Q1 2022 Parker-Hannifin Corp Earnings Call
Okay.
Good day, and thank you for standing by welcome to the Parker Hannifin corporations fiscal 2022 first quarter earnings release conference call and webcast. At this time all participants are in a listen only mode. After the Speakers' president.
There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone keypad and if you require any further assistance. Please press star zero.
Thank you I would now like to hand, the conference over to your first speaker today.
Chief Financial Officer, Todd <unk> Bruno Sir Please go ahead.
<unk> ratio and good morning, everyone and thanks for joining our FY 'twenty to Q1 earnings release webcast as Rachel said this is Todd Liam Bruno Chief Financial Officer, and joining me today is Tom Williams, our chairman and Chief Executive Officer, and Lee Banks, our Vice Chairman and President.
If I can direct you to slide two you'll see our disclosure statement addressing our forward looking statements and non-GAAP financial measures.
As usual we've included all reconciliations for any non-GAAP measures in today's materials.
Those reconciliations and our presentation are accessible under the Investor section on <unk> Dot Com and we will remain available for one year.
The agenda is as usual Tom is going to begin with some highlights on the quarter. He's got a few strategic comments he'd like to add and then I'll follow up with a very brief financial summary of our quarter and provide some color to the details on the increase in our guidance that we released this morning, Tom will close with a few a few closing summary comments.
And then we will open up the lines and take your questions. Just one reminder, regarding the pending Mega acquisition, we are still bound by the requirements of the U K takeover code in respect to discussing certain transaction details. So that's just a reminder for everyone with.
Now I'll ask you to move to slide three and I'll hand, it off to Tom. Thank you Todd and good morning, everybody and welcome to the call.
Turned in an outstanding quarter, and it's a great start to FY 'twenty two.
Thanks to the global team for delivering such a record quarter against the backdrop of strong demand inflation and supply chain disruptions. So a couple of highlights safety performance continued to improve 17% reduction equivalents since on a rolling 12 month basis very strong growth in particular organic growth at <unk>.
Percent year over year.
An extensive list of records with seven first quarter Records.
<unk> total company operating margin net income and EPS and then each reporting segment all three of them at all time operating margin Records EBITDA margin you can see that.
Reported number was 22, 1% adjusted we're 210 basis points higher than the prior year.
Then down at the bottom less rose segment operating margin as adjusted was 22.0.
<unk> 210 basis points improvement versus the prior year, just a great quarter very proud of the team and thank you for your hard work.
Going to slide four there's really three things that drive the company living.
Living up to our purpose.
<unk> generators and deploy that cash.
Being a top quartile performer.
You go to slide five I wanted to spend a minute you're familiar with our purpose statement, enabling engineering breakthroughs that lead to a better tomorrow.
<unk> been trying to show you examples of our purpose in action of the company come to life and one of the secular trends that depend epic is accelerating as digitization.
And then at Investor Day, we're going to highlight <unk> our content as you look at the whole digital supply chain as an example, things like five G infrastructure electronics manufacturing clean rooms data centers electronic devices shielding of thermal management that we do there and of course transportation to get these products around the world.
But the application that I wanted to cover today.
As semiconductors, given especially the importance of a chip.
Chip demand around the world. So if you go to slide six.
There's going to be a significant amount of investment is well aware of and the summit conductor space and thats going to drive for us double digit growth over the next several years.
Now we are we have strong expertise in semiconductor manufacturing about a quarter of our division shipped some kind of content.
Conductor space, so the orientation on the slide on.
On the left hand side of the applications that would go into it.
Inside of our technologists are just a second on the applications. Those six bullets that you see there really are made up of a combination of what we call fabs and tools in the fabs to be the infrastructure or the transportation part of the process and the tools of the various tools that are in the factory opened to make them.
Semiconductors.
On the left hand side of the picture of a wafer and on the center. There that is a picture of an etch tool.
Chamber Etch tool.
On the right are our technology that we bring to create.
Value for our customers per segment as process control, so think of that as precise control of gases and liquids and a process.
Fluid and gas handling provides cooling system for the tools electromechanical is helping with the wafer movement.
<unk> materials.
Shielding and ceiling.
Yielding is helping to protect the wafer from electromagnetic static ish.
Which would destroy the chips.
So we are central to the digital supply chain in this supply chain and related technologies and markets around digital if you combine that will be part of four major secular trends for the company driving long term growth.
Aerospace ESG electrification and Digitization.
Go to slide seven.
Speaking of the breadth of technologies. These eight motion control technologies.
Two thirds as you heard me talk about in the past of our revenue come from customers, who buy for four more of these technologies. So again speaks to the interconnectedness of the two.
Acknowledges the value proposition of the system and subsystem work that we do within it coincidentally two thirds of our portfolio is also helping to enable our customers with their clean technology journey.
