Q1 2021 Parker-Hannifin Corp Earnings Call
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Yeah.
Good morning, everyone welcome to our teleconference. This morning.
Joining me today are chairman and Chief Executive Officer, Tom Williams, and President and Chief Operating Officer Lee banks.
Today's presentation slides together with the audio webcast replay will be accessible on the company's investor information website at <unk> Dot dot com for a year following todays call.
Slide number two you'll find the company's safe Harbor disclosure statement addressing forward looking statements as well as non-GAAP financial measures reconciliations for any reference to non-GAAP financial measures are included in this morning's materials and are also posted on Parker's website at <unk> Dot com.
Today's agenda appears on slide three.
We'll begin with our chairman and Chief Executive Officer, Tom Williams, providing a few comments and some highlights from the first quarter.
Following Tom's comments I'll provide a more detailed review of our first quarter performance together with the revised guidance for the full year fiscal 2021.
Tom will then provide a few summary comments and we'll open the call for a question and answer session. We plan to end the call with the top of the hour.
Please refer now to slide four and Tom will get Us started.
Thank you Kathy and good morning, everybody. Thanks for your participation today.
I hope that you your family and your friends are all safe and healthy so.
So before I go to the core results and one of the highlights slide four which is really our strategic positioning slide.
On page 12, we create value for our customers our shareholders and our people.
I'm going to highlight some of these to the course of my remarks on the opening slides here.
The output of all these differentiators is really that last bullet.
It enables us to be great generators, and employers and cash were just cycle, which is a proven strength of ours, it's only gotten better over the years.
This list is what sets us apart.
What is what enables us to be a top quartile company hopefully a company that you want to be sure.
Let's go to slide five this is one of those competitive differentiators, which is the breadth of our technologies. This is a portfolio.
The motion control technologies, they're all interconnected complimentary to each other so we bring value to customers. It's how we solve problems for customers or customers see the value going into it.
Because 60% of our revenue comes from customers, who buy from for more of these technologies.
So if you go to slide six we'll talk about the quarter. It was an outstanding quarter great results. These unprecedented times in a big Thank you goes out to our entire global team for all their hard work dedication and a great result.
Starting with the first bullet something we take great pride in we are a top quartile safety performance company.
In addition to that we continue to reduce recordable injuries incidence by 31%.
Sales declined 3% organic decline was 13% year over year, but that showed nice improvement versus a per quarter, which was a 21% decline. So we were pleased to see the progress there.
EBITDA margin was 19.5% as reported were 20.1% adjusted that makes two quarters in a row that weve been greater than 20% EBITDA margins were excited about.
And it was a 100 basis point improvement versus the prior year.
We did a great job on debt reduction, we pay down debt in the quarter $557 million.
Our cash flow from operations was just an outstanding level at 22.8.
For Sun so.
So what I call your attention to little table at the bottom of the page.
Go to that last row.
Segment operating margin adjusted ROE C., we came in at 19.9% for the quarter. It was a 110 basis point improvement versus the prior year. Our Decrementals were just terrific. If you look at our tech and those on an adjusted basis with acquisitions.
Were favorable.
We had less sales that we had more income versus the prior year on a legacy basis, So Parker without acquisitions again on an adjusted basis.
14% decremental does create results by the operating team.
So if you go to slide seven.
The de leveraging progress has been just dynamite.
You can see we paid down $2 billion with a death in the last couple of months, we've now paid off 37%.
Florida, an exact transaction done and you can see the multiples.
Whether it's on a gross basis or on a net basis continue to make nice progress reducing those leverage moved since we're very proud of that.
Moving to slide eight.
These outstanding results early underpinned by a couple of factors versus a prior period restructuring that we've done.
Wind strategy and performance enhancements is driving.
And the speed and agility of our pandemic response just for clarification.
If occasion when you look at these numbers. These are cost actions that represent the savings that are recognized in the year as a result of our pandemic response.
Your mental amount is footnoted department as page that was $210 million year over year incremental but the big thing that I want to make a point on this page is the shift to more permanent.
Reductions in well, we didnt put it on or we didn't put Q4 review to go back and look at your Q4 notes, we were 90% discretion or temper.
10% permanent this quarter Q1, we're now 30% permanent move into a full year of 60%.
Maybe just go to the full year section of the page and looking at slide 21, C. $175 million discretionary, it's a little bit less than what we showed you last quarter, primarily because our volumes better we didnt need to enact as many of those description type of actions most of our wage reductions have been restored to normal.
Effective October Onest with.
Some minor exceptions in countries, where those government support supplementary income for short work weeks, which we've continued.
Permanent action stayed the same at $230 million or right on track to deliver that.
Really I think this bodes well when you look at the shift to more permanent actions.
For the remainder of of what 21 and sets us up very nicely roughly 22 big.
If you go to the next slide talk about our transformation and clearly I'm going to show you. A couple of numbers are you. Hopefully you are going to believe the company is definitely transfer will talk about how and we'll talk about more important what we're going to go into future next pages on the how portion of it.
It's been a combination of portfolio things, we've done as well as just sheer performance improvements.
