Q4 2023 Parker-Hannifin Corp Earnings Call
Presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Todd Liam Bruno Chief Financial Officer. Thank you. Please go ahead.
Thank you so much and good morning, everyone and thank you for joining Parker hannifin fiscal year, 'twenty, three fourth quarter and full year earnings release webcast.
As Dennis said this is Todd we have Bruno Chief Financial Officer speaking and with me today for the webcast is Jenny <unk>, our Chief Executive Officer, and Lee banks, our Vice Chairman and President.
I think everyone knows we released our results and all of this slide materials. This morning, our comments today will address our forward projections and non-GAAP financial measures.
On slide two of this presentation.
You will find specific details to the disclosures that we are making in respect to both non-GAAP financial measures and forward projections.
And just as a reminder, actual results could vary.
From what we speak about today in this presentation are based on all of the items listed here that's closures. Our press release this presentation and all reconciliations are available under the investors section at Parker Dot Com and those will remain available for one year.
We are going to start with journey addressing some of the highlights of our strong fourth quarter and really what was a transformational fiscal year.
She is also going to reiterate some reasons that show why Parker is so well positioned for the future I'm going to follow up with just some color on how the quarter wrapped up and provide some details around our initial FY 'twenty four guidance that we released this morning, Jenny will wrap up the call with some key messages and then we're going to open up the lines for Q&A.
Hey.
Jenny Lee or myself.
Now I will ask it all to move to slide three and Jenny I'll hand, it over to you. Thank you Chad good morning to everyone and thank you for joining our call today.
Q4 was a quarter of outstanding performance across Olive Parker, starting with safety.
We remain in the top quartile with a 20% reduction in recordable incident safety.
Safety has been and will remain our top priority.
Record sales of $5 1 billion in the quarter at 22% increase over prior year with organic growth of 6%. This is our second quarter above $5 billion in sales.
We achieved record adjusted segment operating margin of 24% of 110 basis point increase over prior year.
And as we discussed last quarter our.
Our backlog coverage remains resilient at 55% and has increased 1% sequentially.
The win strategy and portfolio changes have delivered a strong finish to a great year next slide please.
Hey, great and transformational year on the right side of the page you can see highlights from fiscal year 'twenty three again, it all starts with our team.
Top quartile safety and engagement deliver these results.
We now have approximately 30% of the portfolio in aerospace and defense and we couldnt be happier with the progress that the Mega integration the team is exceeding our expectations.
And a record 3 billion operating cash flow, 22% higher than prior year, allowing us to make great progress in paying down debt.
Todd will give you a few more details on this in his upcoming slides.
Next slide please.
Many of you have seen this slide before as you know over the past eight years, we have strategically reshaped the portfolio to double the size of aerospace filtration and engineered materials.
I'd like to draw your attention to the middle of the page for the FY2023 update.
Dotted line represents where we originally forecasted our longer cycle and secular trends revenue to be at the end of the year.
The arrow and new solid mind represent that we have realized a bigger shift to longer cycle revenue.
The combination of the portfolio changes and secular trends is already and will continue to create a profound shift in our revenue mix.
We have high confidence that by FY 'twenty seven.
Approximately 85% of the company and long cycle end market and industrial aftermarket.
This mix shift as further reason, while we will grow differently in the future.
Next slide please.
Diving, a little deeper into our future sales growth drivers. The five buckets on this slide will allow us to achieve our FY 'twenty seven target of 4% to 6% organic growth over the cycle.
The win strategy is our business system, it delivers growth and financial performance every tool in this system expense margin.
Capex reinvestment is addressing the last decade of under investment as well as investments to strengthen and develop the supply chain.
This will result in increased equipment spend and higher levels of automation.
And Andrew innovation, or new product blueprinting tool and simple by design principles have increased our product vitality index and as a percent of sales from new products. This enables faster growth in support of the secular trend.
The acquisitions, we have made are great companies with higher growth rates aftermarket and accretive margins.
We continue to benefit from the growth related to secular trend we.
We expect multiple years of solid growth in aerospace driven by both commercial and defense.
And we are enjoying an increased bill of material on all electric passenger vehicles and continue to partner with our mobile customers on electrifying their equipment and helping them to achieve their carbon neutral goals and.
And today two thirds of our portfolio enables these clean technology.
Again, all of this and giving us high confidence to grow differently than we have in the past and achieve our 4% to 6% organic growth over the cycle.
Next slide please.
As a reminder.
Living up to our purpose top quartile performance and being great generators into players of cash it's what drives partner.
This slide provides an update on living up to our purpose.
<unk> engineering breakthroughs that lead to a better tomorrow.
We are committed and on track to be carbon neutral by 2040 and achieved a 20% carbon reduction in fiscal year 'twenty three.
And we are proud to be in the first quartile of the carbon disclosure project on climate change.
Post pandemic, our teams were anxious to get back into the communities, where we work and volunteered over 10000 hours in fiscal year 'twenty three to help serve others.
And again, our clean technologies are critical in helping our customers achieve their carbon neutral goals.
Next slide please.
The combination of our growth drivers and living up to our purpose to a very promising future for Parker.
We're committed to our FY 'twenty seven targets of growing EPS from $21 55 to $30 and achieving 25% adjusted segment operating margin.
Growth from secular trends continued transformation of the portfolio with Megan and continuing to accelerate our performance with win strategy three <unk> will drive top quartile performance and organic growth of 4% to 6% over the cycle.