That two thirds is going to continue to evolve to virtually 100% over time I'll give you. A classic example, the seal work that we do today combustion engine for transmissions are for personal sales. Eventually it gets replaced for seals for motors and batteries and electric vehicles. So the takeaway on the bottom here is really our brand promise.
Helping our customers increase their productivity and their profitability.
And we do that really in two ways. It set interconnected tissue the value proposition that we offer and we're going to be a big part of helping our customers on their sustainability journey as we help with our clean technologies.
Go to the next slide slide eight.
One of our favorite slides, it's kind of if you wanted to know whether park is really different or not.
Picture's worth a thousand words on the left hand side is the EPS trend, we've updated that now for our current guidance for FY 'twenty, two and you can see thats virtually a 45 degree angle there tremendous amount of year over year improvement.
And at two five times EPS growth from the $7 that we were doing in FY 16 and the.
The right hand side is EBITDA margin and you can see in almost 45 degree angle to that trajectory.
We don't guide on EBITDA margin.
Our performance in the actual quarter, we just completed for EBITDA margin was 22, 1%.
You can see that that will continue to show the expansion we're doing on margins.
Question might be how and the how.
It's really in the head of their and our people are engaged with the ownership that they are taking the portfolio changes that we've made.
And then the strategy changes one strategy to point out now most recently three pointed out.
You go to slide nine just a quick update on the Mega transaction.
A very strongly favorable shareholder vote.
Working with the UK government.
With economic and National security reviews that are underway.
Antitrust and FTIR filings are proceeding as planned and we still anticipate a Q3 calendar 2020 to close.
And this as we've described before is a really compelling combination that's going to double the size of our aerospace business and when you couple this with the other acquisitions, we've done CLARCOR, Lord exotic and not make it.
Our portfolio is now much more long cycle less cyclical and faster growing.
And with that I'll hand, it over to Todd for more details on the quarter.
Okay. Thank you Tom I'll ask you to go to Slide 11, I know Tom mentioned, a number of these numbers so I'll try to move quick quarter.
Quarter was fantastic rate seven records sales are up almost 17% versus prior year. We finished at $3 8 billion in sales organic sales are roughly 16%. It's almost all of the total and currency had a small favorable impact of less than 1%. The growth. This quarter was really driven across the board strong.
Broad based demand across all of our industrial businesses and really a rebound in the commercial aerospace market. So we were happy to see that and as Tom mentioned, we continue to benefit from strong growth from this recent portfolio additions, we've had in CLARCOR Lord and exotic.
Both second operating margins and adjusted EBITDA margins expanded by 200 basis 210 basis points from prior year, we're really proud of that number.
Adjusted segment operating margin came in at 22% and really just another strong quarter of margin performance.
Really proud of our teams.
Not only responding to the increased demand, but also executing through a number of various well documented supply chain challenges and I want to give them credit there was a great effort to maintain cost.
In the quarter and you can see that in our results.
Incrementals of 35% year over year, which is really impressive, but even more impressive considering.
Last year, we had $125 million.
Discretionary savings really based on the actions we took during the pandemic. So if you can.
For that the difference in Incrementals would be 58%. So we're very proud of those results.
If you look at net income adjusted net income and adjusted EPS, both of those numbers increased by 40% versus prior year adjust.
Adjusted net income is $557 million, that's a 14, 8% return on sales and adjusted EPS.
$4 26.
$1 21, an increase from prior year, where we finished at $3 five.
If you jump to slide 12. This is really just that breakdown of the $1, 21% increase in adjusted EPS and really the story here is just very strong solid operating performance across every segment.
Adjusted segment operating income increased by $184 million or almost 30% from prior year that really is the first leg of this bridge, that's $1 10 or 91% of the increase in earnings per share all the other items netted to another 11 of.
A favorable items and interest expense other expense and tax were all favorable and that helped us to offset just a slightly higher corporate G&A that was really based off of some of those.
Temporary savings, we took action with last year.
If you go to slide 13, just looking at the segments really the takeaway on this page as every segment.
Generated record margins in the quarter.
The other big thing I want to note is we were able we've always talked about trying to maintain our neutral price cost position, we were able to do that in the quarter across all the segments.
Already mentioned Incrementals already but I think it really highlights our efforts on covering inflation cost and really managing through the supply chain inefficiencies, so 35% as the mris, but 58% if you exclude those discretionary savings and demand continues to be very robust orders for the total company are up 26 person.
<unk> from prior year.
Just diving into the segments really quickly diversified industrial North America sales were $1 8 billion, that's up 17% from prior year adjusted operating margins did improve by 30 basis points from prior year and finished at 21, 3%.
<unk> found performance in that segment, considering it's pretty clear that the supply chain challenges.
Are more difficult in the North American region.
Order rates also very healthy at 32% positive and it's really just continuing to show a strong rebound off of those prior year comps.
If I look at our international businesses and diversified industrial international great quarter here for that team.
Even higher organic growth, 21% organic growth their sales came in just under $1 4 billion and.
