Q3 2022 Parker-Hannifin Corp Earnings Call
Good day, and thank you for standing by welcome to the Parker Hannifin corporations fiscal year 2022 third quarter earnings webcast and conference call.
This time, all participants are in a listen only mode.
These decreases presentation, there will be a question and answer session to ask a question. During this session you will need to press star one on your telephone if you require any further assistance. Please press star zero and now it is my pleasure to hand, the conference over to your first speaker today, Tom Leon Bruno Chief Financial Officer.
Thank you. Please go ahead.
Thank you Paul good morning, and thanks to everyone for joining our fiscal year 2022, Q3 earnings release webcast.
As Paul said this is traveling Bruno Chief Financial Officer, and as usual with me today are Tom Williams, Our chairman and Chief Executive Officer, and Lee Banks, our Vice Chairman and President.
Today, we are going to discuss forward looking projections and also we will discuss some non-GAAP financial measures slide two in our deck.
Details are disclosure statement on these areas actual results may differ from our projections due to uncertainties listed and these forward looking statements and <unk>.
Those are detailed in all of our SEC filings reconciliations for all non-GAAP measures along with this presentation have been made available under the investors section on Parker Dot com and those will remain available for one year.
I'd like to remind everyone before we begin that we are still bound by the requirements of the U K takeover code.
In respect to discussing certain details of the pending merger transaction.
For the call today as usual, we'll start we'll start with Tom discussing some key items for the quarter I'll follow up with some additional color on our Q3 results and.
In detail the increase to our guide.
That we issued this morning with all of our press releases.
The call with any questions you have for Tom or myself.
And with that we are now on slide three and Tom I'll hand, it over to you. Thank you Todd and welcome everybody to the call today appreciate your participation.
It was a record quarter record quarter for the quarter and a record quarter for all time and a lot of key metrics and it was delivered against very difficult circumstances that required exceptional agility and performance our global team.
And then we all lived through it but just as a refresher what happened in Q3, we had the.
Omnicom spikes, which drove absenteeism, we had supply chain challenges.
<unk>, China, Covid shutdowns and Ukraine War, So just your basic average quarter.
Honestly, I'm, just being sarcastic, but obviously not ideal conditions and what was remarkable against that backdrop. We turned in a number of all time records as I've mentioned and my thanks to the entire team for just create performance and resilience in these times. So a couple of comments about the quarter on slide three safety is our top priority. We continue to be top quartile when you look at our.
Our performance on safety incidence versus our peers, we're doing that through our high performance teams, which is how we run the factories and warehouses.
Cultural Kaiser.
As I've mentioned before to shareholders, there's a very strong linkage between safety.
<unk> business performance, if you look at those three metrics for us.
Last seven years are all go into the same direction.
Our sales growth was 9% versus the prior year organic was a positive 11%. So that was very nice we eclipsed $4 billion in sales for the first time in the history of the company first time over $4 billion a quarter. So it was a great milestone.
We had strong demand against virtually all of our end markets.
Operating margin was 23% as reported or 22, 7% adjusted <unk> was 130 basis points better than prior year. So expanded margins 130 basis points in the kind of conditions that I started the call with just remarkable performance increase.
We increased the quarterly dividend 29%.
That is the largest increase in our history and clearly signals the confidence that we have about Parker for the future.
There is some temporary things, which we highlighted in future slides here that Tom will go over about the Q4 impact related to China Covid shutdowns.
Comment here I just want to make is that that's a temporary thing how long. It goes it's hard to predict but we expect to come up to full production sometime in Q1 and that will make up the delta that we're experiencing in Q4.
The course of the rest of FY 'twenty three.
But to clarify if you're looking at or what we're talking about China versus what some of our peers are we only have 60 days left in our fiscal year. So it's very hard for us to make that up.
And Russell for SKU, but we clearly feel confident that we'll make it up.
<unk> 23.
When you look at these results the win strategy as the portfolio changes its effect that accompanies now much longer cycle and a better performing company.
On slide four what drives US is really three things living up to our purpose, which is enabling a dream breakthroughs that lead to a better tomorrow.
Being great generators, and employers of cash being a top quartile performer.
And I wanted to give you. One example on slide five.
I, probably our purpose in action related to clean technologies.
As the world migrates to a more carbon friendly.
<unk> and applications we're.
We're going to be there to help.
One very topical and current area given the inflation pressures in the Russia, Ukraine more is the topic of energy.
Availability of LNG and inflation of energy prices around the world and as the world moves from Brown sources of energy to Greener sources of energy is pretty clear that we're going to need to use all shades of color between brown to green as we walk to the cleaner tomorrow and clearly a big part of that bridge to the cleaner tomorrow is going.
Natural gas and we wanted to talk about really natural gas, where we play in it and just how we are going to be able to help society. Our purpose in action here. So of upstream has four main components of our upstream midstream liquefaction storage and Regasification and power generation on.
At the bottom of this slide you see the six Parker technologies that we utilize to go into there.
A couple of anecdotal comments for.
For each one so an upstream we've got fluid power controls for the rig equipment and instrumentation.
Valves <unk> controls in there as well and midstream is primarily gas filtration on the liquefaction storage and Regasification that'll be our pumps are valves sealing technologies look in advance and this is all under cryogenic conditions, so ultra low temperatures.
