Q4 2022 Parker-Hannifin Corp Earnings Call
Good day, and thank you for standing by welcome to the Parker Hannifin fiscal 2022 fourth quarter and full year earnings conference call and webcast. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and.
Answer session to ask a question during the session you will need to press star one one on your telephone. Please be advised that today's conference is being recorded I would now like to hand, the conference over to Todd Leon Bruno Chief Financial Officer. Please go ahead.
Thank you Carmen good morning, everyone and thank you for joining Parker's fiscal year 2022, Q4 earnings release webcast.
Kermit said this is totally and Bruno Chief Financial Officer speaking and as usual with me today are Tom Williams, Chairman and Chief Executive Officer, and Lee Banks, Vice Chairman and President.
Today, our discussion will address forward projections are non-GAAP financial measures slide two of the presentation.
Details to our disclosure statement and these areas actual results may differ from our projections due to uncertainties lifted in these forward looking statements are detailed in our SEC filings.
Reconciles reconciliations for all non-GAAP measures along with this presentation have been made available under the investors section at Parker Dot Com and will remain available for one year.
In respect to the Mega transaction, while we expect this transaction to close in Q1 fiscal year 2023, that's our current quarter. We are still bound by the requirements of the U K takeover code in respect to discussing certain details we do plan to hold an investor call. Shortly after the close to provide expanded color on the.
Once the regulations allow.
For the call today, I will start with Tom discussing the fourth quarter and our fiscal year 2022 full year results and I'll follow with a brief financial summary, and review some of the assumptions around our initial fiscal 2023 guidance that we issued this morning.
After that we will finish the call with the Q&A section for any questions you have for Tom or myself, so with that Tom I'll turn it over to you and ask everyone to refer to slide number three.
Thank you Todd and good morning, everybody and let me welcome everybody as well to the call.
On slide three we had a great quarter. It was absolutely a dynamite record performance great execution by the team around the world. The first two bullets really is what drove our success.
<unk> has always been our top priority of our leveraging high performance teams think of that is how we are organized around the world and how we engage and develop our people.
Lean is how we run the factories and kaizen as our culture of continuous improvement and how we go about making things better.
We also just conducted at our 2022 engagement survey.
We were able to capture over 90% participation of our people around the world ask some questions around empowerment and engagement and we got great results. We got results that put us in the top 8% of industrial companies. It's really these first two bullets.
Riding an ownership culture within the company driving an ownership of results and our business performance go down in the third bullet sales were $4 2 billion, an increase of 6% versus the prior year organic growth was 10% versus the prior year.
Excellent excellent quarter organically.
Operating margins was 29% as reported or 22, 9% adjusted so that's a 70 basis points better than prior year. This is really excellent margin expansion in the face of all the challenges that you are fully aware of supply chain inefficiencies inflation and of course, the China Covid Lockdowns. So just really outstanding performance.
<unk> is in a very difficult environment lots of records and my thanks to the global team for all their hard work.
Go to slide four.
I'm talking about the full year came in at $15 9 billion of sales, 12% organic growth versus the prior year, So a really big year for us organically.
Segment operating margin of 21% as reported or 22, 3% adjusted <unk> was 120 basis points better than the prior year really speaks to the robustness and the agility of our business model.
Operating cash flow was $2 4 billion.
And that represented 15, 4% of sales so a mid teen CFO way with growing sales, which was very commendable and then of course all of you hopefully are where we announced our FY 'twenty seven targets in our March Investor Day.
To summarize it was bigger growth bigger margins bigger cash flow targets and we're confident in our ability to get there in the future So transformed company with a promising future.
What drives us is on slide five.
It's what's been driving us in the past President will drive in the future versus living up to our purpose, enabling engineering breakthroughs that lead to a better tomorrow being.
Being great generators of cash as evidenced by the mid teens CF a way that you saw and great deploy cash by our pending Mega acquisition.
And then being a top quartile company.
<unk> versus our peers, which really goes to slide six.
So I'd like to show this slide it's updated now for FY 'twenty two numbers.
Really the reason for is showing its objective evidence that our company is significantly differ significantly better than its been in the past.
On the left hand side as adjusted EPS and on the right hand side is adjusted EBITDA margin.
And I think the pace of improvement speaks for itself you can look at this chart everything is moving.
High end to the right.
And truly create progress and particularly if you look at 'twenty, one versus 'twenty two on EPS.
From $15.04 to $18 72.
As a gain of $3 68 census, the largest year over year dollar gain we've had on EPS in the history of the company. So there was a 24% improvement.
Right hand side, almost 800 bps of EBITDA margin improvement.
Which is fantastic and if you look at these two these two improvement trends side by side arguably the most improved industrial company out there over this time period and I'm, hoping for their shareholders and a great company to invest in as well.
Going to slide seven.
The picture here, we're trying to symbolize that were coming in for a landing here on Mega we're.
We're close to the end, we expect to close some time in Q1, our current quarter.
23.
Only remaining regulatory approval as the U S Department of Justice, which we expect to complete sometime in the quarter have fallen the USD OJ. It's customary to go to court in the U K to get final approval, which we expect also in the current quarter.