Operating margins significant expansion of 360 basis points improvement from prior year and they did reached 22, 8%.
Very proud of that team volume, obviously was a big driver here, but also we've talked about this before our.
<unk> focus on international distribution that helped our mix that continues to expand and really some disciplined price cost management across that segment very important drivers for the quarter and order rates also very strong at 25% plus prior year.
If we move to aerospace systems fantastic quarter from that team sales were almost $600 million.
Organic sales did turn positive for the segment three 4%, but it did turn positive and we were very pleased to see that commercial markets are trending up and notably commercial aftermarket came in very strong at 33% over prior year.
So it's glad to see some rebound in those markets operating margin is a great story here 400 basis points improvement that segment came in at 22, 1% and I just wanted to note. It's really nice to see that level of performance. We are still well below pre COVID-19 volume levels. So there is room to grow here at that volume returns. So we're looking forward to see.
That as well and order rates turn positive plus 16% that is on a 12 month rolling basis, but if you remember last quarter. It was minus seven so we did see an inflection to positive orders in the aerospace segment and Thats really just further proof of a slow but steady recovery in that segment. So it really thanks to all of our global team.
Three our great execution, and really just continuing to live up to our purpose and performed extremely well.
If I ask you to go to slide 14. This is just I'll touch on cash flow cash flow from operations was $424 million or 11, 3% of sales free cash flow was $376 million or 10% of sales and our conversion for the quarter was 83%. So I just want everyone to know working capital management continues to.
Be a very strong story here, we continue to tightly manage this and really we're just responding to the inflection in growth here.
That increased level of demand coupled with really our efforts to.
Continuity of supply for our customers drove working capital be a use of cash in the quarter.
Accounted to be a three 6% use of cash in the quarter.
Look at that compared to prior year.
Prior year, we were in the second quarter of a significant downturn today, we are in the second quarter of a significant upturn last year working capital was six 1% a source of cash last year, but just as importantly, I want to be clear on this for the full year. We are forecasting mid teens cash flow from operations and our free cash flow will be.
Well over 100%, so you'll see that strong cash flow performance for us as we go throughout the year.
On slide 15, just really a quick update on capital deployment I think everyone saw this but last week, our board approved a dividend payout of $1 <unk> per share that is our 286th consecutive quarterly dividend and.
And that payout is in line with our.
Announced target of 30% to 35% of five year average of net income and on share repurchases. We did purchased $50 million in the quarter through our <unk> One program, but we also deployed an additional $180 million to purchase shares on a discretionary basis and essentially what that does is that discretionary purchase makes up for the three.
<unk> that we paused the <unk> 501 program.
From FY 'twenty Q4 through FY 'twenty, one Q2, and our goal there is to eliminate dilution.
'twenty two.
And then I just want to give a final update on the Mega financing in the quarter, we did secure a $2 billion differed draw term loan that.
That together with the $215 million cash deposit.
Into escrow are positioned us to take down our initial bridge facility so that was.
Successful and I want to be clear here in October after the quarter end, we also deposited another $2 $3 billion in escrow from a combination of proceeds from commercial paper issuance and also some cash on hand, and that really allowed us to further reduce that branch to $3 2 billion pounds.
Lastly on Mega financing, we did complete a deal contingent forward hedge contract in the amount of $6 4 billion and that really was just the lock in or a pound to dollar rate as we continue to work through financing.
The.
Acquisitions, so great work by the team there.
I go to slide 16, just looking at guidance. Obviously, you saw we increased our guidance this morning.
As usual, we're going to give this to you on an as reported and an adjusted basis. The sales range now for the year is approximately 6% to 9% or just under 8% at the midpoint. The breakdown of that is really all organic at eight 4% organic growth.
We do expect currency to turn on us.
Q3, Q4, and that will create just a minimal drag of about a half a point to topline sales and obviously that's going to impact the international segment.
There is no impact from acquisitions, we still do not expect it to close in our fiscal year. We're targeting Q3 of calendar year 2022, but we have no impact from Mega acquisition sales of our segment operating income and a split on sales is 48% first half 52% second half.
If you move down the segment operating margins, we did increase our adjusted segment segment operating margin forecast for the full year by 30 basis points from our prior guide and that full year now gets us to 21, 9% at the midpoint. There is a range of 20 basis points on either side of that.
And segment operating margin is split 47% first half 53% in the second half.
No change to adjustments at a pretax level. So you see all those numbers those are exactly the same that we guided last quarter and in corporate G&A and other expense, we expect that to be $513 million on an as reported basis and $461 million on an adjusted basis really the only difference there is some.
Transaction related costs with the back of the acquisition.
And just a reminder, we will continue to adjust transactional related expenses.
As they are incurred until we get through all of those transactions.
No change to the tax rate, we expect that to be 23% and our EPS guidance guidance on an adjusted basis is now $17 30 at the midpoint, we did narrow the range a little bit 35 on either side of that and the firm.
