Q3 2021 Parker-Hannifin Corp Earnings Call
Yeah.
Ladies and gentlemen, thank you for standing by and welcome to the Parker Hannifin fiscal 2021 third quarter earnings conference call and presentation.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
To ask a question. During this time, you will need to press star one on your telephone keypad.
If you look on any further assistance please press star zero.
The opening speaker for today's call, it's Parker's Chief Financial Officer, Mr. Todd Li and bring out. Please go ahead Sir.
Thank you Elaine and good morning, everyone and thanks for joining our FY 'twenty, one and Q3 earnings release webcast as Alain said this is traveling and Bruno Chief Financial Officer speaking.
Here with me today are chairman and Chief Executive Officer, Tom Williams, and President and Chief Operating Officer Lee banks.
On slide two you'll find the company's safe Harbor disclosure statement addressing forward looking statements as well as non-GAAP financial measures reconciliations for all non-GAAP measures are included in today's materials. These reconciliations and our presentation are accessible under the Investor section at Parker Dot Com and will remain available for one year.
We will start the call today, with Tom and providing some quarter highlights and some street strategic commentary and I will provide a summary of the quarter our financial results and review the increase the guidance that we announced this morning.
And will then close with key messages and then Tom Lee and I will take any questions. The group may have with that I'll direct you to slide three and I'll hand, it off to Tom.
Thank you Todd and good morning, everybody.
For a jump into slide three and a quarter I wanted to say thank you to all the Parker team members around him for an outstanding quarter and it's real.
More than just this quarter, it's really been a whole year and non performers.
Performance through the pandemic and also the transformation of the company into a top quartile and diversified industrial company.
These results are all because of your efforts.
And let's look at the quarter on top of slide three starting with safety as we always do and a 32% reduction and recordable incidents.
So on the top quartile the combination of safety lean on high performance team structure and Kaiser on road driving high engagement and high performance, you'll see that show up on our results sales growth grew about 1%.
And the decline was minus one but in particular, if you take out aerospace and look at the industrial only.
Total segment grew organically almost 4% so that was significant.
We have five all time quarterly records you can see that net income EPS and then.
Superpowers for Parker, North American International EBITDA margin was very strong and 21 six as reported 21.8, adjusted a huge increase versus prior 250 basis points year.
Year to date cash flow was an all time record at $1 $9 billion and $18 a little over 18% of sales did you go to the very last row. This P&C segment operating margin on adjusted basis, 21.4% again, a significant improvement versus prior plus 240 basis points, so a terrific quarter and really tough conditions.
So you go to the next slide.
I wanted to talk about the transformation on the company.
The old adage that a picture's worth a thousand words, and so I want to take you to slide five and this is really the picture that speaks to the transformation on the company, let me explain and charger for a minute.
So you've got and gold bars adjusted EPS. The Blue line is global PMI plotted on a quarterly basis.
If you look at the last six years and look at that on a green line and compare that to the Blue Global PMI line you see they are much less correlated effect there are divergent and.
And there's been a step change and performance EPS over this time period.
More than doubled from $7 to our guidance of 14, 80, so approaching $15 and what's propelled out over that time period and EBITDA margin. That's grown 600 basis points. So you might ask how how that happened.
Net blue takeaway on the bottom of the pages are people that focus the alignment and engagement that comes when you have people think and act like an owner.
Portfolio, which is a combination of our interconnected.
<unk> and the value they bring and the capital deployment, we've done things create companies that have added to the strength of the company and.
And our performance, which really sits with the strategy of the company.
When should you to point out that kind of on the beginning of this journey and then one strategy III pointed out most recently in FY 'twenty. So this combination has really transformed our company you see that as evidenced on this slide and we're very proud of it but if you go to slide six.
So that's what's kind of in the rearview mirror.
Going forward, we are equally excited about where the company is going to go and.
And I've called this a convergence of positive inflection point and so on the left hand side is kind of those external intellectual assets.
You are familiar with a lot of these and.
Macro apartment industrial momentum you see that and are positive orders and positive organic growth on industrial we showed and this quarter aerospace as recovery is going to recover question is just what the trajectory will be and the timing.
Vaccines, and making progress around the world, there's going to be a significant amount of climate and investment.
Put all of that on top of IBM right. All these damp and low interest rates pent up capex demand and fiscal spending you have a very attractive environment for industrial for the next several years on the right hand side is really the internal things we've been doing which is a three point O in particular, but that last slides and I just went through spoke to all.
Those internal actions because thats whats been propelling us remember that last period last six years really had very little help from a macro standpoint. So you look at the three major things I'd highlight here performance, becoming top quartile strategies to grow fast and the market you've seen our margin expansion, great cash flow generation and consistently over the cycle portfolio.
We've added three great companies, all accretive on growth cash margins and with the rapid debt pay down and we've done.
And we're positioned to do free to future capital deployment, which is very exciting.
The technology will get into on the next slide, but the interconnected technologies release distinctive for us.
And then with the climate and divestment, we are very well positioned with our suite of clean technologies to take advantage of that so that I would tell you that my view and the team's view is this is about as good and environment as we've seen and a number of years go to slide seven.
You've heard me talk about this page.
Power of the interconnectedness of technologies, Brexit day accretive with customers what I wanted to do today in light of the clean technology discussion just gave you for examples.
This suite of technologies helps.
And were clean environment clean technology World. So the first would be electrification and.
