Q1 2023 Parker-Hannifin Corp Earnings Call
Okay.
Thank you for standing by and welcome to the Parker Hannifin fiscal 2023 first quarter 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 tell.
The phone as a reminder, today's program is being recorded I would now like to introduce your host for today's program Mr. Todd The Bruno Chief Financial Officer. Please go ahead Sir.
Thank you Jonathan good morning to everyone and thank you for joining Parker's fiscal year 2023, Q1 earnings release webcast as Jonathan said this is Todd <unk>, our Chief Financial Officer speaking and joining me today is our chairman and Chief Executive Officer, Tom Williams.
As chairman and President Lee banks, and our current Chief operating Officer, and Chief Executive Officer elect Jenny apartment here.
We will be addressing forward projections and non-GAAP financial measures today slide to provide details to our disclosure statements in these areas.
Actual results could vary from our projections for the items listed and these forward looking statements and also detailed in our SEC filings. The presentation today will address non-GAAP measures and reconciliations for those non-GAAP measures are available in.
In this presentation and all of this is available on the investors section at Parker Dot Com and will remain available for one year.
Tom is going to begin the call today with a couple of highlights on the quarter and also provide an update to the Mega integration I'll follow with a brief summary on the financials and review the increase to our guidance that we issued this morning, and then we'll touch on the leadership transition that we announced last week and we will finish the call with Q&A. So if I.
Could ask you to reference slide three and I'll hand, it over to Tom to begin.
Thank you Tom and good morning, everybody. Thanks for joining our call today.
We had an impressive first quarter seven first quarter record sales net income.
And several margin records and we closed the <unk> acquisition, which was a big accomplishment.
So if you look at the slides first of all safety is our top priority, we leveraged that high performance teams lean and kaizen.
We had a 17% <unk>.
And since versus the prior year when you look at that on a safety incident rates have been number of instance per 100 team members that will put us in the top quartile versus our proxy peer group, which is a fantastic results.
Sales were $4 2 billion.
An increase of 12% versus the prior year.
<unk> was very strong in a plus 14% versus the prior and we had strength across all regions and segments.
Operating margin was 19, 8% as reported or 22, 7% adjusted we had a 70% 70 basis point improvement versus prior again excellent improvement in pretty tough conditions.
As I mentioned, we completed the <unk> acquisition integration is well underway.
After a good start and I'll talk more about the second so if you look at the quarter over the last several years is that takeaway that you see on this slide the win strategy the portfolio changes working together to deliver record performance.
Go to slide four.
Some pictures from day, one we showed you some of these in our last call, but it was a great day, one had Parker executives at every Mega site globally 34 sites around the world.
Positive meetings, and we're off to a good start putting the two companies together.
You go to slide five.
I went through this in a fair amount of detail on the September 28th Investor call, but.
Just to orientate you on the page on the left hand side.
The blue bars are the synergies coldest costs achieve this is by fiscal year shows you the walk to a $300 million.
Where the synergies in FY 'twenty six.
That would take us to approximately 30% adjusted EBITDA margin for that period of time, so significant improvement in profitability.
On the right hand side.
Really the how how we'll get to $300 million synergies and again I went through that in a lot of detail suffice it to say it all sits underneath the umbrella of the win strategy. Those four boxes that you see underneath there and we've had we're now seven weeks into it I've had a chance to spend time with the teams I feel very good about our ability.
Building to deliver these synergies.
Go to slide six.
It really is a combination of the portfolio changes that we've made so the doubling of filtration doubling in engineered materials and the doubling of aerospace over the last eight years.
Put that together with our technology offering which is very much aligned with the secular trends are today and the future aerospace digital electrification and clean technologies.
That combination is going to have a profound.
Shifting our sales mix and that's what you see illustrated in these pie charts at the bottom here. So if you look at where we were in FY 15, and you got FY 'twenty seven on an illustrative basis, you'd see that we'd have 85% of the company either industrial aftermarket.
Or a longer cycle that mix shift is what has allowed us to change our FY 2007 target on growth to grow 4% to 6% organically over the cycle.
Go to slide seven.
I was only allowed one slide on these earnings calls.
A sled actually.
It demonstrates that the company is distinctively different and better over quite a period of time here. So on the left as adjusted EPS and we've updated that for the FY 'twenty three guide you see the $80 95 at the midpoint.
And the adjusted EBITDA margins on the right hand side.
Almost 800 basis point improvement over this period of time slide.
Slide really speaks for itself, it's hard to make metrics.
45 degree angle to the right.
But as the fantastic job our people portfolio changes in the strategy of the company.
Arguably.
The most improved industrial company over this period of time.
Great company to invest in.
But that would hand, it over to Todd to talk more about the quarter.
Thanks, Tom.
On slide nine obviously it wasn't impressive quarter, Tom mentioned that it's a really strong start to our fiscal year and our team members just really globally continue to execute.
Deploy the win strategy and we're very proud of the results that they were able to put up Tom mentioned this but sales are up 12, 5% versus the prior year that was a record of $4 2 billion.
The organic growth in Q1 was extremely strong 14% ever.
Everyone has seen the strengthening of the dollar and that has created a currency headwind for us that's about five 5% of sales.