First half second half split is 46% first half 52, or excuse me, 54% second half and then finally I'll just say.
Our Q2, we are expecting adjusted EPS to be $3 74.
At the midpoint.
So that's just a real brief summary of the quarter with that I will turn it back over to you Tom presented comp. Thank you Todd and I think the first bullet sums up our thoughts a big thank you to the global team of highly engaged team delivering outstanding performance.
Couple that with a very bright future propelled by the win strategy three <unk> and <unk>.
Our strategic long cycle acquisitions as part of our capital deployment strategy.
That kind of a quick comment that he wants to make logistics before we start the Q&A yeah, just one comment.
Before we start the Q&A portion of the call wed like to respond to as many analysts as we can today on the call. So if you could ask one question a follow up if necessary and then jump back in the queue it would be appreciated.
So with that Rachel I'll turn it back over to you and we can start the Q&A session.
Thank you and as a reminder to ask a question you will need to press Star and then the number one on your telephone keypad and if your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
Please standby, while we compile the Q&A recipe.
Your first question comes from the line of Mig <unk> from Baird. Please proceed with your question.
Good morning Mig.
Yes, good morning, everyone and.
That's on a very strong quarter.
Tom I guess, where I was thinking we'd start you highlighted.
Big trends that benefit your business right aerospace ESG electrification digitization, yes.
Yes.
First one aerospace is perhaps.
The clearance to observe.
I am curious.
The other three can you can you give us some context in terms of how all of this plays into your business.
How is it driving incremental growth.
And more importantly.
All of these items driven by sort of new product introduction from.
From Parker or is this sort of using the existing solutions that you had.
In new ways that are helping your customers achieve these goals.
Thank you Mick I appreciate you picked up on that comment on the turn my opening comments, but yes.
I'd characterize these are secular trends that.
Feel longer than a normal business cycle.
She is going to take decades to unfold electrification really being kind of a subset of that and Digitization continues to just transform how we interface with each other and how we interface with the supply chain. So these are things that I view as being bigger longer than a typical business cycle for us it's going to be a combination of infrastructure.
So the infrastructure that goes around the world to put these in place things that are also onboard equipment and both of these.
Our bill of material plus type of additions for US and then also the fact that they should be faster growing environments. As a result of it we are doing innovation in this space, but a lot of our portfolio today, which is what I mentioned on that one slide.
Two thirds of it today is already clean technology related.
Yes, we are adding some motors motor controllers and software. In addition to our current portfolio. Our current portfolio was already designed to be very energy source agnostic and be able to respond to these changing dynamics.
We'll try to give a little more context. This in Investor day, and we just started before the call to try to in the last couple of days quantified digital and the threat of that it cuts through the company and its surprisingly large and we'll give you more context on that with some actual numbers.
When we get to Investor day, but.
It has an opportunity you think of the company is being very diverse and probably no end markets outside of.
Aerospace being bigger than five or 6% digital's, a thread that cuts through so many it's going to be probably.
Second to aerospace the biggest spread that cuts through the company.
And ESG.
Holding for the next.
2030 years as the World tries to get to carbon neutrality. So that's what I like if you've got a prior environment thinking on Liza My watch.
Seven years, two industrial recessions in the pandemic I think we're facing a much more constructive environment going forward.
Understood and then my follow up.
International, which frankly performed quite a bit better than I guess.
Two questions here one is on the margin side.
Incrementals and maybe some things that might have been unique that that helped the quarter I don't know if theres anything to call out.
On the order front I am curious as to how youre seeing the various regions develop China in particular.
Know that.
That got geography punches above its weight from a profitability and margin standpoint. So what are you seeing there and what's the impact on a go forward basis in terms of things. Thank you.
So maybe I'll start with that mix versus Tom again.
On the orders.
They were strong throughout the quarter.
To help people.
As you are to look at it from a dollar value basis. The dollar value was fairly consistent with what we saw in the prior quarters quarter. So we had nice consistency the numbers in the 26% improvement went down from where we were in the mid 50% because of the prior period.
It was improving but we saw all regions strong.
Internationally, all all three of the international regions were pretty much the same.
Reported international is 25, but all three regions underneath there, we're pretty much plus or minus 25.
If it takes some change on the margin side.
I would say there was nothing in particular that is different other than what we've been doing all along which was.
<unk>, three <unk> and <unk>.
Rapid re sizing of the company post pandemic and they're being very careful as we've moved into a higher demand.
Feathering costs in it.
In a very judicious type of fashion and a much more lean and agile fashion we've had.
Ever before because of cost structures. So much better I do think international hesitant less supply chain disruptions in North America for sure.
You see that reflected a camera or less.
Thank you.
Appreciate it Mike.
Thank you. Your next question comes from the line of Jeff Sprague from vertical research. Your line is open.
Hey, Thank you good morning, everyone. Good morning, Jeff.
Good morning.
Yes.
Tom I was wondering if you could address a little bit.
What's going on with your OE customers.
My question is.