And we've got a full portfolio of technologies here hydraulic electro hydraulic and pneumatic electromechanical low competitors got that breadth of technologies and we formed about four years ago. The motion Technology Center, which put the best and brightest engineers doing motion technologies and things that fly as well as things with wheels underneath these loans.
And so we put the <unk>.
<unk> and the aerospace teams together and this team has come up with a great listing of products around motors and burgers and controllers, but Theres also in addition to the typical lotion opera.
Opportunities, there's other challenges around electrification like light weighting thermal management shielding structural adhesives and noise vibration and all of these to accomplish what we have is legacy.
Engineered materials and with the Lord acquisition, we're well positioned to take advantage of those.
Second area is batteries and fuel cells that utilize most of the technologies see on this page.
Third would be clean power sources, and that kind of falls into two buckets renewables, which we do a lot and always have done a lot of wind and solar and.
And the hydrogen we just recently joined the hydrogen council and it.
It's going to be both onboard as well as infrastructure opportunities and should go up over the next many years and it's really building and our high pressure and high cryogenic applications that we have today.
And then we've been and more sustainable company for a long time and really the clean technology. Examples for us that started a lot of things and filtration.
And our filtration business protects and purifies assets and equipment for people for a more sustainable environment. So we feel very good about this portfolios, which more climate assessment on the future.
Go on to slide eight.
Just wanted to remind you of our purpose statement and enabling engineering breakthroughs and lead to a better tomorrow and it's been very inspirational for our team and I think it comes more to light. When we gave you examples of the purpose and action, which is on slides nine and.
And again kind of falling with their clean technology discussion went on.
I'd highlight electrification and I'm going to highlight in particular.
Electric vehicles on the left hand side.
You see applications that are changed because of and HCP on EV versus combustion engine on the right hand side you see the various technologies and Parker has that addresses those applications and won't read all those underneath the BDC. The major categories safety related technologies things I'd say weight thermal management and a variety of things we do for Chris.
Nickel protection.
Big opportunity for us. So we obviously are at and the fact is helping to make these vehicles and we'll always do that but the big opportunity for US is the hump where content around engineered materials, our bill of materials for them and easier and HEV is tenex when it wasn't a combustion engine and it.
It's one of the key reasons why our board business has grown so nicely given despite the pandemic we grew 11% organically.
Q3 from board. So we're very happy with the progress so far and our purpose and action around electrification as an example, so with that I'm going to turn it over to Tom for more details on the quarter.
Okay. Thanks, Tom I'll, just orientate, everyone to slide 11, and I'll do a quick.
A review of the financial results for the quarter, Tom mentioned some of these so I'll try to move quickly sales.
Sales for the quarter were $3 746 that is an increase of one 2% versus prior year. We are proud of the fact that the diversified industrial segment did turn positive organically.
Industrial segment organic growth was three seven and obviously that was offset by the aerospace system segment. There are ganic decline was 19, 7%. So all in that drove total organic sales to minus one point out currency was a favorable impact this quarter, a two 2% and just a note and respect the.
And this is the first full quarter that we report, both Lord and exotic and our organic growth numbers. So therefore, the acquisition impact was zero moving.
Moving to segment operating margins you saw the number 21, 4% that's an improvement of 240 basis points from prior year. Its also an improvement of 130 basis points sequentially strong margin performance there and.
That really was the result of just broad based execution of the win strategy, we continue to manage our costs and a disciplined manner.
The portfolio additions and CLARCOR, Lord and exotic are all performing soundly and you've all been familiar with the restructuring activities that we've done in FY 'twenty and in FY 'twenty. One those are on track and on plan and generating savings that we expected.
Adjusted EBITDA margins did expand 250 basis points from prior year finished the quarter at 21, 8% and net income is $540 million, which is a 14, 4%.
Ross that's increased by 22% from prior year adjusted EPS was $4 11, and that is a 72 or.
Or 21% increase compared to prior year's results of $3 39.
And as Tom said, it's just really outstanding performance and I'd also like to commend our global team members for generating these results.
Slide to slide 12. This is really a bridge of that 72 cent increase and adjusted EPS versus prior year and the story here across the board is just strong execution from all of our businesses.
This produced robust incrementals and our diversified industrial segment, and really commendable decrementals and the aerospace systems segment.
Adjusted segment operating income did increase by $98 million or 14% versus prior year that equates to <unk> 58 of EPS and really is the primary driver of the increase and our adjusted EPS number.
Interest expense was favorable to prior by 12.
As we posted yet another quarter of sizable repayment of our service serviceable debt and that is really benefiting from our strong cash flow generation.
Other expense income tax and share is netted to a <unk> favorable impact compared to prior year.
Moving to slide 13. This is just an update on our discretionary and permanent cost out actions and this is just a reminder, these represent both savings recognized and the current fiscal year from our discretionary actions in response to the pandemic and our permanent realignment actions that were taken at the end of FY 'twenty and throughout FY 'twenty one.
<unk> savings came in and exactly as we guided at $25 million for Q3, and now total $215 million year to date.
There is no change to our discretionary savings forecast for Q4 that remains $10 million.
And we continue to forecast the total year to be $225 million and full year savings.
Just to note with the increased demand levels that we're seeing from our positive order entry. Our teams have really pivoted to growth and really now these discretionary actions that we knew would diminish across the calendar year and now really been based on reduced travel expenses.
If you move to permanent savings, we realized $65 million and Q3, our total year to date is $190 million full year forecast again here remains as previously communicated at $250 million.
