Q3 2023 Parker-Hannifin Corp Earnings Call
Good day, and thank you for standing by.
The Parker Hannifin fiscal 'twenty to 'twenty, three third quarter earnings conference call and webcast.
At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star one one on your telephone you will then hear an automated message advising your hand is raised to withdraw your question Press Star one one again please.
Please be advised that today's conference is being recorded I would now like to hand, the conference over to Todd then Bruno Chief Financial Officer. Please go ahead.
Thank you, Chris and good morning, everyone and thank you for joining Parker's fiscal year 2023, Q3 earnings release webcast as Chris said this is timely and Bruno Chief Financial Officer speaking.
Joining me today is Joe Department is here, our Chief Executive Officer, and Lee Banks, our Vice Chairman and President.
Our third quarter results were released this morning, and just a reminder, today, we will be addressing forward projections and non-GAAP financial measures on slide two of this presentation you will find further details to our disclosures in these areas actual results may vary from our projections based on some of the details that are listed on this slide are.
Press release, this presentation and all reconciliations of non-GAAP financial measures are available under our investors section at Parker Dot com and they will remain available for one year, we're going to begin the call today with journey addressing highlights of the third quarter and really touching on how Parker is so well positioned for the future I will follow with a brief financial.
Summary, and then review the increase to our guidance that we released this morning, Jenny will then wrap up with summary comments and then Jenny Lee and myself, we will address any questions from the queue I'll, all asking out of to adjust yourself to slide three Jenny I'll hand over to you. Thank you Chad.
To everyone and thank you for joining our call today.
Q3, with a quarter of outstanding performance across olive partner, starting with safety, we remain in the top quartile with a 17% reduction in recordable incidents.
He has been and will continue to be our top priority. We had record sales of $5 1 billion in the quarter, a 24% increase over prior year with organic growth of 12%.
The win strategy and portfolio changes and clearly delivered record performance driving our full year guidance increase.
We are increasing the quarterly dividend, 11% over last year and we are happy to report today that the Mega integration and synergies are ahead of schedule for fiscal year 'twenty three.
Moving to slide four please.
We couldnt be more pleased with the enthusiasm and dedication of the talented <unk> team further evidence to the shared heritage and culture identified early in the acquisition process.
From the start of the integration safety engagement had been top priority.
We have key leaders and structure in place to ensure performance into the future and the win strategy deployment is well underway.
The picture on the right of this page is from a recent kaizen event held in E&C Park UK location.
And at the end of March we held the win strategy training session here in Cleveland with over 50 leaders from various Mega locations.
There are multiple examples of where the win strategy has already taken root and it's being used to improve the business.
We are confident in our assumptions around working capital opportunity and are already starting to see some of them materialized.
We are increasing our FY2023 synergies from $60 million to $75 million and we remain committed to achieving $300 million in synergies.
2026.
Slide five please.
With the addition of Mega to our portfolio, we are well positioned for long aerospace cycle growth.
Significant content on Premier commercial and military programs all the right line with a growing bill of material.
These are long lifecycle programs with a growing aftermarket well into the future as a reminder, with the addition of Meg at our aerospace aftermarket has increased 500 basis points.
We are greatly benefiting from the recovery of the aerospace market commercial MRO and OEM is very strong and military is positioned to do well in the upcoming years.
With the addition of negative complementary technologies, we provide a comprehensive offering and a stronger bill of material that allows us to add value and help solve our customers' problems.
We have key technologies, such as advanced sensors for more efficient engine control thermal management systems for higher heat loads and lightweight materials for reduced fuel consumption.
All of these enabling sustainable aviation.
Aerospace and defense markets are now 30% of our sales.
All of this adds up to significantly increased shareholder value.
Slide six claims.
Many of you have seen this slide before as we introduced it last year at our Investor Relations day over the last eight years, we have strategically reshaped the portfolio to double the size of aerospace filtration and engineered materials.
The combination of the portfolio changes and secular trends is already and will continue to create a profound shift in our sales mix.
FY 'twenty seven we will have approximately 85% of the company and long cycle end markets, our industrial aftermarket.
This mix shift as further reason, while we will grow differently in the future and it is why we are committed to our FY 'twenty seven target of 4% to 6% organic growth over the cycle.
Slide seven please.
A lot of discussing questions and inquiries lately on backlog.
And as you can see by the chart on the left of this page our backlog is at a record level.
It is encouraging is that in Q3, we saw our backlog dollars increased 3% sequentially.
Since FY <unk>, we've seen a three X increase in backlog dollars and a two X increase in backlog coverage.
Very important to note here that we are constantly analyzing the backlog at the division and group level and staying close to our customers on the health of the backlog, we know from the past that it is a bullet proof, but having said that.
This consistent growth over time is an indicator that the portfolio changes are changing the company.
Slide eight please.
As demonstrated by the strong performance in the quarter and the increasing power of our transform portfolio I wanted to share a few slides with you on why Parker is built for the present and the future.
Slide nine please.
Parker is a proven business system the win strategy three pointed out.
Whenever I talk to anyone about the win strategy, whether it's a new Parker team member or someone externally I would say the same thing.