We have entered fiscal year 2024 on a solid foundation the guidance that we're sharing with you today reflects continued progress to these FY 'twenty seven goals.
Tom will go through the quarter and the guide and then I will be back with more comments on our guide assumptions and why we are still very bullish about the future and the 4% to 6% organic growth over the cycle.
Over to you Ted Thank you Jenny.
Everyone's Paul I'm going to start on slide 10, and I'm really proud to say once again every Q4 number highlighted in this gold box is a record for the company. It was really just an unbelievably strong finish to the fiscal year.
Going to try to move quickly because journey already spoke to the 22% sales growth and 24% segment operating margin.
But in respect to sales organic growth was 6% when.
When you take a look at the Mega acquisitions and the divestitures that we did in FY2023 the net addition for the quarter was 16% and the good news here is on currency headwinds have moderated. It's now was just a slight headwind of 0.4% in the quarter.
One thing I do want to note as adjusted EBITDA margins of 24, 4%, that's an increase of 130 basis points versus prior year and if you continue down the page both net income and adjusted earnings per share did increase by 18% versus the prior year. Our adjusted net income was similar at 91 million.
Or a 15, 5% return on sales and adjusted EPS was $6 eight.
In the quarter that is an increase of 92.
Or 18% versus prior year.
Certainly we always stress how important is the finished strong and really these results are just really a testament to the resilience of our global team. So thank you to everyone for a great Q4, great.
School year 'twenty three.
If you move to slide 11. This is just a bridge on how we have generated $6 and eight <unk>. This is a 92% work.
And I'm proud to say again, you could see the biggest bar on this page is increased segment operating income. If you look at that we increased segment operating dollars by $264 million, that's nearly 28% increase year over year.
That added $1 63 of EPS two to a total for the quarter.
There were a few headwinds below the segment.
Really no surprise, obviously that interest is 100% related to Mega Thats consistent with what we've seen in past quarters and income tax was favorable this year in the quarter, even though we did finished favorable it was a headwind of 19th compared to what we did last quarter.
And if you think about that last quarter. We did have a few onetime items that were related with the acquisition that were favorable and some higher discrete last year. Those were obviously non repeat of issues. This year. So the story on the walk is just really strong operating execution and it's really across the board.
If you move to slide 12, just some details on the segment performance every segment delivered positive organic growth this quarter, but they also delivered positive margin expansion you can see across the board here Incrementals were very strong and all of these margins of records.
And I'm also proud to say, even with the challenging comparisons orders did increase from last quarter to a plus three versus prior year and our backlog did increase 1% sequentially and did reach a record $11 billion. So this is really the result of robust aerospace activity, but also the changes to the portfolio.
So that we spoke to.
Throughout the year.
Just jumping into the North American businesses sales were very strong $2 3 billion.
That was 5% organic that's really right in line with our guide.
<unk> operating margins did increase 60 basis points to 23, 5% really just driven by excellent execution across other north American businesses incremental metals also did improve sequentially and that helped drive our margin expansion.
One thing to note orders did turned negative to 8%, but that really still is against tough comps.
We still have strong backlog coverage, we believe we will continue to support growth and customer sentiment overall remains positive in North America. So all in all a great.
Quarter, and a great finish by our North American team members.
You look at the international businesses sales were $1 5 billion organic growth nearly 4% organic growth did remain positive in all of our international regions really led by Asia Pacific eight five.
Percent almost eight six.
Yeah.
Excuse me Latin America was two 5% positive and even EMEA, which we've seen some softness in did post a 1% positive organic growth even with all that said margins did increased 90 basis points finished at 23, 3% versus prior year and really still continue to.
To reflect consistent performance.
Performance productivity improvement good cost controls and that increase in distribution mix that we've talked about periodically.
Orders in the international business did improve from last quarter. They are still negative one but it is a nice improvement from last quarter and again from our international team members, great consistent performance and are glad to see these results.
If you move to aerospace. This is really the story of the quarter really standout just fantastic results all around sales of $1 3 billion, 16% organic total sales or a 90% increase versus prior year Thats really obviously benefiting from the <unk> acquisition.
But if you look at the business commercial OEM and MRO continue to be very strong both of those businesses are growing at plus 20% versus prior in the quarter. The military OEM business did return to growth this quarter with high single digits organic performance that was really nice to see.
Operating margins, a new record high.
Really increasing.
Impressive 160 basis points to 25, 8%.
Those strong margins reflect that growth in the commercial aftermarket businesses and really notably a nice favorable mix of spares versus repairs. So you can also see. The addition of Mega has also increased our aftermarket exposure that was one of the compelling aspects of that acquisition, we're glad to see that materialize.
And the results.
The aerospace team is really doing a phenomenal job, obviously dealing with growth.
The integration is ahead of schedule and on track and the results are really.
Fantastic to see its really.
Truth that Parker and Mega are really better together, if you look at.
Aerospace order rates, plus 28 continues to be robust and that obviously is helping our backlog.
Great performance across the segments.
If I jump to slide 13, I just want to highlight our cash flow performance. We finished the year with extremely strong cash flow.
It was a record in FY2023 we increased cash flow from operations of 22%. We reached a record $3 billion of cash flow from operations. That's 15, 6% of sales free cash flow also very strong $2 6 billion or 13, 6% of sales our capex came in right, where we were forecasting 2%.
And just as a note because this was the closing of <unk>. We did have some transaction related expenses that were a drag to cash flow that was about 1% of sales. So those obviously aren't going to repeat next year and we have set ourselves up extremely well to be great generators of cash.