Timing is perfect, where adding a transformational acquisition doubling aerospace at the beginning of a commercial aerospace recovery and with the.
The synergies in front of us to help us grow.
The topline and the Bottomline.
And as Todd mentioned, we will host a call.
After this closes to bring it today on <unk> and update our guidance.
Moving to slide eight.
We're going to talk a lot in the Q&A about FY 'twenty three sales guidance I'm sure, but I wanted to highlight the future growth drivers that we've talked about in our March Investor Day. These growth drivers remain intact and I'm just going to walk you briefly through the five column that you see here. The first is our business system the win strategy.
About the things, we can do ourselves to grow differently organically, it's about innovation strategic positioning distribution growth incentive plan changes that we're making and simple by design.
The next column the Capex.
Changes that we expect over this time period, we think this will be a very constructive time for industrials is going to be a need to invest in supply chain development tool sourcing automation all things that are going to be very helpful.
Hardware products.
Regarding channel restocking and particularly here I'm, referring to the distribution channel it's.
It's improving but there's still ways to go and I think our partners will probably be somewhat cautious as they add inventory, but as we go out the next several years, but clearly not at the inventory levels I would like to be so that's additional tailwind the acquisitions are transformational reshaped the portfolio doubling filtration doubling engineered materials doubling our <unk>.
Aerospace business once made it closes and really shaped reshaping the portfolio to be much more longer cycle accretive more resilient and then our linkage to the secular trends around the world Aerospace digital electrification and clean technology are all going to help us grow differently. So theres targeted organic growth by FY 'twenty seven.
Four 6%, we think industrials and Parker in particular.
Going to be a very attractive space of the upcoming years and with that I'll turn it back to Todd to talk more about the quarter. Okay. Thanks, Tom I'm going to start on slide 10. This is just the year over year comparison of our Q4 financial results and as Tom said really proud of our team members for just delivering across the board record results against the <unk>.
Drop of several continued global challenges. So Tom mentioned the sales was up 6%. We did hit a record sales number of $4 2 billion in the quarter organic growth was double digit at 10% I think everyone's following these currency rates a strong dollar drove a currency headwinds for us it was a minus four.
Impact sales our backlog remains healthy it did increase 21% versus the prior year and over 90% of our markets are in growth phase. So we're very happy with that two markets to note our commercial aerospace in North American industrial markets or two that really remain.
Very robust.
Adjusted segment operating margin was 22, 9% for the quarter, that's a 70 basis point increase versus the prior year and our adjusted EBITDA margin was $23. One that's 100 basis point increase from prior year in the quarter.
Both these margin numbers segment operating and EBITDA margins exited the year at the highest levels of our fiscal year. So really happy with the strong finish that the team put forth in Q4, when you move down to net income adjusted net income was $671 million. That's a 16% Ross just also happens to be a 60%.
<unk> improvement from prior year.
In the quarter for $619 million that is related to the mega deal contingent currency contracts and I just want to remind everyone that these contracts we entered into these contracts really to eliminate.
Currency exchange rate risk associated with the purchase price of the Mega acquisition and total expected U S dollar outlay related to the transaction.
Included in these contracts is neutral to the transaction consideration, we announced last year.
So moving onto EPS EPS is great $5 16 on an adjusted basis that is a record is an increase of 78 sensor 18.
Really just commend our team for the strong finish for the for the fiscal year. If you move to slide 11. This is just the bridge this detail some of those elements of the 78 improvement.
We did generate 35% incremental margins that was really aided by our margin expansion, but more significantly just very solid execution across every one of our businesses.
Adjusted segment operating income increased by $80 million or 9% versus the same quarter last year that accounts for over 60% or 47 cents of EPS improvement that we had in Q4.
If you net corporate G&A interest expense and other all of that amounts to just about one favorable and we did have a few discrete tax settlements in the quarter that drove a lower income tax expense that did calculate two of 24.
Positive impact to EPS and that was specifically in our fourth quarter and then finally, just a slight reduction in the number of shares outstanding.
Accounted for a favorable <unk> <unk> to EPS. So all in that's the 18% increase in adjusted EPS or our $5 16.
Sure.
If you move to slide 12, I'll talk a little bit about our segments.
Across the board very strong performance here at 35% incremental margins.
We increased.
Segment operating income really across the board and it's really just nice to see positive organic growth in every segment.
Growth continues to be very broad based orders for the total company ended up positive three and that really is against a backdrop of increasingly more challenging comps.
And the team really remains agile in this current supply chain and inflationary environment, We're happy with our actions. It is materializing in our results and the financial statements and just really.
<unk> of all the effort that's going on here all of this gives us performance our confidence in our performance that we will achieve our FY 'twenty seven targets that Tom mentioned, we just announced.
Back in March.
I jumped into the businesses in North America, very strong organic growth of 15% versus prior year sales reached $2 1 billion adjust.
Adjusted operating margins increased 40 basis points to our North American team achieved 22, 9% Ros and really we've talked about this all year. They continue to manage well through a more difficult regional supply chain.