Power Gen Im going to cover on the next slide so a lot of what we do for society on compressed natural gas and liquid natural gas is going to be directly applicable as the whole move to hydrogen which is on slide six so that last value chain as part of <unk> I think <unk> has the power generation fees.
And <unk>.
Clearly whats obvious here was really helpful for us and I think our customers as all the technology that we have on <unk> and LNG are directly applicable into hydrogen you can see in the middle of the Patriot applications of spy Pullets, we are in the middle.
On the right hand side of our various technologies.
Similar technologies.
Both fuel sources.
<unk> in our sealing technology will need to be even more sophisticated and which we're working on as we speak to be able to steal hydrogen which is a smaller molecule a more typical to seal, but will be a big part of this bridge with natural gas and we will be there to help on society is ready for hydrogen as well.
Slide seven which happens to be one of my favorite slides in.
And while you may be tired and we show on this slide I think it's the simplest way for shareholders and people that maybe aren't familiar with us to understand how different the company is over the last seven years.
Ben our people, which.
Which is really their engagement their ownership those top quartile results that we see from our people driving top quartile performance within the portfolio.
And I would just summarize it.
When we closed Mega we will deploy $20 billion.
Money into acquisitions reshaping the portfolio, we will have doubled engineered materials doubled aerospace and doubled our filtration businesses over this period of time dramatically reshaping the company and the future of the company.
Just the strategy side, you have the win strategy two <unk> and.
And three point O now over this period of time and you've seen what it's done to margins EPS. These are just phenomenal. This is high and to the right type of metrics on this page, which is hard to do I can assure you that so hopefully you see from this progress.
In addition to the alignment we have with a positive secular trends in aerospace digital electrification in clean tech that our business is poised for a very promising future over the next five years.
I wanted to close my.
Opening comments with giving you an update on slide eight.
With where we stand with the regulatory clearances regarding to the Mega.
Transaction, so on the antitrust side, we've already cleared without any conditions from the following countries, Australia, China, Saudi Arabia, Singapore, and Turkey, Brazil has given us unconditional approval subject to our usual 15 day waiting period. So that's in good shape, we've received <unk>.
Additional antitrust clearance from the European Commission subject to our commitment to divest of our aircraft, we won't break business, which is in process.
And then on the foreign investment side of things the transaction has been cleared by Australia, Denmark, Germany, and Italy, So probably the simplest way for me to describe what remains and what's left are antitrust clearances for the U S and the UK.
National Security clearances for the UK and France.
So we're making good progress and we continue to expect the transaction will close sometime during Q3 of this calendar year and we're very excited and we're going to put two great companies together, we're going to double the size of aerospace.
We're going to have create synergies as we work together and we're going to do all of this at the beginning of an aerospace recovery. So the timing is perfect.
That I will turn it over to Todd to give you more details on the quarter.
Okay. Thanks, Tom I'm going to start on slide 10. This is just the year over year comparison of our Q3 financial results and Tom mentioned this really.
All the credit goes to our team members really demonstrating stellar execution to generate a number of record results in a quarter that as Tom mentioned have a lot of disruptions.
Sales increased 9%, we did eclipse 4 billion for the first time in our history.
Organic growth was 11.
Currency was a drag of two points so.
That's how we get to the 9% growth I just want to make a comment our backlog levels are unbelievably strong they are up 25%.
From this time last year and over 90% of our end markets are in.
Growing state.
We continue to see all regions.
<unk> extremely well commercial aerospace and really all of the North American markets are really the most robust but it is broad based across the company.
Tom mentioned it but we did expand segment operating margins of 130 basis points in the quarter. We finished at 22, 7%.
On an adjusted basis and I'll go through the segments in a couple of slides, but really every segment every region contributed to this performance.
The inflationary it supply chain issues they are persistent they remain.
Yet our team members are really showing their resiliency as we leverage the win strategy to really.
Achieve our goal, which is top quartile performance.
When you look at EBITDA, our EBITDA margins expanded 70 basis points. We finished at 22 six for.
For the quarter and net income adjusted net income grew by 16% in the quarter and we finished at.
$630 million or 15, 4% return on sales.
<unk>.
Net income grew.
60% versus prior year very very impressive I.
I think we've mentioned this multiple times before but Tom was talking about <unk>.
Currency deal contingent hedge we have on the pound to dollar requires mark to market accounting treatment.
Due to what's going on with currency rates and really the strengthening of the dollar versus the pound we did record a pretax noncash.
Charge in the quarter of $247 million and that really accounts for the major difference between the as reported and the adjusted numbers this quarter.
When you look at EPS, we did $4 83.
That is 71 greater than prior year, that's up 17% from the 412, we did last year. So just really solid performance across the board.
Again, I can't thank our team enough.
If you go to slide 11, what we did here is we just put a graph together with displays really the elements of that 71% or 17% increase in EPS and again once again this quarter. We continue to outperform its really driven by volume of course, the margin expansion that Tom and I talked about but really.
What I like about this is it really displays our solid operating performance.
The majority of the change all of it is showing up in segment operating income of 75.
Of the 71 increase is all segment operating income if you look at everything else and Thats the <unk>.
Of a drag, but I'm really proud that we were able to not only.