Asked me I've used it and it works.
Is a systems focused on the fundamentals we trust the process and we know that making the safety and engagement of our team members are top priority consistently delivers results.
Our lean tools kaizen culture supply chain and simplification initiatives have driven margin expansion and we will continue to do so well into the future.
Our increased aerospace exposure is delivering results today as well as our 800 basis points expansion of international distribution, which still has room for growth.
Our innovation sales are two times the previous decade, and we have a new annual incentive plan that incentivize the right behaviors and driving intensity around profitable growth throughout the whole company.
Nearly all of our 65000 team members are on this plan as of this fiscal year.
Now more than ever we have better top line resilience.
Slide 10 please.
And the good news is we have significant opportunities ahead.
As I mentioned earlier, approximately 85% of our portfolio with a longer cycle and more resilient there.
<unk> mega growth opportunities well into the future and we are confident in achieving the $300 million in synergies by FY 'twenty six.
The win strategy three point outperformance acceleration will further drive margin expansion and ensure we hit our FY 'twenty seven goals.
As I mentioned in our February call the pandemic and subsequent increase in volume exposed some areas that we can further improve upon to become supply chain leaders.
We will utilize new tools and strategies to respond to changing demand, while increasing productivity and achieving best in class lead times.
Simplify design has become a business fundamental and we will continue to drive us to design excellence by reducing complexity and overall product cost that is helping to further expand our margins.
We're very excited about zero defect, it's still early days it exposes the hidden factory improves quality reduces costs expand margins and most importantly provides a better overall customer experience.
And with all of the announced and already initiated Mega capital projects. In addition to the secular trend.
We will grow differently in the future.
I'll now hand, it over to Todd.
Thank you Jenny just for reference everyone I'm going to start on slide 12.
With just the Q3 financial summary, it was a stellar quarter for the company.
Every number on this page highlighted in the gold box is a record for Q3 every single number and <unk>.
You did mentioned this but we did surpassed 5 billion in sales for the first time for a quarter in the history of the company reported sales were up 24% versus prior year organic sales were very robust at approximately 12% in the quarter and that did extend our string of double digit organic growth quarters.
Net of acquisitions and divestitures did have a favorable impact on sales that was approximately 15% and currency still remains negative, but it's basically exactly as we forecast explains to four.
Percent impact for the quarter.
And that is obviously unfavorable to prior year.
When you look at adjusted segment operating margins, we did exceed our forecast.
We finished at 23, 2% for the quarter, that's an increase of 50 basis points versus prior year. It's the first time in history of the company that we surpassed 23% for a full quarter. So impressive results really across the board.
When you look at dollars on segment operating margin we.
We generated nearly $1 $2 billion in segment operating margin dollars that itself is a 27% increase from prior year and it happens to be the second quarter in a row that the company has generated over $1 billion and adjusted segment operating dollars.
When you look at EBITDA another record here, we surpassed two.
24% for the first time in the history of the company. We finished at 24, 2% and adjusted net income of 772 or 52% Ross was an improvement of 22% versus prior year and finally, when you look at EPS adjusted EPS nearly $6 $5 93 for the quarter that was.
An increase of $1 10, or 23% compared to prior year, just outstanding execution for the company for the quarter. When you look at sales and segment operating margin net income and earnings per share every single one of those was an increase of accretive and 20%.
I can tell you I am just immensely proud of our team for the record performance Mega is really truly adding value to the company and the company is just executing soundly across the board.
If you go to slide 13. This is just a walk on that $1 10 improvement of EPS year over year and I mentioned on the last slide the biggest driver of that is our increase in segment operating income dollars.
We did basically an additional $250 million in segment operating income at 27% increase that added $1 50 to EPS year over year. When you look at the corporate G&A and other that was a 23.
Favorable EPS impact that was primarily driven by lower salary and other benefit costs.
<unk> as you all know is a headwind that was 50% headwind, but 100% of that is attributed to the Mega acquisition and of course, what's going on in our rates.
If you look at income tax that was <unk> <unk> unfavorable really it's driven by some prior year favorable items that.
That were discrete that arent repeating this year.
And really that's the walk to the $5.93, it's really stellar number record 23% increase.
If you go to slide 14 across the segments you can see as I mentioned, it's really just across the board solid performance organic growth was double digit positive in every segment, we exceeded our margin expectations across the board and our legacy businesses really performed soundly with.
Incremental margins above 30% in every single cell.
Segment, beginning this quarter on orders.
We finalized the Mega structure, we felt good about that and going forward, we are including.
Mega orders in both the prior and current period for comparison purposes, and we really feel that that better reflects the transformed portfolio.
<unk> mentioned earlier so all in orders remained positive despite really some tough comps versus prior year and finished at plus two.
Demand remains really broad based across most of our markets and Jenny also mentioned this but I just want to reiterate the dollar value of orders in the quarter.
Well certainly the highest that we've had in FY2023 and it did grow 9% sequentially from <unk>.
Q2 and of course, the backlog, obviously, it was up 3% sequentially as well so our team members really just executing well to meet our customer expectations and really focus on delivering top quartile results. If you look at the North American businesses sales really strong at $2 3 billion organic growth was just under 12%.