Environment, So just kudos to them Incrementals in this segment was about 25%. So we're happy with that with all the headwinds.
And really orders continue to impress at plus 10%.
In the North American segment, our backlog is up 50% versus prior year and it did grow 5% sequentially from Q.
Q3.
Moving on to International International sales $1 4 billion.
Organic growth just above 5% for that segment.
Organic growth in EMEA, and Latin America was mid teens positive with Asia Pacific mid single digits negative, obviously that was driven by the shutdowns.
China based on the Covid outbreak.
But margins if you look at margins margins were 22, 4% and still increased 30 basis points from prior year. Despite all that.
All of those challenges and really just tremendous effort from our Asia Pacific team, we forecasted a $100 million.
Negative sales impact based on the shutdowns at the time, we talked last quarter.
Team really out achieved and that ended up being only a $50 million impact for the quarter and it was really a strong month in June so much appreciation to our Super dedicated Asia Pacific team, They really went above and beyond to serve our customers.
International order rates did inflect to a minus four which did reflect some short term impact from those shutdowns in China.
But great overall performance by the international team looking at aerospace another strong quarter from Aerospace. This is the best organic growth and margin performance that.
Segment has had all year sales were $676 million organic growth is up about 8%.
Commercial businesses in both the OEM and MRO MRO markets, very very strong and the operational margins increased 260 basis points.
And finished at an impressive 24 to those Q4 margins did benefit from a favorable mix aftermarket mix and lower than expected <unk> expenses that were really just due to some program timing.
So this is really a record margin performance for that segment and I still note that we are still.
Low pre COVID-19 sales level. So we're very happy with the cost controls and the execution in our aerospace business.
A note on orders aerospace orders are showing flat, but if you remember we've talked about this we did have some very significant military orders that we booked in Q2 of our FY 'twenty two that continues to make our 12 year comparisons difficult. If we exclude those items aerospace orders were positive 24.
<unk> for the quarter and our aerospace dollars and respect orders continues to make.
Really strong so overall segment performance very very strong and I am proud of our teams, it's really a testament to our strategy.
Our purpose.
So if we jump to slide 13 cash we had an unbelievable cash flow generation quarter in Q4, it was really stellar we.
We did exceed the forecast that we gave at Investor day for both cash flow from operations and free cash flow by about $100 million for the full fiscal year Tom.
Tom mentioned this but we generated $2 4 billion in <unk>.
Cash flow from ops that was 15, 4% of sales free cash flow was $2 2 billion or 13, 9% of sales and obviously the conversion is 168%, we really have been managing working capital very diligently throughout the year as our year progressed that use of working capital began to.
Normalized across the company.
If you look at this year the change in working capital was a one 6% of sales use of cash if you compare that to prior year last year that was a 1.0 source of cash. So we are very disciplined our teams are focused on generating top quartile cash flow performance and.
Again, we're really confident that we can achieve that FY 'twenty target of 16% just a few comments on leverage at the end of the quarter.
Gross debt to EBITDA was four 7% net debt to EBITDA was four 5% that increase from last quarter is really a result of our issuance of $3 6 billion of bonds.
That we will use to fund the Mega transaction that cash is sitting in escrow. It is on our balance sheet listed as restricted cash if we exclude that restricted cash our net debt to EBITDA at the end of June was two point times, so happy with the reduction there. The spike is just really preparing for the Mega transaction and just one five.
I'll note on our strong cash flow performance, we've already used one 5 billion of cash that we've generated this year to fund the Mega transactions. So we are really happy with our position on that and we're looking forward to getting to close.
Welcoming all the Mega team members and to Parker Hannifin.
If we go to slide 14 guidance. This is just some detail on the guidance. We released this morning as usual we're providing this on an as reported and an adjusted basis and I think everyone caught this but just to be very clear.
While we expect that Mega transaction to close in this quarter. We have not included any sales or earnings in our guidance number. However, we have given you color on the interest expense that is already committed for Q1 and I'll give you some more color on that in a second so no sales in earnings just the Q1 interest.
We have already committed to in our Q1.
So if you look at sales.
Reported sales growth for the year is forecasted to be flat to 3% or.
Or one 5% positive at the midpoint.
Organic growth is obviously better than that it is expected to be three 5% at the midpoint with a range of 2% to 5% on that.
As usual, we're using currency rates as of June 30, we do.
Do forecast currency to be a headwind this year it will be about a 2% headwind to sales versus the prior year and as usual if you look at the split our sales are 48% first half 52% second half.
Moving on to segment operating margins margins are as reported.
Segment operating margin guidance is 24% on an adjusted basis Thats 22, 5%. That's at the midpoint, we have a range of 20 basis points on either side of that and the split of segment operating income is 47% first half 53% second half we are forecasting incremental margins to be 30.
<unk> for the full year.
And just to give a little bit more clarity on a few additional items.
Corporate G&A, we expect to be $204 million in FY 'twenty three the interest related to the legacy company. So this is excluding mega interest as expense expected to be $228 million.