The performance side. It all starts with the Parker business system, which is the win strategy and two major updates that we've made that you're familiar with which is really propelling our performance we simplified the organization structure standpoint.
Acquired three.
Outstanding companies that were accretive on gross margins and cash flow and they're performing very well during the pandemic.
I think the best evidence, which is a slide you've seen before it's on slide 11.
Which is a transformation across the last five manufacturers sessions on how would the raising the floor operating margin. We wanted to put this slide and again.
Because we've updated it based on the latest adjustments when we include deal related amortization and our adjustments.
Did that through all the prior periods.
So the reported in shades sets in grade and gold is the adjusted and you can see that the improvement now is even more pronounced elon.
1100 basis points over this period of time, just dramatic improvement and others, we intend to keep moving in this direction.
Slide 12.
Could talk more about the future now and where we're going and.
And it's going to be all around.
One strategist 3.0, which we just recently changed in our purpose statement.
Isn't that blue box on the bottom both of these changes have created excitement within the company and an inspiration from our people on that higher purpose and we're all trying to live up to.
Slide 13 from going to spend a little bit of time going through 3.0 to give you a little more context and color as to why we think our future performance is going to continue to accelerate I'm going to make a comment on each one of these so you start with simplification you.
You've seen what we've done on structural things and organization design work continues simplification is going to expand into more 80, 20 and simplified design and of course, you are all familiar with 80 20 that but for US it's still early days with lots of UBS.
Simplified design is the realization that 70% of your cost is tied up in how you design the product and what we want for our company's design excellence and operating excellence, we want both of those things and the way you get design excellence is through simple by design is going to as three major buckets, it's going to be complexity assessment.
Of our existing and new designs are going to use four guiding principles and how we design products, we're going to design with forward thinking.
Designed to reduce we use material.
Designed to reuse things that we use across the company, we're going to design to flow.
We're going to enable all those with the use of AI, which is going to allow our engineers to be able to do these things in a much faster and.
Analytical fashion.
Second bullet is innovation in our stage gate process, we call internally when innovations us taking an idea to launch for new products and we're making three changes there once a metrics.
Thats called PVA product vitality index, not a new metric for most familiar with us. It's the percent of revenue that comes from new products and things that we've launched to commercialize in the last five years, we're holding people accountable to that and we're seeing nice progress.
We've also include key.
Two key process changes one is new product blueprinting, which is an outside in orientation for engineers, so spending more time with customers and end users to understand their pain points and her needs. So that we design and develop better products to solve those the course simple by design is embedded into the new innovations will.
Third Bullous digital leadership, we put this honor for the pandemic, but of course with the pandemic. This is even more important.
The first one related to sitting.
Great next to me.
Strategically positioned six feet away from me, though.
I had a sievers retiring on January Onest. This is part of cap is long term plan.
And she has 33 years with the company and 33, great years and everything she's done she has accelerated into pricing helped us a tremendous amount of.
Weather was bad times and recessions are good times with expansions, it's been a big part of the win strategy and her team partner team to work we did on those acquisitions.
As a huge lift by the finance team and really made a big difference for us.
A great example of values and results and a good example for the rest of our leadership team.
So this is Cathy his last earnings call.
I can see she's pretty tore up about.
But she is going out of style. Because these are fantastic results to do as your last earnings call.
Now succeeding Kathy on slide 15, as Thailand Bruno.
Tom will be our CFO on January Onest of next year I think a lot of you know Todd Todd was Investor Relations and knows the company extremely well 27 years with the company definitive.
Spend a division controller group controller, now corporate controller and he'll be joining Liam myself in the office of Chief Executive as CFO. So Todd if you want to just make a few introductory comments regarding yeah. Good. Good morning, everyone first of all I just want to say congratulations to Kathy on a wonderful 33 year career with Parker Hannifin.
So many people across the company that have you to bank for all you've done for the company and that includes me.
We worked so closely and so well together for so many years.
Help cents.
Integration costs to achieve of <unk> and.
Vision related amortization of 63.
Offset by the tax effect of these adjustments of 18.
Prior year first quarter earnings per share were adjusted by a net 45.
The details of which are included in the reconciliation tables for non-GAAP financial measures.
On Slide 18, you will find the significant components of the walk from adjusted earnings per share of $3 five for the first quarter of fiscal 2020 to $3 seven for the first quarter of this year.
Despite organic sales declining 13% in total sales dropping 3% adjusted segment operating income increased the equivalent of nine per share or $16 million.
Detrimental margins on a year over year basis for favorable.
<unk> trading excellent cost containment and productivity by our teams.
In addition, we realized an 8% increase from lower corporate G&A as a result of salary reductions taken during the quarter and type cost controls on discretionary spending other.
Other income was 14 lower in the current year because the prior year included higher investment income and gains on several small real estate sales.
Moving to slide 19, we show total Parker sales and segment operating margin for the first quarter organic.
Organic sales decreased 13% year over year.
This decline was partially offset by favorable acquisition impact of nine 1% and currency impact a 0.8%.