Improve.
Yes, but do it at the operating line.
If we jump into slide 12. This is our segment performance.
Growth continues to be broad based across every segment and every region demand is continues to be robust our orders are up 14%.
The team has taken prudent actions to manage the inflationary environment and that really has positioned us to continue to maintain margin neutral on all of these price cost issues that are fairly well documented across the world.
That and the operating execution that I talked about really allowed us to improve margins in every segment.
If you look at our Incrementals at 37%.
We've talked about this a couple of times, but we still are going up against the pandemic level comps.
$25 million of discretionary savings in Q3, if you account for that Incrementals would have been 44% for the quarter. So just.
Really solid incremental performance.
Really highlights the power of the win strategy and it demonstrates the transformation that we spoke about at our Investor day.
<unk> March eight.
If you jump into the segments North America surpassed sales of $2 billion.
Organic growth was almost 15% versus prior year and adjusted operating.
Operating margins expanded by 100 basis points.
<unk> reached 22, 9% for the quarter that led the company this quarter right, which is really impressive North America has certainly had challenges across the supply chain, it's great to see them rebound and lead the company again.
They are incrementally improved in the quarter and Theyre the best Incrementals, they generated all fiscal year and even more importantly order rates accelerated to 23% and backlog of course grew even stronger just Barry.
Execution and broad based demand in the North American segment.
If we move to international sales were about $1 4 billion.
Organic growth there is almost 9% from prior year.
EMEA and Latin America combined was mid teens positive in Asia Pacific was low single digit, but all regions are positive in the international segment.
Again here.
Operating margins expanded 110 basis points in international and finished really at a high level of $22 seven.
Really satisfied to see the consistent performance of our international teams continue to post and we've talked about this it's been a long term effort for a long time and I'm really happy that we.
We're seeing the results out of our international segment order rates international or plus nine.
If we look at aerospace Aerospace continues to rebound sales were $632 million organic growth was almost 6% very strong demand in our commercial markets, both OEM and MRO.
Operating margins are great expansion here 250 basis points of improvement came in at 21, 9% and I just want to remind everyone. With this great margin performance. We are still operating at below pre COVID-19 that baseline when it comes to sales.
Orders in aerospace are minus four but if you remember we talked about this last quarter.
A few large military orders in the prior period that really just kind of make a tough comp in aerospace if you exclude those items aerospace orders were positive <unk> and.
And again aerospace dollars in the quarter are the largest dollar level that we've had in the last four quarters. So it just really gives us confidence in the aerospace recovery really proud to be able to.
These results across all of our segments and.
Like Tom said, it really demonstrates the power of the <unk>.
Performance and portfolio change that that a lot.
All of our team members have been working on for some time.
So if I go to slide 13, our cash flow generation rate, Tom talks about being great generators and great players of cash year to date, we've exceeded $1 5 billion in cash flow from operations Thats 13, 3% of sales our free cash flow is about $1 4 billion, that's almost 12% of sales.
Our year to date conversion is 117%.
We continue to still manage this diligently.
In a growth environment, right, which is.
Not the easiest thing to do if you look at year to date working capital is a use of cash cash of about 3% versus last year. It was a source of cash of about one 2% Q4 is our strongest quarter for cash if you've followed us for a long time, you know that we still continue to forecast.
Mid teens CFO .
Obviously greater than 100% conversion when it comes to our cash flow conversion.
<unk> called out the 29% dividend increase that we announced this.
This really reflects the confidence we have in our ability to generate cash not just in the short term, but in the long term as we look out to achieving those FY 'twenty seven goals.
Just a few notes on leverage or gross debt to EBITDA was two eight our net debt was $2 six.
But.
If you remember we have about $2 5 billion of cash.
Escrow to pay.
<unk> for the Mega transaction, we are classifying that as restricted cash if you exclude that $2 5 billion, our net debt to EBITDA would be one 8%.
Now, let's look at the guidance I'll go to slide 14.
On the guidance, we obviously announced an increase to our guidance. This morning, I'm going to give it to you on an as reported and adjusted basis, we are raising full year EPS by <unk> 10.
Last quarter, we are projecting $18 <unk> per share we are now at $18 and 15.
<unk> per share at the midpoint, we've also narrowed the range $2 15 on either side.
Sales growth for the full year is forecasted to be about 10%. We did increase the organic guide 50 basis points from 10, 5% to 11%, so 11% full year organic growth.
And while currency remains a head bit headwind in the quarter for the full year, we think it will be about 1% drag to the top line.
Just a reminder on currency for our guide we are using March 31 rates too.
To calculate our estimate.
If you look at the segment operating margins full year guidance is 22, 1%.
Wanted to call out if you look at that versus last year's actuals Thats, a 100 basis point increase in segment operating margins. So im glad to be able to speak to that the corporate G&A interest and other is really expect it to be.
$947 million on an as reported basis and $459 million on an adjusted basis and the adjusted we've kind of the adjustments we have detailed out for everybody.
The acquired intangible asset amortization is $315 million.
Business realignment charges are 20 million lowered cost to achieve is $5 million and of course, we closed our Russian operations that is a charge of $20 million. If you are curious that was $13 million and the segment line.
$7 million below the segment operating income line.