One item to note we did guide that the cost of the FY 'twenty, one restructuring would come in and around $60 million. It's now expected to be $10 million less or $50 million, but there is no change to the expected savings that we are forecasting.
Total incremental impact for the year for both permanent and discretionary savings is $260 million and just one other thing to note. This will probably be the last quarter that we detail. These items as we anniversary the pandemic induced volume declines and really focus our attention on growth.
So the takeaway is savings are on track no changes other than the expense will be a little bit less.
If you go to slide 14, and this is just highlighting some items from our segment performance for the third quarter and our diversified North America business sales were $1 76 billion.
That is an improvement and organic sales sequentially from Q2, it's still is down one 2% from prior year, but if you look at the adjusted operating margins. We did increase those operating margins by 190 basis points versus prior year and reached 21, 9% for the quarter.
We were able to increase these margins despite that sales decline due to our disciplined cost management those portfolio improvements, we've talked about and really margins and this segment are at a record level.
If you slide over to order rates another positive here they improved significantly from plus one last quarter and they are now ending the quarter at plus 11.
Looking at the diversified industrial international sales robust organic growth here of 11, 1% total sales came in at $1 $3 9 billion and another great story here adjusted operating margins have expanded substantially and reached 21, 6%.
And improvement of 400 basis points versus prior year.
Clearly the double digit organic growth coupled with the cost containment and the effort from our global team really generated this level of record margin performance as well and again another plus here as order rates accelerated in this segment and are now plus 14% for the quarter.
And if you look at aerospace systems. They continue to really perform soundly and the current environment sales were $599 million for the quarter organic sales showed a slight sequential improvement from Q2, but are still down basically 20% from prior year commercial end markets are still under pressure. However, there is strength and our flow.
Terry and markets.
And what's nice here is operating margins were 19, 4% 30 basis points better than prior year, despite that 20% decline and volume and if you look at our fiscal year.
And that performance of $19 four is the highest they've done all year. So we're really proud about that decremental margins are also impressive here and this segment. This quarter there, 18% decremental margins order rates appear to have bottomed and finished at minus 19 for this quarter and just a reminder that is on a rolling 12 month basis.
So overall, we're pleased about a number of things this quarter that diversified industrial segment organic growth of three seven is a positive.
Total segment margins improved 240 basis points from prior year and at record levels orders have turned positive and a plus six and our team is really continuing to leverage the win strategy to drive significant improvements on our business and increase productivity and generate strong cash flow.
So with that I'll ask you to go to slide 15. This is just some details on our cash flow.
Year to date cash flow from operations is now $1 9 billion.
And that's 18, 1% of sales.
That's up 45% from prior year and it is.
Year to date record.
Improved net income margin as we've talked about before is really a key driver and this it's created a step change and our cash flow generation, but I also like to commend our team members intense focus on our working capital metrics each of our working capital metrics is improving and showing positive results and I'm really proud about that.
Moving to free cash flow of 16, 8% of sales that's an increase of 630 basis points over prior year and our free cash flow conversion is now, 141%, which compares to $1 22 and the prior year.
So great.
Cash flow generation there.
Moving to slide 16, and I just want to mention some things we've done on our capital deployment, we did pay down $426 million of debt. This quarter that brings our total debt reduction to a little over $3 2 billion and the last 17 months since the Lord acquisition closed this reduced our gross debt to EBITDA to two four.
It was three eight and the prior year and net debt to EBITDA is now $2, two and Thats down from three 5% and the prior year.
Looking at dividends last week, you saw our board of directors approved a quarterly dividend increase of 15.
Our 17% this raises our quarterly dividend from 88 to $1 three per share and extends our record of increasing the annual dividends paid per share to <unk> 65 consecutive years.
And finally, as we mentioned at the Q2 earnings release, we reinstated our <unk> program.
And repurchased $50 million of shares and the corner.
Alright. So if you go to slide 17, and I'll just provide some color to the increase and guidance that we gave this morning.
And really the strong year to day performance and these order trends have positioned us to increase our full year outlook for sales to a year over year increase of four 5% at the midpoint and the breakdown of that sales change is this organic sales are now expected to be flat year over year acquisitions will add 3% and the <unk>.
All year currency impact is expected to be one 5%, we've calculated the impact of currency to spot rates as of the quarter ended March 31, and we held those rates constant to estimate the Q4, 'twenty one and impact.
Moving to segment operating margins our guidance for the full year is raised to 28% and that would equate to an increase of 190 basis points versus prior year.
And just some additional color some things of note corporate G&A interest and other is expected to be 381 million on and as reported basis and a $479 million on an adjusted basis. The main difference between those two numbers is that $101 million pre.
Pre tax or <unk> $76 million after tax gain on real estate that we recognized and adjusted and the other income line and Q2.
That's the main item if you look at our tax rates down just a little bit we're now expecting the full year tax rate to be 22, 5% and moving to EPS on a full year basis, our as reported EPS guidance range has increased from 12, 96% to 13 26, that's 13, 11% at the midpoint and on an adjusted base.
<unk>, we're increasing the range from $14 65 to <unk> 95, and Thats $14 80 at the midpoint.
For Q4, adjusted EPS is projected to be $4 18 per share that excludes 54 or $93 million of acquisition related amortization expense.
Finishing up our business realignment expenses and integration costs to achieve.