I thought it would be apparent maybe in the quarter that there would be some more pressures there I'm sure. There were some sales slippage and the like but it doesn't jump off the page in the numbers. So to speak so maybe just a little color on what's going on with the Oes the shape of their inventory.
And just your visibility into the remainder of the year.
Yeah, just those Tom.
I wanted to touch on customers and then a little bit about us because what you are referring to is really supply chain issues and those would be the two fronts that it touches obviously.
With our customers I would say the supply chain has been much more acute.
There are an issue versus our own supply chain.
What we've seen with orders from customers is it much more longer period.
<unk> staggered release states.
Trying to make sure they have a spot in line so to speak we've had push outs on delivery.
Exceptions.
So you may have a date as to and due to other challenges. They have is our supply chain with other suppliers that may not necessarily want that delivery, which we fully understand they don't want to sit on a less inventory there's been temporary idling of plants.
This isn't really tied to the oes, but you've got the rolling energy shutdowns that we've had been experiencing in China, which will continue I think pretty much all the way to the Olympics.
We've done pretty well through all that if I had to use round numbers.
It's probably a $50 million to $75 million impact as far as the OE customers.
Feeling supply chain things that others to us.
I think overall demand with them continues to be strong as more just sliding to the right and then trying to manage a more complex supply chain.
Their inventory as they have always been just in time.
And they are being very careful to not accept other inventory that they don't need that they can put together with holes that they might have on your bill of material.
Great. Thanks for that that's very interesting and then on.
Price cost.
Quite an achievement not only get the dollar neutrality, but margin rate neutrality, but I wonder if you could just give us.
A ballpark number of the actual realized price on a year over year basis that you are running at nominal price.
Jeff It's Lee I can't give you an actual number but I will tell you.
The margin neutrality is a lot of hard work by everybody in the company and I think it shouldnt be a surprise we've had two processes embedded in our win strategy for going on 20 years, and that's around pricing and it's around supply chain and those processes give us very accurate indices around our selling price index on our purchase price.
So what it does is it aligns the whole company and it gives us a way to roll things up about what we need to do going forward and.
What youre seeing or the benefits of those processes really.
Embedded in our company and institutionalized.
Great. Thanks, I'll leave it there.
Take care.
Okay. Thanks.
Thank you. The next question comes from the line of.
Todd Davis from Melius Research. Please proceed with your question.
Hi, good good morning, guys.
Good morning, Scott Hope Youre well.
Sure.
Well great results from you guys make our lives easier so thanks for that.
On.
Now that we've had a little bit of time post.
Post COVID-19 yet.
Little bit of time can we take stock of Lord and exotic kind of where they are versus the deal models on imagine perhaps maybe.
Not quite on the top line your deal model, but perhaps better on the margin line, but I'm just guessing.
Color there would be helpful.
Yes, Scott as Tom.
We cannot be happier with both of these transactions lowered has proven to be.
More resilient and faster growing than legacy Parker and Thats, what we had hoped for.
Its margins are beating what we had expected and that just kind of cash flow that we reviewed with the board.
<unk> is performing in the upper Twenty's EBITDA. So it's.
Accretive on growth, it's accretive on margins accretive on cash flow.
And is exposed to more of a longer cycle.
Businesses that exotic has performed remarkably well.
We bought exotic nobody would have anticipated.
The Max being grounded for as long as it was but even with that.
Their portfolio.
<unk>, we put up mid Twenty's EBITDA. So it's a little light on the top line, mainly because of two things that Max grounding in the.
Pandemic.
But its margins have held up very consistent with what we had approved for the port and we know we are at the beginning of <unk>.
A long cycle improvement there with exotic.
The aerospace traffic is going to come back and the Max ramp up is coming back so.
We've gotten through the worst of it.
To be quite an exciting transaction for us.
Yes.
Sounds good.
CLARCOR, it's been obviously a few years, but that business is also exceeding our expectations from it from the model standpoint, So a lot of hard work across the team and that is.
Flowing through in all those numbers that we just talked about they are a big piece of that as well so I didn't want to lose sight of that.
That was a great deal, but moving onto I'd love Your slide six and the semiconductor example, but.
How do you can you go to market as one Parker.
When you are.
Looking at content into a semi fab.
Reduced.
Have account managers that cover certain accounts under representing in looking at the entire business and Thats how we.
Organized operationally.
<unk> technologies, but our commercial teams are organized around channels to market, either global Oems national Oems or distribution and so as that account management team.
<unk> power power apartment to the customers or if we go through our channel partners as our distributors that are bringing the power of Parker, bringing our comprehensive offering together.
Okay.
Good luck the rest of the year guys. Thank you.
Thanks Scott.
Thank you. The next question comes from the line of Anne Duggan from Jpmorgan. Please proceed with your question.
Hi, good morning, and diagnose hereafter 20 years, yes, good morning.
Yes.
Maybe first on your guidance for fiscal Q2, you're guiding to 374 at the midpoint than consensus is that 386.