Adjusted segment operating margins nearly 23% and if you remember there is a dilutive impact on some of the Mega businesses that are in the industrial.
<unk> North American businesses.
Like I said before legacy businesses really outperformed.
Strong sales growth.
Our supply chain, improving gradually and really just great incrementals across those base businesses.
And really strong backlog and that demand is very solid across all of our north American businesses.
International really outperformed in the quarter sales were $1 5 billion organic growth exceeded our expectations and finished at just about 10% organic growth versus prior year.
Organic growth in the international segment was positive in all regions.
EMEA was plus 11% Asia Pac eight and a half Latin America, 8%. So all positive in every single region in the International segment. Adjusted operating margins were up 70 basis points finished at $23 four really benefiting from that volume that strong organic growth, but really some focus on cost.
Roll and productivity improvements really help leverage results in the international segment. This quarter overall, just really strong performance across every region and then finally aerospace thank.
Secular trend, we've talked a lot about.
Sales were $1 2 billion Thats, almost 90% increase from prior year that is obviously clearly driven by the Mega acquisition, but organic growth led the company in aerospace at 14, 5% versus prior year and really just strong across the board OEM and MRO commercial businesses.
Sales and orders are very strong both being mid twenties positive and interesting this quarter military OEM returned.
Two flat versus down from prior quarter operating margins extremely sound 23, 5%, that's 160 basis point improvement year over year, Ginny mentioned, it but the Mega integration is going extremely well synergies are ahead of schedule. We did raise our synergy estimate for the quarter $15 million and.
Performance in those businesses continue to impress.
Order rates in aerospace, obviously very strong you look at that.
Order number of plus 25, but both strong in commercial and military end markets, just really sound operational performance across the company no weak spots at all.
Moving to slide 15, and just talking about our year to date cash flow performance.
Cash flow from operations was 12, 8% of sales $1 8 billion of cash generated so far this fiscal year that 16% over what we did last year free cash flow of 10, 9%. Our capex remains right at 2% like we have been forecasting there.
There are some onetime transactions that were the result of the <unk> transaction.
That impacts our cash cash flow by one five points so without those transactions those numbers I. Just gave you would be one 5% better and free cash flow continues to be greater than 100%.
We're at 111% year to date and just.
I want to reiterate for the full year, we continue to forecast forecast cash flow from operations.
And free cash flow conversion of over 100 and that free cash flow would be mid teens for the year.
If we go to the next slide just touching on capital deployment and some leverage.
We did increase our quarterly dividend our board approved this last week, so 11% increase the dividend payout is now $1 48.
That is in line with our stated target of being in the range of 30% to 35% of our trailing five year net income and the increase this quarter does increase our annual record of increasing annual dividends paid of 66 years 267 years, So long standing a record that we intend.
To keep.
On leverage we did make some significant progress reducing leverage this quarter, we paid down approximately $650 million in debt in the quarter. If you look at our gross debt to adjusted EBITDA. It was three 2% that's down from $3 six last quarter. So <unk> four turns from Q2 and if you look at the net debt to adjusted <unk>.
<unk> finished the quarter at $3, one that's down <unk> three turns from Q2. So we are pleased with the deleveraging progress. We are on track and we continue to target our leverage commitment of two point out times that we are.
Committed to delivering on our.
Commitments there.
Looking at slide 17, and guidance, obviously, we increased our guidance this morning.
We have incorporated the obviously the strong performance from Q3, but we've also increased our expectations for Q4.
Full year sales growth at the mid point increases to 19% versus prior year with organic moving up to 10% that's up from 7% last quarter.
When you look at the net impact of acquisitions and divestitures, we expect that to be about 12%. That's just up slightly from $11 five last quarter and currency remains a headwind no change to our prior guidance with the full year, we expect it to be a minus three when you look at adjusted segment operating margins, we've increased our full year <unk>.
By 40 basis points, we now are forecasting 22, 5% for the full year and the midpoint of adjusted EPS is raised to 27 five for the full year with a range of plus or minus <unk> 15.
Just some specific details for Q4, we expect organic growth to be approximately 4% in the quarter and segment operating margins to be approximately 22, 6%.
And finally EPS for the quarter, we are forecasting $5 32 at the midpoint same range wrapped around that and we've also included guidance by segment and several other details that could be useful for your models in the appendix.
With that just a really solid quarter glad to increase our guide and with that Jenny I'll hand, it back to you and ask everyone to reference slide 18.
Thank you Chad.
As discussed today Parker has a very promising future.
Our highly engaged team is living up to our purpose as evidenced in the results. We will continue to accelerate our performance using the win strategy three point out.
And as mentioned several times, our portfolio transformation is making a longer cycle and more resilient.
This will allow us to achieve our FY 'twenty seven targets and continue to be great generators and to players of cash we.
We remain committed to top quartile performance.
Next slide please.
A quick look at our upcoming events for the rest of the calendar year.
And with that Chris we are ready for questions.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one one on your telephone and we accrued name to be announced to withdraw your question. Please press star one again.
Please standby, while we compile the Q&A roster.
Our first question comes from Joe Ritchie of Goldman Sachs. Your line is open.