And that Meg it related interest that will cover Q1, only has $42 million of roughly 25 of EPS.
We will give you an updated interest expense number once we schedule that update call that we have post close on packet.
Other income and expense is expected to be $14 million and as usual any acquisition related expenses that are associated with the Mega transaction will continue to book those as occurred we're not going to guide for those we will just adjust those out as they incurred we do expect the tax rate from continuing ops to be 23%.
Next year that is essentially what our continuing ops rate was this year that does not include any discrete items that may be favorable or unfavorable and finally, we expect full year EPS on an as reported basis to be $16 53 at the midpoint or $18 50.
<unk> and the range on both of those figures is plus or minus 40.
EPS is split 46% first half, 54% second half and just a little color on Q1, we foresee Q1, adjusted EPS to be $4 13.
And that's right at the midpoint and then just a little color on those adjustments. It's really just the acquired intangible asset amortization, which is now $300 million.
And expected business.
Realignment charges of $35 million. So we tried to give a lot of color there we.
We hope that that was helpful.
Slide 15 might give a little bit more color. This is just the bridge and really the highlights here.
It's really just continued strength in demand across the board, obviously, our productivity initiatives and our.
Our expectations across all of our operations.
The increase in segment operating income on a year over year basis. The total is 49 cents.
EPS of increase and I just want to note that that does include an estimated headwind of approximately <unk> 40 based on currency.
On a constant currency, obviously that 49 would be 89.
But we're incorporating that 40.
Currency headwinds, so we get a 49% increase in segment operating margin.
When you look at corporate G&A that legacy interest and any other items those are all forecasted to be favorable to prior those actually help us by <unk> and then again that forecasted tax rate of 23 cents creates a 55 headwind compared to that lower tax rate that our actual rate was in that.
2022, and I just would note there on that our FY 'twenty two we always have discrete we don't try to forecast them because they move around so much but our FY 'twenty two did have higher than normal amount of discrete items. So.
It's just a little color on there.
And as I mentioned earlier, we've included that interest expense you can see the bridge there. It's 25 to <unk> $42 million that is the Q1 amount only and Thats, how we walk from our FY 'twenty to finish two legacy $18 75, or including that 25, Meg at $18 50.
So with that that's what my color on guidance, Tom I'll hand, it back to you and ask everyone to move to slide 16, So just to wrap things up before we open up the Q&A. It was a record FY 'twenty two probably easier to say what was not a record there are so many records so to speak of a challenging.
And if I remember my congratulations to the entire global team for just a job well done it's been our people the portfolio changes and the second bullet there changes we've made to the win strategy specifically on schedule III.
That are driven or just a period of time 800 basis points, almost 800 basis points of EBITDA margin expansion for.
We're positioned to pour wealth in FY 'twenty, three and it's really because of the the remaining items you see on this page last three bullets the portfolio is dramatically different reshaped from where it was in the past.
With Mega closing in this quarter very few companies are going to be in a position to add a Greek company tied to future growth and synergies that we will be able to do and then we are positioned for growth of the secular trends arrow digital cleantech and electrification.
So hopefully you feel as you've seen our numbers a transformed company.
With a promising future.
With that I'll turn it over to Carmen to open up to Q&A.
Thank you, Sir and as a reminder to ask a question simply press Star one one on your telephone one moment for our first question.
Our first question comes from Jeff Sprague with vertical research partners. Please go ahead.
Thank you good morning, everyone.
Im not sure if I'm going to cross the lines with this maybe question, but I'll just give it a try.
We reported today as I'm sure you well know.
And they put up a 17% EBITDA margin.
Just thinking about the trajectory from your slides last year right you had them at 19% in 2019 into 14 and 2020.
Clearly on the upswing now or are you able to at any way address whether kind of the aggregate results. There are in fact in line with your original deal case.
Jeff It's Tom. Thank you for the question, Yes, we feel very good about <unk> results. They are growing faster actually than we had expected and faster than Parker aerospace they grew at 11% for <unk>.
Last six months the EBITDA held in there at 2017 as you mentioned.
And we projected as we looked at this as it gets back to pre COVID-19 levels.
We'll put them at the 19% and hopefully maybe better than what the 300 million of synergies. So theres still a trajectory that would put the two companies together to get to that 30% EBITDA.
For <unk>, we feel very good about what the job that they're doing and frankly, we can't wait to welcome.
Welcome to the team.
And just on I guess for Todd on this interest expense just to be totally clear this $25 million to $42 million.
Ties to the permanent financing you did right. So on on close obviously, there's going to be additional interest expense in the equation it sounds like youre going to.
Hi, there yeah. It's a good question you're right. The majority of that 25 is related to the longer term debt that we issued there is a slice of.
Some <unk> in there, but the vast majority of that is the bonds that we issued in prep for that and Youre right. We will give you a full look at the.
Financing of the interest lay out post close and will fill in the rest of the quarters for the year on that.
Can I sneak one more in.
Are we still looking at kind of the $70 million gap, so to speak between GAAP accounting and <unk> accounting as it relates to R&D and other items, yes, Jeff I think I don't know if we can answer that Jeff we're still kind of looking at that obviously post close that will be part of what we give color on.