Can you talk about where you think the biggest.
Disconnect in between.
Alright, it sounds like Bob and once Youre guiding to where should we be.
Most focused.
Where do we need to review.
Yeah, It's Tom I would say, it's probably at the top line.
So what we tried to do with Q2, you saw that we raised.
The organic guide for the full.
Full year from seven to eight 5%.
That was primarily by raising the second half or second half.
Cargo was four 5%.
<unk> got a 6% when we left Q2 basically the same.
And Thats really based on what we saw in.
In Q1 and in particular in October.
Alan just supply chain challenge is more around what I was talking about but Jeff around our customer demand.
Kind of.
Uncertainties are difficult to predicting.
Delivery dates and time on this on that you also have we just look at the raw dollars.
The $1.
So very much proportionately from Q1 to Q2, so normally in Q2.
Would have less work days, which was what we have in North America typically if you look at it over the last 20 years.
Q2 is typically 4% lighter Q1 and internationals typically 1% later.
We lowered North America, a hair more.
On the supply from a dollar standpoint versus Q1, mainly because of that extra 100 bps.
Hi chain, uncertainties and part of what we're looking at is those.
As temporary.
Idling that customers have been doing in particular.
What we haven't had any customers announce it yet.
You've got the holidays.
It would be very easy for them just to extend a day.
<unk> those type of things and so we're just trying to be pragmatic as to what Q2 would look like given the natural progression from Q1 to Q2, putting on a little bit.
And so I think the difference would be in the top line because.
Incrementals.
For Q2, if you look at it on an apples to apples again taken out the discretionary basis that.
We had in prior Q2.
Another upper Fifty's, just like Q1, so when you look at the operational excellence.
<unk> Incrementals is pretty hard to beat.
So it's really the only difference you can have is.
Top line assumptions I'm, giving you the context of how we came up with our Q2.
Very helpful and I guess, if I had 10 timed back entirely your first half back half weighted.
Great Thats all I appreciate you taking the time to give us that color just as a follow up then if I look at your sales in diversified industrial North America, 19% versus the <unk> 32, which.
It just that your lead times are extending.
Can you just confirm that and B is that what gives you confidence in the back half.
Revenues or is there still some uncertainty you mean, you are not known for having long lead times. So they have confidence in the back half and make no change to your revenue.
Part.
Half two is some of that back half contingent on all of the supply chain is getting better through the course of Q2 in.
After the races thereafter or is there still some.
Lack of visibility for key back half for you guys.
And I'll leave it there thanks.
And as Tom again, so, yes, we don't always have complete visibility, but our.
Our backlog is increasing sequentially.
With America went up 14% and international went up 6%.
Part of it.
We're also just recognizing that.
The second half, we don't see necessarily significant improvement from supply chain, we think youll get a little bit, but most of the supply chain improvements will be.
More so into our FY 'twenty three.
We have not been impacted a lot of that but I think the difference you're seeing between orders and organic growth is what I was referring to earlier as customers putting in orders in and having it be over multi quarters release dates or as in the past. They would they would give us orders that were much shorter cycle. These are longer cycle.
Bye bye industrial standards with release dates over multiple quarters.
Okay. That's helpful color I appreciate that thank you I'll get back in queue.
Thanks, Dan.
Yes.
Thank you. Your next question comes from the line of David Raso from Evercore. Please proceed with your question Hi, Thank you.
Obviously been covering the company for some years in the international margins have really been impressive now running ahead of North America.
And part of it lately, maybe it's been the supply chain issues are a little more acute in North America, but can you help us better understand how we should think about that notable improvement in international margins.
Geographic be it obviously, you're building out more Parker stores whenever it may be bigger distribution. There just trying to understand when we think about you say the upcoming March meeting and we think about margin improvement from here.
This was a major issue years ago about Ken International.
Closer equal North America.
Now it's been many quarters in a row, it's running ahead and I'm just curious about that.
The drivers and how to think about that going forward. Thank you David as Tom we could not be happier obviously, because this has been something the company has been working on for a long time long time on international margins. So I would say it started a while even before the changes to the win strategy Liza <unk>. It started with our team working very hard.
<unk> changed the cost structure.
And all international in particular.
EMEA.
Just.
Recognizing that all of those different countries and different infrastructures. There was an opportunity to try to simplify the so thats been going on for multiple years, so having a more agile lower cost structure than a concerted effort to grow international distribution.
From where we started at 35% 35 65 split now up to 40, and we will give you the latest.
When we get to Investor day, but it's north of afford it now so you're getting some mix there.
We've had Asia has always historically been a very strong performer.
Really kind of set that region.
If we think you can think about over the last 30 years, we said that region.
The latest and so we took all the best practices that we had from everywhere around the globe and we set that region up from a cost structure standpoint.