If you look at slide 18, and this is just a bridge of our increase.
Our adjusted EPS guidance. These results that we just reviewed you can see the outperformance that we had in Q3 that.
And that increases our previous guide by 57.
The order strength that we just reviewed and really the exceptional operation.
And execution by our teams have allowed us to increase Q4 guide by an additional 33 and that is exclusively based on increased segment operating income.
This raises our full year EPS guide by about six 5% from prior guide and.
With that I'll turn it over to Tom for some summary comments and ask you to move to slide 19.
So we've got a highly engaged team you see that this was traveling and results the ownership culture that we're building.
Broker performance and difficult times these numbers are.
Historical all time highest for us and not the best of times, the convergence of positive inflection points, we feel it points to a very bright future.
And the cash generation and deployment as evidenced by the rapid debt Paydown and acquisition performance and our dividend increase which I would just highlight is the first time, we've ever been over a dollar and $1 three on our quarterly dividend, which we're very proud of.
So the win strategy three <unk> and our purpose statement is well positioned and in addition to those inflection points for a very strong future I'll turn it back to Alain for to start the Q&A.
And as a reminder, if you would like to ask a question. Please press star one on your telephone keypad now.
And your first question comes from the line of Jamie Cook from Credit Suisse.
Hi, good morning, and nice quarter.
Just two questions one I.
I understand you don't want to talk about 2022, and I'm trying to understand the setup for incrementals and to what degree and volumes are still there and can we have a pause.
Average sort of Incrementals and how the discretionary cost sort of factor back and you know and impact incremental margins.
And then I guess my second question.
As regards to your longer term margin targets, which.
<unk> on already starting to beat those targets, so and particular with volume is not really showing up and your numbers I'm just trying to think about how we position and your margins longer term potential ATB.
And at a higher structural level. Thank you.
And Jamie as Tom So I'll start with the Incrementals.
One thing I would point out is our guidance for Q4.
As incrementals are about.
30%.
And if you were to do like for like take out the discretionary savings we had in Q for prior periods that would be about a 50% incremental so there'd be at the Incrementals that you know.
We feel based on the cost structure and all the things we've done with.
And to point out when three point out that we would generate at this point and the cycle. So we.
We would continue to do 30% I think as we go into 'twenty. Two obviously, we're not guiding to that yet, but I think.
A good round number to use for us, but I'll highlight Q4.
Because it is impacted by the prior year discretionary, which we don't have now and we're not as much and.
And that difference is pretty significantly go from a 30 day plus 50.
And so it speaks to the underlying power of the business is there and then on your question on long term margin targets. Yes. This is a good problem that we have that we basically beat our targets by two years.
Our guide at 28 at the midpoint on op margin.
Within spitting distance of the 'twenty, one and then EBITDA, what we don't guide on EBITDA margins will be at the 21% for full year on EBITDA. So we're actively working on what those new set of targets will be and.
Sure. This is a question everybody has and we're.
Going to disclose them at IR day, which will be March and next year, and we think thats the appropriate for them to do that but rest assured we're working on it and we're not going to subtle.
Sure be happy with stopping and where we're at we're going to continue to March forward and we will give you that vision when we have on Investor day.
Okay. Congrats thank you.
Thanks, Jamie.
And our next question comes from the line of Andrew <unk> from Bank of America.
Hello, Andrew.
Yeah, I guess I'll follow James Lee and ask one question, but it will have two parts.
It seems you guys are getting ready for.
Some of the best growth you've seen.
A long long time.
And the two part question that I have for you is.
How do you think about your supply chain and manufacturing footprint.
To meet demand and growth over the next three or four or five years and North America. So that's part one.
And part two.
<unk>.
For the past.
Decade at least.
And we didn't really have a lot of growth and North America structurally.
And in terms of your distribution channel do you need what do you need to do to optimize your distributors for.
This new growth environment do they need to be better capitalized.
And theres been some consolidation do you need to continue consolidating your dealers so part one.
Manufacturing getting ready for this multiyear upturn and part two what do you need to do on the distribution side. Thank you.
Okay, Andrew it's Tom I'll start maybe leak and pile on with.
The manufacturing structure of the company, but we feel that we're well positioned to take advantage of this growth and one of our strength historically.
Is when there is a spike in demand.
Our supply chain and the fact that we.
Make buy and sell local for local and our manufacturing footprint, which is diversified around the world.
And typically been more responsive and our competitors and then what we've done with three point O and added kaizen and.
And so I start on my opening comments when you links to safety performance.
Lean kaizen and the high performance seems like a high performance teams and the structure of how we run the various sales of value streams.
Got a very powerful combination and as we do Kaiser and we keep finding ways to free up capacity free up floor space free of capacity and our equipment.
And we're able to do what we would call more simple automation.
On kind of carry which is.
Uses the only free thing and life, which is gravity and if you saw these or gravity induced and material handling things and simple automation and the factories has allowed us to be responsive to this demand and so I think we're well positioned obviously, we're going to have to continue to invest which we will.
Has found ways to do it more efficiently and Kaiser and it's been kind of the great Liberator force to be able to do that on the channel.
The channel has been to your point has been consolidating over the last number of years.
And.
Better positioned than it's ever been to respond.
We did see nice growth and distributions sequentially and our.
And our distributors are investing and some inventory for the future and.
And I think there'll be positioned to respond and obviously, we take share through them as well as through our Oems go on direct.