If you look at conversion free cash flow conversion for the year of 125% and I just really want to thank our teams for the great work on working capital we strive to be great generators grew to players of cash. It reached in this $3 billion milestone is really the result of a significant effort from our team across the globe.
If you go to slide 14.
You can see what we do with all that cash we reduced debt.
$850 million in the quarter.
Since we closed Mega just this fiscal year in September we have reduced our debt by $1 4 billion.
Since announcing Mega way back in August of 2021, we've already paid down approximately 35% of the total consideration of nearly $10 billion. So very impressive work.
Cross the board by our team if you look at leverage gross debt to adjusted EBITDA finished the year at two 8% and net debt to adjusted EBITDA finished the year at two seven excuse me two points of times.
Yeah.
We've spoken about our great track record of how we are so dedicated to quickly deleveraging after the deals and since closing the transaction in September we have already reduced leverage by one full turn so we're proud of that.
Looking forward to next year, we expect to generate.
Significant cash flow we.
I think we can reduce debt by an additional $2 billion in FY 'twenty four and we are targeting leverage of two times in early FY 'twenty five.
Okay, so moving to guidance.
Put in FY2023 to bed.
You can see what we are looking at here is slide 15.
And I'll start with the topline reported sales growth for the year is forecasted to be in the range of 3% to 6% or four 5% at the midpoint.
That equates to approximately $19 9 billion in total sales. If you look at the split the first half is 49% in the second half of 51%.
Speaking specifically to organic growth for the full year, we expect it to be one 5% at the midpoint.
In respect to aerospace, we're expecting high single digit growth in aerospace a little over 8% North America organic we expect that to still be positive at plus one and international we are forecasting slightly negative two 5% those are all full year numbers.
The backlog that I just spoke of earlier does support our growth. So we feel confident in these numbers and if you look at the breakdown the guidance does assume assume acquisition sales roughly $500 million from Mega offset by $400 million of the divestitures that we did complete in FY2023 so the net impact is 406.
<unk> million dollars or about two 5% of our total sales.
I mentioned currency earlier based on spot rates as of June 30, we do expect currency to be a slight tailwind of 0.5% are roughly $100 million. So that is based on currency rates as of June 30.
We still see margin expansion. This year of 30 basis points is what we're forecasting for FY 'twenty for that is all based on continuing to accelerate our performance across all of our businesses using the win strategy and of course delivering on Mega synergies that we have communicated if you look at adjusted segment operating margin our guidance is <unk> <unk>.
Three 2% at the midpoint and there is a range of 20 basis points on either side of that midpoint.
If you look at operating.
Income dollars segment operating income dollars. The split is 47% first half, 53% second half and for the full year, we are forecasting incremental margins of 30%.
Two other items with respect to guidance corporate G&A is $240 million. That's a full year number interest expense was $5 25 that is a $40 million reduction from where we finished in FY2023 really just based on our strong debt pay down and other expense is $25 million.
Full tax rate, we're guiding at 23, 5%.
That is without any discrete items that is really a continuing rate from operations 23, 5%.
Finally, we expect full year as reported EPS of $18 55.
Or on an adjusted basis $22 40.
The range those are both midpoint numbers the range on either side of those 50 plus.
Plus or minus and the split 46% first half 54% in the second half.
Specifically for Q1 of FY 'twenty four we are forecasting adjusted EPS to be $5 10.
At the midpoint.
Looking at cash flow full year free cash flow is expected to be between $2 6 billion and 3 billion. So it will be mid teens free cash flow and our conversion.
Be over 100%.
Also included in the appendix of some segment guidance details and some other specifics that you might find helpful.
If I move to slide 16. This is just a bridge and really highlights follow again very similar to what's happened throughout this fiscal year.
Organic growth the acquisition sales margin expansion and the $75 million of incremental synergies for the year translate to an increase in segment operating income of $1 47.
It will have less interest expense next year based on that debt reduction that we've done, but and that will add 23 to EPS.
Our forecasted tax rate of 23, 5%.
Is a headwind of 26.
But you remember we had a lot of favorable items in FY2023 we're not forecasting those to continue.
We also had lower interest income if you remember we pre funded those the Mega transaction in June of last year. So we had interest income in the first quarter of last year that was about $35 million.
Just to note that is reported in the other expense slash income line on the business segment statement that was a one off benefit that obviously will not repeat in FY2023 that's a 'twenty one.
Headwinds the rest is just a forecasted <unk> <unk> unfavorable to EPS or it is just some really some non repeating items in there.
And obviously share count is also a <unk> <unk> headwind that we hope to make up.
So thats a lot from FY2023 to FY 'twenty for EPS at the midpoint is forecasted to be $22 40.
So with that Jenny I'll hand, it back to you and ask everyone to move to slide 17.
Thank you Ted just a few key messages to close this out so FY2023 with a tremendous year with record performance, we have top quartile safety and engagement and that continues to drive results and our business materially have a great team.
We have a proven track record and we're going to continue to accelerate our performance with the win strategy three point out.
Transformation of the portfolio is clearly delivering a longer cycle and more resilient portfolio and this will allow us to achieve our FY 2007 targets and continue to be great generators and to players in cash.
So before we go into Q&A I'd like to give you a few of our assumptions and comments on the guide.
So obviously aerospace is a real growth differentiator for Parker in fiscal year 'twenty four.
We are projecting total aerospace growth at 17% with the acquisition sales from magnet and organic growth of 8%.