But what's helped US a lot. The last couple of years is that as the Europe team in Latin America, Latin America being small for us, but both of those teams. It made a marked improvement and when we think going forward to your other part of your question David We see no reason why they can't continue.
We'll give you new targets when we get to March but you see right now our full year. Good basically in North America International margins conversion, we had always hoped basically the same.
And so going forward, we don't see any reason why that can't be and they both have equal opportunity to grow.
Two higher levels and Paul will give you that vision.
Sure.
A quick follow up the back half of the year fiscally speaking you've revenue is only up 4% and I have to believe pricing is running probably at least that.
So the idea of volume being essentially flat or down in the back half of the year is that simply conservatism around the supply chain or just trying to understand why volumes won't be able to grow.
In the back half.
So just a clarification of the back half organic.
6%.
About a 1% currency.
Headwinds.
Nuts, that's around five.
And there is some.
Being what.
What I mentioned earlier pragmatic about uncertainties on supply chain or so.
Our customers.
But then we're not immune we have some of our own.
Challenges, but I think our team has done a particular job weathering it and probably the best evidence of our ability to weather supply chain is just our ability the MRO us because if you're struggling with your supply chain issues.
It ultimately shows up in your marginal return on sales.
But that's how I characterize the second half.
Alright, Thank you very much thanks.
Thanks for the questions David.
Thank you. The next question comes from the line of Nathan Jones from Stifel. Please proceed with your question.
Good morning, everyone.
Good morning Nathan.
Parker.
Over the years.
Continued to move towards and has always maintained a kind of local for local sourcing and manufacturing structure has that given you guys.
Better supply chain here, that's allowed you to pick up any market share.
A competitor as you might have longer <unk>.
Why change and do you think that that market share gain will be sticky or transient more supply chain normalized.
Yeah, Nathan it's Lee.
Maybe I'll touch the first part you are right. Our strategy always has been to build and source local which has been incredibly helpful and I think the other thing thats kind of benefited us.
Through these disruptions.
We've worked hard on dual sourcing strategy work where appropriate.
Which has given us some flexibility.
One of the things that kind of as we've itself into this are simple by design effort sent some key areas, where it's been easier for us to do material substitution than we've done in the past. So all that together, it's really I'm not saying, we're immune but has made us to be able to work through the supply chain disruptions.
I would say the market share that we pick up is very sticky.
One youre talking about a lot of engineered products. So when people take the effort to.
To engineer the product and it's not something that you quickly change and two.
The reality is if we're taking on new business, we're looking for commitments on both.
From both of us to be committed to the five going forward.
And in that.
On that standpoint, I think.
It's sticky.
Thanks, and my follow up Tom was still one of your comments, where you talked about.
Customers, giving you.
I get the orders over multiple quarters, rather than maybe just.
Just one quarter does that have a meaningful impact on the order rates.
In the quarter, you just reported first quarter 2002, and should we expect that to have maybe a little bit of a negative impact on the order rates as we go forward with that increased visibility that customers are giving you at the moment or is that not a significant amount.
Nathan It's Tom it's hard to quantify if you take the orders in and try to dissect and separate all the ones that are multi quarters.
I'd be hazard a guess.
I don't think it's material.
What's different as far as in the past at least on industrial and normal business conditions.
It's a normal supply chain as a normal order entry patterns.
<unk> had a fairly consistent input output.
Quarter to quarter, maybe a little bit going into the next quarter. This is clearly more over multi quarters and.
Actually its good its customers trying to plan for longer trying to make sure that it got there.
Or or ticket in line.
In a way that helps us from a planning standpoint, so when things do stabilize if they continue that way I think thats a good thing for scheduling them are factors in schedule and our supply chain.
Great. Thanks for taking my questions.
Thanks, Nathan take care.
Thank you. The next question comes from the line of Nigel Coe from Wolfe Research. Please proceed with your question.
Thanks, Good morning, Thanks for the question.
So <unk>.
Aerospace so I wonder if we maybe unpack the outperformance a little bit and.
Let me focus a little bit more on a military because that's been an area, where we've seen especially in Europe. The market. Some some noise from some of your competitors.
In defence and I'm, just curious how you see.
Military over the next fiscal year compared to your prior expectations.
Nigel it's Tom So our military military OEM and.
And Thats why we mentioned in our last call, we do see that being slightly soft kind of mid single digits decline in.
And that's primarily because of the repositioning that our customers simply did to try to strengthen the supply chain to protect the supply chain. During the pandemic that didn't want people to go under and so they kind of pulled forward demand.
In the last fiscal year, leading this fiscal year later.
We're adjusting inventory so that should come back.
Into FY, 'twenty, three and beyond and I would see that being a low to mid single, but probably more towards the low single digit.
Growth on the military OE side.
And then our military MRO we have.
Some softness in the quarter.
We're still forecasting.
Mid single digits positive.
For the full year so.
The only weakness that we're really experiencing for the full year.
Be military OEM based on the supply chain things I've mentioned.
