in the second half and what we're doing enough for 21 to cover cover those total cost me to come out plus the same time, our volume is starting to get better as we move was quarters.
Yes, so on the permanent then.
Tom.
Sounds like those build over the course of the year.
Is that can you give us a little color on that trajectory is that a.
Is that indicative of the run rate also as you exit or would you actually exit at a higher run rate than that to shifty.
Well as splits on the two fifties approximately 57%.
In the first half 43, and the second half and so part of what's making up to 250.
As we got $130 million its carryover from.
Hi, Twentys actions and then we go to 120 million come from coming from the new.
$65 million of costs that were encouraged by 21, so it's a combination of the two coming in there.
And just one last one if I could on on cash flow.
Greater than 10% now doesn't sound like real high bar, but.
Are you are you assuming now given the performance that you've put up.
Recently, but are you assuming.
Some kind of negative working capital swing into next year that would be muting the cash flow.
No it gives us today.
We don't want to go backwards on a percent.
The dollars become tougher you know because we're forecasting.
Point $2 billion less revenue, however from a percent standpoint CFO away margin.
And then recognize we are those are really great Europe, 13%.
So we can always to that every time, but I would I can tell you I would not be happy if it came in at 10.
So we're going to be looking to be well north of the.
We will become and we'll see what happens but to the expectations. We would continue to work working capital.
We have opportunities still on inventory, we have opportunities with our acquisitions of inventory.
We're going to work receivables and payables liquid normally do so I would see it being the team effort on the cash flow just like we've always done.
Thanks, Thank you.
Thanks, Jeff.
Thank you. Our next question comes on the line of Joe Ritchie with Goldman Sachs. Your line is now open.
Thank you good morning, everybody.
Thanks.
So Tom maybe just digging in a little bit further into the end market trends I know.
A lot of your business is short cycle. So there isn't a tremendous amount of visibility, but it seems like if I heard you correctly the modest improvement in both North America International I mean, as a way to think about at that July then.
For North America was down, let's say north of 20% and international still down double digits.
Mid teens, and then I guess just.
I guess the second part of the question is really as you as you talk to your distributors what are the thing about inventory levels and the potential for restock.
So let me start with of restocking question.
So.
Right now we're forecasting that distribution will continue to probably have some mild destocking for the first half not as much as what we saw obviously in Q4 with some mild destocking.
To maybe give you a little bit more color.
On the markets.
We for intern so that minus 11.
At the midpoint is north American minus 11 international minus seven aerospace amounts 20, but I want to give it a little bit more insight on international So we're forecasting AMEA.
And these are obviously put a plus or minus.
Numbers at minus 10 Asia Pacific at flat.
Latin American minus 10, so it's a small portion of the portfolio.
We have a number of markets.
But.
If I just give you I'll give you a couple of comments I'll try not to make this too lengthy.
Our view of end markets for 21, and again my comments are not trying to position the entire market I'm just begun parker's going to do but what we saw as positive as life Sciences, and we're going to continue to see a pretty good first half on up based on the ventilator, but that will tell will decline as we go into second half power generation.
Coming off the bottom still being positive semiconductor.
Positive and then we'll have aerospace military OEM and aerospace military MRO being positive mid single digits and automotive actually being positive for full year and automotive will be negative for the first half.
But it turns to be a positive second half as we see both combustion engine volume in a particular our content on end HGV being such a strong build material there that that will drive a lot of growth frozen our engineered materials business than a neutral category, we've been material handling mining.
AG.
Telecommunications refrigeration.
Forestry.
On a negative portion.
For a by 21, we've got distribution now.
We think distribution has reached bottom.
And as started a slight recover except for those sugars to support oil and gas I mentioned my comment about de stocking. So it will be down probably high single digits in that 5% to 10% range in the first half some regions could be worse.
Turning positive in Q4, but we look at Asia being positive for distribution.
For the full year.
Then the commercial on the aerospace, which is probably where people want to questions what should we assume.
The aerospace so commercial OEM.
We assumed and minus 25 to 30 something in that range for the full year.
And how it came up with as we took current anticipated production rates. So the rates that you see published by the Airframers.
And the engine makers and.
Times, our goal material, obviously thats subject to change, but thats based on current production rates and we know of right now.
And then on commercial and MRO, we forecasted down at minus 35 to minus 40.