Despite declining sales total adjusted segment operating margin improved to 19.9% versus 18, 8% last year.
It's 110 basis point improvement reflects positive impacts from our wind strategy initiatives and the hard work and dedication to cost containment and productivity improvements by our teams.
Moving to slide 20, I'll discuss the business segments, starting with diversified industrial North America.
For the first quarter, North American organic sales were down 14, 1% and currency negatively impacted sales 0.3%.
These were partially offset by an eight 5% benefit from acquisitions.
Even with lower sales operating margin for the first quarter on and adjusted basis was an impressive 21.0% of sales versus 19, 4% last year.
This impressive favorable incremental margin reflects the hard work of diligent cost containment and productivity improvements and the impact of our win strategy initiatives.
Moving to the diversified industrial International segment on Slide 21.
Organic sales for the first quarter and the industrial International segment decreased by seven 3%.
This was offset by contributions from acquisitions of nine 1% and currency of two 9%.
Operating margin for the first quarter on and adjusted basis increase 219, 2% of sales versus 17.0% in the prior year and impressive incremental margin of 66, 5%.
The teams continue to work on controlling costs and utilizing the tools of our win strategy.
I will now move to slide 22 to review the aerospace systems segment.
Organic sales decreased 21% for the first quarter, partially offset by acquisitions contributing 10, 8%.
Significant declines in the commercial businesses, both OEM, an aftermarket were partially offset by higher sales in both military OEM and military aftermarket the.
The diversity of our aerospace portfolio, which includes business Jets General aviation and helicopters is providing some additional balance against the current market pressures.
Operating margin for the first quarter was 18.1% of sales versus 24% in the prior year for a detrimental margin of 43, 5%.
Realigning the businesses to current market conditions and strong cost controls are helping to offset the less profitable mix imposed by the pandemic and the lower volumes.
On Slide 23 report cash flow from operating activities.
Gosh flow from operating activities increased 64% to a first quarter record of $737 million and an impressive 22, 8% of sales.
Free cash flow for the current quarter was 21, 5% and with the drop in net income of just $17 million. The free cash flow conversion from net income jumped to 216%. This compares to a conversion rate of 118% last year. The teams remain very focused and effective and managed.
During their working capital and consistently generating free cash flow.
Moving to slide 24, we show the details of order rates by segment.
Total orders decreased by 12% as of the quarter ending September.
This year over year decline is a consolidation of minus 11% within diversified industrial North America minus 4% within diversified industrial international and minus 25% within aerospace systems orders just as a reminder, that we report the aerospace systems orders on a 12 months rolling average.
Looking ahead, the updated full year earnings guidance for fiscal year 21 is outlined on slide 25.
Guidance as being provided them, both and as reported in and adjusted basis.
Based on our current indicators, we have revised our outlook for total sales for the year two a year over year decline of three 5% at the midpoint.
This includes an estimated organic decline of seven 3% offset by increases from acquisitions of 2.8% and currency of 1%.
With calculated the impact of currency to spot rates as of the quarter ended September 32020, and we have held those rates steady as we estimate the resulting year over year impact for the remaining quarters of fiscal year 21.
Please note or revised guide does not forecast any additional demand pressure caused by further shutdowns as a result of a second wave of increasing covid infections.
You can see the forecasted as reported and adjusted operating margins by segment at the midpoint total Parker adjusted margins are now forecasted to increase 30 basis points from prior year.
For guidance, we are estimating adjusted Martin's margins in a range of 19.0% to 19.4% for the full fiscal year.
For the below the line items. Please note a significant difference between the as reported estimate of $400 million versus the adjusted estimate of $500 million.
In October as the subsequent event to the quarter. We reached again on the sale of real estate of $101 million pretax or $76 million after tax that will be recognized as other income.
Since this is an unusual one time item we plan to remove this game as an adjustment to our adjusted earnings per share.
The full year effective tax rate is projected to be 23%.
For the full year the guidance range for earnings per share on and as reported basis is now $9 93 to $10 53 or $10.23 at the midpoint on and adjusted earnings per share basis. The guidance range is now $11 70.
To $12 30.
Or $12, even at the midpoint.
The adjustments to the as reported forecast made in this guidance at a pretax level include business realignment expenses of approximately $60 million for the full year fiscal 21.
Savings from current year and prior year business realignment actions are projected to result in $210 million in incremental savings in fiscal year 21.
Also included in the adjustments to the as reported forecast or integration costs to achieve of $18 million.
Synergy savings for Lord are projected to be an additional $40 million getting to a run rate of $80 million by the end of the year and for exotic we anticipated run rate of $2 million savings by the end of the year.
Acquisition related intangible asset amortization expense is forecasted to be $322 million for the year.
Some additional key assumptions for full year 2021 guidance at the midpoint. Our sales are now divided 48% first half 52% second half.
Adjusted segment operating income is split 46% first happened, 54% second half.
Just as earnings per share first half second half is divided 45% 55%.
Second quarter of fiscal 2000 22021 adjusted earnings per share is projected to be $2.38 at the midpoint.