Mega acquisition related expenses that we've incurred to date is $84 million and finally that deal contingent hedge hedge that I mentioned on a full year basis its $396 million.
We will continue to adjust the transaction related expenses.
As they are incurred all the way up until we get to close.
A note on tax our full year tax rate is down a little bit we expect that to be about 21, 5% for the full year.
And when you do all the math for us that equates to an EPS adjusted EPS Guide for Q4 $4 16.
This quarter, we actually put another slide in here, it's a bridge on our guidance reconciliation.
Q3 performance that we had we really outperformed our guide significantly we'd beat our guide by 29, we've rolled that into our full year guide here and based on really strong.
Backlog and order rates.
In North America, specifically, we have increased our Q4, North American organic growth guide by 300 basis points.
Versus what we thought last quarter and that really is generating about <unk> segment operating income in Q4.
Tom has mentioned this but the COVID-19 related shutdowns in China are a near term temporary headwind for us in Q4, obviously Q4 is the end of our fiscal year here, we are estimating that to impact Q4 sales by $100 million.
We're using a 40% decremental on this $100 million.
Which is greater than what we normally operate at simply because.
A number of our facilities are fully shut down so.
We are.
Confident that the.
The facilities that are operating in China, and those others in the international.
Are going to be able to perform but we're using a 40% decremental on just that $100 million.
Near term headwind that equates to a 24 cent EPS headwind going into Q4.
All the other items net to a slight EPS reduction of <unk> and that really is the walk on how we get to our new guidance 18th 2015.
So.
Before I turn it back over to Tom I, just wanted to make sure everyone saw the press release that we issued on Tuesday with Robin announcing.
Her retirement plans after what will be almost two decades with Parker hannifin.
Robin has really been a driving force within the company really helping us to transform.
Our M&A processes are long range planning.
And of course, serving as our voice and our biggest fans with the investment community.
She has put forth timeless effort.
To champion peer W, which is our first business resource group that is focusing on developing women leaders and that will leave a lasting imprint on partner. So Robyn all of US here, we couldnt be happier for you for your husband, Scott as you transition into the first phase of the next step.
Phase of your life and we thank you very much.
So I'm going to just pile on while we have Robyn blushing, an embarrassing anymore.
She's just done a great job at insurance to <unk>.
Three years.
I think about our dealmaking skills and what you do once you let M&A.
Our ability to finance all of these transactions, which is something you just thing and like Todd said at the Investor Relations and you've all experienced it hopefully to be the top spokesman person for the company just an outstanding leader, we're going to Miss her but thankfully.
He has given us lots of lead time here and she's not leaving until the end of the year and we will get every ounce out of or that we possibly can on these next several months. He is nodding her head in agreement.
And the last slide slide 16.
We have a highly engaged teams of the people behind these results their ownership their engagement.
<unk> is driving our success.
You saw the EPS and the margin expansion.
Phenomenal speaks a disciplined strategy speaks to the portfolio changes were a longer cycle and more resilient company and we've got great.
<unk> to the secular trends that I referred to earlier and we are going to help the world as it moves.
The clean technologies to be more sustainable we gave you a new guidance new feedback on where we're headed for FY 'twenty seven with continued improvement across the board and really a transformed company.
Promising future again, my thanks to everybody that global team.
Fantastic quarter fantastic year to date.
Im going to turn it back to Paul to start the Q&A.
Thank you Sir.
We will now begin the question and answer session. If you would like to ask a question. Please press star one on your telephone keypad again. Please press star followed by the number one on your telephone keypad.
Please standby, while we compile the Q&A roster.
Your first question is from Scott Davis with <unk> Research. Please go ahead.
Good.
Good morning, everybody and congrats Robin I did not see the announcement.
He will be missed.
And we appreciate your help over the years.
I wanted to talk a little bit about your results I mean, it doesn't seem like supply chain hurt you guys.
Really at all I mean, you had 11% core growth in our <unk>.
Zero GDP world So.
Was there a tangible impact to supply chains on.
Being able to get stuff out the door in the quarter. It didn't seem like it could have been much.
Scott It's Tom your supply chain is still a challenge.
I would characterize it if I take ships out of competitive chips in a second.
It has stabilized but stable is still at a fairly inefficient level is it really hasn't shown much improvement over the last several quarters, nor will we forecast and then obviously, we're not forecasting very far out towards the rest of our fiscal year, but I think it's going to be challenged as we go into the calendar.
The rest of the calendar year, we did see worsen was chips and that continues to be a challenge, but I think why you've seen us perform maybe better than most has been our ability to where local for local.
Our supply chain has been built around that for years and while we continue to want to localize even more.
Had a running start against a lot of this we've been active on trying to increase towards sourcing.
And our engineers, we spent a fair amount of time with our engineers working to develop alternative materials.
Qualified with our customers our materials, we need a more readily available, especially on the chips qualifying alternative chips and some of our engineered materials products, where some of the chemicals et cetera.
Typical to get qualifying alternate materials there.
Same doing all of the above and just an awful lot of elbow grease and work in the factories and warehouses to.
To make this work this is not the easiest environment, but the team did a great job with it.
Yes, certainly seem so.
The example, you gave of natural gas to hydrogen was kind of interesting.