We're very happy that we closed Meg it.
We also closed the aircraft will break divestiture all in net of that it added 4% to our sales for the quarter.
Adjusted segment operating margins $22, seven and that's an increase of 70 basis points from prior year.
Adjusted EBITDA margins came in at 23, 3%, that's even bigger increase at 120 basis points up from prior year.
And really this year over year margin at both the adjusted segment operating margins and the EBITDA margin improvements really just demonstrate.
The power of win strategy three point out.
When you look at adjusted net income number is $616 million up to 14, 5% Ros adjust.
Adjusted earnings per share is $4 74.
That is a Q1 record at sub 48 from prior year and that's really despite some currency headwinds that we saw in the quarter. Both adjusted net income and earnings per share have increased 11%.
Versus prior year.
Obviously I just want to make a couple of notes there were a number of several onetime items incurred this quarter as a result of the Mega acquisition and the wheel and brake.
Divestiture. We've included a reconciliation to all of those items in the appendix or those are mostly over but some large one time items and I really want to thank our global finance and accounting teams for getting all this done with just two weeks of ownership.
In the quarter.
Really really well so on and this isn't really a fantastic start to our fiscal year.
If you go to slide 10. This is just the bridge.
On the year over year EPS improvement I've already mentioned it but the strong Q1 operating performance obviously the main driver there we generated $133 million or 16% additional segment operating income Q1 versus Q1 last year that equated to 80 cents of the Earth.
Per share improvement Incrementals were extremely strong excluding acquisitions and divestitures total company did about 36% Incrementals. When you look at everything else. The net of corporate G&A other tax and shares outstanding all of that nets to <unk> and you can see the big line their interest expense was 35.
Five cent headwind, but 100% of that is related to the Mega acquisition.
We knew that that was going to be a headwind.
So all in at $4 74, that's 11% increase from prior year. If we go to slide 11, just looking at the segments you can see organic growth again very strong in the quarter. Our orders remain positive in every segment, despite some notably tough comps versus prior year total company orders were up 5%.
And we continue to see continue to see broad based demand across all the end markets that we serve.
Strong incrementals drove that margin expansion that 70 basis point.
Margin expansion versus prior year and again our team members just really continue to be agile in the current environment and I'm very proud that they were able to generate record sales and operating margins looking at North America. The organic growth was extremely strong in North America, nearly 18% sales came in at $2 1 billion.
Significant margin expansion 200 basis points.
Over prior year that reached 23, 4%.
Volumes, obviously were a big driver here, but again we've talked.
Over the last couple of quarters about the specific regional supply chain challenges. Our team has just been very resilient working on our operational efficiencies and that really is the main driver on driving this strong margin performance Incrementals in North America ex acquisitions with a 38% orders are positive at plus three and.
Again, just operating on all cylinders in North America broad based demand.
Looking at the international businesses organic growth again strong there 12%.
Organic growth sales reached one 4 billion.
Organic growth was positive low to mid teens in every region and our international businesses.
Adjusted operating margins expanded 30 basis points from prior year and reached 23, 1% and again, that's all in light of some currency headwinds.
<unk> more heavily impact this segment, our Asia Pacific team continues to outperform.
Talked about that they have done a great job recovering from those shipment delays that were a result of COVID-19 shutdowns and that we feel that that is kind of mostly played out in Q1 here.
Orders are positive and the international business to plus six and that clearly reflects a rebound obviously from China as well.
Looking at Aerospace systems sales were 746 million now Thats, obviously up 26%. If you remember about 82% of the Mega transaction does get reported in this segment there is about $150 million of Salesforce Megan.
Q1 in our aerospace systems segment.
That makes up 19, 5% of the sales increase but if you look at organic growth very strong there as well as seven 4%. We just continue to see strong OEM and MRO commercial volumes continuing throughout the.
The year.
When you look at operating margins that was impacted really by mega coming in wheel and brake coming out and then there were some nonrecurring program.
Timing charges that were in respect to our OEM business.
So all in.
Thats, a one time issue and we don't see that continuing going forward. If you look at aerospace orders on a 12 month rolling basis, It's plus five but you remember we've talked about these.
Multiyear military orders that will anniversary next quarter, if we adjust for that orders were positive, 29% and aerospace and aerospace dollars continue to remain at extremely high levels. So all in great performance across all of our segments, we're really happy with the way the team performed there looking at cash another good story here.
Look at our cash flow from operations was 10, 8% of sales free cash flow was eight 8% of sales or Capex did hit 2%.
As we have been signaling.
And free cash flow conversion was 96%.
The transaction costs that we've talked about did impact CFO and that free cash flow pretty significantly in the quarter is about.
450 basis points of impact those will minimized as we go on throughout the year, but I just wanted to call. It out that that was a drag on our Q1 cash flow.
We do still expect free cash flow for the year to be in the mid teens, so no worries on that.
On slide 13, I just want to give you a couple of updates on the capital deployment I'm sure everyone has seen this last week, our board approved a quarterly dividend payout of $1 33 per share that is our 298th consecutive quarterly dividend payment and.
Our record of continuing.