And we've got a great distribution team our partners are strong and we've got a great distribution and sales force others tours have been investing and application engineers and.
And then relying on us to be better on supply chain and <unk>.
Arise we can continue to do better, but we have made quite a bit and stride on that so I think both of those will be well positioned to take advantage of this upturn.
Thank you Tom.
Thanks, Andrew.
And your next question comes from Scott Davis from Melius Research.
Hi, good morning, everybody.
Thanks tore.
Including me.
Kind of fascinated by slide.
And I know you've shown it before but.
I don't think you guys have disclosed kind of the opportunity difference between.
The electric vehicle and potential content versus ice.
Is there any way that.
And you can quantify the opportunity for us.
Scott It's Tom so.
For competitive reasons and for sensitivities with customers I won't get into the dollar content, which is why you heard me describe it in terms of just size vs.
Price.
<unk>, our bill of material.
Our bill of material on board is primarily almost exclusively all engineered materials. So everything when you go down that list on the right hand side on slide nine. These are all engineered materials and this would be and a combination of.
A pretty strong portfolio, we had before we did Lord.
Within Lord added quite a bit to that and really the combination. We've got there has really given us a very attractive offering for customers and.
The debate is how fast it's going to grow and what percentage of the total fleet will take over.
But for US every time, there's a new EV, it's an upside opportunity recognized as I mentioned, the lower drilling and levers on the quarter towards a third aerospace. So large aerospace business is doing a little better than legacy Parker's because they are pretty big military exposure, but it's feeling pressure just like legacy Parker's.
And for Lord as a whole to show a plus 11% to shows you the growth we've got on.
On the EV and HEV sales.
Okay fair enough and.
What.
Just again looking at slide 13 and the.
And the discretionary costs versus the permanent.
How do you think about this.
Going forward and kind of past the middle of the year.
We'll just we'll expenses kind of go back to pre COVID-19 levels is that something that you guys are starting to model and or is there some sort of a.
Prudent to discretionary that's even that almost becomes permanent if you will like people will travel a little bit last sorry, you're.
And you find that you don't need to send 30 people do on trade show you can send 20 I mean it.
Or is that in the numbers already and.
Open end question I guess Thomas.
Yes, Scott this is Todd I'll take that question Youre right on all accounts there.
And we talked about this last year.
The decline in volume came so quickly we pulled a number of levers on discretionary expenses.
A lot of this was in response to the volume declines right.
And we talked about our permanent actions and that eventually our permanent actions would rightsize the business, we feel like we're there now.
But we have found a new way to do business right. I don't think we will go back to the way we did things.
Travel trade shows those are all great examples.
But there will be some right.
Still trying to figure out what that is but it will not be.
Like it was before so that will be essentially a change that will be structural going forward.
Okay perfect. Good luck and congrats guys. Thank you. Thanks.
Thanks Scott.
And you have a question from Joel.
From BMO.
I'm glad you started off with the safety talk Tom and I've got my my mask and my safety glasses on and I've got all my shops, and everything I'm ready for it.
Friday digital stay safe stay safe.
Can you talk a little bit about the inventories and the channel and and aerospace and just sort of maybe more generically how the industry is setting up for 'twenty, two and 'twenty three and like what are you hearing from.
And from your customers and and your distributors and things like that.
Joel it's Tom so on distribution.
We saw really nice improvement versus Q2, so distribution came in at plus two overall for the quarter versus a minus six and the prior periods are on 800 basis point improvement and <unk>.
Distribution.
We saw really good growth and Asia Pacific and Latin America, and that 15% to 20% range.
<unk> was flat and North America.
Just slightly negative low single digits, but pretty much across all of our distributors. We saw a combination of.
Actual activity driving demand and then investing and inventory coming months. So I think the channel has turned from them.
Last quarter I talked about selective restocking I think it's pretty much across the board people planning for the future.
And then on aerospace, we still need time.
I think we're bouncing along the bottom there.
And.
And we sized the company.
Put up great margins, where we're at right now.
The advantage of being very diversified and our segments.
And engines military and commercial helicopters et cetera going down the line that has helped us quite a bit for about $50 50 military and.
And so we're well positioned on a question Mark there is just.
What will the trajectory.
And how long do we bounce along the bottom clearly I think the military side.
Continue to be strong force. It was strong this quarter and will continue to be strong.
And for both we and.
And we're over on the right programs there and.
On the commercial side will be all based on what we will be based on line rates from us.
Oems Air Framers and then.
And on the MRO side for commercial it's all about.
Air traffic shop visits and.
And you see positives with airlines hiring pilots back.
And departure and rates are improving.
And that will speak well to shop visits on the road.
Alright.
Great. Thank you thank.
Thanks Joel.
And you have a question from Joe Ritchie from Goldman Sachs.
Good morning, Joe Hi, Thanks, Hey, good morning, guys.
And so I'll ask a multipart one question, but really around free cash flow because that's been that's been a great story for you guys as well and so.
And as we think about next year and the inflection that youre going to see and growth. How do we think about you having to build working capital within your own.
Distribution.
And the impact that that could have on 2022 free cash flow margin and then beyond that like longer term, what's kind of like the right entitlement margins are going to be going up longer term, what can free cash flow margins look like longer term for the company.
Hey, Joe. This is this is Todd I'll take that question and thanks for.
Noting our superb free cash flow, we are really proud about that.
We don't we don't guide on free cash flow.
And we're really happy with our results there has been a step change if you look back over time.