It begs the question of does the competitive landscape change as you go to the more complex hydrogen applications. I mean, my understanding is that it's the specs have to be pretty darn tight in hydrogen.
Highly.
Highly volatile material, but.
Does the competitive landscape change at all or is it do you think that competitors.
We'll be there similar competitors would be there.
Scott, It's Tom again, I think it does change a little bit I think it thins out because I think theres fewer people that can do the kinds of things that we can do in that area.
The fact that we've already developed a lot of these cryogenic solutions puts us in a running start with it yes, we have to look at hydrogen embrittlement to make sure that there is material compatibility, which we're doing.
And then our advanced what we've had in engine materials and the fact that we have that technology. In addition to all the other technologies because the big like I mentioned, the big challenge with hydrogen as ceiling of molecules is much smaller and prone to leaking too volatile.
And so we put it.
Investment as we speak just looked at that early this week, we had a clean Tech review with all of our groups.
We're investing right now so we can be ready for when that does come to market.
Okay. It sounds good I'll pass it on thank you.
I appreciate it and good luck guys. Thanks Scott.
Your next question is from Mig <unk> with Baird. Please go ahead.
Alright, Thank you and Robin all the best and congrats.
Tom I wanted to go back to your comments on North America.
You really kind of highlighted this geography.
Celebrating maybe relative to the others.
Wondering what are you seeing that's differentiated with special here.
Let's leave the China, Covid lockdown to decide because that part is pretty obvious.
And I'm curious.
<unk> when we're looking at.
When shall acceleration in order intake.
Are you actually seeing better volumes.
A function of higher pricing given everything that's happening on a commodity.
Well I think in North America.
As Tom I think North America has gotten on top of the horse so to speak.
The supply chain challenges, we had were the most pronounced in North America. They had more work to do our work to do on logistics until sourcing on qualifying alternative materials versus the other regions and I think you see the benefit of some time and good work by all the teams, which was evidenced in there are more or less is improving.
As you go through the course of the year and them having their best.
Quarter to date, and leading really all of the segments. So North America clearly has gotten on top of it made a lot of progress to.
To that.
Vantage point.
There is good volume improvement.
Across the World, obviously, I think most of that volume improvement.
That's been in North America.
And in aerospace because aerospace with long term contracts were somewhat shielded from the inflation pressures there.
So that benefit from the volume as well.
Okay.
Then my follow up I'm curious as you're looking at your international business.
Maybe Europe specifically.
Are you seeing any change in the pace of business customer confidence or whatever you want to call. It as a result of this situation in Russia and Ukraine. How did April progress for you maybe relative to March if you can comment on that thanks.
On EMEA I would say Ken it's Tom.
Too soon to know for sure how the whole, Russia and Ukraine.
Process is going to play through obviously, Russia.
And our Hearts go out to premium.
People and we've done a lawful lot.
Of our philanthropic work has been to help.
All the people that were involved there, but it's small sales for us it's immaterial.
The human toll is huge sales tools is immaterial.
But our orders for.
If I look at Q3 versus Q2 were roughly the same they were in the low teens I'm talking about EMEA.
We do forecast sales sales you break out the international piece in EMEA was 13%.
For Q3, we're forecasting it to soften in Q4, 5%. So we do anticipate some moderation there some of it is comps some of it.
It's based on what we're seeing with orders and Thats, all baked into our guide but.
I think to fully understand.
The second derivative is if all of the Ukrainian War I think we're going to need more time to see how that plays through.
Understood. Thank you.
Your next question is from Jeff Sprague with vertical research. Please go ahead.
Thank you good morning, everyone.
Congrats Robin.
Hey, just a couple of Mega related questions if I could.
First Todd on the on the FX hedge.
Are you completely economically neutral at close on this obviously.
With a strengthened a lot against the palm.
Impacts the ultimate out of pocket.
Just clarify that and also.
Any color on whether or not your funding costs.
Consummate the deal hubs have moved materially here.
Yes, Jeff Thanks for that question.
On the deal contingent hedge what we did is we locked in a pound dollar rate.
We did that in September .
Time period, obviously, a lot has changed.
Across the world and economic.
Economic landscape since that.
We still are confident that that was the right thing to do it has made our certain fund process as we go through the transaction certainly much clear and much easier.
Most recently.
You've seen the pound to the dollar really the pound weakened the dollar strengthened that has created these accounting transactions that we have to record.
Each quarter.
So from an economic value standpoint, we're working through that right now obviously.
There's a lot of moving pieces with the valuation of the purchase price accounting of all that stuff, but we're confident that we're going to.
The result that we have as.
As far as the financing goes.
We've done a lot of work on this with our team with our advisers on this and.
Really what we found is the.
Increasing interest rate environment is pretty much priced into the market.
So.
Just on a high level the way we are attaching that is really <unk>.
Based on our strong cash flows we are just leaning towards more of a mix of serviceable.
<unk> on the transaction.
So when you look at this compared to the last large deals that we've done.
Financing plan is basically using the same methodology and they are about the same costs in total.
So more to come on that Jeff, but we feel good with where we're at in respect to financing and the pending transaction.
Great and then.
Thanks for the color on the approvals and what remains.
With the with the U K National Security.
The longest pull in the tent here or should we think about the remaining items as roughly equivalent and on the same timeline.
Jeff It's Tom it's hard to predict that.