To increase the dividends paid is now at 66 years and I want to just leverage because I know thats a number thats been on People's mind at the end of Q1 leverage now reflects all mega related debt. The trans transaction. If you look at our gross debt to adjusted EBITDA at three 8% net.
Debt.
It's three 6%.
Those numbers are presented on a trailing 12 month basis and they do not include any mega pre close EBITDA. So that is basically base Parker adjusted EBITDA doesn't really include any mega EBITDA and we fully expect that to improve.
As we go throughout the year as we start to.
Include that negative EBITDA, we are fully committed to our Delevering plan and I'm really proud to say since we made this announcement last August .
So really August of 2021, we've applied over $2 billion.
Of cash towards the purchase price so great work on that.
Okay looking at guidance you saw this.
We are now including the.
Acquisition, and we are excluding the wheel and brake divestiture in our guidance, we're providing this on an as reported and an adjustment basis and Tom mentioned this we're increasing the sales growth rate growth range now to a range of 11% to 14% or 12, 5% at the midpoint organic growth forecast is.
<unk> increased two 6% at the midpoint.
Acquisitions net of that divestiture is going to be plus 11, and we do see currency being a larger headwind now we are now.
Increasing that unfavorable impact of currency to four 5% and that is using spot rates as of September 30.
When you look at adjusted segment operating margins. The range is now 21, $722, one or 21, 9% at the midpoint.
So that is all in includes megabit and excludes wieland break obviously, our strong Q1 performance just a few other items to note on an adjusted basis corporate G&A is expected to be $207 million interest expense thats, all in including everything from negative $5 10, and the other income expense line.
It's actually going to be income of $23 million for us really no change to the tax rate, we expect that to be 23%.
You can see the.
Full year as reported EPS is now $13 20 at the midpoint or 18, 95, adjusted and Theres a range of 35 on either side of that.
And just looking a little bit more forward into Q2.
See adjusted EPS to be $4 46 at the midpoint for our second quarter.
Lastly, all the adjustments that we've been talking about on a pre tax level are listed in this table.
Now includes at least the current estimate we have for the Mega related intangible amortization of $2 <unk>. So you can see the total is now $5 20.
And it also includes integration costs to achieve specifically for.
<unk> of $70 million for the remainder of the year.
Especially with the acquisition expense to date, we've adjusted for all of those the majority of those are over but we will adjust those out.
As they come through.
Okay last on the guidance bridge.
Just give you some details to that obviously, we started the year with our initial guidance of.
Yes.
$18 50.
We have the call at the end of September which included Mega and excluded we won't break so that was another 30 <unk> of additional EPS that we saw for the year that got us to the $18 83.
Really our strong Q1, there is a little bit of moving pieces here because of maybe coming in and we won't break coming out.
We calculate that to be about a 54% beat to our original guide and for the remainder of the year. We've really increased Q2 organic growth just slightly and we've held the second half to exactly what we said in our original guidance, we have incorporated the recent currency rates and.
The estimated impact on segment operating income right now we feel like Thats, a 42 cent headwind.
Theres nothing else, notably changed to our guide for the full year and all and we increased our full year adjusted EPS Guide to 18 95 at the midpoint.
So with that.
I'll hand, it back to you Tom.
Thank you Tom So on slide 16, we've got the leadership transition.
As you saw last week, we announced several leadership changes in coordination with the board I had been planning my transition for many years I happened to be turned 64 years old Tomorrow is my birthday. So my early birthday present is my last earnings call.
<unk> been CEO for eight years and believe this is the right time to step down from CEO position effective end of this calendar year.
<unk> always had eight years in my mind.
You used kind of the two term U S. President is kind of the length of tenure that I've felt about right.
And so now is the right time for me to surface.
To help facilitate a smooth transition.
Plan to continue as executive Chairman.
The first of next year to December 31, 2023.
At which time I plan to retire from Parker and the board has truly been an honor to lead this great company and if you'll indulge me I have a few thank you so on the dimension.
First of all our shareholders that are listening in.
Thank you for the confidence you showed me the company on your behalf.
My thanks to the FERC <unk> board of directors for just create advice of counsel, perhaps as to me, but to our management team.
To the analysts who pretty soon we're going to ask me lots of questions. Thank you for an open and constructive and transparent relationship I've noted numbers for many years.
Always appreciate the relationship.
All the Parker team members just incredible people take ownership in everything we do it's our culture. It's our people that are the secret behind our success.
Two the Parker leadership team.
Without a doubt the best leadership team that I've had a chance to work with.
A very deep and talented team that our shareholders take a look to create comfort.
And to the office of Chief executives as people are sitting around the table with me today, the journey, Todd and Andy. Thank you for helping me to lead the company.
Business leadership is a team sport and I appreciate your help and.
A special thanks to Lee for 19 years, we've been business partners, we felt each other together we'd hoped it could be a better company.
I really appreciate it at least going to continue on its face chairman and president going into the new year, I think it's going to be a big help to the team.
If you go to slide 17.
One of the most important responsibilities of the board and myself as CEO succession planning as you saw the board elected to any parameters. Our next CEO effective January one.
Jenny will report to the board of directors will be a member of the board as well <unk>.
<unk> is currently Chief operating officer has been a group president twice in the general manager of choice.
He's a great person and a great leader proven track record of success and I have complete confidence.