Hi, Thanks, good morning, everyone.
Hi, Good morning, Joe.
Hey.
Let's start on the backlog.
As a percentage of next 12 months.
Super interesting, how that's progressed over time.
Yes.
My question is really as you kind of thinking about the 2024 framework and Youll give us guidance in August .
How is it going to inform that framework.
And whether that they like more narrow sales range and any any color you can give us around that would be helpful.
Well Youre right, we will come back to you in August with that with the full year guidance. So we really believe that this backlog as we've shown the consistent increase over time will remain I always use the term demand and I think that with the transformation of the portfolio we're going.
To have more backlog, because we have a longer cycle business. So we will look at it for the new fiscal year.
The same way in which we have been looking at it most recently.
That will help us with any future year guidance.
Okay. Thank you.
That's helpful and I guess.
Maybe maybe.
Hi.
Seemingly are still selling very well you take a look at the organic growth you put up this quarter.
There is clearly some pricing that's coming through that as well just maybe talk through the orders in industrial a little bit.
And I'd love to hear whether there are certain areas, particularly in <unk>.
Backfill distributed how that's holding up today, whether theres any destocking, it's happening just any color around that would be helpful.
So I'll start off and give you a little bit of color on industrial and then I'll, let Lee chime in on distributions. So in North America orders to go negative that Todd mentioned, a negative for them just to remind a real tough comp as North America last Q3 with plus 23.
Customer demand remains strong we have seen some destocking happening and we believe that's very steady an overall positive outlook and we continue to believe there'll be broad based growth.
International also at a minus for that decrease was mainly driven by Asia Pacific.
Which was down the mid teens.
China mobile construction remaining very soft.
A lot of I think.
Automotive awaiting further government stimulus.
Semi soft.
But.
That's pretty pretty much what drove the international negative and EMEA.
There's really no signs right now the market weakening strong mobile construction and automotive.
Still some some tough comps related to Covid vaccine business last year, and some supply chain challenges.
But that's primarily around electronic chips and sensor so.
It looks it looks looks.
Looks to be good in EMEA.
Joe I'll just add on just a quick this is Lee just a little bit about distribution I would tell you in general.
The sentiment is still very strong very positive and the backlogs have stayed very consistent.
Theres, obviously here and there some.
Some balancing of inventory, but it's truly negligible the total backlog for distributions and that's really true for for all the regions North America. The most.
Asia.
Continue to see some strength in China on our distribution level in EMEA has been fairly resilient.
Which you know.
If you would ask me a quarter ago I thought it would have a little more headwinds, but it's been much more resilient than I planned on.
Got it thank you both.
Okay.
Thank you one moment for our next question.
Okay.
This question comes from Andrew Coleman of Bank of America. Your line is open hi, good.
Good morning.
Good morning, Andrew Good morning, Andrew.
So love your slide that shows the company's transition to a longer cycle business over time, and how it's just fundamentally different.
But.
I guess.
<unk> for Jenny Lee.
As you as the company has transitioned the portfolio clearly is happening outside of aerospace as well.
How are you adjusting the sales organization and your go to market to deal with the fact that you now have to deal with longer.
Longer horizons, perhaps you do need to carry more inventory to sell.
These kinds of customers, maybe give us a 30000 foot for you. Thank you.
Yes, that's a great question, Andrew So I think.
I could probably spend a half hour on this conversation, but the sales organizations continue to morph.
Around the globe I would say at high level, we've got very focused teams that deal in the aerospace sector deal with the Big Oems.
A separate organization on the MRO side, and then with key market segments.
Could take electrification initiatives around automotive, we've got a whole sales organizations and application engineers that deal specifically with that so.
We are constantly adapting we've got a team right now thats dealing nothing but hydrogen generation.
Even though it's early days.
So we kind of organized based on some of these secular trends and based on what we see the opportunity in the field.
Excellent. Thank you.
I guess I want to resist asking this question give us given his background but.
I think lots of debate on HVAC and I know that this is one of your largest businesses.
Can you just give us more insight if youre willing to go that granular what's happening.
Korlym.
Yes, if you if you can't that's great and if you can just would love to hear your view on U S. Construction cycle. Thank you.
Okay.
So obviously very very fond of Portland Division and a lot of history there.
It is one of our markets that is single digit negative right now, but I would tell you.
This is a very strong business and historically has done very well so.
We don't expect that this is going to be anytime in any long term impact to the division and I think they are in a good condition Andrew.
Thank you.
Okay.
Thank you one moment for the next question.
First question comes from Scott Davis of <unk> Research Your line is open.
Good good morning, Jenny and Lee and Todd Congrats on another.
Good quarter here, a great quarter.
John You mentioned in your prepared remarks about a new new annual incentive plan, what can you share a little bit of color around what you changed or what you are emphasizing in the plan.
Yes, thanks, Thanks for asking Scott So we used to be.
Plan that was driven off of return on that asset and it was very difficult for all of our team members from inside of our factories, even up into our offices to understand.
Lastly, we're all those numbers came from and how they fit into that calculation and now with our annual.