Strong mid teens growth in commercial and mid single digit military.
Story, all the way around.
We have now had two years in a row of double digit growth for industrial, but having said that as Todd mentioned industrial orders have been negative for the past two quarters. However.
However, in North America backlog coverage, it's still above 30%, which is roughly double what it has been in the past and it will support the growth we have in the first half.
We do expect some destocking to continue but overall sentiment from our customers is positive about steady demand and future growth obviously.
Obviously, theres more macroeconomic uncertainty for the second half and we'll update you on that in future calls.
While we did see an improvement in international orders from Q3 to Q4. This does include a benefit coming from some of those multi period longer cycle orders and an easier comp from last year's China Covid shutdown.
Again, the backlog coverage remains above 30%, but as Todd said, we are forecasting negative growth for the first half and full year.
Since the last time, we talked we have seen some signs of Europe's flowing cut.
Customers are returning to those seasonal shutdowns, where they do maintenance in their facilities and were starting to see some softness in some of the end and geographic market as well as some weakening macroeconomic indicators.
And although China had stronger growth in Q4 than Q3.
Recovery is slower than anticipated and then we will face a tough comp in Q1 against prior year, China coping rebound.
So in summary, this is our thinking right now strong aerospace growth strong backlog on the industrial side.
Near term uncertainty and tough comps that the future growth drivers that I went through on the earlier slide remain intact and activity is at a high level.
Still very bullish about the future and our 4% to 6% organic growth target over the cycle.
So now I'll hand, it back to Donna for Q&A.
<unk>.
Thank you the floor is now open for questions. If you would like to ask a question. Please press star one on your telephone keypad at this time a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up the hill.
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Again that is star one to register a question at this time today's first question is coming from Julian Mitchell of Barclays. Please go ahead.
Thanks, and good morning.
Maybe.
Just wanted to start off with the industrial businesses.
Maybe give us a bit more color on the assumptions.
International.
It sounds like you've got a down first half organic sales and also down second half organic sales.
In the guide.
So you sort of assuming.
The negative pressure there for the coming six months or so just wanted to check that.
And broadly on Destocking any regions or markets to call out in particular, where that's most severe.
Good morning, Julien So so first of all I'll take your question on international.
Like I was talking about earlier, obviously the backlog is still strong it's about 30%.
But those customer shutdowns that I mentioned that takes that takes that weeks out of the schedule that we hadn't seen previously so a return to that it is one of the reasons.
Then obviously.
Since the last time, we talked we've seen we've seen a slowing in Europe, we've seen that demand not be as strong.
In certain regions and then.
The China recovery is we haven't seen the rebound from the stimulus that had been previously anticipated. So that is all weighing in there as well.
I see and maybe just following up on the sort of the Destocking comment.
Comments you'd made.
Any more color on market so geographies most affected.
But we did see destocking happening in Q4, and we just expect that to continue through the first half.
Let me comment a little bit on the specifics of the.
Region and market accelerated.
Julian It's Leah good morning, I think.
Destocking.
We'll see at the distribution level.
As for going on for a couple of quarters, they were holding more inventory than usual, but I would tell you. The sentiment is still strong so we've seen destocking across our European distributors in North America.
Maybe to just a little more color on Europe journey was talking about the biggest softness really is around the dock region. So it would be Germany, Austria, Switzerland.
I think it's a couple of things.
The China export market is a big deal for them in China has not rebounded like we all expected it would.
And then I think when you pivot to Asia.
With China the property was.
Continue to weigh heavily on the on the business community. There. So all the stimulus we read about.
It Hasnt trickled down to any significant economic activity.
I am still expecting that to change going forward.
But those are the those are the plus size as we move forward.
Hey, Julien this is Tom I would just add we do.
Don't have this really first half second half weighted.
We are forecasting international in total to be about two 5% for the full year and if I look across the year, there's no real waiting there it's about an even split.
That's great. Thank you.
Thank you. The next question is coming from Joe Ritchie of Goldman Sachs. Please go ahead.
Hi, Thanks, Good morning, guys and nice nice end to your year.
Thanks, Good morning.
Maybe just.
Hey, just wanted to maybe talk a little bit more about North America.
Obviously, yes.
You've got this little order deceleration the Destocking commentary.
Just maybe maybe talk a little bit more about what your expectation is for orders going forward or any any comments you can make about how this fiscal first quarter is trending that that would be helpful.
Yeah. Thanks, Keith Thank you so <unk>.
Obviously, we've already talked a bit about what we expect to see it continue in destocking and just kind of a.
A softening in orders despite a very positive sentiment from the customer so in the first half in North America, we're projecting 2% growth.
And overall for the year, 1% so.
We think that there are some macroeconomic uncertainty in the second half.
But in the first half.
We fully believe that this strong backlog, it's going to to support what we have in the guidance. So.
The backlog again above 30%.
A little bit down about 2% down from last quarter, but very strong.
And in talking with our customers, we continue to constantly pressure test it and analyze it in.
We're not really seeing any any major push outs or cancellations. So we feel good about the guide we have out there.
Okay, Great and then maybe just focusing to arrow I guess, it's funny like you're expecting 8% growth good growth, but why.
Why is 8% the right number it feels like it could be better than that and then particularly with military inflicting.
And then also would love to get any.
Any color around where the integration is going better than expected with Megan.
Sure sure. So the first half for Aero. It is 12%. So obviously, we're going to see some nice growth here in the first half than in the second half we have thought 5% in.
Comps get pretty tough in the second half so we feel.