Turning to leave the company in the future.
I'll turn it over to Ginny to make a few comments and finish the presentation.
Thank you Tom.
I am honored and proud to be appointed the next CEO of Parker Hannifin and very excited about our future.
I am grateful to both Tom and Lee for his support and Mentorship over the last several years and to our board of directors for their confidence and leadership.
Moving to slide 18.
Effective January 1st this is the office of the Chief Executive Lee.
Todd and I have been part of this team for some time and we welcome Andy to the role of Chief operating Officer.
Andy will report can Lee as I do now in my current role.
This is a seasoned leadership team that has been part of the company's transformation and an integral part of developing and implementing win strategy three pointed out.
This team will continue to deliver record results.
Sure.
Moving to slide 19.
As I look to the new calendar year in the second half of our fiscal year. My priority is to build upon the success of Parker's transformation.
We're focused on integrating <unk> into the Parker family, achieving the synergies we've committed to delivering a record FY 'twenty three.
Win strategy three pointed out we will continue to accelerate our performance across the company and our portfolio transformation, coupled with the secular growth trends it makes us more than confident in achieving our FY 'twenty Senegal.
Before we go back to <unk> for Q&A.
He has a few panic.
Okay. I know everybody is anxious to get to the Q&A, we're going to get there quickly, but we've got one more thank you to have happened here. So.
Tom.
Behalf.
60000, plus teammates around the world our management team really from myself. Thank.
Thank you for eight exceptional years his leadership.
Our Chief Executive Officer, you came into that role you've had a great vision.
You boil that vision down to three key deliverables, you said, we're going to be the safest company in the industry.
We're going to have the highest engaged team.
Thinks and acts like an owner.
Since your time in office, we've reduced our.
Incident rate by 73%.
Annually qualify and measure we're the top engage workforces.
Amongst our peers.
You mentioned it in your slides earlier, you drove us to be a top quartile financial performer.
Nearly 800 basis points increase in EBITDA margin during your time.
And a two seven times increase in adjusted earnings per share.
And lastly, I remember us talking about this we're going to be great generators and great deployment of cash.
Excluding today's numbers your time in office, we've increased the enterprise value of this company by $30 billion $48 8 billion.
Total shareholder return not including today, 180%.
And dividend increased quarterly dividend increase of 111% increase from 63 to $1 33.
Capital deployed during this time period $25 billion.
But I think most importantly time as youre, leaving us with a company.
Not only in management talent portfolio.
It's structured to have its best days are ahead of it so with that thank you very much. Thank you and now I will turn it over to Tom retired sooner.
Yeah.
Alright, Jonathan we're going to go to the Q&A I'll, let Tom catch his breath here, a little bit, but I want to make one Claire.
Clarification I called out at an incorrect number on our Q2 EPS I read last year's number the number that we're looking for for FY.
FY 'twenty three in Q2 was $4 31.
Point.
So with that Jonathan we are ready for Q&A I'll turn it back over to you.
Certainly and once again as a reminder, if you have a question at this time. Please press star one on your telephone and our first question comes from the line of Scott Davis from Melius Research. Your question. Please.
Good morning, guys and congrats everybody.
Tom a high integrity eight years, I think thats, a greatest compliment I could probably give you.
It was exceptional.
Thank you excellent.
Jenny what does the board want you to do differently.
If anything maybe you can start with that.
Thank you Scott.
My priority as I said is to build upon it.
Part of the transformation that is well underway.
Our focus is actually focused on integrating mega, bringing them into the family and achieving the synergies that we've committed to and we're <unk>.
Obviously, we're going to continue on our journey to tap tap tap core top performance and delivering long term value for the shareholders.
So I don't expect that we're going to see big changes in the day to day.
Running the operations and Tom and I are both committed to a very smooth transition.
Jenny maybe just to follow up on that I mean, how would you compare your kind of leadership style or differences are strengths.
<unk> versus <unk>.
Versus time, if you will.
Well I think that.
We have a lot of the same leadership style.
And I don't know that I want to get into my weaknesses.
Alright.
<unk> had two good managers here, who have helped me develop in strength over time.
From a leadership perspective very.
Very passionate about safety and our team members just the same comment I am very.
Very passionate about providing a customer experience that stands out amongst our competition and.
Very focused on organic growth in the future and delivering that performance.
That we've delivered and that recent past and even more sonicate Sir.
Scott, It's Tom if I could just chime in for a second.
One of the things that Lee and I did when we have our change in the win strategy, but it was two point over our originally three.
This was very much an inclusive process, where it wasn't the two of us squirreled away in a corner.
Coming up with all of the answers it was very much bottoms up obviously as we had guided but it was very much lots of input and Ginny was part of it.
Part of all those changes and cheese.
Very capable of driving the ship going forward.
Okay, well I'll pass it on best of luck to all of you folks and best of luck Tom in your next chapter.
Thank you.
Thank you one moment for our next question.
And our next question comes from the line of Andrew <unk> from Bank of America. Your question. Please.
Yes, good morning.
Good morning, Andrew.
Once again I want to extend my thanks to Tom and congratulations.
Hey, Jamie.
Thank you Andrew Thank you Andrew.
