Q1 2024 Parker-Hannifin Corp Earnings Call
Greetings and welcome to the Parker Hannifin fiscal 2024 first quarter earnings conference call and webcast at.
At this time all participants are in a listen only mode.
Brief question and answer session will follow the formal 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 Hadley and Bruno Chief Financial Officer. Thank you you may begin.
Thank you Diego welcome to Parker's fiscal year 2024 first quarter earnings release webcast.
Diego said this is traveling and Bruno Chief Financial Officer speaking, Thank you to everyone for joining US. This morning with me today is Jenny farmer tier, our Chief Executive Officer, and Lee banks, our Vice Chairman and President.
Our comments today will be addressing forward projections and non-GAAP financial measures slide two of this presentation provide specific details to our disclosures in respect to these areas actual results could vary from our projections based on the items listed here.
Our press release this presentation and reconciliations for all non-GAAP measures were released this morning and are available under the investors section at Parker Dotcom and they will remain available there for one year.
Today's agenda is going to start with some highlights of our outstanding first quarter. She will also reiterate how our portfolio transformation along with strong aerospace secular trends position Parker for a promising future.
I will then provide some financial details on the quarter and detail our increase to our fiscal year 'twenty guidance journey is going to wrap up and then Jenny Lee and I will take as many questions as we can fit in the hour and with that I would ask you to move to slide three and Jenny I'll hand, it over to you. Thank you Chad good morning to everyone and thank you.
Joining our call today Q1 was a standout quarter driven by a strong portfolio and our teams executing the win strategy starting.
Starting with safety at <unk>.
16% reduction in recordable incident safety has been and will remain our top priority.
Record sales of $4 8 billion in the quarter, a 15% increase over prior year with organic growth of two 3% record adjusted segment operating margin of 24, 9%, a 220 basis point increase over prior year with all segments coming in about 24%.
And 26% adjusted EPS growth, along with 11, 4% free cash flow margin.
The combination of Parker and make it delivered an outstanding quarter for aerospace and a strong start to the year as.
As a result of this performance we are increasing our FY 'twenty guidance and Tom will cover. This later in the slide deck next slide please.
Many of you have seen this slide before the transformation of our portfolio over the last eight years has doubled the size of the aerospace filtration and engineered materials. As a result of this from FY 15 to FY 'twenty four guidance you can see the obvious shift to a longer cycle and secular red.
Next we have high confidence that by fiscal year 'twenty seven we'll have approximately 85% of the company and long cycle end markets and industrial aftermarket.
Next slide please.
The mix shift that I just spoke of is evident in our strong backlog.
For total Parker backlog remains resilient.
Bridge has doubled from 27% in fiscal year, 16% to 54% today and this has been consistent for the last several quarters.
Aerospace backlog is extremely robust this coverage will support high single digit growth well into the future.
Industrial backlog coverage continues to be two times, what it was in the past from mid teens to low 30, we now have long term visibility from the portfolio changing acquisition with secular.
Longer cycle exposure.
Next slide please.
We have transformed the portfolio and we have strong backlog.
Let me remind you of the future sales growth drivers.
<unk> strategy is our business system that delivers growth and financial performance. It is a proven strategy and every tool in this system expanse margins.
Macro 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.
Innovation or new product blueprinting tools and simplified design principles.
Increased our product vitality index that is the percent of sales from new products, enabling faster growth and support the secular trends.
And as mentioned on the previous slide the acquisitions, we have made a great companies with higher growth rates aftermarket and accretive margins.
We continue to benefit from the growth related to the secular trends as previously stated we expect multiple years of solid growth in aerospace driven by both commercial and defense.
And no matter, what the energy sources from diesel to electric to hybrid.
Primary Parker content that we have today increase is one and a half to two times with electrification.
With two thirds of our portfolio supporting clean technologies, we are well positioned today, even better for tomorrow, and we are truly energy agnostic again all of this is giving us high confidence to go differently than we have in the past and achieve our 4% to 6% organic growth over the cycle.