Great. Thank you and good luck.
One moment for our next question please.
Our next question is from Joe Ritchie with Goldman Sachs. Your line is open.
Thanks, and good morning, everyone and congrats on the nice here.
Thanks, Joe.
Maybe I'll, just kind of start and maybe parse out a little bit more the guidance that you just gave for <unk> for 2014 number obviously.
The interest expense would have been.
Hi.
More like $4 38.
Can you maybe just.
Can you give us a little bit of details on the trends that you saw exiting the quarter and what the expectation is either for growth or for margins for that for that core business.
<unk>.
Joe It's Tom So I'll talk about the first quarter, but I'd like to lift it up and maybe talk about the whole year as well because it kind of goes hand in hand, with our thinking there.
Maybe if I could start with it.
We always relish.
Being a little bit sarcastic being one of the first companies to talk about calendar 'twenty threes.
<unk> spot we've put in.
This forecast period is probably.
A little more complex than others, and so we have a lot of unprecedented actions.
Somewhat unknown consequences things that youre, all familiar with quantitative tightening rising interest rates inflation.
Strengthening.
Energy costs and availability in the Ukraine more so.
It's a it's a list that we really haven't faced and forecast into.
But we've got strong backlogs.
We've got resilient order entry we are very pleased with the order entry that we showed for.
For the quarter.
And actually we saw even though international was minus.
For the quarter.
It's really influenced by EMEA.
Asia for the month of June in particular Asia with the Covid shutdowns.
We saw international orders come back quite nicely in July kind of in that mid to upper single digits. So our guidance.
Really includes our AI model.
Inputs from the divisions customers and distributors and we still see broad based growth across almost all of our end markets. We've got almost all the end markets positive.
If I could maybe go deeper into some of the secular areas aerospace, which you saw at the midpoint.
5%.
We've got greater than 10% of our commercial OEM and military MRO.
High single digits for commercial MRO.
Soft military OEM.
Versus some of the.
Initial provisioning of the pull forward that happened on F 35, and 130 foot that'll turnaround in FY 'twenty four so aerospace in general really really positive for the whole year.
That whole digital thread through the company.
Is going to grow in that mid single to high single digits, and what I've referred to as end markets like semiconductor heavy duty truck, which is up to transport all of these digital goods lift.
Lift trucks with <unk> type of things data centers and telecom.
And then if I look at Cleantech electrification kind of in aggregate and if.
If I look at automotive AG mining construction and.
And you just cut the sliver of electrification that cuts through those that's all growing at greater than 10%.
I'm going to get to your Q1 drilling in there.
Power Gen.
It's going to grow mid single digits.
It's a combination of renewables and conventional and oil and gas which has been soft the last couple of years is.
It's going to turn positive for you in the 10%. So we've got LNG CMG and really kind of a return to investment here with I think the world recognizing as we journey from around a green or need all shades of colors in between there we're going to need oil and gas for many many years. The other part I would remind people is not only the growth rates of these secular trends.
Faster the bill of material content is higher so our fill material tends to be one five to two times traditional ice application.
But get closer to your question, though.
The first half second half splits.
First half till I'm talking about total company five 5% organic second half 2% organic.
Got Q1.
At a little higher organic growth rate.
Kind of a high single digits, 7% give or take.
For the Q1.
And that's what's.
Coming off of the current orders that we've got the fact that we saw international get better in the month of July .
But really kind of framed our thinking for Q1.
Hey, Joe I will just add a little bit of color on Q1, obviously you called out the <unk>.
Additional interest expense that we tried to highlight there but.
Right is a big big issue. If you look at our Q4 tax rate it had those discrete items and there we are guiding to 23% and then you know this is a normal thing, but we do recognize a higher amount of equity based comp in Q1. So if youre doing a Q4 to Q1 work that other line is higher than what we normally have in Q4.
Sure.
Okay. So let's keep it to one question. Thanks for the detailed answer.
Yes.
Thanks, Jeff.
One moment for our next question please.
Comes from the line of Scott Davis with Melius Research. Please go ahead.
Hey, good morning, guys.
Good morning, Scott.
Youre one of the few companies we cover that's generated real cash flow this quarter.
You didn't seem to have a whole lot of supply chain problems. I mean, what is there is there anything that supply chain or that.
That you would call out as an issue.
Scott It's Tom.
Our first part of why we've done is maybe better than most.
The strategy, we've been utilizing for years local for local we've been focused on dual sourcing before dual sourcing became popular.
That has clearly helped us whether this but we're not immune.
We have felt it.
Team has done a great job of things scheduled and chefs working with our suppliers I think the use of our lean techniques and kaizen are all things that are maybe helped us to perform better than others.
If I was to characterize supply chain going forward.
Let's take ships out of it for a second it has stabilized and in our forecast period coming up FY 'twenty. Three we are going to see slow gradual improvement I wouldn't characterize it that we're going to be back to normal by the end of FY 'twenty three but they.