And this excludes 63 or $106 million of projected acquisition related to amortization expense business realignment expenses and integration costs to achieve.
Offset in part by the gain on real estate of 59 or $101 million.
On slide 26th you'll find a reconciliation of the major components of the revised fiscal year 2021, adjusted earnings per share guidance of $12, even at the midpoint compared to the prior guidance of $10 30.
The teams outperformed our original estimates, beating the first quarter's guidance by 92.
With this performance in our continuing efforts to control costs, we're raising our estimated margins, which will in turn generate 81 of additional segment operating income over the next three quarters.
This calculates to an estimated detrimental margin of 11, 4% for the year.
Other minor adjustments to below operating income line items reduces our estimate by a net <unk> all in this leaves $12, even adjusted earnings per share at the midpoint. Our current guide for fiscal 21.
If you are now go to slide 27, I will turn it back to Tom for summary comments. Thank you Kathy so the portfolio our motion control technologist gives us a clear competitive advantage versus their competitors cute.
Cute and continue to ensure local to three acquisitions and we're really feel strongly with the wind should <unk> in our purpose driven.
That are both days are ahead of us.
One handed over to Sonya to store.
Thank you as a reminder to ask the question you will need to patch star one on your telephone to withdraw your question press. The pound key as first question comes from Jamie Cup of Credit Suisse. Your line is now open.
Hi, good morning, a nice quarter.
I guess just.
First question on the aerospace side, you narrowed the guide sorry, you raise the top line a little relative to four in the margin, but Tom any view on how you are thinking about the recovery out of the commercial business and how we think about the correlation between.
Global aircraft milestone our revenue passenger miles like should.
Should we expect a greater lagged unusual in terms of how we think about parker's pick up versus those two items and then obviously the margin performance was very strong in the quarter I guess show attribute that to win but were there any sort of.
Anomalies or price coster mix or anything else that was sort of you'd is.
Favorable.
The margin performance in the quarter. Thank you.
Okay, Jamie is Thomas compared to the emergency poster with aerospace. So when we look at aerospace. We think you are going to serve our initial look.
So it will it will bottom out next quarter for us, but when you.
Look at the components for for your forecast.
The four major so everyone soco, one at a time of your commercial OEM. We've good good assuming a 25% to 30% reduction in those basically using the current production rates with our customers have given those times were cool material.
Terry OEM will be low single digits, which seems reasonable with ya.
135 engine Camaro.
Commercial or tomorrow, which is one of the questions. You ask we have minus 35 to 40.
That compares to we wrote point is 40 and the last quarter. So we we see a little bit of improvements urban significant improvement available see kilometers currently around 55%.
And that's not unusual to see our MRO run a little bit both available Street commerce airline to purchase are supportive of that kind of forecast.
That we've given you up there.
Military Omarosa.
We've got a positive good single digits loopy and supported by fleet upgrades to an extent service flavorful those some of the older nurture.
Military aircraft.
Mission critical 80, or MCAT initiative, where to make sure. The fleet is 80% ready to go.
All those things we think we still feel good about this forecast I would tell you one of the things we like about aerospace because we've been very aggressive on her caused us we've taken 25%.
Of our people out unfortunately, given the conditions.
You are in a position from of March two point.
A return on assets are very attractive business for us.
Longer run to this will be a longer return.
Bottoms and Q2 in stores to turn.
Our second half over the next several years with the cost structure, we have employees it'll be a very attractive business for us.
Nice gradual growth before eventually gets back to where it was which would which will obviously take time.
Orders for Q1.
In general.
<unk> you are right.
To win strategies 2.0, and no three oh, so although restructure was done in the past.
But I do think we showed the advantage in Q1 we're.
We're pretty much at our run rate.
The permanent savings or actions because we came out of the gate very aggressive on the preliminary restructuring and then we also stupid peak disclosure reactions that we are able to help in Q1.
With restoring salaries of that will come down.
So I think that was part of what helped Q1, but when we look at margins if you can.
Compare our first half a second half.
We're going to still show a nice improvement in our second half with this guy.
Okay. So to my closing comments are <unk> are ahead of us over the top one of our margins.
Thank you I appreciate it I'll, let someone else to ask a question.
Thanks, Jamie.
Thank you and our next question comes from Nathan Jones Stifel. Your line is now open.
Good morning, everyone.
Morning, Nathan.
Just like to start with the top line guide Cathy you said, you're intending or you're planning for that can split 48, 52, which I think is what it typically speed split for you every year and kind of the way that you typically guide at this point in the year.
She also that implies that you don't really see any fundamental sequential improvement in the businesses.
Is that the way you've gone about framing these guidance and if we do say the economy gradually get better as we go through the rest of the year with that tend to suggest that may be your your second half of 21 guidance could be could be a little bit better than where you are out at the moment. So.
And this is Tom.
So part of what we looked at.
When we looked at improving the organic open minus 11, amongst seven and a half.
Was that we looked at our queue to have.
Have been very similar to Q1.
The industrial piece, maybe a little better.