I kind of alluded to that and and.
The slides there, it's really driven by our increased margin performance.
But not only that I mentioned, our working capital and our teams really have put intense focus on this and that's one of the areas that.
And we really have improved with these recent acquisitions kind of bringing them into.
Parker type terms and Parker type policies.
We're not done with that we still have room to go on that on every single one of those metrics. So we do see that improving.
Will there be some pressure as growth comes.
And <unk>, but it will not adversely affect those numbers.
We see a positive future share for cash flow.
Got it okay. Thank you very much.
And you have a question from Nathan Jones from Stifel.
Nathan Good morning, everyone. Good morning.
I'd like to follow up on the aerospace side Tom.
Tom specifically on commercial aerospace and even more specifically on the after market side, that's where you guys are going to say to pick up on Nick and macro side have you seen sequentially that get any better.
Really seeing the front and all of air traffic start to pick up and if not what's the typical kind of lag do you see from when that recovery and air traffic starts to when you actually see the recovery and you're off the market.
And as Tom So sequentially on sales for commercial MRO, which we saw a 13% improvement going from Q2 to Q3.
And the lag is sometimes hard to predict but the sequence of the.
Increase and available seat kilometers and increase and departure rates drive shop visits to go look at some period of time after that and that's.
That's always the hard part because it depends on what the routes are and the cycles and took.
Our engine etcetera, but those will start to improve and then once the shop visits go up and our flow through and the commercial MRO is going to happen. So I can't give you an exact lag because.
And if I did it I would probably be wrong, but clearly these are all positive signs pilots being hired.
Rates, calling up available seat kilometers chart.
Just to at least stabilize and start to improve those will all speak the shop visits going up and.
We'll drive higher content of MRO for us.
Okay, and then one on on you.
Use of cash here.
You guys had said once we get to about mid this year and mid calendar year, and youre going to be out of debt to pay off and obviously producing a lot of cash flow.
Can you talk about your approach to the M&A market now when we might expect to see you back into it and.
The maturity of the pipeline looks like right now.
And it is Tom again, and so youre right our serviceable debt.
We will will be paid off this quarter. So we'll enter FY 'twenty two with no serviceable and our next payment Corp. Upon that through to September.
Calendar 'twenty two.
So we have opportunities and.
We haven't always described it and the lessons learned from the financial crisis, just to continuously work to financial pipeline.
Todd and myself just did reviews, we do this all the time leap doses on a monthly it was his presence and so this is something we stay on top of building those relationships. So the pipeline is active but it's always a matter of finding a willing seller willing buyer and so it's this activity doesn't necessarily translate into.
<unk>.
Actual properties being acquired.
We're looking and certainly we're going to continue to.
By companies with the same kind of themes that you've seen before that either are immediately accretive or accretive within our synergy time periods.
It helped the growth rates of the company helped margins help cash flow and.
Youll continue to see and speed the consolidator of choice and we think we are still the best hole This motion control properties.
But we'll also look at the other areas that you've seen us build on and the low.
Last several years and hopefully by now and people feel good about our track record.
The last three got a lot of fanfare and we've been good at this for a long time, we've done on the 80 deal last 20 years, and I think youll see us to continue to be active on that.
First and foremost for us and dividends.
We're very excited too to clip that dollar mark on a quarterly basis and on and Youll see us stay on top of that our net income is going to growth and we're going to stay on top of those dividends to match that.
And net income growth.
We'll continue to invest and the company organically and productivity.
And if we don't find the right properties, which our preference would be to do deals because it drives cash and EBITDA growth.
I think we're a great investment and we will.
And who buy shares on a discretionary basis on top of 25, one but the pipeline is active and more to come.
And on that.
Great. Thanks for taking my questions.
And you have a question from Julian Mitchell from Barclays.
Hello Julien.
Maybe.
First question around the sort of linked topics of cost inflation and component shortages.
And and the sort of unifying factor of tight supply chains.
I guess two parts. One is do you think there is much evidence of sort of excess stocking up on accelerated stocking up by your customers or channel partners.
Given all the headlines around supply chain shortages and.
And then secondly, when you look at Pall care itself.
And how comfortable do you feel on that pricing outlook.
Offset cost inflation pressures.
Julian It's Lee.
I was waiting for somebody to ask a question on material costs and pricing.
Looking at our commodity chart, right now, which has got trends year over year quarter over quarter going back to the last big inflation period, It's a sea of Red.
But the thing I would say about our team as we saw this coming early on as we did this and as you know.
We've got really two great internal processes inside the company, it's how we track our PPI, which our input cost and how we track our selling price index to make sure that.
We always maintain this margin neutral kind of kind of rule.
<unk>.
We've been active with price through the distribution channel and.
And we will continue to do that we're fortunate to have great contracts in place with many Oems.
Raw material cost escalators in them, but our goal on the whole pricing side is to be margin neutral we've done that before and we'll continue to do that.
On the supply chain side I would say.
Just echo what Tom said earlier, the biggest benefit is our business model. So we design source make sell and the region for the region.
Everything you read about and.
On the paper.
Not immune to that I mean, there is still <unk>.
Things that happen on a day to day basis, but I would just tell you from a company standpoint, it's not material I mean, we manage it day in and day outage. So on pricing I think we're active and a good place on the supply chain side.
We're managing it the model's set up so I don't think we'll get hurt and it's really not going to be material.