Making school improvement, which will be good as is and this year. It was it was more of a struggle for the whole year, but chips is a different story.
We're fortunate we're maybe not quite as chip dependent obviously is our OEM.
Customers are but certainly our aerospace business motion systems in particular, those two businesses.
Fair amount of electrical and electronic content and that one we're not forecasting really any improvement.
We've done an awful lot of work with our engineering team qualifying alternative suppliers alternate materials across the board.
<unk>.
A lot of critical to them, we've been able to be very nimble and agile.
With expanding our available materials and supplies to satisfy demand and we did that on shifts but chips is still a struggle.
And for FY 'twenty, three or we're not forecasting any help on chips I think it will take beyond that time period to get better.
Yes, Tom I would just add working capital.
Working capital is a focus we talk about it every week our teams are very dedicated to it.
Really did a fantastic job in Q4.
Clearly must have confidence in your supply chain to be able to have working capital improvement.
So just wanted to clarify on guidance, the 2% to 5% organic guidance does that.
Okay.
I would imagine that.
Just based on pricing you did this year alone you would probably have.
Two points of price in there.
But.
Can you clarify on that please.
Scott you broke up about mid weather, but I think youre asking about the guidance, you're probably asking volume versus price is that your question.
That's correct, Tom sorry, if I breakout okay alright.
Alright, so as you know we don't.
Get into segmenting price for all of the commercial reasons.
But downfalls of pitfalls, but just suffice it to say as we go from the.
Five and a half in the first half to two in the second half.
That volume is going to mimic the probably when we look at it a volume standpoint.
Aerospace is going to be fine all year.
Organic growth or organic growth actually expands and our second half versus the first half, but on the industrial side.
Second half will be weaker for all the things that we see.
And so somewhere in our Q3 and Q4, we will probably get to a flat volume slightly negative somewhere in that time period.
So we do that is in our forecast.
Okay.
Okay.
Alright, good luck well done guys. Thank you appreciate it thanks. Thank you.
Moving to our next question please.
Yeah.
It comes from the line of Stephen Volkmann with Jefferies. Please go ahead.
Hi, Good morning, guys. Thanks for taking the question.
I'm wondering maybe somewhat on the same topic here.
Presumably despite the fact that you've really done a great job with margins and Incrementals I'm guessing there's still been some sort of productivity headwinds from these supplier kind of issues and I'm wondering if that's true and if maybe you could ballpark what sort of headwind you've seen.
Yes, Steve as Tom it's really hard to do that.
Give that kind of.
That detail, but you're right. It's in there we had overcome it overcame it with all the things we were doing in the supply chain win strategy pricing et cetera, but it's really hard to quantify it will be something that will gradually.
Help us as we go into this year, but as I mentioned.
We're projecting gradual improvement not some big step change.
The supply chain improvement.
Got it Okay, I guess, what I'm trying to think about this is that if supply chain were to normalize and it doesn't sound like that's really totally your view, but if it were my guess is that the incremental margins would be kind of higher than what you've laid out.
Well certainly it would help us I mean, the incrementals in the guide are pretty.
It's a pretty respectable North America is at or around numbers 30 International's at a decremental upper twenty's.
Aerospace is that a mid twenties recognize that aerospace is a unique.
Challenges here as we compared to the prior or mix shift is going to be much more commercial we got commercial <unk> growing <unk> commercial MRO, which is what.
<unk>, we had in FY 'twenty to be a commercial MRO corn growing twice commercially and I think everybody understands the difference in margins.
On MRO versus are we on.
So that's probably the.
That inverse we had in FY 'twenty to be a commercial MRO corn growing twice what commercially.
Everybody understands the difference in margins.
On MRO versus.
So thats, probably the biggest headwind there, but its still putting up mid twenty's incrementals, but to your point ship.
Steve If we were to end up having.
Even quicker supply chain improvements, yes, thats a potential upside for us.
Potential upside for us.
And then just final one on supply chain is just we do hear hydraulics as a bottleneck for a lot of the customers that we speak with still and I don't know whether theyre, just using the wrong supplier or whether that's kind of an area of issue, but are there opportunities for.
What kind of share gains here, if you're able to manage that more effectively.
Again, Steve is absolutely and I would not want to.
Pretend that we are literally white in the because we have opportunities because I know our customers listen to this and that's one of the.
Top things that they talk to me about.
But we do have a distinct advantage that we are typically much better than our competitors. When you look at lead times and our ability to deliver so we always look at these times, where it's kind of a struggle that we can become the go to supplier of choice.
And have an opportunity once a customer makes that kind of commitment that tends to be pretty sticky. They are not going to switch back after making the effort to switch.
So again that's potential upside.
Okay. Thank you guys.
I appreciate it.
One moment for our next question please.
Comes from Jamie Cook with Credit Suisse. Please proceed.
Hi, good morning nice quarter.
I guess my first question.
Tom can you just talk to your assumptions with and North America in industrial organic growth first half versus second half and then just sorry guys.
Your organic growth is below your targeted range yet.
6%. So just your view on the macro.