Recognizing that tends to follow available seat kilometers and so we got to first half being obviously more stressed on commercial and MRO of minus 50.
Second half of minus 20 to minus 30 rounding out the rest of the.
Negative markets have been construction.
Trucks.
Seeing tools oil and gas grill.
Tires mills about or so thats, a quick spend to the end markets.
We came up with the.
The the guidance I would tell you the our process.
We use a process, which is similar we've done in the past when we take all end markets to top 20, we look at external forecast and we filled up kind of hit by end markets. We take our divisions and groups and build is up we also take or customer distributors, but this year, we've built an AI model.
Which is a first time ever done us and we use to last 10 years with the data.
And our history to help come up with one of the entertainment entered dependencies on the things that were predictor of future forecast.
Recognizing we never had a pandemic unopposed tenure, so thats, new and while the AI model was helpful until we have more months as a pandemic in there.
Well to continue to be refined so theres been there was a fair amount of science, but I'd. Just tell you. This is a forecast and we all know what happens is forecast. This is our best effort at this point to tell you what we think's going to have.
Thanks, Tom I was very helpful and my quick follow up and apologies if I missed it because I got cut out of the last question I think Jeff asked this question, but just just thinking from a quantification perspective on the cost outs just want to make sure. It's clear so for fiscal <unk> 21, you've got 450 million in cost benefits we.
Netting that number against the 175 and discretionary actions from fiscal year 20, or what's the what's the what's the right number to think of it as a net benefit in fiscal <unk> 21.
So maybe I can help the analytics that we're keeping the permanent savings separate from the temporary action savings so they're independent of each other we did about the total year fiscal year 20 had about $76 million of cost and we seek.
Gary over savings into fiscal 21, a lot of those costs came through the fourth quarter and we see the benefit coming into 21 so of the.
Saving you see in fiscal year 21. Some comes from the actions. We are ready took the rest will come about a 120 million will come from the actions we plan to take in the in fiscal year 21, those actions will be heavily weighted into the first half about 75% of the dollars will come through the first half.
And 25% in the second half so you'll see.
Most of the savings coming into fiscal year 21 from those actions.
Okay got it thank you.
Thank you. Our next question comes on the line of Nigel Pole with Wolfe Research. Your line is now open.
Thanks, Good morning, and lots of great detail.
So no free cash flow full cost for full for 21, So should we should we take.
You know the Kashi PS is the best estimate for free cash flow, but we do have cash restructuring.
Think about some I guess my real question is do you think that working capital will come down in line with sales Oh.
We get into a point now will be up some rebuilding some during second half of fiscal.
Good question Nigel Yes, you can expect that capsule exceeds the well we'd like to say for our target is more than 10% as Tom described 10% only would be disappointing for us at this point.
Sales decline as we are projecting then we would expect working capital to come out.
Just accordingly, as we typically do were very good at pulling that working capital down as the volume comes down.
The improvements that we talk about in the second half or in the fourth quarter keep in mind is talking against some pretty low comparable.
So it shows improvement year over year, but it's not a significant dollar increase in terms of volume. So it would not require significant working capital in the fourth quarter.
Great. Thank you and then my follow on his own price <unk> doesn't feel like as little price pressure across cap goods.
Right now when we clearly you emotion films suggests a yield you don't see much price either but commercial Aero is an area where are we there are some concerns im just curious if you are seeing.
Some price concession request, so some get backs.
To your OEM customers and commercial Aero.
[noise] Nigel actually I would.
Maybe I'll just a couple that with.
Oddity material inflation, we do see.
Some modest material inflation across the channels, but our goal always has done from a cost price standpoint to be margin neutral.
And we still expected to happen this coming fiscal year.
Okay. Thank you.
Thanks Nigel.
Thank you. Our next question comes from the line of Andrew Obin with Bank of America. Your line is now open.
Oh, yes, good morning.
Hi, Andrew.
Great quarter by the way.
Just a first question I guess on supply chains, a both global.
And North America eight have you seen any disruption shipping stuff from Asia to North America and also in Mexico.
To the U.S. and have you made any adjustments are to supply chains.
Post call that are you thinking about making structural adjustments. Thank you.
Andrew as Tom So I would take you back to really our strategy, which has been a long term trojan supply chains that weve.