But we've had a lot of discussions with U K government has a couple of tracks or economic considerations, which are really the things we had a $2 7 million national security considerations that are in the tubular and a number of discussions with them.
Then you have there.
I trust process as well.
I can't predict who will go first adjust at the at the list of who is in the.
Our box is increasing.
And this all bodes well that we are getting closer to the end.
I think youll see them, probably all kind of co roughly and about the same timeframe would be my guess.
Great. Thanks for the color good luck with that.
Your next question is from Jamie Cook with Credit Suisse. Please go ahead.
Hi, good morning, and congrats on a nice quarter.
I guess.
First just.
Modeling question.
It looks like the aerospace margins.
A nice bump in the next quarter. So is there anything unusual.
Driving that or I'm, just trying to understand what that could potentially mean for the trajectory into 2023 is aerospace starts to improve.
So that's my first question and then I guess my my My My second question.
Again, very good organic growth and the market is very concerned about.
A slowdown.
People are using the R word just wondering if you could talk to how you think your portfolio could perform in a slowdown.
Some of the market share gains are you getting market share in Quebec, and the pricing dynamics.
Now.
<unk>.
Make your sales more resilient, assuming oil going into a downturn over the next six to 12 months. Thanks.
Jamie It's Tom so start with the first one the Aero margins Q4 nationally.
Our highest margin in aerospace typically based on shop visits.
Exposure with the summer et cetera.
Aircraft and engines.
And then also has been driven by the commercial MRO activity.
<unk> is growing at the fastest rate that happens to be our highest margins.
Which is why you see that pro forma that they do now coming back to.
Is this question happens all the time as far as well how will Parker do during the next recession and I'm, hoping you can go to that slide.
And in my prepared remarks. This is my favorite slide that shows the margin and EPS expansion that has two industrial recessions, a pandemic and of course everything we're experiencing today all in it and you've seen us move pretty much at a 45 degree angle. So I think you could rest assured this team has proven its resilience to weather any risk.
And we will.
If it happens whether it's the same we have in the past, but I would argue to your point.
The company is significantly different.
In Investor Day, we went through the longer view of the company to win the win strategy and how the portfolio has dramatically changed and we doubled the size of engineered materials filtration and aerospace and that's going to allow us to grow differently than when we showed you that five year vision.
Maybe didn't see it there was a.
A mix of short long and aftermarket and we get out to FY 'twenty seven if I add up the long and aftermarket is roughly 85% of our sales mix. So that's going to have us operate much.
Much differently have you go to say well, Tom I don't care about five years I'm worried about what's happened in the next 12 months or so I think kind of a come back to.
Our ability to perform as proven in good times or bad times, and we have the benefit of.
At the beginning of our commercial aerospace recovery, which is going to help us.
Linkage to the secular trends much more so than we have in the past.
It could get impacted and I'm talking of electrification digital aerospace and clean tech, but theyre, probably not going to get impacted the same as any of the traditional end markets. We have mega coming onboard. So we get a lift from the acquisition just from an incremental revenue there we're going to have the synergies et cetera.
And we are a company that is dramatically leaner.
More agile proven by what we've done the last seven years.
<unk>.
Those last quarter.
Being sarcastically I was referring to was a normal quarter I think if anything we've proven.
Proven to be very resilient team and the ability to be flexible nimble and I think youll see that.
Our floor.
Okay, Thanks, and congratulations Robyn thanks for all the help deepen fantastic.
Thanks, Jamie.
Your next question is from David Raso with Evercore ISI. Please go ahead, hi, Thank you and best of luck Robyn.
Quick question on the China getting back to full production in July can you just give us a little more color on your confidence in that and then also I mean, historically, you've sort of gone through $3 12 pressure curves through the key market.
The North American orders were strong, but I'm just curious are there any areas that you are seeing the book to bill.
Or the $3 12 pressure curves that you track that are starting to show.
Some of the short cycle businesses that maybe are showing a little bit of cracks or are we just not seeing any cracks anywhere in the north American market at this stage.
<unk>.
David It's Tom So I'll start with.
The full production comment in China. If you noticed we've put Q1, we didn't say July was in Q1.
<unk>.
The first thing I'll say, it's an educated guess, obviously no smarter than anybody else.
Only president Chino is one of those lockdowns are going to turnaround. However, a couple of things just.
Part of what we had seen we forecast as you some pragmatic thinking.
Bit of history. So we go back to when China went through it.
The beginning of Covid, it had a pretty rapid rebound compared to the other regions. So some of that was factored into our equation.
And then just thinking about the practicality of how long can you practically key people locked up.
And they are apartments in their homes and started middle of March and so there is a point of diminishing returns here people are going to have to come back to factories are going to have to come back and so our best guess is sometime in Q1 of FY 'twenty.
<unk> seen a slight pickup you're always going to be September and I could be wrong on that too, but we had to pick a time. The point I was making about the comment is that it's temporary this is not a permanent situation in China and if we look at FY 'twenty three.
China, we would make up whatever happens here in the next several months because we have another 12 months to help us to make up for that.
Your comment related to end markets and we have over 90% of the end markets positive.
And virtually with the exception.
Everything is positive with the exception of aerospace military.
In power Gen and that's our outlook for Q4.