So I'm going to ask sort of more near term question.
There are a couple of companies this earnings season.
That have called out sort of.
I think some clouds on the horizon in terms of short cycle.
Frankly, these management teams that I do respect so how do you think and I appreciate your second quarter guidance.
As you look at your order activity as you look at lead times as you look at the backlogs.
What do you see the interplay of perhaps improving lead times, perhaps improving supply chain.
Does it do to the orders and how do you think about inventory your inventory and what's happening to the inventory in the channel. Thank you.
Andrew It's Tom so inventory in the channel.
A little bit of them referred to our distributor channel.
Nothing really sequentially.
How material.
A lot of our distributors are going to probably wait and see how their fiscal year ends in the new year begins but maybe what youre getting at.
So many words is kind of what sort of thinking about the rest of the day.
<unk> periods.
What gives us confidence et cetera.
We were pleased that the order entry was.
It was positive against some very tough comps in the prior year.
Dollar volume that we saw through the quarter it was pretty consistent across all the regions and segments.
We were also really happy that international saw mid single digit order growth.
And then we saw that in EMEA and in Asia.
And we had mid teens and Latin America.
No.
<unk> got aerospace in there at around a plus seven as we think about the full year.
The industrial.
Markets are very positive we had over 90% of our end markets are in a growth phase.
So our guidance really utilizes that input our backlog.
AI model.
Feedback from our customers and distributors.
<unk>.
We still see broad based growth over to the point you were getting at it's going to moderate as the fiscal year progresses, yes.
Supply chain is healing, but I would say is healing slowly.
It's not really making I would say that big a difference on lead times at least not yet.
So as a result, we did bump up our guidance im referring to organic sales guidance, we took our first half.
The prior guidance to now was five 5%, we bumped it up to 10, 5%.
We left the same was the second half.
On the second half basically around 2% organic growth.
For us even though we've got the backlog we've got this broad based strength.
We're cautiously optimistic.
And originally I say that is that we'd like to see.
How the year ends and talking with the calendar year ends for our Oems and how do they start with their order patterns in particular, particularly their demand signals to us in January .
Everybody is most of our Williams our fiscal year.
Calendar year type of companies.
And so once we have they're all running hard to finish so I think there's sort of a new year's will be a good indicator, which is why we didn't we didn't changes but in general we're still very positive and we have a lot of things going for us when we think about.
The secular trends the changes we've done.
From acquisitions and.
In general I think there's a indicative better capex investments for industrial so I feel very bullish on the long term I think we're just being more careful.
Near term given some of the <unk>.
Macro uncertainties out there.
Yes, no look our.
Survey work is fairly consistent with what Youre seeing but obviously you have a live view my follow up question is clearly cash flow has been one of the strongest suit that partner for a long long time.
I know you are laser focused on cash conversion.
With rising interest expense right it seems that <unk>.
Financing is getting more expensive right.
Running inventories is more expensive.
For your customers and your distributors.
What things.
Things can you do or what things are you doing to continue to have this.
Very strong cash conversion.
Going forward as both your customers.
And your suppliers have your distributors are probably going to be more conservative with their cash rate just because it's more expensive to flow is working capital and inventory et cetera. Thank you.
Yes, Andrew I'll take that this is this is Todd obviously.
Cash flow generation profile of the company is something that we all work extremely hard on virtually every day.
Feel like we can do better on inventory, we've been vocal about that we have.
Whether the the supply chain challenges globally extremely well, but we have tools in place to further reduce that inventory as we go forward as we bring <unk> into the company, we see opportunities there.
Payment terms and receivables terms, so we see activity on that as well and the other thing that I would note is as we've talked about.
Asset <unk>.
Conversion rate our.
Annual variable incentive plan.
The company is now 100% on that plan so all of our team members.
Across the globe are all incentivized on achieving their cash flow plans for their respective businesses.
So.
I think youll see us continue that I feel confident in telling you that we see free cash flow in the mid teens number and that is all part of our commitment to that Delevering plan that that we spoke about so I feel really strong about our ability to deliver on that.
Thank you Todd and thank you everybody once again, we thank you and John and congrats.
Great.
Thank you Janet Congratulations look forward working with you. Thank you.
Thank you.
Thank you one moment for our next question.
And our next question comes from the line of Jeff Sprague from vertical research. Your question. Please.
Thank you good morning, everyone.
Well I don't want a late on Tuesday, I don't want to hear anybody up here and you'll get all choked up or anything, but Tom really congrats and thanks, Jenny best of luck going forward too.
Watching your tenure here.
I Wonder if you.
And I think it's okay.
I Love My people in Cleveland as you know.
I Wonder if we could talk a little bit just about price cost.
Where we're at now I think.
I think Tom you said supply chain healing, a little bit not materially.
Just interested in.
The friction that might still be going on both on a price cost standpoint, and also just kind of the factory inefficiencies side of kind of the ongoing lack of or how much maybe.
Pain, you had to absorb in fiscal 'twenty, two and how you think that might play out in 'twenty three.
Jeff It's Lee.
Take a stab at that.
Look the slope of the curve priced.
Price cost is has moderated but cost is still a real issue.
There are some commodities that have that have come down off their peaks are still high if you look on a historical level.