We feel good about that 8% organic number right now so obviously, we're seeing really nice.
Really nice growth in commercial OEM, we see those narrow body rates increasing.
The bodies are starting to recover but really it's a story about narrow body rate increases and then MRO.
As Todd mentioned earlier, the Mega acquisition has really increased our aftermarket exposure and it's been really strong with the air traffic recovery, especially with those those narrow bodies and we're pleased to see military OEM return obviously, the military budget increase is going to drive mid and long term growth.
F 35 is nearing peak delivery so all good news there.
And then.
Same thing with military MRO, I mean theres debt.
There is a focus on retrofits and upgrades at our fleet agent. So really really good outlook for all of aerospace going forward. So.
So your question about.
Negative integration I mentioned in the slides, we couldnt be happier with the progress that that integration, we're forecasting another $75 million in synergies in FY 'twenty four team did a great job in FY2023 of clawing. Some actions ahead, allowing us to increase the synergies by $15 million. So really just a positive.
Outlook for aerospace.
Sounds good thank you.
Hey, Joe This is Tom just one thing I would add if you remember a year ago. When we did the the megabit post close call we said that.
We felt Meg it could add 80 cents of EPS on a full year basis. We are ahead of that schedule. So that should give you some comfort too that it is adding EPS above line as well.
Okay.
Thank you. The next question is coming from Andrew Open of Bank of America. Please go ahead.
Hi, guys good morning.
Andrew.
Good morning, Jana Todd we.
Good to hear from you guys. Yeah, just a question on <unk>.
Cost.
Companies are starting to talk about this inflation, maybe some deflation.
What's the view on the company's pricing power into next year and also the ability to actually extract price concessions from our supply chain.
Yeah.
So.
As you've covered us a long time I mean.
The one thing I think we've got a good handle on inside the company is kind of price cost and the ability to.
To push cost and the price every one of our facilities is embedded in our win strategy.
Look at cost constantly and we look at price.
I would say pricing has become much more normal now we're not in that rapid inflationary period.
But our goal is always to keep things margin neutral.
And we're working it and we're working the cost side on the supply chain side too so.
I am comfortable that kind of the price cross scenario, we have is baked into our margin forecast.
Okay.
Excellent and then the other question you sort of talked about.
Europe slowed down.
Typically Germany on the dock region.
If you read the newspapers as economists politico a lot of articles about sort of structural slowdown in Germany, right, because our exports to China cheap energy from Russia could.
Could you give us the slowdown as an opportunity to sort of reconfigure your manufacturing footprint and supply chains.
In central.
I'd call it central Europe, or Western Europe in general what are your thoughts.
Is it too early to say.
Well.
So first off we've been reconfiguring, our supply chains, and our manufacturing footprint in Europe for the last eight or 10 years.
You remember when Tom and I took our roles we had a big initiative I absolutely do.
So.
And I would just tell you that that is always ongoing.
So we never stop with that and we take every opportunity we can.
To just continue to be better and we're doing that today, yes, we don't wait for an event Andrew it's something we're always working on.
Yes, Andrew.
Okay.
Thank you.
Lee brings up a good point.
We've been working that initiative for a long time and if you look at the margins that I just ran through for Q4 and really what we're guiding for FY 'twenty four youll see that those international margins are similar to every other piece of our business. So that it's been a great success, great European team with Great leadership doing great things really are.
No I appreciate it just hasn't been doing something right. Thanks, a lot. Thank you.
Thanks, Andrew.
Thank you. The next question is coming from Nathan Jones of Stifel. Please go ahead.
Good morning, everyone.
Question on the margin guidance in <unk>.
Aerospace.
Jenny you just mentioned $75 million.
Additional synergies for 2024, which I think about 150 basis points.
And the margin guidance is up about 60 basis points. So maybe just some commentary on.
On the core I guess margin decline in 2024 or is that really just a function of increasing commercial OEM as part of the mix or something else in there.
You just answered the question right, we expect those that narrow body rates to go up and it's it's definitely a matter of mix.
Okay Fair enough that's helpful and then.
Then.
Just on the M&A outlook now.
Do you guys have obviously done a sensational job paying down debt.
Back to towards two by the end of the fiscal year early in 'twenty five.
What are your kind of view of criteria forgetting raw material back into the M&A market.
And you know that the shape of the pipeline I know you guys continue to cultivate that even when you're out of the market.
Just commentary on unplanned.
So we're committed first to pay down our debt that is our number one priority and our focus.
We're always working the pipeline.
Have longstanding relationships with people.
People, we talked to you know as we have in the past so that.
That's not something that we ever let go stale or dry.
<unk> pipeline. So for now we're focused on paying down debt and.
We expect to get in the range of about two times by fiscal year 2025, and I'm sure we'll talk about in the future.
Fair enough thanks for taking my questions.
Thanks Damon.
Thank you. The next question is coming from Jeff Sprague with vertical research partners. Please go ahead.
Hey, Thank you good morning, everyone.
Thanks, Anne just hey, good morning.
Touch base with all of you I just wanted to follow up on your comments on price cost margin neutral.
I believe you got yourself to price cost margin accretive through this period.
Correct me, if I'm wrong on that but.
Should we kind of expect that trend back to neutral.
To occur here in 'twenty four.
Or can you actually maintain some kind of positive spread.
Well I think Jeff again, you followed us we've always maintained some kind of positive spread we're always looking at the portfolio. We're sunsetting products we've got.
Different strategic pricing initiatives.