Incentive plan the the operators on the shop floor all of the people who support the manufacturing environment, everyone can clearly see because it is it is based off of.
Sales and profit and cash so they know exactly how they fit into it at the division level. So if you can if you can kind of imagine a.
Our production planner.
Thinking about the inventory they need to bring in and the scheduling of the shop floor.
Our intent to that fact that that is cash and that is a metric that drives their incentive plan. So that's just one example of how we've been able to.
Take that plan and the metrics that support it and deploy it to where everyone can understand and buy into it.
First full year this year.
All groups and like I said nearly all of our team members are on it.
And has been very positive thus far.
That makes sense.
Just conceptually to back up a little bit.
Okay.
I've been studying companies for 30 years, it's very hard for capital spending to stay at levels around 2% of sales.
With.
Growth above.
GDP unless productivity is just exceptional.
So I guess my question, which is a little bit of a tough question here, but.
Productivity is something you measure in kind of the 3% to 4% level I would guess it would have to be something like that to be able to sustain something down towards the 2% power. How do you guys think about it I guess is the question.
Yeah, Great question. So we think about it a little bit higher than that were very challenging when it comes to continuous improvement.
Hi.
<unk> strategy has been so successful our lean tools.
And Cai that constantly drive cost out of the business and make that productivity possible.
That goes again to every member of the business being a part of using those lean tools being part.
So it's it's Eric ingrained in our culture to consistently be more productive quarter over quarter year over year and.
And in many cases, that's part of peoples annual goals, depending on the road area. So we pride ourselves with the hardest on ourselves. We still think we have plenty of room to improve but we do pride ourselves on constantly looking for ways to increase efficiency and drive output.
So even above the 3% to 4% level that I mentioned is that what you said jimmi Sue.
Some cases that target that divisions will be that yes.
Wow, Okay impressive. Thank you best of luck.
Thank you.
Thank you one moment for the next question.
This question comes from the line of Mig <unk> of Baird. Your line is open.
Thank you and good morning, everyone.
Wanted to go back to backlog as well.
I'm curious how much of this backlog is deliverable.
In the next 12 months do you have sort of multi year orders that are that are in here.
Did you kind of look at the backlog build here.
Is there a sense from you as to how much of this is just kind of a function of.
<unk> change in lead times, and folks kind of security in production slots.
Goes to just the pure structural change in Europe .
Model.
Well Mig.
I think.
That.
Obviously, we know that the supply chain, it's been very chaotic over the last several years, but.
That's why we wanted to talk about this consistent growth over time, because this is not just related to whats happened in the supply chain.
You can look at the slide you can think about where.
Lord and exotic.
And now it has come into play and those are all in longer cycle businesses that put orders out there for a further period of time.
So when you look at that.
We think that this is something that is going to be.
Consistently out there into the future we don't expect that we're going to see this drop very much.
And how much of this is deliverable in the next 12 months is it all of it or not.
About 85% of it.
Okay, then my follow up.
On industrial International and maybe this kind of relates to the backlog discussion too we're looking at the last couple of quarters.
We have seen.
Declines.
Your organic growth has stayed positive you're guiding for the fourth quarter, implying still positive organic growth.
There is this disconnect I guess between orders and organic growth and I'm wondering how you would frame it for us to think on a go forward basis. Thank you.
Well I think the big thing there is that the backlog remains strong.
Right. So the orders did go negative, but as I mentioned earlier.
We constantly check the health of that backlog and.
We see the shippable orders to that backlog.
Yeah.
Thank you.
Thank you one moment for the next question.
This next question comes from the line of Julian Mitchell of Barclays. Your line is open.
Okay.
Hi, good morning.
Just wanted to switch.
Switch tack, maybe to the aerospace business.
Some of your peers have been very very upbeat as they're thinking about the defense or military.
Exposure.
Into next year.
I think youll orders are starting to reflect that in the last couple of quarters. After some tough.
Comps prior to that.
So maybe help us understand kind of how youre thinking about that military piece within aerospace over the next kind of 12 to 18 months.
And any update around make it.
Organic performance.
Sure.
First of all Youre right about military military OEM, we're starting to see orders return on the F 35, F 135, and the Blackhawk.
We're we're happy to see that that's looking good on military MRO, it is increasing as well without some new partnerships.
On on stocking and when you look at.
The growth.
Compared to last year military OEM will still be negative mid single digits, but as Todd pointed out it went flat to prior year for the for the first time in the last quarter and MRO will be will be high single digits. So.
Feel really good really good about that.
The second part of your question again please.
It was really around the sort of the growth outlook into fiscal 'twenty full arrow is a particularly sort of backlog centric business, especially the OE side.
So is it realistic that we could see kind of high single digit growth again for the segment overall next year, just because you've got very good commercial growth and now sort of mid <unk>.
Helping.
Yes, absolutely, we see that as a possibility.
And just as a note last quarter I mentioned that the outlook for this fiscal year for Meg It was $1 9 billion at 17% and we've increased that to $2 billion at 19%.
So.
<unk> outlook.
Yes, Jimmy Julian I would just I would just add if you look at our <unk>.
Organic growth in our aerospace business nearly 15% the Mega business is performing better than that if you remember the dip down lower than we did.