Okay. That's great. Thanks, Tom and then you raised your margin by a points at the midpoint for aerospace I think the revenue number stayed unchanged. So just curious what's changed since you gave guidance back in.
In August.
Well.
Aerospace team has done a fantastic job there was a couple of factors Nigel It's Tom again.
First of all.
Commercial MRO uptick so Todd mentioned that commercial MRO up 33% for the quarter and order entry on a 312 was over 70% so you're starting to see the replenishment of the commercial aftermarket which is of the four elements.
<unk> margin that we would hit and then.
Within that kind of favorable mix within that favorable mix the spare to repair mix was favorable so at the beginning.
Which is typical when customers are trying to maintain.
Assets and minimize cost they'll do more repair work in the.
Once that's kind of exhausted and they had to put back in spares and we've seen an uptick in spare activity and then the aerospace team has done a great job, but if you go back to the beginning of the pandemic.
Moved very aggressively at the beginning to resize the business for the long cycle and what's really remarkable here is we're going to put up these margins were putting up the guide at 29% will be higher than our previous all time high.
Pre COVID-19.
And so this business is not even set 80% volume COVID-19.
It's putting up margins that are higher and the best we've ever done pre COVID-19.
Fantastic job and to your point Nigel if you were to compare that aerospace performance against other aerospace peers, I think we would do quite well with them.
Well that raises the question of whether you can get to mid twenty's longer term, but I think we would need.
That one from March but thanks, Tom.
Yes.
Thanks, Nigel take care.
Yeah.
Thank you. The next question comes from the line of Stephen Volkmann from Jefferies. Please proceed with your question.
Good morning, Steve.
Hi, Good morning, guys. Thanks for fitting me in here.
You mentioned, Tom I think that some of your OE customers were sort of delaying some of their deliveries certainly understandable, but what are you seeing in the distribution side, our inventories also really low there.
Would they rather be building them, a little let's say could.
Absolutely, Steve as Tom and I can let Lee chime in if he has anything hoekstra. Our distributors are finding the same challenges when you talk to them.
They would love to be building inventory this could be.
Strategic use of cash for them as they could but they are having a hard time really all of our suppliers getting up to where they would like them to be.
We're pretty much running a hand to mouth.
And so when I think about the longer term opportunities for us on growth here.
Got the pent up demand and it kind of reflects off the bottom, but there'll be an inventory replenishment back to normal levels.
For distribution, which will be that will help us and if you go out longer.
Longer than that.
You've got Capex reimbursement.
Two things there under investment and I think this whole localization as a giant burner underneath it now because of this lack of product availability is going to drive.
Customers and suppliers to add capacity and to create dual capacity, which is infrastructure opportunities for us ESG and then just the capital deployment.
I think there is a long term secular growth trajectory, but to get to your and more near term question.
Yes, the distributors or R. R.
In desperate need of more material and we're doing everything we can to get it.
Okay, Great and then maybe just my quick follow up.
You guys, obviously did much better this quarter than I think most of US expected and I think maybe than you had been expected and yet for most of our companies things actually deteriorated through the quarter. So I guess I'm just curious really what changed for you from three months ago.
Allowed you to kind of come in with such a strong result.
Well I think three months ago.
We're doing an annual guide so we're careful to annual guide.
Tom.
As to get too far over our skis, we tried to factor in.
An element of uncertainties with supply chain, because we were experiencing already when we did the August good I think we have whether it's the supply chain issues better than <unk>.
Dissipated allow us to generate higher organic growth and then the.
The operating margins are I think indicative of early multiple years of effort.
It's a combination of 2.3 point out the capital deployment buying buying companies that are accretive on margins and cash and growth.
It's not an overnight sensation is really you.
Go to that one slide that shows the EBITDA trend.
And building on it and the pace of that improvement.
On top of some very quick.
The cost actions that we did in the pandemic and thankfully not a lot of those costs have come back we have been able to run the <unk>.
Differently in a more digital fashion, which has clearly helped us on some of those variable costs.
Great. Thank you guys.
Thanks, Steve.
Rachel I think we have time for at least one more question. So could you take who's next in line.
Sure. The next question comes from the line of Jeff Hammond from Keybanc capital markets. Your line is open.
Hey, good morning, guys.
I.
You put me in I know you can't say much on the Mega deal, but I guess I just wanted to understand if like in your from your perspective. If the review process are the gating factors around getting the deal closed or the timing has changed at any in any way.
Jeff It's Tom no not at all where we're on schedule.
We had always kind of anticipated.
Third quarter next calendar year.
The reviews, we're doing with the government on economic and National Security will conclude.
Well before that.
And really the pacing item will be just the antitrust and MTI filings, which are proceeding as planned but you just can't.
Predict every country has a different process and timing and it's difficult to predict that outcome. So that's that's our best guess, but everything is on schedule.
Okay, Great and then.
Tom I like the slide on the clean tech as well.
Two thirds of the product, enabling clean tech, but I'm just wondering.