Mike had a European China come out of this and why is North America toward more resilient. Thank you.
Yes, Jamie so the photos section members over the cycle with an FY 'twenty seven target.
Being two to five in the current climate with all of the things I said at the beginning of quantitative tightening by inflation interest rates the dollar Sterling.
Exiting it's pretty remarkable that were putting in that kind of a number given all the conditions we are facing so.
To make that comment on the sort of six months, specifically on North America.
First half is more like seven five second half goes to one and a half.
And international.
First half two and a half versus kind of a flat second half.
As far as AR.
And markets.
I gave color around the secular ones, but if I just was to bucket I don't want to read this list and for everybody to tariffs but.
We have a couple on the greater than 10%, but I would say this is pretty indicative as I described these across the world. Obviously some of the regions have a little bit.
Or softness.
In particular, I think maybe to get before I go to that some of your.
Question around.
Difference between regions.
We see EMEA.
And probably given everything that's going on there between the war.
Energy challenges.
The regions.
Second half is probably going to go negative so that's in our guide.
In Asia Pacific.
<unk> not <unk>.
Weaker than North America, obviously, it's going to be in the.
Hello.
The low single digits throughout the whole year.
The first half we've got China somewhat flat rest of Asia mid single digits in the second half both China and the rest of Asia gets in that low to mid single digits, recognizing that Asia gets a chance to compare to the current quarter with last Q4, which was really a tough quarter given all the shutdowns So North America.
More resilient on order entry and we've seen that the last quarter or two.
Rejecting the trend for the whole year.
Maybe I'll just start there if you have any follow up.
No I mean thats good color I guess my only other question is I know you don't want to comment specifically.
On pricing and what your assumptions are but to what degree should we think.
Your pricing is fairly sticky so that if we do get in queue.
Deflationary market.
That potentially the positive for you and I guess sort of what's embedded on price cost in the 2023 guide. Thanks.
Jamie It's Lee I would say.
As you look at pricing across the.
Enterprise.
It's fairly sticky I mean, there are material contracts on the OEM level that flex based on what's happening with commodities.
But that's a small part of what's going on so I'm not really concerned about a price rollback inside the company.
Okay. Thank you.
Thanks, Jamie.
One moment for our next question please.
Comes from David Raso with Evercore ISI. Please go ahead hi.
Hi, Thank you looking at the split it looks like despite you have higher organic in the first half and second half.
The margin improvement in the first half and second half year over year was about the same right. It's about 20.
20 bps in the first half year over year and 10 bps.
In the second half so I'm, just making sure we understand despite the slower organic growth in the second half of the year the margin performance year over year will be similar.
And again is that a price cost is inherently better.
In calendar first half of 'twenty three than back half.
Davis.
Yes, that's part of it.
Yes, definitely pricing was better in the second half of 'twenty, two which will help us as we go into the end of 'twenty three.
But I think we've proven.
And slowing.
<unk> line areas to do pretty good at margin control. So I look for us to continue to do that.
And then lastly, the comment about July I think you said all of international orders went back to us.
I think he said mid to upper single digits was that a year over year order comment for July for all of international and if you can give us a little more color around that would be great. Yes, David. Thank you for this time again, thank you for asking it because it allows me to clarify so it's just a one month. So it's a 112 would be July versus July . So it's not our typical $3 12, which was oil.
I don't typically quote that number but given coming off the negative 312 international and of course, when you hit the forecast into a new calendar year. We look for every single piece of data, we can get our hands on and that was a nice indicator for us because we saw really all three regions Latin America held up well in Q4, but Latin America.
To do well in July where we had both EMEA and Asia.
Turn back positive in July .
One month, so it's not at all.
Long data trend, but it was a good indicator I think China getting better in July from June to a little bit of reopening I don't think it would surprise people, but that Europe reaccelerate. It in July .
I'll leave it at this any color on that as that distribution is an OEM I think that's a pleasant surprise that Europe reaccelerate it last month.
One month I don't have my typical segmented market type of comparison, but I would just say.
Across both distribution and OEM.
Okay. Thank you very much.
David I would just add on the on the margin walk throughout the year currency does come into effect that a little bit right. So we have a little bit more headwind in the first half and it kind of normalizes as we get to the second half just because the comps become a little bit easier on those currency changes.
I'm just looking at the margin walk in it's a very similar progression Q1 to Q4 versus what we did this year as well.
Alright, Thank you very much thanks, Dave.
Our next question please.
Comes from the line of Nigel Coe with Wolfe Research. Please go ahead.
Thanks, Good morning, everyone.
No it does.
It does feel like July .
Well, it's a bit stronger than June .
During the second quarter.
Technical account of course.
Yes.
Broad and you touched pretty much every single part of industrial economy.
I'd be curious if you could give your perspective on what's going on outside of China, obviously, which is a bit more of a film beat but.
So maybe maybe Tom you might want to take that but just in terms of the financing for megawatts.
It looks like we got about $6 billion already financed on the balance sheet.
I'm just wondering just based on whatever cash we got on collateral with the derivative contract et cetera, how much more to be raised to get to that nine $9 billion.