Next slide please.
Now, 30% of our business aerospace as a growth differentiator for Parker and Parker and Maggie are a powerful combination. This team has embraced the win strategy and it's exceeding our expectation we couldnt be happier with this acquisition.
Next slide please.
From nose to tail, we have a comprehensive portfolio of products and services.
Parker has a broad product offering for both airframe and engine applications make it broad new product and system areas, including braking fire detection and suppression.
Thermal management avionics and sensors and electric power.
This breadth of technologies is enabling a more strategic relationship and discussions with our customers both OEM and aftermarket.
Next slide please.
This slide highlights the favorable aerospace secular trend, we are experiencing now and well into the future taking.
Taking a look at the sales mix at the top of the page. We are now 45% aftermarket and 800 basis point increase with the acquisition of methods and we have a balanced portfolio with strong growth drivers in each of these four areas.
At the bottom of the page or the macro growth drivers on the commercial side, we are expecting double digit growth in aircraft deliveries and air traffic.
On the military side, the department of defense budget increases and our military aftermarket partnerships will drive mid and long term growth.
A very promising future for aerospace.
I'll now turn it over to Todd to go through the summary of our Q1 results.
Thank you Jenny I'm going to begin here on slide 11, and just touch on some of the financial results. Jenny mentioned this our FY 'twenty four is off to a very strong start really speaks to the alignment across our global team.
We broke several records this quarter, we set records for sales and on an adjusted basis.
Segment operating margin EBITDA margin net income.
And earnings per share if you look at the sales growth, it's up 15% versus prior year, obviously strongly impacted by the net of acquisitions and divestitures.
You look at that impact that was a little over 11% positive to our growth organic growth remained positive at two 3% and currency was actually a slight favorable a 1% impact in the quarter. When you look at adjusted segment operating margin was 24, 9% that is an increase of 220 basis points versus <unk>.
Higher year and you look at adjusted EBITDA margin that was $24 eight an increase of 150 basis points versus prior year.
You look at adjusted net income, we generated $776 million and net income.
Adjusted EPS was a record at 596, if you look at both of those items.
26% improvement versus prior year.
And we can't say this enough, it's our portfolio transformation and really consistent execution across the global team.
Great work delivering a standout quarter here and I'm really pleased to say that these results are consistent across all of our businesses.
And if you can move to slide 12. This is just kind of details with 26% increase.
And earnings per share of $1 22 of improvement.
What I really like about this chart. The main driver continues to be standout operating performance. We increased segment operating margin dollars by nearly $250 million that that was $1.46 of our EPS growth.
And while all segments contributed to growth really the strength in our aerospace business was a major driver this quarter.
If you look at income tax that was 17th favorable this year really that is solely based off of a few discrete items that settled in the quarter.
We did have some headwinds on the other expense line of 27 and also the interest expense line of 10 cents, but I'll tell you both of those items are simply related to timing with last year's funding of the Mega transaction, we do not expect those to repeat going forward.
And finally, our corporate G&A and share count, we're just slightly unfavorable <unk> each and that is really that is in line with what we guided to so nothing.
Certain there so that's the walk to the record $5 96 in EPS and it really is just driven off of broad based operating improvements obviously the mega results are in there the synergies are in there and as you can see strong record margins across all of the businesses just great job by the team.
On Slide 13, we'll just talk a little bit about segment performance every segment delivered adjusted operating margins over 24%. That's the first time in the history of the company that that has happened and it was really again, just driven by strong performance. Good volumes, obviously mega synergies helped quite a bit and really just the global team is.
Very aligned.
If you look at Incrementals, we did 40% incrementals versus prior year really proud of that number and orders are positive at plus two.
Versus prior year and backlog coverage as Jenny mentioned really remains elevated.
Again aerospace activity remains especially robust on the order lines. So just great work there.