We make buy so local and local local that helps us a lot on this and that we do not have a tremendous amount of.
Cross continent type of activity, we've not seen any disruption has been material nature. The supply chain team has done a really great job and part of our protocol as always we look at risk mitigation and we look at the.
Solvency of suppliers and their ability to deliver we what we always look at doesn't make sure that things are in good shape and we don't see any major things to worry about there, but this is an opportunity for us as our customers look at those and they may have supply chains that are different than we were structured and as that happens or not really seen it.
Any material standpoint.
That will provide a revenue opportunity for us as they move plants are we relocate things we have an opportunity since we have a global footprint to satisfy them.
As a move.
Can I guess the follow up question on inventories on the channel on both distributors and sort of Oh, we.
Hey, you know, we really since the great financial crisis, we really haven't seen a big restocking cycle do you think we're going to death, one after kogan I'll use that people have sort of these talks a little bit are we going to see you think anything materials coming out of it.
And the second thing.
But can you tell us about sort of the bullwhip effect, if youre OE customers, how much this sort of distorts sales than what you've seen the channel. Thanks.
Andrew I can start as Lee as of end Eddie can you can add on it.
I think what you see with both of you we a lot of your.
Question to answer will be the trajectory of any kind of recovery.
At this point based on what we're just curious guidance, we are projecting a modest recovery not some sharp type of recovery if its sharper than I do think you'll see some restocking type of opportunities based on what we're projecting I think you're going to see just normal kind of and pull through type of stock. So we saw a pretty major.
These stocking in Q4, we think some of that will continue.
At a lower rate and both OEM.
And distribution in the first half.
I think the restocking opportunity, we're not projecting are counting on it right now but at the trajectory of the recovery was to be more sharp and obviously I think people would be looking into something that needs to do.
Thank you.
Thank you. Our next question comes on the line of David Raso with Evercore ISI. Your line is now open.
Hi, good morning, I'm trying to better understand the margin guide for the year.
Now you're looking at the guidance with amortization excluded.
You are guiding 18.9 goes down the 18 one.
With that seems lets say reasonable.
Given the amortization this year is going to be a lot more helpful to the margins last year last year that about a 210 bips.
Given your sales guide it adds 260.
So when you strip that away and we have more history looking at before this change of how you reporting.
You're implying the margins before amortization.
Being pulled out at 15 fives.
And.
Thats on a 12.5 billion sales base.
The last time, you had margins that low revenues were 1 billion or half a billion less.
What you're guiding.
And just given the improvement the company has been showing on margin I'm, just making sure that we're trying to suggest.
That the margins.
The old way used to reported before you pull that amortization the margins are going to be down to 15 five.
That's just seems.
Half a billion or billion less than in some years back when you're doing 15 aid or Fourteeneight I'm, just trying understand why would the margins be that low I mean aerospace mix issue a little bit we can just help us level, so why would be lower than even years ago.
When revenues were.
The lower.
David as Tom I'll start I'll, let Kathy.
First of all that it's a little bit difficult you do have to back out acquisitions, because that was in the first quarter two through all of them are less as a little bit. So if you're and we can share. This will give more prevalent in the one on one you'll have with relevant and jet with the decrementals.
Without acquisitions late and we kept them in when they left.
Earn a 25% to 30% range for a guidance in an uncertain times that has a really good guide on them or was it so.
Them or was this has come out to be appropriately positioned when you look at their respective segments. So North America 18.9 versus nine.
Again, this is a make an apples to apples amortization.
Put back in both years.
We had 11% volume drop when we have mobile mix headwind. So that seems dropped 40 bips seems reasonable.
International.
We've got lower volume.
And so thats dropping 30 to 70.1 versus 17.4.
Aerospace drops the most.
This is what helped a lot here in the point 2020 to have to 70.9.
And the big difference there as the international military Emerald, which really give us a strong.
Fourth quarter and then they had the most severe volume drop.
For the full year at 20% organically so I. Thank.
These are really good numbers.
MRO us for an August guide are best in class as far as what we would cut too I can tell you we've never ever guided to a 25% to 30% on our was always typically.
Right into higher to the talent to the 30% range. So we are reflecting the business has gotten better. We're also forecasting into very uncertain period of time.
Hence why we didn't go down to the teens, because that's a difficult thing.