And the airline Covid.
Times, but.
Orders are strong and if you see the total orders that we reported it as a plus 25, so we feel really good going forward about aerospace.
That's very good to hear thank you and just one quick sort of fiddly follow up apologies for this but just sort of the <unk>.
<unk> of the guide if I look at the North America industrial.
It looks like you're assuming sort of margins are down a bit year on year in the current fourth fiscal quarter.
Just wondering if thats correct and is that more just around the kind of seasonal.
You've got a sequential decline in sales and that's bringing the margins down.
Else going on there.
Yes, I mean, I would just say Julien Q3 was fantastic I mean, it was stellar far exceeded our expectations, we were forecasting a slight decline in.
Margin for Q3, we outperformed and we did better than that we did increase our Q4 margin expectations. You are right, though it is slightly below prior year. It's just a combination of mix and of course mega being in there.
Obviously your organic growth moderating so.
We're going to try to do the best we can there, but we are forecasting just a slight dilutive year over year just for Q4.
That's great. Thank you.
Thank you.
Thank you one moment for the next question.
This question comes from the line of Jamie Cook with critical suites.
Hi, good morning, a nice quarter I guess two questions one the international margins have surprised on the upside in particular this quarter in your guidance. So can you speak to color, what's going on there how much of that price cost versus some structural stuff and then I guess my second question back to you.
Parker's change business model with later cycle businesses and negative and greater backlog.
Going into a potential recession, how does parker manage the business differently going into recession versus the old Parker that was much shorter cycle in terms of levers that you. Paul maybe you are less aggressive to take cost out quickly I'm just trying to understand how you approach the new Parker and a pending recession.
Thanks.
Hey, Jimmy this is Todd thanks for the good comments, there I'll start with the international margins and then maybe I'll hand, it over to Jenny to.
Talk about how we're going to manage through whatever the future holds for us for the macroeconomic trends.
Absolutely right International margins international volumes far.
Surpassed our forecast and it really was across the board it was.
Europe is way better than feared.
Asia has been extremely resilient with.
Startups to start.
The shutdowns in the back and forth with certain end market.
Latin America has really been very solid for us so across the board.
A combination this specifically this quarter lots of volume leverage a great cost control.
Integrating the Mega businesses that are in the international area and it was just solid execution across the board.
I wouldn't call out price cost is any different than any other.
Our region Theyre doing exactly the same thing that we're doing everywhere across the board. It was really just.
Solid execution.
Jenny you want to take thanks Pat.
Jamie probably the biggest thing to say is we don't.
We don't wait for the recession hit we have a playbook for this.
Quite honestly, we're always planning for the next recession. So when you look inside of the win strategy and you look at our toolbox. Some of the things I was talking about earlier constantly using our lean tools and archived on events to make sure that we drive out cost.
Those are the things that are always ongoing that help us expand margins.
We get to the point where.
There are some changes in volume we have several different levers that we pull.
Round over time around the temporary workforce before.
Before we make any any permanent reductions.
We also make sure that.
We are constantly keeping an eye on the customer demand.
Mike right now we've seen no significant push outs or cancellations, but we continue to work closely with them. So we can stay ahead of that from the standpoint of bringing in inventory.
And in staffing the shop floor. So we have a lot of levers we pull on an ongoing basis and we performed well in the last couple of downturns.
And as I mentioned before we're very well positioned for what's going on today and into the future.
Thank you great job.
Thank you.
Yes.
Thank you one moment for the next caller.
The next question comes from the line of Nathan Jones of Stifel. Your line is open.
Good morning, everyone.
Good morning, Jason.
Just a question on the corporate G&A I think Gary you said lowest salary and other benefits, albeit you hear of anybody talking about.
Yeah.
Labor cost is going down can you give us a little more color around what's going on there Nathan.
Nathan Yes that was that was me.
It's really true its a lower salary costs across the board.
I did mentioned other benefit cost a little bit of that is pension.
Other things is just market based benefits so.
It's really a combination of really just minding, our SG&A like we always do and then some favorable headwinds from pension and other market based benefits.
Are you talking about salary costs going down per capita or the number of heads going down.
Yes, it would be the number of people.
Okay.
And then maybe if you could just give us an outlook on working capital going forward.
You, obviously got growth to support, but its probably carrying extra inventory of supply chain issues on themselves out.
So just any expectations I guess more for going into 'twenty four then.
For the end of the end of the fiscal year, yes.
Yes for sure obviously working capital with.
What's been going on supply chain, obviously dealing with the growth and making sure.
Got continuity for our customers it has been a headwind to cash flow.
I think we've turned the corner on that our teams are really focused on reducing inventory.
Tightly managing Capex rate our plan has been 2% we've kind of stayed at that throughout the year. There is opportunities certainly across the mega businesses as we continue to integrate those so we feel positive about that being a <unk>.
Tailwind for next year, and I would tell you across a number of the legacy businesses, we think theres opportunity there as well so I expect that to be a plus for us going forward Nathan.
Great. Thanks for taking the questions.
Yes.
Thank you one moment for the next question.
Okay.
The next question comes from the line of Nigel Coe with Wolfe Research. Your line is open.