And then lastly, I would just say as we celebrate that one year anniversary with Mega. We're really very pleased with those businesses continue to outperform its been a great addition to the company.
If you look at North America, specifically sales volume is up four 5%.
We generated $2 2 billion of sales organic growth was slightly positive.
5% there.
And that was impacted by some destocking and challenge channel rebalancing that we've kind of mentioned that throughout the quarter.
You look at adjusted operating margins, we did increase operating margins 150 basis points to 24, 9% and that was really just great execution, and obviously cost controls so great work there.
And if you look at our orders in North America, They did improve versus last quarter. They were minus four they did improved from minus eight and.
And backlog coverage in North America, obviously remained strong as well, it's a great workout to our North America teams.
In the international businesses sales were $1 4 billion that is an increase of about two 5% versus prior year organic growth. In this segment was about negative two so that was down.
Organic growth in EMEA was positive too right. So that was a plus Latin America also very positive at plus eight.
The impact of the segment was really driven by Asia Pacific and that was about a negative eight.
Organic growth and that's really just a result of.
Mostly China softness that I think is well documented and also some tough comps that we had in the prior year.
However, if you look at operating margins, even with that negative to organic growth, we expanded operating margins by 100 basis points in the segment finished at 24, 1%.
Our team members they are focused on productivity cost controls that.
The team really expanded margins and a very very tough environment. So just great resilient performance across the segment, they're very nice work order rates do continue to be choppy. They did decline to minus eight really those conditions, driven really out of Europe and China.
The standout for the quarter is our aerospace business right just a stellar quarter from aerospace sales were $1 $2 billion that was an increase of 65% versus prior year organic growth very robust at about 16% and that was really broad based double digit growth in all of the aerospace market platform. So.
Business is very strong there operating margins unbelievable, new record, increasing 610 basis points to 26% really that was driven by healthy margins rate increases.
At the airlines strong aftermarket growth really all those things contributing to great.
<unk> performance I will note, we did benefit from a few small favorable onetime contractual settlements in the quarter and we do not expect those to repeat throughout the rest of our fiscal year <unk>.
Aerospace quarter as already mentioned this but plus 24 very robust gray.
Great future for the aerospace business.
If you move to slide 14, just a quick look at our cash flow our cash flow from operations increased 42% versus prior year cash flow from operations was $650 million.
The 13, 4% of sales our free cash flow increased even more 48% increase versus prior year.
Finished at 552 million for the quarter, that's 11, 4% of sales and free cash flow was 85%.
For the full year, we are committed to our strong cash flow generation profile, we are forecasting mid teens.
Cash flow from operations and of course, we will extend our record.
Free cash flow conversion of over 100% for another year, so great great start to the year on cash flow.
Moving to slide 15, I, just want to touch real quick on our leverage reduction I think everybody knows we are focused on.
Our leverage reduction commitment, we reduced debt in the quarter by $370 million.
And just since the Mega close we've reduced debt by over $1 $8 billion and improved our leverage by 1.2 turns both of those numbers are ahead of what we originally scheduled if you look at gross debt to EBITDA is now two six and net debt to adjusted EBITDA is now $2 five and of course, we are still committed to <unk>.
Cast over 10 over $2 billion of debt pay down.
<unk> 24, so great great work, there that could come.
Looking forward on slide 16, just some details on guidance basically we are reaffirming our full year organic growth midpoint, we did incorporate.
September 30th currency rates.
And we are increasing our margin and EPS expectations for the year.
Sales growth for year is now forecasted to be in the range of two five to five and a half or roughly 4% at the midpoint that split will be just as it always is 49% in the first half 51% in the second half.
We are raising our aerospace organic growth guidance, a 200 basis points from eight in our prior guidance and up 10%. So that's great.
To see that business performing so well full year organic growth is tweak just a little bit the company will remain at one 5% currency is a small offset which is now expected to be just a slight headwind to our prior guide.