Still a lot of friction in the supply chain, where even though raw commodities may have peaked the finishing of those raw commodities before they get to us sometimes.
A real supply chain issues.
And there is still lots of inflation.
Up and down.
<unk>.
You can see it from.
To your MRO supplies coming into our facilities too.
Food to wages et cetera. So.
We're on top of it as you know I mean, we measure this like crazy.
Not only just.
Commodity costs, but also total inflation costs.
And we've got great visibility on how we're doing on pricing to make sure that we see margin neutral I would say in the factories.
Again, the slope of the complexity has got better.
But for me to tell you that labor availability is still a non issue I would be kidding you.
It's still a little bit deal I think the thing that helps us through a lot of this.
As we just use our our Parker lean system. When we go in and we just figure out how we're going to reconstruct the value stream.
Bring out the efficiencies and get better throughput et cetera. So.
We're addressing it I can't put a number on what the difference is going to be but we're on top of it and we're making you see it in the margins in the company, we are still doing better on a year over year basis.
And.
Also maybe just kind of do this cyclical question or just macro outlook question.
Clearly, it's actually impressive the orders are positive against those comps, but I'm just wondering.
Where the backlog stands these days do you have more then.
Kind of a quarter's worth of coverage at this point.
And just kind of any any other like leading.
Indeed caters that youre trying to.
Stay on top of year should kind of look around the corner economically yes.
Yes, Jeff it's Tom the backlog went up went up 16% year.
Year over year or so.
Most 8 billion on the legacy portion of the company add another $2 billion plus for Mega So it would be little over $10 billion.
Backlog, so obviously, we will well more than a quarter for the backlog I think the thing that we want to watch we feel very good about aerospace backlog and we feel good about the industrial is my comment I was making the Andrew.
Wanted to watch the demand signals.
To see if anything changes once we get to the new calendar year, but the backlog or is it gives you a lot of confidence that.
You'll be fine.
Great. Thanks, a lot congrats again.
Thank you one moment for our next question.
And our next question comes from the line of Joe Ritchie from Goldman Sachs. Your question. Please.
Hey, good morning, guys and Tom I guess.
Comment to you.
I'm going to Echo what everybody else has already said.
That's a class Act.
Congratulations on your 210 years.
Thank you. Thank you Joe.
Okay. So I guess.
My first question I know, we're all trying to get at this.
Okay volume question really in the second half of the year.
And Tom I guess.
As you kind of look at your curve it still seems like the environment is.
Healthy.
Are you seeing kind of any deterioration across any of the different end markets I'm, just trying to really understand.
The expectation still for second half volumes to be negative.
Assuming that is still the expectation across the industrial base.
Yes, so it's interesting Joe some of that.
Forecasting the second half because if we look at backlog if we look at the orders that we saw within the first quarter. It would tend to make you think we could do more in the second half and there is a chance we could and we'll have to wait and see how that turns up but given the amount of uncertainties that we see in some of the AI.
Model data.
<unk> been building over time and as Matt Barnes based on the data.
We are projecting that things are going to moderate as we go into the second half.
And with price that's baked in there Tom we get somewhere between a third and fourth quarter, we probably are going to have some unit volume declines.
When we look at the outlook for 'twenty three on all the end markets.
The exception of aerospace military and a little bit of weakness in HVAC, primarily because of residential.
Everything's either neutral to the strongly positive just as we go into deeper into the year, we have more end markets gliding to that kind of low single digits neutral.
Category, which is what makes up our forecast.
Got it. Thanks, that's helpful and makes sense I guess, one follow on I know you just touched on the backlog increasing.
Yes.
Other multi industry company recently.
Uptick in cancellation rates have in their backlog I'm just curious.
Seen any of that any orders that had can't claim at this juncture or still kind of studies you guys.
Jos Toms steady as she goes we haven't seen any cancellations.
Now so we'll be paying attention to and most of the time for our customers want to make a change they won't cancel per se. They will just push out delivery dates and that's why my comments about watching demand signals from the Oems at the beginning of next calendar year will be an important indicator I mean right now our Oems are very positive.
About the future.
Okay, that's great to hear and Jenny look forward.
Spending more time with you as well congratulations.
Yes.
Thank you one moment for our next question.
And our next question comes from the line of David Raso from Evercore ISI. Your question. Please.
Yes, I was curious for the quarter the orders in North America can you give us a little split between the order patterns from distributors versus OEM.
David It's Tom we don't split them out, but given us such a big part of the company.
It would mimic the orders that we reported.
For the 312.
And then when it comes to the second half of the fiscal year I appreciate all the commentary about.
Just being prudent.
Just curious, though if you didn't see cancellations in your backlog.
Yeah.
I guess the central I'm asking are you expecting some cancellations in the backlog just given the size of the backlog.
It looks like you're going to start at least fiscal second half with a pretty healthy backlog I'm. Just curious what are you factoring in when you have down volumes in your base case for fiscal second half.
Yes, so it's not down by much it's down small, but I guess, it's just.
The lack of the unknowns.
Very rarely seen in March.
A monetary policy.
It's kind of high inflation land the plane softly on the surface of the aircraft carrier. So hopefully it happens and maybe it happens after maybe if there's any issues that happens after our fiscal year later into calendar 'twenty, three but thats I think thats what.