Aerospace little worse as I mentioned bottling up then we will see Q3 bitter in queue for.
Pauses were forecast for Q4 is positive high single digits. When you look at the second half as a whole will have industrial.
He was on combining North American international.
As a positive low single digits aerospace around a minus 12, so we get the flat.
Because of the aerospace negative I think part of what we're looking to.
Q2 and Q3.
As to understanding what we have a lot of positive trends with order entry Pmi's moving in the right direction and market's moving too.
Or the silver in decline.
Or certain works or in decline.
The work so they're not disorder.
With the realisation that there's risk in the next two quarters types of the virus activity.
We're not assuming that it's getting any worse, but they think there is a fair amount of uncertainty as we go into Q2, three which of the winter part for most of the.
World and you've got Covid in the flu season, together, which creates political unknown.
So we are still a very positive.
We think it's going to the next two quarters will be a little bit slower sequential it was still bitter quarters top one that we have guided to just last quarter. So we are reflecting that improvement.
I think realistic as far as what's going on.
Okay. Thanks, then unfree cashflow obviously.
Very good conversion.
A lot of free cash flow. This quota that's going to be typical when you're saying declining revenue as Unicode liquidate your own working capital.
As we get later in the year and used to adding to look at more you know more actual you ready your growth how are you thinking about free cash flow and free cashflow conversion for the full year.
Based on the guidance that you've provided for the top line here.
Yes, Nathan in this cafe I'm glad you asked we had a tremendous first quarter and a lot of that came from managing the working capital as you suggest I do not anticipate that it will continue at the pace that we saw in the first quarter as the working capital will be there'll be more need for example for them.
Centaury and payables will also have an impact and receivables. So yes. It will slow down we still constantly believe will be at over 100% conversion each quarter and for the year. It was it was a great start to the year and will remain above that 100% conversion, but it won't continue.
In new at the pace that we were able to enjoy this quarter.
But you think it'll be over 100% each quarter for Ya.
Yes, I do.
Okay, well, congratulations Kathy and congratulations and welcome back toward I'll pass it on.
<unk>.
Thank you and our next question comes from Jon and Jeff Gordon has to get your mind is now open.
Thank you and good morning, everybody.
Congratulations Kathy.
Great to.
To see that and.
I wouldn't worry about the coronavirus, Joe Biden kind of defeats the virus.
Thank you John [laughter], Hey, 64000 dollar question.
And industry is like when do when.
When the economy normalizes is capex not op expect capex likely to prospectively come back and if so how do you see the landscape across the multiplicity Beaver and markets in terms of customers predisposition to spend Capex and obviously I would I would leave out commercial aerospace and oil and gas because we know those are.
Pretty challenge, but the kind of as a framework to even understanding for the vertical is operating Tom and we kind of close out if not even above pre covid levels you'd have a lot of visibility about we don't have the same kind of visibility. So you can share your thoughts that would be great.
So John is Tom.
I think what you're getting at is what is the future hold and obviously capex.
Is a key ingredient potentially driving more industrial activity and when we get through FY 21 were characterized of what we have two quarters, where things are still a fair amount of uncertainty Q2, Q3 Q4, we have an easy pandemic comparison, but by then I think.
We will around the corner, but I'm very optimistic about FY 22, so early for everybody else's second half of the calendar year 21 and beyond.
There is low interest rates, there's fiscal stimulus that's in place and maybe more that might come the vaccine or air travel is going slowly resume.
Or order entry by then we will turn positive.
The end markets are going to continue to shift.
<unk> shifted into accelerated growth are forecast for global industrial production growth, which is a good indicator capex spending is positive and you triple what I would characterize as a much better industrial environment.
With our own growth initiatives and I'm pretty optimistic.
A number of years look like we were able to look at it.
Hi is this week with our jobs, we've phase two recessions together and the pandemic.
So it can't be any worse.
And all indicators that this is a much better environment and I do think capex two people, making more strategic longer term investments will come back on to play which was and that will just add to it.
Yeah, I think that makes a lot of sense.
You've called Old 80, 20 as part of your framework just in the spirit of another 80 20 company.
W has been.
Probably realizing and targeting some share gains to time to take the offense.
Do you envision opportunities for Parker.
[noise] share gains across your businesses and perhaps because they smaller players of pulled back.
Or Conversely, I guess there've been tougher competitor gym competitor has emerged let's say in China for instance.
Absolutely John is Tom again.
We think that is a big opportunity there and we track now that's part of our quarterly cadence we have all of the commercial leaders.
Accounts.
Sure the prior quarter assure the next quarter and it's going to be a multiple multitude of things and a lot of it's on the wants to source was creating a great customer experience for our customers is the first thing you Gotta do to to grow and then we think with innovation simple by design and all the other things that we're doing.
Opportunity to to make sure we have obviously got stronger through this and we think we can take advantage of that our service capabilities have gotten better we've acquired companies that are growing faster them and we were doing extremely well and they're heading too.
Are offering to customers and create more valuable to go to.
So yes, I do think there's a sheer shipped here opportunities.
Perfect. Thanks very much.
Thank you John.