Oh, Thanks, good morning, everyone.
Great quarter.
Strong execution obviously.
Sure.
So.
Just looking at the fourth quarter guidance unless unless my math is wound care you are guiding for sales to be down.
The four 5% again, if I'm wrong. Please let me know, but that's something we only normally see during the sessions I think it's 2009 and.
2020, it doesn't sound like you're planning for recession. So just curious whats, causing you to be so conservative with that full Q guide and what are you hearing from customers. As you go into 2024, you're hearing more caution as we kind of come into that planning session.
So that would be helpful.
Yes, Nigel Hey, this is Todd.
Figure number might be a little bit high I think if you look at it we might be might be close to two.
Down from from Q3, and when you look at this Q4 really starts to kind of anniversary some of these.
Growth periods that we had prior year. If you remember Jenny said last year I think North America was plus 23.
We significantly increased our guide if you look at organic growth for the quarter.
I think we were almost flat was our forecast coming into Q4, we're now.
Florida for four 5% organic growth.
Still some.
Certainly out there we're monitoring it closely.
Like I said, we're just giving you the best look that we have.
Right now we feel really good about aerospace and we're watching North America and international you've seen the orders the orders did.
Turn negative.
Robust we're just.
Giving you the best look we got to this point.
No and I appreciate that.
That's helpful.
You're down 4% for both North America, and international and those that you've made a slight tweak to the policy with acquisitions.
Yes.
Those numbers include the contribution from from the Mega industrial businesses in both segments.
That changed to the like for like.
So just the prior year, so we still have a cool, but including Mega. So do we have four five points in North America from magazine.
Yes, we did youre absolutely right, what we started to do this quarter, we finalized the formal structure of where those mega businesses now sit within our legacy Parker Hannifin.
And we felt good about that and as we've talked about the change in our portfolio and when we looked at what we were guiding going forward. We felt at this point in time. It was prudent enough to to include those both in the prior and in the current year period, so that as those comparison rates that youre seeing those are apples to apples comparison rates and if you remember.
Yes, 80% of the peg it fits in the aerospace systems segment.
Roughly 20% of that does sit in the international segment roughly 15% of that is North America five of that is in.
International and I would tell you just got to keep in mind, obviously aerospace segment has got the biggest chunk of that you can see the plus 25 on the orders in the aerospace segment.
It is a smaller slice of mega that it's in the.
North America, and international and industrial segments, and when you look at the size of those businesses. It really is a small impact to what.
Would have as historically reported.
That's very helpful. Thanks.
Yes.
Thank you one moment for the next question.
Our next question comes from the line of Jeffrey Sprague with vertical research partners. Your line is open.
Thank you good morning, everyone.
I was on late so I'm, just going to ask one and I apologize if it's been addressed but.
Just again looking at kind of the backlog.
It is interesting the backlog affords sales has moved up pretty nicely certainly arrow plays a big role in it but looking at even industrial back.
Backlog before sales by my math is sort of double what it used to be high teens to maybe you know into the thirties now sort of thing I just wonder if you could maybe address how much of that.
Is reflective of the longer cycle business mix shift that's going on within industrial.
Versus just kind of legacy supply chain and other issues and just kind of the the raw ability to get stuff out the door as you deal with supply chain both.
On the back end of the process through your plants and that out to the customer level. Thanks.
Thanks, Jeff Yeah, we believe that the majority of it.
Due to longer cycle business and the way that it is going to look going forward. So if you think about the addition of.
The lowered business and you think about how that impacted the industrial segment.
Definitely longer cycle and in here along with all of the aerospace that you already mentioned so we feel like this is the new way that the backlog is going to look.
And feel that it is.
A little bit of supply chain impacts, probably but seeing this growth over time.
Indicators to us that the portfolio changes are really changing the company and changing what the backlog looks like going forward.
And maybe then just the second part of that.
So the margins, obviously look very solid or are there any residual just inefficiencies that youre dealing with in the system because of the supply chain or other dynamics or is that pretty much iron itself out at this point.
I would say overall, we've seen some supply chain healing, but we definitely are still in the thick of it when it comes to electronic sensors and chips.
Our motion systems group on the mobile side are impacted by that and I would say that aerospace not only impacted by by chips in sensors, but still.
A little bit of a bumpy road in supply chain yet in aerospace.
We're not completely through it.
Great. Thanks for the color.
Thank you one moment for the next question.
This question comes from the line of Jeff Hammond with Keybanc capital markets. Your line is open.
Hey, good morning, everyone. Good.
Good morning, Jeff how are you.
Hey.
Just a follow on on supply chain I guess, one if you look in the industrial business as supply chain kind of heel or are you seeing.
<unk> and order patterns less blanket orders and maybe how does that impact the order rate and then also just.
Is this supply chain friction comes out how do you see that playing out in the margins going ahead.
Yes.
Well first of all we're not seeing any significant changes.
And order patterns or.
Lead times overall I would say.
The.
The thing I would say about that is that.
When we have supply chain issues in any of our businesses. It does somewhat drive inefficiency right, where we're doing whatever we can to get the material in in and get it out the door. So as the supply chain continues to heal and different parts of our business.