Yeah, I think Tom when you when you strip out the change.
And you look at a pre adding back.
Immunization really sticks out.
Is international which just put up up margins year over year.
Through the amortization add back.
And last year and totaled 59.
Guiding it around Fourteeneight with the decremental of around 40.
Just trying to sensors something unique going on internationally.
Creating that more amortization something going on international mix part of it I guess, one thing I am I missing for me International is a lot less amortization is getting allocated you got to look at both years with amortization and.
And that's what it has articulated for 20 with amortization.
All in a 17.4 and it's only drop in 17.1. So it is not much of a drop at all for international.
Batches.
What you would expect with the kind of volume drop.
So I think part of you talk offline with you add backs per project, you're you're throwing in.
International amortization as if it as the bulk of amortization, both amortization would reside in North America.
Yeah, I'm just taking the quarter you just reported in times when you buy for essentially keeping it as a run rate by quarter. So maybe.
Robin Okapi offline, we can get the exact add back by segment.
For 21 would be great.
Okay. Thank you so much.
Appreciate it.
Thank you.
Our next question comes on the line of Nathan Jones faithful. Your line is now open.
Good afternoon, everyone I guess it is now.
Good afternoon.
I've got one that's probably for Lee.
Can you guys talk about what kind of reaching you're seeing in your are an operations from safety protocols that you.
I had to put in a as part of your process is whether that's.
Changing how do you shake sales are laid out or anything like that or additional cost.
That you've been card and you've got some meaningful to your results and then are there.
Planned for you to be able to improve those processes and eliminate some or all of those frictions as we go forward.
Well if thats a great question. Thank you.
You know first off because I know, there's a lot of team members, let's say I can't say enough about what our worldwide team has done and put again the safety protocols, but.
Audited by a lot of outside the Gulf.
Governments and they've always applaud, what we're doing internally to to separate things out and keep our worker safety.
But you know remarket, yes, yes, there is a costs, it's not material. Thanks uplift.
It's remarkable what our teams continue to do in terms of Reconfiguring, our cell still getting to same productivity flow, but separating our workers from each other giving on the space, giving them. The in many cases plexiglass separation separations and just organizing a.
Hey.
Production system that you know is consistent with our our lead production system. It gives us excellent flow and keeps everybody safe.
So nothing meaningful to talk about.
Doing a great job and and the results I think prove it out.
Fair enough thanks for that.
Maybe on capital allocation Tom.
We are getting out there that getting a low three probably by this time next year, it's going to be in the two and a half maybe a little bit better than that even.
Depending on how the recovery guys.
When how are you guys thinking about went to reenter the M&A market in a meaningful fashion or what kind of leverage metrics do you need to get down to before you'd look at that and how is the cultivation of the pipeline going in the meantime.
And I'm going to start with that and then I'll turn it over to Tom I'd like to Recalibrate, you a little bit keep in mind that EBITDA, it's dropping.
So the denominator gets a little bit more difficult I think at two and a half time next year is a pretty aggressive projection and not what we're anticipating we'll be able to do.
Tom you want to comment but on the AG, yes, so we're probably going to be still north of three when we finish but obviously, we're going to dividend we.
Possibly can you saw the pace of debt reduction we did this this last fiscal year, but on acquisitions, we continue to always build those relationships and look at those strategic targets and have those discussions, but we're not going to enter into those until we get.
The M&A get get the leverage down into those low twos.
And we're going to work very hard to sooner, we can get there the federal day.
Fair enough thanks for taking my questions.
Nathan.
Thank you. Our next question comes from the line of John inch with the Gordon Haskett. Your line is now open.
Oh, Thank you very much good afternoon everybody.
Yes, Hi, Kathy could you comment a little bit on the first quarter expectations for core growth and obviously the Genesis of my question is.
You've got North American orders and international orders much worse than the core growth you just put up and then an outlook that chose this substantial topline rebound right in all of fiscal plenty ones I'm, assuming we're heading to a pretty tough next quarter or too is there anything you could say about that.
John as Tom It so similar to what I mentioned when I went through the first half the first half.
It's going to be minus 19.
Total company.
North America is going to get a little better.
Minus 25 last quarter to minus 20 on an international management team to minus 12, so we see that gradual improvement improvement will be.
Little bit in Q1, and a little bit more in Q2.