Thank you and our next question comes from Josh Saga vertical research online is now open.
Thank you good morning, everyone and congrats to Cathy.
Two for me if I could first just.
On the margins Tom a couple of questions around that but I was hoping you could just help us a little bit more understand the cadence. It does appear that on similar revenues you've got a stepped out in queue too.
I guess, you don't have quite as much discretionary actions, but it seems like there's still a lot of positivity flowing through.
And the year guide is below kind of what you did in Q1 right as revenues are expected to build as the year progresses. So.
Understand you might want a little dose of conservatism going into the winter here, but is there.
Is there really something going on mix or otherwise that we should think about the kind of understand that margin profile.
Sergio is Tom couple comments.
The implied changed from Q1 and Q2.
Is pretty normal sequential shift that we have here you go back and look at our queue on the queue to over to here is pretty much the same neck of the woods. Yes. You are right in Q1, we have the benefit of all the permanent actions because we were pretty much at our permanent action run rate and we had almost all the discretion reaction so that was.
Big opportunity, but I would just the guide.
Right now.
Is still.
30 basis points better than last year.
And if I look at this the first half second half will go from 18 and a half.
About a total company two and a half to 19 eight in the second half so we see an improvement and obviously queue for.
We will be built in Q1, so the improvements there we do have a little bit of a mix Edwin as mobile you look at our end markets that have come back. This is not unusual mobile has come back faster.
Other and marketed nuts.
Margins, but these are still fantastic numbers.
For us to be in this kind of environment.
Putting up at four year is 19.2.
We're pretty proud of him.
Yeah, I know the absolute numbers or solid just trying to understand the pattern and then.
Second just on channel.
Yeah.
Did you actually see and normalization of channel inventories or where are we in the progress and what do you see distributors doing here as you look forward. The next couple of quarters.
So just a stomach and I'll start in Lincoln.
So we felt that what we saw.
It looks like through the quarter Destocking is pretty much run its course.
We are anticipating sequential improvement on distribution.
And when we look at the whole second half distribution global positive.
6% in queue for a little bit of Saugus to acute three.
Full so half will be positive.
Asia will be positive for both Q3 and Q4.
Distribution will be a little bit careful in queue to most of them are calendar year.
Fiscal year companies and I think it'll just be a little bit careful as far as what they do is go.
Go into the end of the fiscal year. So they won't get too ahead of themselves as far as research, but I do think as they go into the second half.
I'll look to probably strategically restock some things available.
Oh I've got nothing else ahead of the settlement by and large is.
Is positive.
Great. Thanks, I'll pass it.
Thank you Jess.
Thank you and our next question comes from Nigel Clough Wolf Research line is not open.
Thanks, Good morning.
Of the congratulations to check into it.
So.
I'd like to just this coming school with somebody and market dynamics, you usually give some some pretty good details so that puts and takes.
Ah just love to know, whether you've seen sort of phase III faithful, maybe phase one India markets.
Well could Nigel I'll give you the spin.
Spin through the market's for everybody.
Maybe I'll start at the higher levels of you want the short version this is but what we would call. Subsequent some of these are all organic numbers total company months 13.
Minus 20 in aerospace distribution was minus 14.
Industrial as a whole whole group and was minus seven in Louisville was minus 13.
If I would take it and to adapt.
Below the.
And I'll give you two spirits buckets, the positive markets and this would be all greater than 10% positive with semiconductor.
If science aerospace military OEM in aerospace military tomorrow.
Positive growth high single digits was power generation and rail we had one market that was neutral that was refrigeration.
The remaining market square declining and I'll give you those rivers segments low single digit decline was telecom egg.
<unk> was a total motive.
And the 10 to 20.
Percent decline was distribution mills, and foundries construction heavy duty truck loan and turf, a marine and the 20% to 30% decline machine tools hires mining forestry material handling and then grew to the 30% decline with oil and gas aerospace commercial OA aerospace commercial tomorrow.
The denial just on those.
Phases, the four phases.
I would just highlight the big shift if you look at the last quarter, we had 90% of our end markets all those and markers I just talked about 90% of them said and accelerating decline. What you would expect if it were we were in no way of 84% of them and Desilver to decline, which is a good sign that's the first sign of healing you got to go into the.
We call phase for gifts or decline and you'll have the opportunity to move into phase, one which is accelerating growth.
So that's the spin to the markets.
Great Great kind of is always and then it looks like you're going to be at an EBITDA margin.
Kind of sick of 20% for this year.
Your long term targets is 19, 20% probably about my math, but you've long term target 2023, 21 defense. So I'm just wondering if you you know.
If you see opportunities to see that targets I mean, what does what does this you imply at.
Basically the trough of the cycle, 20% type margin was that meaningful margins.
<unk> going forward.
So neutrals Tom again, so yes, we're proud of that we're excited we won't change those targets should we'd like to do them for a four year earliest get close during a portfolio do the but clearly were performing better and faster pace and we had anticipated.
And those targets are all pretty fresh we just one update it IR de which is just March and to your point, we're doing this and not the best of times.