Thank you and then how about on your own sort of customers or channel partners do you see them kind of across the board doing any kind of accelerated stocking up because of the supply chain issues being so well publicized or do you think that the activity is kind of normal for what one would expect.
<unk>.
As you see a macro inflection positive.
Listen everybody is very very busy right now I would say supply chain issues aside and North America labor is very tight I mean, you read about that that is a fact.
So a lot of our customers are doing what we're doing just really using kaizen automation, where appropriate et cetera.
<unk>.
Look every time, there's a ramp there is a little bit of a bullwhip effect, but this is no different than anything I've seen in the past.
Just people trying to manage the increase in demand.
Great. Thank you. Thank you thanks Julian.
And you have a question from Jon from Gordon Haskett.
Thank you and good morning, everyone Hey.
Lee maybe to pick up on some of the themes here what are you seeing in terms of competitive behavior, particularly given the inflationary backdrop, how are competitors jockeying jostling and.
How is that maybe modifying your own behavior in this period of post pandemic core emerging from post pandemic.
I think they are really the narrative right now Jon is Ralph supply I think everybody's.
We're structured much differently than many of our competitors. So the issues that you read about every day and maybe youre not as imperative to us.
But I think the narrative right now is around supply people are looking for continuity of supply and they can get it.
Everybody understands what's happening with commodity prices.
So I don't really see any.
Negative.
Customer actions, taking place I will tell you.
And we've talked about this for years.
This is always an inflection point for us where we tend to do better than the market as we come out of this it's a combination of two things we've done a lot of work with OE customers on design during the downturn, because they're looking to simplify their designs and take cost out we do that through our application centers, we see the benefit of that as we ramp up and then second.
Our our internal distribution systems are really poised to take advantage of disruptions with competitors.
Well I was wondering.
As prices go up and everybody is trying to raise.
And various aspects of their operations our competitors one of the ways that competitor might instigate a price cut to position themselves as by not raising commensurately.
Compared with other people or other other companies or players are you seeing any of that kind of that of that behavior is it still a little bit too soon to tell.
And I haven't seen that kind of behavior and I typically really don't see that you are just kind of the cycle you.
Do you see more of that.
And you see more of that Jon when you are at the bottom of the cycle and people are trying to fill up factories.
Yes that makes sense and then Tom.
By design as it becomes more ingrained and whats call it and operating competitive advantage for Parker you think it can be used to perhaps offensively target companies for M&A picking up on the M&A theme.
And I was thinking you could maybe provide a bit of an arbitrage opportunity for state partner to be able to go in and maybe even bid more knowing you can drive more synergies and other bidders that don't have simple by design.
As part of their Arsenal.
Yes, Jon So clearly simple put us on and I would just say everything thats and win three <unk> as part of our basket of goods that go into evaluating and acquisitions. So we look at what the.
And best practices are for the acquisition with those practices do we bring a combination and one plus one equals three generates the synergy plan and Thats.
The synergies, which you alluded to with simple by design.
The opportunity you have to pay.
And we really look for is what's the synergize to EBITDA multiple and we're done.
And is that something that makes sense, given where we're trading the other partners aside from acquisitions to get it.
He was talking about was competitive dynamics simple by design is an opportunity for share gains.
As we come up with products that are simpler to make easier supply chains and mobile.
More reliable et cetera, and maybe in some areas, where we weren't currently have share allows us to penetrate and account.
Overall, we've got 11, and 12% market share of this on a $35 billion space. We've got lots of room to grow simplify it sounds just one of many share gain opportunities.
Makes sense great. Thank you Raj Thanks, Jon.
And you have a question from Jeff Sprague from vertical research.
Morning, Jeff Hey, good morning.
Thanks, everyone.
And I guess two for me just thinking about this idea Tom.
And trying to break the gravitational pull of the PMI.
Two questions one on just kind of maybe fundamental on the business and maybe a second kind of philosophical.
First obviously, the PMI as a broad industrial benchmark right.
Have you considered that.
Calling your segments.
And as a diversified industrial just suggests you are and industrial proxy.
Perhaps some kind of different earnings presentation with makes sense and you give us this global technology platforms, but we don't know anything about the profitability of those sub segments. So that's more of a philosophical question I Wonder if you've thought about that and then secondly.
Although most of your business is short cycle right I would argue it's really a broad mix of early mid and late.
And I think to some degree people confuse short with early on.
And I'm just wondering if you could kind of give us some rough buckets what percent of your business you would actually characterize this early cycle versus mid cycle versus late cycle.
Okay. Jeff is tough so those are that's a good question Harlan.
First of all the old PMI gravitational pull and that's one of the reasons. Besides I think it's just a great way to describe the company whether it is slide five.
And that's D for those user.
Looking at your slides thats, the whole PMI versus our EPS trend.
And I Hope you all people got the point there and this company is dramatically and I don't undermine underlying dramatically different.
And yes, we will never be completely detached from PMI is because obviously.
That represents a total manufacturing activity and we will benefit from that but we didn't get much helped on that over last six years and you've seen us total EPS.
And that 600 basis points to EBITDA margins.
No.
And we'll continue that and hopefully people recognize that we don't need the macros and to.
To help us we have enough self help with two point on <unk> pointed out total.
Keep last for many many years.
The current environment is going to get better. So we are going to get some help with your comment philosophically on our reporting segments, yes.
A raging internal debate for many many years, there's pros and cons to it probably a longer discussion, but I can do on an earnings call.