It was the same.
The pressure curves look good we still feel very good about what's going on.
Based I would describe it.
And last quick clarification, the aerospace it's rolling 12 months I appreciate that when does that large order, that's making for difficult comps roll off in that count.
Yes, David I can take that one this is Todd.
We still have another two quarters to get through that if you. If you remember we just started calling that out last quarter. This is the second quarter, we'd call. It out so we've got two more quarters to go.
Alright, thank you.
Your next question is from Joe Ritchie with Goldman Sachs. Please go ahead.
Thanks, Good morning, everyone and Echo all the comments about Robyn really really great working with you and wish you the best.
First question.
Industrial on the global business.
Just looking through the guidance it looks like you're kind of forecasting a mid single digit decline in you had a pretty high decremental qualify 30 incremental I know that the comps are tough.
And <unk> is there anything else that you can do you want to call out.
The <unk> number.
Joe has some of your point of sales or margins.
Yes.
If my math is right it looks like it looks like sales are expected to be down year over year margins also down call. It more than 100 basis points I'm, just trying to just kind of parse it out.
Whether there is some conservatism in there.
I think you guys are seeing something specific to Q4.
<unk> for the for the international business.
Okay, So well margins total for the company $2022 two as well.
Effective Q4 guide as we did 22 point to Lash last year last Q4.
And we see expansion in North America, North America market expand aerospace margin expands and then Asia.
International margin expense declined a little bit still coming in or implied guide is right around 21%.
And that's because of the China shutdown, so really good margin expansion in areas outside of the China shutdown topline Todd prefer to this.
They bumped up North America organic guide by 300 Bips upon prior guide to do good auto aerospace by 15 and of course, we took down international to maybe to calibrate people the effect of the China shutdowns.
We went through we would increase total guide for Q4 by 250 Bips.
It was normal.
Total International will go up 600 particular, so it's a pretty big impact.
Which is waiting down international.
Got it okay that makes a lot of sense and then and then also kind of wanted to ask about Aero I'll say more from a near term perspective.
I recognize you guys are.
Kind of calling for some good growth year over year on the margins as well.
Hence, we though it doesn't really seem like the margin do you expect to be pick up.
In the fourth quarter, just based on the full year guide.
And if anything you would call out from a mix standpoint in the fourth quarter versus the third quarter or.
So still seeing good mix coming through in <unk> as well.
Hey, Joe This is Todd I could take that one.
What we've got in the fourth quarter guide Youre talking specifically for aerospace right.
Yes, we actually are improving margins.
From Q3 to Q4, we did.
'twenty one nine in Q3, and we're right at 22.2 for Q4. So there is expansion there.
Okay Alright, great.
Thanks, guys I'll get back in queue. Okay.
Thanks, Jim.
Your next question is from Stephen Volkmann with Jefferies. Please go ahead.
Great. Thanks for taking the question and congrats Robin.
For me.
Very impressed with the sort of incremental margin.
Margin performance accelerating here and Im wondering just kind of directionally, how we should be thinking about that for.
23 is there some reason that it would revert to kind of a long term average or do we get to enjoy a longer period is a little bit higher incrementals.
Steve as Tom.
I'm going to probably not make any specific comments about 2003 I think you can appreciate there's a lot of things that change we're one of the first companies to.
Is it good fortunate to talk about 'twenty, three and so I won't talk about it a month sooner that I need to however.
In general what I articulated incrementals they turn.
Two that slipped at your highest point at the beginning of an upturn they start to moderate and then you use 30%.
Kind of over the cycle type of number.
Deeper in the cycle. It would go below 30, so we will see as the numbers roll up and as we forecast, but I continue to we gave you.
Five year look I think we had incrementals in that low <unk> over the course of the next five years to get to those five year targets and so thats, we need to do that consistently somewhere over the next five years to hit those five year targets.
You've seen our track record on doing it.
Pretty good about our stage II ratio on the five year targets.
We'll see what happens, but the company is clearly.
In better shape in better condition.
Generate those incrementals.
Okay, Yes, I agree with that.
All right.
Maybe I'll shift to to ask you about distribution and Im curious.
If there's any interesting trends youre seeing in distribution that are worth calling out as we try to think about the direction of everything here.
And maybe you can add a comment on kind of distributor inventory.
When you do that.
Steve its fleet.
So distribution as a whole I would say, it's going very well.
I'll break it down a little bit North America.
Markets are very positive.
For those distributors are covering the natural resource industries that business is coming back.
Quickly specifically.
Internationally, we continue to grow distribution. Despite all the turmoil about 100 basis points a year. So we've been making great progress on that and I would say on inventory everybody could use more I mean, there is a great Paul taking place, we're able to satisfy customers but is.
Our whole distribution, if they could build more inventory I think it would.
And are you seeing more price in the distributor channel relative to the forest.
We have been.
We've been very proactive on making sure we cover material cost.
Do the pricing.
<unk> with that and those distributors have been passing that those price increases along.
Okay I appreciate it guys.
<unk>.
Thanks, Steve.
Your next question is from Nigel Coe with Wolfe Research. Please go ahead.
Thanks, Good morning Robin congratulations.
Relations Thanks will help.
Good luck to Megabits in some of these currency moves.
Sure.