Yes, Nigel this is Todd.
We are complete with the financing program for that the one element of that is that $2 billion delayed draw term loan that we will.
Once we get.
More clarity on the close date, so thats really the last piece.
And it is already set we just have to.
Wait till we get some clarity on close.
So the $42 million in <unk>. So we can annualize that add on the $2 billion for the collateral.
It gets us in the ballpark of the current interest rate for interest expense for <unk>.
Yes, it's a good question what our plan on that is to come back to you. Once we close in we've got some clarity on what the rates happen to be we will lay that all out for you in a very good detail.
Okay. Thank you.
Yep.
Yes.
One moment for our next question.
Comes from Joseph <unk> with Wells Fargo. Please go ahead.
Hi, good morning, everyone.
Good morning, John .
Hey, I wanted to start on backlog.
Imagine it was flat to up a little bit sequentially.
Running at something like <unk>, what would be normal levels relative to demand.
So as you're thinking about the upcoming year.
Or do you expect in terms of backlog trends do you think this is something that sort of normalizes relative to demand over the course of the year or.
Just on what you are hearing from customers that they still want to order kind of well in advance.
Just generally how you're preparing for that.
Joe It's Tom So backlog is up significantly year over year about 21% backlog was $7 8 billion.
In June 30, but sequentially it was pretty flat and so I think this is kind of the peak in the backlog there, but I would expect it to moderate through the years slowly declining probably not getting back to what I would call a normal backlog through the course of the whole year, but starting to moderate.
This backlog in addition to our order entry patterns the secular trends of portfolio changes. These are all part of why.
We felt good about the 2% to 5% organic growth good.
Got it.
And then related to market share gains.
Do you have any perspective on what you think you achieved in terms of share gains last fiscal year.
I imagine North America was it was a bigger opportunity with presumably some of the tougher supply chain.
Dynamic in that region.
Specifically, if you could comment on that as well and really all of this related to the industrial businesses.
Joe It's Tom again, so I would characterize it yes, we did gain some share.
Calculate market share by region and all of that is really difficult.
You don't get the degree of accuracy, we track share by account.
And obviously I'm not going to quote any accounts here.
But thats, where you can actually get good accuracy, because you know what.
Potential is for an account.
<unk> sales into it.
You have good gauge R&R.
Repeatability of that so we've seen where we've been able to make some improvements not in every single account, but on some accounts so that I would use that as an indicator that we.
We have made some progress but obviously.
More to come.
Very good thank you.
Okay.
Yes, Sir.
Think we maybe have time for one more question.
Excellent one moment for our last question. Please.
Comes from the line of Julian Mitchell with Barclays. Please proceed.
Hi, Thanks for squeezing me in maybe.
Just a first quick one around the free cash flow margin assumption and then you had a very strong sort of 14% margin in the year just finished.
As you look at the sort of the current <unk>.
Business ex Meg it how should we think about that free cash flow margin.
In the upcoming fiscal year should that sort of move up slightly with operating margins or do you get a big sort of stable from working cap in the first half or something.
Julian Hey, this is Todd that's a great question. We obviously are very proud of our cash flow performance that we just finished in FY 'twenty two we do see a little upside of that in FY 'twenty three obviously the growth isn't as great as the growth period that we just came through teams continue to manage working capital. So I think youll see a slight.
Increase and that.
We will give you a little bit more color once we get some of the Mega details on what it does for the whole company obviously on the.
The integration here in the stub year, there will be some.
Pressure on the total company free cash flow just as we get through the.
Acquisition, but core company will be very similar to what we did last year with a little upside.
That's good to hear and then a quick follow up.
Aerospace guidance I think Tom you had said that the organic sales growth assumption for aerospace is higher growth in the second half I think year on year than the first half.
Any color.
Around that you had to do with sort of easing supply chain constraints in commercial OE.
Lumpiness in military.
And then commercial MRO I think you said up high single, which May look low versus what some other companies have talked about for the next year or two.
Yes, so maybe I'll just give you the splits on the splits but the segments. So our guide assumes mid teens commercial OEM.
High single digit decline in military OEM, that's again the pull forward in the provisioning on the F 35.
And the ones that are kind of engine high single digits on commercial MRO remember, that's comparing against what we do.
Just as last year, which was a plus 36%. So that's when you get this really big difficult comp on the commercial MRO, but it continues to grow and the military MRO.
Positive mid teens do that math of those core segment gets you to the $6 half. These first half second half is just kind of a normal pattern aerospace tends to be stronger growth in the second half.
You'll have some of the military MRO probably hitting.
Longer than the second half as well.
Great. Thank you.
Thank you Julien.
Alright. This concludes our FY 'twenty Q4 earnings webcast, we really do appreciate all your support all your interest in Parker like we said we will do another one of these shortly.
Once we get through close Robin and Jeff are obviously here all day. If you have any further questions. Once again I. Thank everyone for job once again I. Thank everyone for joining and we will talk to you soon.
And with that ladies and gentlemen, we conclude today's conference. Thank you for your participation and you may now disconnect.
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