We will look for those opportunities can be can be more productive.
It's one of the things that I mentioned that we were focused on in the last call and again in this call is that some of the chaos that we went through really highlighted some areas.
Where we could improve and we could look to use new tools and new strategy to.
Analyze that demand in a faster way be more reactive.
Thus increasing productivity.
And shortening the lead times, so definitely still opportunities out there to become supply chain leaders and we're working closely with our suppliers on this and it's one of the things that we've come out and said that we are.
Where do you think capital for to invest in our supply chain.
Okay, and then just on the on.
Meg do you have an accretion number for the quarter to give us and then just on the.
The op synergies should we think of that as more of a pull ahead getting things done faster or.
Some upside to that 300 number.
Yes, Jeff This is Todd I'll take that we're not going to give a <unk>.
<unk> accretion number I would tell you we're just extremely happy with the way that's performing it is.
Doing exactly what we hoped it would do.
Do you look at the synergies we did.
The synergy number for FY2023 from 60 million.
$75 million Thats, basically just doing things faster.
So if you look at the cost to achieve if you go to that detail on the cost to achieve slightly higher that is just a result of doing things faster than we originally had planned. So we still are committed to the $300 million and the full third year of acquisition that we just pulling those a little bit forward.
Okay. Thanks.
Thanks, Jeff.
Thank you one moment for the next question.
This question comes from Josh <unk> with Morgan Stanley . Your line is open.
Hi, This is toby on for Josh.
Congrats on a great.
I wanted to follow up on the order trend question. Jenny you mentioned some of the Mega projects that have been going on where are you seeing this in the business. How would you think about the potential uplift given Parker historically is focused more on components and assemblies.
Yes so.
We it's difficult to directly tie to a specific project, but we are definitely benefiting.
From some of these projects and the secular trends.
You think about a lot of the new battery plants that are being built to support electrification.
We're there when they are prepping the land.
Are there when they are building a factory and where their win there.
Putting all the equipment in the factory so definite benefits there also.
Although it's a little bit longer term for these to be online that will directly benefit from a lot of the chip and sensor production that is coming to to the U S and today. If you look at the secular trends, obviously aerospace we've been talking about that a lot today. So we're we're.
Definitely benefiting from that secular trend in that market recovery.
And.
Beyond the battery production, we currently have.
A lot of content on electric vehicles, and when we transition from internal combustion to electric and one five to two times develop material for us.
In addition, we're starting to see.
In electrification standpoint, a big pull on our mobile business.
So between Mega Capex projects and secular trends again, it's.
The reason, we feel so confident about those targets in the future for a 6% organically and really why we believe we're going to grow differently with this portfolio.
That's very helpful. Thank you.
Hey, Chris This is Todd I think we've got time to maybe squeeze in one more question, let's take one more and then we'll wrap up after that thanks.
So Todd standby for our last question.
Our final question comes from the line of Joe O'dea of Wells Fargo. Your line is open.
Hi, Thanks for taking my questions.
Yes.
One just on the quarter in the North America margins.
Flat year over year on 12% organic growth and so can you elaborate a little bit on mix I think would make it and there may be some drag but also just anything else that you could be ramping up on the investment spend side.
Where you could see opportunities there.
Yes.
Let me take the this is Todd when you look at the Mega business, we're extremely happy with the way the Meg business is.
Performing if you remember what we did was we put.
Some of those businesses in the technologies, where we thought they fit past that would be engineered materials and a little bit into filtration.
Those just happen to be.
Some businesses some parts of Mega that our lower performance compared to the total.
So when you when you take that out if you could look at just the legacy portion of North America. It will be very similar to what youre seeing across the rest of the company record performance record volumes record.
Incrementals and her strong incrementals I should say and really.
Sound performance across those legacy businesses. So if I had to call one thing out it would be the main driver why North America was flat it would be simply the inclusion of those mega businesses in that pool.
That's helpful.
And then just in terms of what's kind of changed over the past three months I think Jenny three months ago, you were talking about maybe seeing a little bit of push outs I'm sure a little bit of destock as supply chain improves here.
Given the strength of the revenue in the quarter no real evidence of much in terms of push outs and so I'm just curious with credit conditions out there obviously, the macro uncertainty, but sort of day to day. What you are seeing anything notable in terms of shifts either more constructive or more cautious.
Yes, really I think it goes back to the strength of the backlog and we've seen no. Notable shifts we were we were cautious last quarter and I think we obviously are very pleased with the performance Mark.
They are really really strong months for us. So we were able to ship a lot of that backlog and.
Again that backlog is still healthy.
And that really is what has led us to the guide for Q4.
I appreciate it thank you.
Thank you.
Alex Thank you for your participation in today's conference sorry. Please go ahead, yes.
Yes. Thank you Chris This concludes our FY2023 Q3 webcast if anyone needs any kind of clarification.
Other questions or needs follow up.
Both Jeff and the yen will be here for today and tomorrow.
We appreciate everyone's time, we appreciate your recognition of the strong quarter.
We obviously appreciate your interest in Parker. So thank you all for joining us today.
That does conclude our program you may now disconnect.
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