But I would tell you we deal with a lot to do with a lot of core tough customers and pricing is very competitive it's really what we do with the balance of the portfolio that helps us out.
And as we talked about in the past.
One of the great strengths of this company is the distribution base, we have which gives us a great opportunity to kind of price into that market.
Understood and then Jenny just back to Aero.
Can you be a little bit more explicit about what your aero commercial after market.
Sumption is inside the guide and.
Is the growth similar.
C Parker arrow and make it.
On those metrics.
I guess I would say first of all that it is very similar but obviously the Mega acquisition. As we've mentioned has meaningfully increased our aftermarket exposure. So mid teens is what we're projecting right now and again that air traffic recovery, especially with the narrow bodies with the high domestic <unk>.
<unk> is that really what's going to help that into the fiscal year.
Alright, Thank you very much.
Okay.
Thank you. The next question is coming from David Raso of Evercore ISI. Please go ahead.
Hi, Thank you for the time on the margins industrially that you have them up despite an aggregate your industrial organic sales were down just wanted to make sure I understand the destocking that you're referring to.
You know I think that's probably as distribution, which would be a challenging mix. If that's your destock are you also referencing though maybe a more balanced destock, it's at Oes as well I'm just trying to get a sense of the ability to have margins up when you're destocking distributions of a heavy lift so I'm just curious any color on that.
The what's in the backlog it sounds like the backlog will help carry the first part of the fiscal year are the margins, particularly positive which will be coming out of the backlog I was just trying to get a sense of the margin progression and how the margins up if organics down industrially for top line.
Yeah, So David primarily when we talk about Destocking, we are talking about distribution, but we're just seeing a kind of a moderation.
Of growth across all of our customers. So.
Don't worry about margin degradation.
We're not going to allow that we have all the all the right things in place to make sure that we hit our margin targets.
So really.
It's about.
Or just continuing to see the benefit of this transformed portfolio right, we're continuing to see.
The power of the acquisitions that we've done over the last several years.
Hey, David This is Todd I would just add to that.
And he is absolutely right. We do believe that we can expand margins both in the North American businesses and the international businesses. It really is a testament to the power of the win strategy.
But if I'm looking at the numbers here. It really is a smooth glide path very similar to what we've done here.
Historically with our normal seasonality so it's not weighted in any one way or the other I gave a little color on the splits of segment operating income, but the margin expansion is a nice glide throughout the year.
And maybe I missed it just a clarification the first quarter in North America, particularly has a hard comp or are we seeing margins could be up every quarter in North America or is it just for the full year in the first quarter was down and then its up from there no. We see margin expansion in every quarter this fiscal year.
Alright. Thank you so much thanks, David Thanks, David.
Thank you. The next question is coming from Josh Buckle Winski of Morgan Stanley. Please go ahead.
Hi, good morning, all.
Morning.
So Jamie referenced the backlog here a few times.
I think for most folks they don't really think about backlog when they think about the industrial pieces of Parker clearly, that's changing but maybe some more.
You kind of breakdown of how long does that backlog extend out is there.
<unk> set of end markets or channel mix like I would assume more OEM, maybe more project activity you just any kind of color you can give us on the nature of that backlog and really the duration over which you'd ships is it kind of one to two quarters, three four or something like that.
So.
The backlog as I said it.
At 55% right now and it went up 1% sequentially. So that we can talk about that backlog being so strong in especially.
Obviously aerospace is in there, but in industrial being above 30% is roughly double what it was in the past. So we were sitting around 15% to 17% coverage in the past and now we have 30, so that's really coming from the acquisitions, we've done the higher aftermarket the longer cycle.
So we're seeing a more resilient and longer.
I caught the demand horizon, a longer horizon on that backlog. So we feel very strongly about it now we know from the past the backlog isn't bulletproof, but we.
Our constantly pressure testing and analyzing and talking to our customers, which is really a great benefit and thats being 17th centralized because our divisions can have.
Real time conversations to make sure that that backlog is strong so.
I wouldn't.
Being able to break out all the detail that you are just asking about between the channel and the OEM, but I would I would tell you that.
Over 30% coverage and industrial is a good place to be right now and that's why we feel good about covering the growth we have in <unk>.
The first half.
Got it that's helpful and then Oh Yeah. Please go ahead. This is Todd I was just going to add to that.
The other thing to keep in mind is when we talk about the company, having 30% aerospace exposure of 5% of that exposure that does come from our industrial businesses. So that is also a plus there as well.
Understood. That's helpful. And then just pivoting to something I've heard a lot of your peers talk about you know, particularly this quarter on U S Mega projects or I guess, North American Mega projects and near Shoring. Obviously, you folks play in all stages of that I guess, you know new products that are being developed here as well as the construction of maybe.
Some of these facilities themselves open ended question, but it's yes.
That's something that in Parkers, I guess more kind of component and subsystem type business that youre actually seeing yet or is it just a little too early maybe we see that more kind of later in 'twenty four.
We are seeing some of it.
Through our through our customers and our distributor partners.
Youre right Theres, just been a massive amount of announced Capex I mean, some some industry sources are citing over 500 billion.
Some key examples of that where we will get into the game is the semi fabs in the electric vehicle battery plants. There that are now breaking ground.
So we win Parker wins, when the job site is perhaps.
When the factory is built and when the machines go into the factory. So it's early days, but.
Parker is waning and we'll continue to win in the future.
Great I appreciate it best of luck Christina.
Thanks, Josh.