The only thing that will weaken will be aerospace's aerospace longer cycle will be finding bottom probably the most likely kind of in the middle a year is one aerospace funds Bob.
And do you expect these businesses the good turn positive by the end of fiscal plenty wanted just as part of your guide or still hovering now getting.
Yes, so we got in Q4, it will be probably plus high single digits on the industrial portion.
And are without us, though still trying to get back to even.
Yes, I apologies if you went over this before there's just a lot of moving parts I wanted to ask again as a follow up the structural actions I guess I was under a bit of impression that.
The company was not looking to take structural actions based on all the work that you'd done before so Tom I'm wondering kind of what perhaps maybe I got that wrong, but was there something that did trigger.
Your thought process to go ahead and take structural actions like do you think the outlook merited that as the quarter preceded and can you tell us anything about sort of how you're allocating these actions across.
Aerospace versus international versus domestic ops.
Yes, I'll give you kind of more strategic piece I can let cathy comment as far as a.
In the segments, but.
When we looked at a John we looked at aerospace oil and gas.
Going to be down for long and so we needed to take structural actions there.
We also just looked at district, the trajectory here and the opportunity between all the things we've been doing or even more continuous improvement regarding the structure of the company.
So that's why we're looking at permitted if this was to bounce back sharply already.
I would not be doing at the pace of effectiveness is going to be a little longer trajectory and we have some certain end markets that are down.
For probably several years and wanted to take the actions now to getting the right position and we really felt that way.
As we are going through it at the end of Q4 Thats why we took those actions. The actions. We took in Q4 really helping a springboard into end up by 21 on the on a savings of cats and wants to add on his first how it's going to split between segments.
Yes by 21, John the split will be about half of the costs will be through the international operations and then the remaining 50% will be fairly evenly split between aerospace and North America.
Keep in mind that these actions are more.
Workforce related than they are asset related.
I guess I would just add ons on the one thing that we did buy structuring about a 50 blend a permanent discretionary is it gives us flexibility to move depending on what happens on demand.
Well I'm, sorry, I don't understand the Permian discretionary gives you the flexibility to what.
To move based on demand. As example, if we just made all permanent action you probably have a little less flexibility by doing a mixture of both we've got more flexibility and we're not taking out assets, which gives you even more flexibility and you can obviously people become.
Yeah no. The numbers are are definitely impressive on the payback. Thanks very much appreciate it.
Thanks, John can respective everyone today, we're going to take one more question and then echo.
Thank you. Our last question comes on the line of Andy Casey with Wells Fargo Securities. Your line is now open.
Good afternoon, and thanks for taking the question I guess, it dovetails with Johns last.
As shown on the.
The concept of workforce versus assets within the the restructuring.
Can you comment on it as other companies may or May have done similar things.
Whether your experience with this pandemic has accelerated stuff already had in the pipeline.
And what sort of things might those be.
And as Tom So we always look at.
How to continues to get better as far as our people and how we deploy them and thats combination a lean and ties and simplification all those type things so.
So we always have a pipeline of those type of ideas to groups in the divisions do and when you run into where volume is down it was volumes coming down for longer some of those things getting get accelerated.
Clearly we look at the most of stressed in markets that is causing us to take more aggressive action there because we don't expect them to come back aerospace as an example anytime soon.
But we always look at how to get better on the structure the company.
And.
I would say this is that plus our response to the end markets that are being the most distressed.
Okay. Thanks, Tom and then then last question I mean, there's quite a few questions around this but yes I take the the midpoint of the first half second half's.
A framework the Catholic put out.
The decremental margins.
With all the adjustments are.
Slipped slightly above 30 in the first pass and then kind of high Twentys and the second half.
Is is that difference I know I'm splitting hairs, a little bit but is that difference.
Really mix related then and the impact of acquisitions or is there something else.
And do you summarize it because when you take out the acquisitions.
Well I haven't when they've lapse.
Most apples the decrementals are in a 25% to 30% range that have been.
Saying, so that's pretty good because to your point mix is not going to help us fixtures as well.
Okay. Thank you very much.
Hey, Thanks, Andy.
Sarah This includes our Kinane our earnings call. Thank everybody for joining us today, Robin and Jeff will be available to take your call should you have further question.
I appreciate your time this morning enjoy the rest of your day.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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