I'm guessing that the bulk of the functional currency is U S dollar.
Im guessing that the bulk of the cost basis building is that correct.
That implies that if we do have the.
Structurally weakest building going forward that should be helpful to margins I'm just wondering if you could maybe comment on that.
Yes, Nigel this is Todd.
I don't think I could comment on that we are bound by the by the code.
We did.
Mentioned I believe on the call, there's a significant mix of the.
<unk> business that is in the U S that obviously is dollar based so I think I'll leave it at that but.
Okay.
Right.
The move is significant.
The exploring and then.
Just thinking about the international so it looks like ex China.
So the.
Kind of the ex China business is low single digits in <unk>. So I'm just wondering if maybe you could just talk about what you're seeing geographically.
And central markets, and then would you encourage us to model of the company at that $100 million of loss sales through FY 'twenty three at this point.
Nigel It's Tom Yes, $100 million that we will recover sometime in FY 'twenty three and obviously we will.
It gives you the guide.
Here in August .
And I think about that markets across the regions.
In Q3.
I'll just give you. The reasons. This is all organic numbers Ive given you at both North America, and EMEA and mid teens Latin America upper teens aerospace.
6% and then Asia Pacific was was in the low single digits in Asia Pacific was.
It was impacted because of China, China was down mid single digits. The rest of Asia was up high single digits and that's how you get to the patient number but when you look at end markets.
It's pretty much across the board as I mentioned on.
David David's question.
Strength in 90% of our end markets.
The decline was aerospace military power Gen. So it's very broad based.
Lifted up even higher.
Distribution and industrial both quarter about the same rate or a little bit slower, but it's been across all the segments.
Great well, thanks, Tom Good luck.
Thanks, Pat Joe Hey, Paul I think we've got time for one more question.
Thank you Sir.
Final question is from Julian Mitchell with Barclays. Please go ahead.
Thanks, very much good morning, and I appreciate all the help Robyn So yes, I guess my final question really just on the aerospace business.
I guess two aspects one is I think you toned down the sales guide a little bit for the year. So just trying to understand what drove that.
And whether you think on the revenue side the minute tree headwinds.
Beth entering fiscal 'twenty three.
And then the margin performance for the year was a hold in aerospace is kind of exceptional.
Operating leverage this year.
Is there any way you could parse out drivers within that.
Around maybe synergies or lower R&D, just so we can sort of use our road map to get to the sort of forward Incrementals next year.
So Julien it's Tom what's driving aerospace if I just give you the two key components.
The commercial recovery.
Both in Q3 commercial MRO was plus 21% and commercial OEM was plus 21%. So those two and when we get to the full year plus 27% for commercial MRO plus 17 for commercial OEM.
And I think actually when I when I look at my numbers.
We've bumped aerospace up 50 bps in Q4.
As the prior guide so we see aerospace is positive the order entry again once we cycle over the.
Our multi year military order, which we've been trying to give you visibility of that most of that was plus 20, how many orders that we had.
Commercial OEM was over 100% commercial MRO was 60% some gigantic orders.
What you got right now offsetting that is the military piece.
<unk>.
So we're pretty tracks lots of companies the military piece for supply supplier of health a lot of the Oems pulled in military business into FY, 'twenty, one which makes the comparable in 'twenty two difficult, but we'll cycle through that in animal military will eventually get back to kind of a low single digit type of growth. So I'm very bullish.
On aerospace.
We don't have any of the <unk> synergies and that kind of stuff into it now.
But.
We have the same goal for aerospace as we do it for everybody else trying to get to 25% Ros over the next five years.
We've got a great acquisition and what we've shown.
What that synergies.
<unk> that.
The Mega business up to a 30% EBITDA once we get those synergies.
A lot of things that will help us with aerospace.
And thanks, So is there any kind of outsized mix, so R&D tailwind you'd call out for the margin performance in fiscal 'twenty two.
Overall in aerospace.
In the current quarter. It was light mainly due to the timing nothing unique there.
I would say in general, it's a tad light, but it's going to be two 5% to 3% for this fiscal year.
Probably be more in that three to four range and cycle over that five year period of time.
You won't see that hit in any material.
Material way like a specific quarter specific here, it's going to be over there.
That period of time, we'll grow the MRO.
It's still.
R&D then so by historical standards.
Pretty efficient R&D spend versus where we were at the beginning of the super cycle for aerospace.
Hey, Julien I would just add to that if you remember it dependent MF when we made our adjustments aerospace.
Made the most aggressive adjustments from a cost basis.
So we have obviously benefited from that throughout this year.
Those costs are not coming back so that that would be another change from this year versus.
Pre pandemic levels.
That's great. Thank you.
Yes.
Okay that concludes our Q3 earnings call I would like to thank everyone for joining us today Robin and Jeff are going to be here. Today. If you have any further questions or if you'd like to congratulate Robin personally I would just like to make sure everyone knows Robyn.
We will be here through December 31 of this calendar year. So you definitely have time to congratulate her hopefully in person as we.
Go throughout the year.
And she'll be here for the next couple of calls as well.
So.
That said I'd like to thank everyone for their interest in Parker and thanks again for joining us today.
Ladies and gentlemen that concludes today's conference call. Thank you for joining you may now disconnect. Thank Steven one housekeeping.
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