Thank you. The next question is coming from Joe O'dea with Wells Fargo. Please go ahead.
Hi, good morning, Thanks for taking my questions.
Joe.
Morning, Todd wanted to circle back you talked about Mega trending ahead of that 80 cents that you had given about a year ago just any.
Sort of color on what you think the all in Mega contribution as this year.
Yes, I would say, it's slightly above that 80 that we really forecasted for the first full 12 months.
So you know we've only owned 95 months, but it has been it's been a fantastic nine five months.
We've talked about the synergies being ahead of schedule, but the other thing is they're benefiting from the secular trend in aerospace so their growth has exceeded expectations.
Expectations every quarter.
Since the close so we feel really good about that really happy to get the deal done.
Got it and then.
Jenny I wanted to circle back to the macro Capex investment sort of drivers that you talked about kind of the three main buckets with underinvestment supply chain Mega projects.
Can you just talk about sort of within those buckets, sorry, if you can rank order what youre seeing is sort of like the biggest growth drivers for you, but also just what youre seeing in terms of kind of the evolution of them, maybe where things are accelerating where things have played out a little bit more.
Well I don't know that I can rank them right now, but I would tell you that I see activity and obviously all three of them.
If you start off just thinking about the capex.
Investment because of the reinvestment over the last 10 years.
We're seeing it.
Just some upgrading upgrading our factories a lot of a lot of work being done to really give out the supply chain and increase capacity.
So that ties into the investment a lot of.
A lot of machinery and a lot to help really that supply chain development, you know a lot of folks that.
GAAP Burns during the pandemic are are going to dual sources. So that drives a lot of a lot of investment and as I mentioned, just a few minutes ago. The mega projects, we're starting to see some of that we're hearing about involvement in that from some of our distribution partners.
And it's still early days, but there's a lot out there for us to go win.
Thank you.
The next question is coming from Jamie Cook of Credit Suisse. Please go ahead.
Hi, good morning, Congrats on a nice quarter.
Most of my questions have been asked but I guess, just you wouldn't notice from looking at your results, but in 2023 or 2022 is there any way you can handicap the inefficiencies.
So a lot of a lot of work being done to really develop the supply chain and increased capacity.
So.
Going to your earnings whether it is related to <unk>.
And that ties into the investment a lot of.
Supply chain.
A lot of machinery and a lot to help really that supply chain development a lot of folks that.
Employee not being back that right and I'm just wondering pre.
This is an opportunity for 2024 potential tailwind that not fighting it and then my second question I don't think you you said that you had I know you walked through some end market color, but last quarter, you told us the percent of the portfolio that was growing versus not growing I think last quarter, 90% of the portfolio was still in growth mode can you give us an update.
Got burned during the pandemic or are going to dual sources. So that drives a lot of a lot of investment and as I mentioned, just a few minutes ago. The mega projects, we're starting to see some of that we're hearing about involvement in that from some of our distribution partners.
And it's still early days, but there's a lot out there for us to go win.
Just on your portfolio percent flat versus growing versus negative. Thank you.
Thank you.
Yeah.
So.
The next question is coming from Jamie Cook of Credit Suisse. Please go ahead.
Jamie It's really I guess I will start a couple of things one in terms of we're always striving for productivity and continuous improvement so.
Hi, good morning, Congrats on a nice quarter.
I guess most of my questions have been asked but I'm I guess just to you wouldn't notice from looking at your results, but in 2023 or 'twenty 'twenty. Two is there any way you can handicap. The inefficiencies you know running through your earnings whether it was related to you know supply chain, you know employee not being back that right and I'm just wondering.
Certainly things coming out of Covid work chaotic.
All of that chaos is subtly down so those are opportunities for us but.
Productivity is increasing you see it in our numbers.
And kind of the inefficiencies of work going on are getting better it's not perfect.
Great if any of this as an opportunity for 'twenty 'twenty four potential tailwind that's not implied in your guide and then my second question. Lee I don't think you you said that you had I know you walked through some end market color, but last quarter, you told us the percent of the portfolio that was growing versus not growing I think last quarter, 90% of the portfolio was still in growth mode.
Still our supply chain issues out there, but its a FERC cry from what it was before.
I would say when we look at our markets from the backlog we have all our markets.
Or are still growing at different different levels.
It's kind of interesting nobody talks about oil and gas anymore, but that's been incredibly strong land based oil and gas here and even offshore here in.
Can you give us an update I'm just send your portfolio percent flat versus growing versus negative. Thank you.
And in Europe, everything in aerospace is great.
Yeah.
So.
And forestry in automotive is still great North America anything around electric vehicles is doing really well and we share a lot of content.
Jamie It's really I guess I'll start off a couple of things one in terms of you know, we're always striving for productivity and continuous improvement sure.
Those areas and then construction equipment still steady.
Certainly things coming out of Covid work chaotic similar that chaos is subtly down so those are opportunities for us but.
Throughout all of that is as Ed I think some of the areas that have softened and you've seen it with public announcements is the whole area of HVAC.
Productivity is increasing you see it in our numbers.
Is down I think that short term that will come back.
Yeah kind of.
The inefficiencies of work going on are getting better it's not perfect.
Yeah, some semi con semi count as so often life sciences really just tough comps coming out of Covid things, we're really we're really going to air this.
There still are supply chain issues out there, but its a FERC cry from what it was before.
I would say when we looked at our markets from the backlog that we have all of our markets.
Sentiment is.
Your stock comp so it's getting better as we've kind of cycled through the comps.