We're being cautious we're very positive given the breadth of the end markets that are strong is pretty much across the board.
And to your point the backlog, but they won't necessarily canceled vehicles is a shift.
To the right if they decide that they don't need it and.
And that's we're pausing to just wait to see the indicator so when we do our.
Next call will be in February or at least to January to reflect on how did the Oems come back from the end of their fiscal year. They come back the same way.
Looking to update us and Thats the benefit of every quarter I get a chance to talk to you and give you insight as to what we're seeing.
And I apologize if I missed this earlier, but that thought process for the fiscal second half how does that dovetail into further price increases from here.
I think on the pricing OSB had mentioned, we'll stay on top of it.
A lot of the pricing that we did.
We're going to anniversary in the second half.
Price increases are catching up to cumulative effect and inflation is still there and we're going to continue to look at the stand top of it.
If we compare the price increases.
2022.
There'll be less not nothing to say every single partner, but in aggregate.
The business.
Alright, Thank you very much and obviously congratulations to everybody. Thank you.
Thanks, David Thank you David.
Thank you one moment for our next question. Our next question comes from the line of Stephen Volkmann from Jefferies. Your question. Please.
Yes.
Hey, good morning, everybody. Thanks for fitting me in Tom Happy birthday, I cannot imagine a better present and not having to do this with US four times a year. So.
Thank you.
I'm going to look forward to that part of it.
Sure.
Okay.
So maybe this is a journey question and I apologize it may be a little bit too early but sort of what are the couple of the feedback things that I hear relative to other sort of premier industrial does that Parker doesn't have at least quite as much an obvious sort of recurring revenue story or SaaS type revenue.
Story.
And secondarily that you guys don't really do much in the way of.
Divestitures, which have become kind of.
I guess fashionable amongst these industrial companies. So I'm curious if maybe those might be a couple of areas, where there could be some sort of modest change in the strategy going forward.
So Steve it's Tom so on a recurring revenue you're right, maybe a software as a service, but if you look at our recurring revenue with half of our industrial business going through distribution and Thats almost all aftermarket. So that's a recurring revenue stream with Mig it.
Additions that we've made there on the aerospace side, our aftermarket piece is going to go.
36% to 41% so that 500 basis points of improvement that we talked about maybe it brings so we've we've.
We've significantly increased the aftermarkets.
Some of you might remember from the Investor day, we talked about increasing.
In the international distribution, which we bumped up to 100 basis points every year. So that's a change that mix.
That's been one of the key agreements and international.
Margins are now at parity with North America, which most people.
<unk> for a long time never thought that would happen.
The divestitures, we'd like.
I've always uses tree analogy, we like the tree.
Some branches, we'd like to trim off and we're working on that as we speak.
And when we're ready, we'll announce those but theyre not going to be.
Clearly significant but we'll continue to look at that we do at best on a review.
<unk> and then we share that with the board.
So we will do divestitures, but.
This portfolio has been very thoughtfully built.
And that these technologies are.
Very well interconnected the fact that two thirds of our customers.
The buy from four or more technologies speaks to interconnect interconnected technologies.
So they like that we can come in over the strong bill of material.
Drive their cost of ownership down to help them with their sustainability issues and we couldnt do that if we were a one trick pony.
But youll see us do more on the divestiture side, but it won't be materially significant.
Super Thanks Best of luck everybody.
Thanks, David.
Thank you one moment for our next question.
Our next question comes from the line of <unk>.
<unk> from R. W. Baird. Your question please.
Thank you good morning, and congratulations to everyone.
On or working with you over all these years.
Thanks, Craig and I can remember.
We had to get it.
Okay.
So do I and I look forward to seeing you in Chicago next week.
I guess my first question on your industrial segment.
Q1 came in better than expected and I'm trying to understand.
What the sources of upside we're here is it debt.
There's something going on with your customers in terms of the supply chain getting better in production rates increasing for it.
What was really the variance versus your expectations.
Well I think in Q1.
We had a lot of help pretty much across the board I'm looking at all the end markets I'm not going to read off to you but.
Everything was pretty much north of 10% so it was.
I think we had guided North America 10.
And so we were a little bit off on that so just turned out to be theres no single market that pulled it forward obviously when distribution comes in.
It came in at 15% to 20% range.
By the size of the automakers pulls a lot of the.
Industrial numbers up but it was broad based and.
Everything was north of 10%.
We had a few that were greater than 20%.
So we were we were pleasantly surprised.
It was a good thing.
We.
Kind of guided a little bit lower than reality.
Okay.
But.
Youre, not really pointing to something going on in the channel in terms of.
Stocking or something of that nature, and I kind of asked because again going back to that second half discussion. It seems to me like a lot of your OEM customers.
Significant backlog and if anything they are actually trying to increase production volumes in calendar 'twenty three.
Which is a little bit at odds with how you have your guidance structure.
Yeah. So on your question about distributions and market related maybe a minor inventory, but back to the point on next year.
That's a possibility of what you just described part of what we factored in and especially a normally.
All the elements into the AI calculation is just some risk around what does the macro economy do.
Interest rates.