So I think this is an indicator those were always go poison post they were not in destination. So we have lots of room to grow and I'm, hoping my page on three point O, which was kind of the reader's Digest.
<unk>.
Gives you indicators that we think there's a lot of gas in the tank here.
But we won't change those until we get a little closer.
We've demonstrated.
Doing them more sustainability more sustainable fashion, but yes, we are pleased with the progress that we're going to.
Beat those numbers.
Great good job.
Next cycle.
Thank you and our next question comes from gaming Rosoff Evercore. Your line is now open.
And then again our next question comes from David Rosoff Evercore. Your mind is now open.
Thank you very much really two quick questions. If you don't mind the margins for the rest of the year appear.
[noise] appear to be sort of flat.
Nine months over nine months and I can understand aerospace is down a lot, but even the industrial businesses. You don't really have the margins up much you over a year and I do appreciate some of the cost savings or a little less dramatic than we just saw in the first quarter, but when you highlight distribution is may.
Maybe ready to restock, a little bit are definitely improved some degrees or something else about the mix source something we're missing about price cost.
That would not allow the margins who improve much industriali I think when you strip out.
D a and just do it you know old school EBIT you'll.
You really don't have the north American margins much up at all maybe 20 bips year over year and.
International only up 50 Bips when it was just up now.
150 <unk> so.
I, just Wanna make sure I'm, not missing something and the second question simply with the deleveraging pace going this quickly.
When do you expect to be able to lean forward and and you know think about the M N a market a little bit or however, you want choose use the balance sheet and if it is M&A just a little later land kind of what you are saying I'm pricing and so forth. Thank you.
So David is Tom So I'll give you guys a little more color because the margins are doing quite well.
If I just compare the second half of 21, the second half of 20 and I'll give it to you by segment.
25 for North America versus 19.
98, and prior period 19.0, and international force $18 through so very nice improvement.
And a half aerospace versus the 26, so obviously aerospace feel more pressure and we ended up with 98 versus a 19 foot. So the margins are improving we do have as I mentioned earlier, a little bit of a mixer one with more mobile.
Very typical at the beginning of the upturn the mobile and markets speed or faster. We we saw the odor entered in the last quarter and those markets Kosta.
Customer base of all us margins and when you compared to distribution.
Industrial.
Then on the deleveraging said, yes.
Gives us lots of opportunities and we continue to work down to.
Nor pecking order, which you'll be familiar with.
First and foremost as dividends in our next dividend target to raise the dividend to keep our track record going is Q4.
And you can rest assured we're going to do that.
The next is continue to fund organic growth of productivity, which will do the and that's about it.
2% of.
Of sales.
We will continue to delever, but as we glide down or we have an opportunity to look at reinstating. The timpee five one and we will update you all on our thinking of the next earnings call.
And then there is an opportunity as we go down in the glidepath here to look at acquisitions and share repurchase and I think because our our cash flow has been so strong that we don't necessarily have to wait till we get to 2.0 again to finally.
Most of the acquisition pin that there's probably opportunities.
Properties that are more reasonable size versus.
Doing a carpool reward that.
Will allow us to do and glide down and basically not be impact dissolves to be able to to meet our commitment to all the credit rating agencies and deliver to speed. We wanted to enter the EBITA. So much higher now that we can probably absorb some some some things as we glide down and not Mississippi is we tried to get done.
So it does give us a lot more opportunities and those opportunities will depend on what's available in the in.
And the tradeoff is something we look at every time.
And the ZIP code to summarize that than the cash flow is the visibility of at the strength of it.
That began maybe not a CLARCOR size, but the idea of having to wait till the end of the fiscal year to lean forward with M&A, that's not necessarily the case any longer something could occur before the end of the fiscal year.
I don't know if I'd go that far I think it's going to be <unk>.
The acquisition activities and went up by 22 type of thing I think sequentially, you're going to look at.
The timber five one you can look at dividends.
Honestly the thing that we've learned over the years because we're.
Pretty good Tracor European acquire we worked at pipeline all the time, but I think we'd like to see the deleveraging go a little bit more.
The point I was trying to make is that once we get into 22.
EBITDA growth has been so high that we can start to look sooner than we would probably would've looked in the past.
Terrific. Thank you.
Congratulations Kathy in touch thanks.
Thanks, David.
Thank you and our next question comes from Andrea When I think of America as your line is now open.
Yes could I guess, it's still good morning.
I'm running entered.
Congratulations to coffee and thank you and congratulations to Todd.
Maybe I will ask you more questions on margin pace in the second no I will not do that.
<unk>.
Just.
Just a question on you'll hydraulics business and just sort of trying to figure out your performance.
Versus.
Your competitors.
Hey can you talk about the pace of borders throughout the quarter and when do you think we should hit positive quarters.
Or your.
Hydraulics business industrial business.
Yeah Mom's quarter. However, you want to answer it. So that's question one.
Okay. So enters tub first overdose remind everybody our industrial business is not just hydrolysis eight motion control technologies novo's compare my neighbors across the street.