Or are still growing at different different levels.
It's kind of interesting.
Hey, Jamie This is Todd I would just add to that on your 90% question.
Nobody talks about oil and gas anymore, but that's been incredibly strong land based oil and gas here and even offshore here.
Look at our total orders last quarter. They were plus two they did move to plus three so there really hasn't been a material change in that percentage of end markets that continue to grow.
And in Europe , everything in aerospace is great.
Forestry in automotive is still great North America anything around electric vehicles is doing really well and we share a lot of content.
Thank you.
Yeah.
Thank you. The next question Dana This is sorry to interrupt you. This is Todd I think we have time for one more question. So wherever you have next in the queue that'll be our last call.
In those areas and then construction equipment still steady.
Throughout all of that is as Ed I think some of the areas that have softened and you've seen it with public announcements is the whole area of HVAC.
The next question is coming from Jeffrey Hammond of Keybanc capital markets. Please go ahead.
Hey, good morning, everyone. Good morning, Joe.
Is down I think that short term that will come back.
Just to go a couple of quick questions supply chain and Arrow has kind of been a problem point, just wondering what youre seeing there and how that kind of forms.
And Semicon Semicon is soft in life Sciences, really just tough comps coming out of Covid things were really.
Kind of the growth rate.
We're really going there.
And how much it's maybe holding holding the growth back.
Is it just tough comps so it's getting better as we've kind of cycled through the comps.
Yes, so it's interesting I have been talking to a lot of people about supply chain as always and the aerospace supply chain is really experiencing with the industrial side of the business day at 18 to 24 months ago. So just.
Hey, Jamie This is Tom I would just add to that on your 90% question. If you look at our total orders last quarter. They were plus two they did move to plus three so there really hasn't been a material change in that percentage of end markets that continue to grow.
It's a little bit tough theres constraints responding to that.
The high rate increases in demand.
Thank you.
But I would tell you the outside of <unk>.
Thank you the next question.
Dana This is sorry to interrupt you. This is Todd I think we have time for one more question. So wherever you have next in the queue that'll be our last call. Okay.
<unk> and electronics.
We're starting to see some lead times moderating but.
Overall, I would say, it's still a constraint for aerospace. So again, we worked closely with our suppliers.
Okay. The next question is coming from Jeffrey Hammond of Keybanc capital markets. Please go ahead.
Hey, good morning, everyone. Good morning, Jeff.
We're investing and developing suppliers, especially in aerospace because obviously with it being a third of our portfolio. It's very important to us that we can deliver disorders.
Just a couple of quick questions supply chain and Arrow has kind of been a problem point, just wondering what youre seeing there and how that kind of informs.
Yeah.
Kind of the growth rate and how much it may be holding holding the growth back.
Okay, Great and then.
I think as was the case with Lord exotic the.
The deleveraging process is pretty swift here and it seems maybe a little bit ahead.
Yes, so it's interesting I been talking to a lot of people about supply chain as always and the aerospace supply chain is really experiencing with the industrial side of the business day in 18 to 24 months ago. So just.
Level set us on when we start to shift away from that debt pay down.
Hey, Jeff This is Todd obviously, Jenny mentioned it earlier, we are fully committed to to debt paydown.
It's a little bit top theres constraints responding to that.
So if you look at what I mentioned earlier.
The high rate increases in demand.
We expect to pay down another $2 billion of debt in this fiscal year of FY 'twenty four.
But I would tell you that outside of <unk>.
<unk> and electronics.
Don't expect to get to two times till early FY 'twenty five.
We're starting to see some lead times moderating, but overall I would say, it's still a constraint for aerospace so.
So.
We've talked about the portfolio, we never stop looking at it both from an addition, and subtraction standpoint, but our main focus really is still for FY 'twenty. Three is too can tell you that debt pay down.
Again, we work closely with our suppliers.
We're investing and developing suppliers, especially in aerospace because obviously with it being a third of our portfolio. It's very important to us that we can deliver the daughters.
Trajectory.
Okay. Thanks, so much.
Thank you.
Yeah.
Okay. This concludes our FY2023 Q4 webcast as always we fully appreciate everyone's interest in Harker, Jeff Miller, our VP of Investor Relations and <unk>, our director of Investor Relations are available if anyone needs any further.
Okay, Great and then.
I think as was the case with Lord exotic.
The deleveraging process is pretty swift here and it seems maybe a little bit ahead.
Level set us on when we start to shift away from that debt pay down.
Hey, Jeff This is Todd obviously, Jenny mentioned it earlier, we are fully committed to to debt paydown.
Clarifications or has any questions on any of the materials. We covered this morning I want to really thank everyone for joining we appreciate your support thanks.
So if you look at what I mentioned earlier.
We expect to pay down another $2 billion of debt in this fiscal year of FY 'twenty four.
Don't expect to get to two times till early FY 'twenty five.
So.
We've talked about the portfolio, we never stop looking at it both from a physician and a subtraction standpoint, but our main focus really is still for FY 'twenty. Three is too can tell you that debt pay down.
Trajectory.
Yeah.
Okay. Thanks, so much.
Thank you.
Okay. This concludes our FY2023 Q4 webcast as always we fully appreciate everyone's interest in Harker, Jeff Miller, our VP of Investor Relations and <unk>, our director of Investor Relations are available if anyone needs any further.
Clarifications or has any questions on any of the materials. We covered this morning.
I want to really thank everyone for joining we appreciate your support thanks.
Okay.
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Yeah.
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