Higher and higher and does that eventually start to temper demand.
And so thats.
Why do we forecast that the way we did it doesn't maybe it doesn't start to temper it within our fiscal year and we'll update that guidance.
However, we have more current data, but that was the thinking that we're forecasting we're not any smarter than anybody else.
Other than we just wanted to get a little closer to the target before we get little more bullish on the second half.
Alright fair enough. Thank you and congrats again.
Thank you one moment for our next question.
And our next question comes from the line Nigel Coe from Wolfe Research Your question. Please.
Thanks, Good morning, and thanks for the question.
And told me about a hell of a run so congratulations.
And Tony Congratulations as well.
So my question really is on the guidance.
I think you took down industrial margins by 40 basis points in both North America and international.
Normally <unk> would be sort of the lowest at the lower point of the.
<unk> segment.
The way that the field playing out so just wondering maybe if you could just address the thinking on the marketing cadence from here.
Yes, Joe it's a great question, obviously, we.
Specifically, we are including the.
The Mega.
Acquisition.
Roughly 20% of that goes into the.
The industrial segment, 80% of it goes into aerospace.
That does have a slight negative impact to our margin.
Just for this first year as we get through the integration as we start to.
I realize some of those synergies.
Also a little bit on the international side, you know currency has been a fairly large headwind, we expect that to get a little bit bigger but that.
That is essentially the only real adjustments that we've made the margins going forward.
Nigel it's okay that makes sense.
The legacy portion of the company actually goes up 20 bps on margins and legacy portion of the companies that are mid thirties incremental MRO. So it's all the factors that.
Todd described which is causing.
The slight decline versus the prior year.
No. That's really helpful that makes a lot of sense and then just switching to mega.
There's obviously no hedges in place for U S dollar and euro versus the British pound, which makes that kind of thing.
So the British company.
A subsidiary of a U S company with the majority of its revenues in U S dollars, maybe not so I'm. Just wondering are you have you executed or your comp and any changes to the hedging policy for negative.
Yes, Thats a great question, we're learning exactly what the Mega process was as we get through this you know, it's a little bit over a month now we most likely will do something different we're not rushing to exit out of anything that they have in place, but overall, we're happy with that structure, we called it out 70%.
Of the sales dollars are in use.
S. Dollar so we feel good about that and we feel really confident in our macro hedging program across.
The legacy business, we will obviously integrate meghan into that process as well.
That's great. Thank you.
You know Jonathan Justin.
Time for one more question.
So whoever is next.
Certainly then our final question for today.
It comes from the line of Jamie Cook from Credit Suisse. Your question. Please.
Hi, Good morning, and Tom I'm sure you're sick of this congrats well done thanks for making a lot of us look smart.
And congrats to you Jenny we look forward to working with you.
I guess just.
Never got quite sick of us no.
Okay.
I guess just to I don't think you've commented on trends specifically that you're seeing.
In Europe or in China, I think I get some pushback on your guys on just concerns over European exposure and then my second question obviously.
A lot of concerns around the macro but I'm just wondering.
Even if the macro is a little weaker than you think is there enough sort of question as you think about perhaps supply chain ends up being better you hold more price cost or just synergies assumptions with.
Maggie.
The top line is a little weaker there's other ways to make ups you still maintain the guidance. Thanks.
Yes.
Jamie It's Tom So the comments on China, China in Q1 was a positive approximate 10% organic.
The rest of Asia was about the same temperature organic and we've kind of got Asia very similar to how we described.
Company monitoring or those low single digits as we go to <unk>.
End of the year.
We have a lot of things we can do to your point.
The macros were to weaken we've got.
Backlog, we could use supply chain.
I don't think supply chain could get worse, but that's probably going to be a positive side. We've done this before where we've created an organization thats more nimble and flexible and structured differently you've seen how we've been improving each recession that one charge is for people to.
So does my favorite one chart.
That was over two industrial recessions of pandemic and the current supply chain.
So this team is pretty good for being flexible and more on its toes in its on its heels when it comes to and so we're already working on those things we can do to be ready in case it got worse.
But we're still pretty positive.
So it won't be okay.
Thank you.
Okay. Thanks, Jami. This concludes our FY 'twenty three Q1 webcast. Obviously, we do appreciate all the thanks and congratulations.
Tom is obviously still very deserving of that congratulations with Jenny and Andy.
Well, but I also want to remind everyone of an announcement we made back in may.
And that was Robin Davenport retiring right. So this is Robbins last earnings call as well.
She has been a big voice of our investment story really for the entire tenure that Tom has been.
So Robyn we thank you for everything that you've done.
And we wish you nothing but the best in your next chapter.
Familiar face to everyone I think everyone knows Jeff Miller, who was our director of Investor Relations. Jeff has agreed to take the position of Vice President of Investor Relations.
Starting in January and he will lead our IR program going forward, so congratulations to both Robin and Jeff.
<unk> changes as well.
Both Robin and Jeff will be here. If you have questions you can either kind of clarification.
<unk> and anything we do.
We discussed today. So thanks, you thanks to everyone for joining us anything.
<unk> discussed today interested Parker thank you.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
The conference will begin shortly.
Raise your hand during Q&A you can dial one one.
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