But we continue to.
To think that represented and the way we do today is the best way because if you go back to those eight technologies and the fact that two thirds of our revenue and cultural culture survival and foremost technologies, that's exactly how we go to market.
We don't go to market, specifically, one off technologies all the time.
And we go to market. If you look on our commercial teams leveraging that present technologist. So thats. How we are presenting the company to shareholders is exactly how we go to market on the whole early versus mid versus late I'm, not even going to try to do that other than I'm going to reinforce your point, yes. We are a mixture and obviously you can look at aerospace characterize.
And as long.
And where do you want to put EV EV, we're feeling that now, but EPS and long term change its going to happen, where do you want to put all of that clean technologies that could add up all the things I've talked about on that one slide related to clean technology, and you get a pretty significant percentage of the company.
Obviously hydrogens long long very long cycle, what's happening there electrification is a little more near term so.
I think unfairly we've been characterized as early.
And made it because it was just historically, how we used to report orders on a monthly basis people could see those things sooner I think we're a good mix.
And.
I think hopefully over the last six years people recognize we're a good fit.
You want to venture money on.
And on this team.
Great Thanks for that perspective.
Thanks, Jeff and yes.
And you have a question from David Raso from Evercore ISI.
Good morning, David curious it seemed like the January price increases you put through.
Relatively modest I think kind of where we were and that cost escalation momentum and it made sense, but as the quarter has gone on and we look out to fiscal 'twenty two.
And I'm, assuming the fluid connector group and put out and increase but.
You don't usually do a lot of increases for July one the setup here feels though more accommodative to you putting price increases through so two questions.
Is it fair to say, we should see a lot more.
Mid year price increases and we've seen in the past and second is the lead time issues significant enough where distributors, who would normally want to get ahead of that increase.
Are not able to given the lead times.
I'm trying to get a sense of how much of the price increase we could think about for 'twenty, two and in sales and that kind of capture it versus maybe a little bit of a.
Natural pre buy that you see sometimes when you announced the increase.
Yes, David It's Lee I'll take that question and so I think it's fair to say you achieved mid year price increase is going after the distribution channels not only in North America, but globally.
And given where we are with input costs et cetera, and I would say by and large you're probably pretty correct on lead times.
Is that a lot of pre buying while there is some.
Not what you would expect if the level of activity wasn't so strong as it is right now.
Alright terrific. Thank you very much.
Thanks, David and I know everyone's got a pretty packed schedule today. So Alain will take one more question before we wrap up.
Okay. The last question comes from Josh.
Okay Winski from Morgan Stanley.
Good morning, Josh how are you.
Okay.
And we May have lost you have lost Josh.
Do you want to take on and you wanted to take another question.
You don't go to the next we will go to the next the next day.
And thank you next question next question and the guidance your line.
Nigel Coe Wolfe.
Wolfe research.
I'm guessing doses suites.
The results.
Thanks for fitting me in here.
So look I think that I think.
Yes. It has been a good point on the on the early cycle points.
And that you're still negative until year three segments. I think has some puts and youll notice the accountability cycles. So I think thats an important point I did want to go back to your comments.
How about incremental margins in 2022, and I know that that wasn't guidance necessarily but if you could do sleep cynical on margins with the temporary costs coming back and.
And perhaps focusing on place and pre ramp and.
And the backup and kind of the year.
I guess one is on Oscar.
Do you think that there is a line of sight based on weighted today hidden updates and incremental margin for FY 'twenty two.
Nigel it's Tom So you are right we are not.
And our guidance discussion for 'twenty to 'twenty, two is hard enough to do and we do it on August.
But I think philosophically.
Our goal and.
And what is best in class has to do with 30% incremental.
And I think the evidence that we're going to do about 30% and Q4, even with the tough comps that we have.
Discretionary cost us we did in Q4 of prior period are.
Are evidenced that we can do that going into 'twenty, two and we'll see when we pull the numbers together because as Q4 is probably one of our tougher comparisons.
And it will Q1, and probably another tough comparison, but it but it will get progressively easier as we go through 'twenty two those comparisons, but I think a 30%.
It's still on our radar and Q4 is good evidence that we can do it and Q4.
We can do going forward.
And then.
And that raises the question and then if you can do it in an environment like this.
Presumably FY 'twenty two.
Fixed it and there'll be that helpful. I don't think and FY 'twenty, two but once aerospace kicking back into gear.
Do you see do you think 35% maybe it could be a good one might be on FY 'twenty two.
I missed that.
What was before FY 'twenty two there.
Do you think that better than 30% could be a good number to use beyond 2022.
Over the business cycle, we've always told people.
And if youre modeling us over multi years used 30.
Now clearly and inflections, we've done better than that on a $40 50 range.
And while we're on inflection now is a little bit masked because of the prior period big huge discretionary savings. That's why I gave the number if you took that out of the 50, so typically glad pretty high up at the beginning.
30 over the cycle tend to later and a cycle youre down into the Twenty's.
But if youre modeling multiyear and I would use 30%.
Okay, that's great. Thanks.
Thanks Nigel.
Right.
That concludes our call today I'd just like to thank everyone for joining us.
As always we appreciate your interest and Parker Robin and Jeff will be here all day. If you have further questions or if you need clarification.
And I hope everyone has a great afternoon and stay safe everyone.
Ladies and gentlemen, this does conclude today's conference call. Thank you for participating you may now disconnect.
Okay.
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