Organic decline was 15% in our industrial decline North American International was more like 10% so.
It shows more diversified portfolio that we have the order trends in the quarter approves sequentially or North America, and international and we actually had international with Asia Pacific and Latin America turn positive.
In the quarter.
At one we would turn positive is a total company.
It's hard to pin that down exactly perform a likely sometime in Q3.
Gotcha and just a follow up question aerospace could you remind us post the exotic.
Transaction, what was the mix between commercial and military in the aerospace portfolio and where are we right now thank you.
Andrew is Tom again, so the mix right now is 50 50.
And in the past it was about two thirds, one third of the surround numbers to throw a commercial one third military so if two things going here much higher military content with exotic and then of course you have the commercial market softening. We're about 50 50 and I think.
Thing is really helped us in aerospace if you go look at our sales decline.
Versus other aerospace businesses, where we're at the top of the list and we're not thrilled that we declined whenever somebody would you compare declined to others. We are in the top Puerto Rico compare emergence.
Aerospace appears where the top Puerto Rico compare decrementals, we're in a tough for October so why.
One strategy, but.
And the diversification of the portfolio, we have a very diversified technology portfolio are.
4% on engines commercial military this.
German aviation helicopters regional transportation, it's very diverse so that allows us to kind of weather the storm and certainly the 50 50 now in the military content being much more stable has helped us quite a bit.
And 50 50 is a it's a normalized revenue mix or is that a revenue mixed post commercial crash.
Posted the commercial decline.
We could probably in the follow up calls offline give you an approximate what it would be a commercial came back but.
That's like a thousand different durations, what assumption do you want to make them commercial improvements you know so you could have I could give you a dozen different answers there, it's probably not going to be 50, 50 forever because commercial is going to grow but we will have a much higher military component to what we've historically had it won't be a third anymore.
Yeah, you guys did have been better than Ethan mode. So just trying to figure out what's going on here congratulations on a great quarter.
Long term, we're in the 40 to 50 range appropriate.
Congratulations. Thank you thanks, Andrea Sonya in respect of everyone's time.
Take one more question.
Thank you and our last question comes room, and then you're in a J P. Morgan your lifestyle open.
Hi, and good morning, and same in regards to campaign switches wishes and my question is are and again the end market demand.
And particularly on the mobile side.
Can you talk about a little bit of a bunch of mixed there I mean, we just heard from Sam H industrial an ankle and I'm sure from Dear that and they order books for agriculture up double digits, maybe you're not just seeing that chant.
But just maybe a little bit of color on your mixed with a mobile is a more construction versus an egg or do you anticipate orders coming through now that they Oems are beginning to see a pickup and their orders. Thank you.
And as Tom maybe I'll, just make a couple of comments about some of the AG Margaret some kind of our view for.
For the year.
And <unk> is in particular quarter to some kind of summarizing our view as we get towards the end of the year.
Culture for us is somewhat neutral we see.
S government support comparing prices up.
Like at a construction.
Non residential a soft in both North America and Europe.
Asia Pacific is positive in both residential and nonresidential, but I think it's a small equipment activity. That's been positive that's been offset play weaker large equivalent primarily outside.
China.
Automotive for us as soft first have a.
A strong second half and we see.
Bush an engine platforms, starting to turnaround of what we see.
Pick up an electric vehicles and we have.
Right content on the whole Avi side of things.
Trying to see if I missed it.
Mobile and workers.
That appropriate the biggest ones.
Maybe mining since that's mobile, even though sorry mining.
We've got neutral, but we see that as a positive second half I would say for most of these and when I look through.
My communism is kind of an aggregate with a full year, but we got egg as a positive second half.
Mining is a positive second half real positive second half.
Construction getting to neutral in the second half.
Automobile deposit so when we look at our second half with just a minor exceptions of.
Aerospace oil and gas being negative everything is either neutral or positive.
Okay I appreciate that that's a good color and then just as a quick follow up can you talk about how do you think about the return of the Max.
<unk> production and sales and is there any early aftermarket opportunities as they take all those parked aircraft and have to mean tigger.
Figure them or do you just have to sit and wait for production volumes to pick up how how do you think about the restarting of that production line.
<unk> [laughter].
And stuff so.
Obviously is a positive and and bowling it already a signal to us.
Our production started in May and we've been at seven.
Per month.
Going over to 10 per month starting in January.
So the signal had already started so this is a good thing.
And if you just think about how our aerospace businesses performed.
Even with no Max and then just tell at a low rate of and that's a good indicator.
I don't think there'll be a lot of Emerald provisioning again, I think it's primarily just couldn't help us on the east side.
Mario side will be more after the planes flying into his starts to get some players cycle time on them.
Okay. That's helpful color I leave it there in the interest of time and I. Appreciate it. Thank you. Thank you man.
So this concludes our Q&A and the earnings call. Thank you for joining us today and I. Appreciate your interest in Parker, Robert and Jeff will be available throughout the day to take your calls did you have any further questions.
They say if everyone.
Ladies and gentlemen, this concludes today's conference call and webcast. Thank you for participating now disconnect.
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