So if you look at margins, we're raising our margin expectation to 23 six at the midpoint, there's a range of 20 basis points on either side of that and if you look at what we're forecasting on a year over year change, we're increasing that expectation to 70 part 70 basis points of margin expansion versus prior year. It was 30 basis points.
Our prior guidance.
Rental margins really just based off of the strong Q1 performance, we expect those to be around 40% for the full year and if you look at the other items corporate G&A interest and other are relatively unchanged to what we guided to last quarter.
Tax rate for Q2 through Q4, we expect to be 23, and a half. So if you look at the full year that will equate to about 23% on the tax line.
EPS on an as reported basis is now $19 13 at the midpoint and adjusted EPS is $23.
And the range on both of those items is 40 plus.
Plus or minus.
Split remains the same 48% first half, 52% second half and specifically for Q2 adjusted EPS is now expected to be $5 and 17.
Good point.
And as usual if needed we have more guidance specifics that are included in the appendix and that's all I had Jenny I'll turn it back to you.
17.
Thank you Todd.
And now I would like to recognize our colleague and friend Lee banks during his last Parker earnings call.
And he will be retiring as vice chairman and President effective December 31 2023.
He joined Parker and 1991 has been an officer of the company since 2006 and a director since 2015.
During lease tenure sales grew at a 7% CAGR to nearly $20 billion.
EPS grew from 36 cents per share.
In fiscal year, 91 to $21 and 55 adjusted per share in fiscal year 'twenty three.
Since 2015 total shareholder return was 292% versus S&P 500, industrial sector of 80%.
And if all of this isn't enough I'd like to repeat a few of my comments from last week shareholder meeting when we announced <unk> retirement.
It's obviously not possible to overstate the tremendous positive impact Lee has had on our company our businesses and our team members around the world.
His legacy and track record is nothing short of extraordinary.
Leading our largest businesses kept growing our global distribution network.
To championing and driving operational excellence.
Co, creating the recent versions of the win strategy.
Most importantly, and what he's proud of is to recruiting leading and developing many of our most talented leaders and beyond.
We set the bar for all of us for what that looks like it was a key leader in the transformation of Parker's performance and portfolio.
Lee on behalf of all of US we can't Thank you enough, we will Miss you and we wish you and your family nothing, but great health and happiness in your retirement.
Thank you Jenny.
Okay.
We know youre going to crush retirement, just like your question.
I've got a plan.
Alright next slide please.
Yeah.
A few key messages to close this out before Q&A Q1, with a great start to fiscal year 'twenty four our focus on safety and engagement will continue to drive positive results in our business. We have a proven track record and we're going to continue to accelerate our performance with the win strategy three pointed out it's been a success.
Both first year with Meg it.
And the transformation of the portfolio is delivering a longer cycle and more resilient revenue mix, allowing us to achieve our FY 'twenty seven goals and continue to be great generators and to players of cash in a very promising future ahead of us.
And to your tenants.
Diego, we're going to open the call for Q&A. So we'll take whoever's first in the queue. Thank you. Thank you and just a note to the audience, we'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press star followed by the number two if you would like to remove your question from.
The Q for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
And our first question, we have Andrew <unk> with Bank of America. Please state your question.
Yes, good morning, good morning, Andrew.
Uh huh.
Congratulations we'll definitely Miss you.
These EPS numbers are staggering when you started where you are right now.
Uh huh.
Just a question in terms of guidance.
If I take the midpoint of your EPS guidance.
And you gave us the first half second half split.
And then just subtract what you printed in the first quarter.
There seems to be sort of sequential decline in EPS that would be quite a bit more than what the history would suggest and I am just trying to understand is that given that you do have mega now is that just different seasonal pattern that Parker is going to have or other one time.
In the second quarter.
Versus the first quarter, that's sort of the implied numbers are driving thank you.
Hi, Andrew I'll take a stab at that and then or at least get some color I'll, let him add.
Q2 for US is obviously got some seasonality and it is our lowest volume quarter of the year, but really I would call out just a stellar performance in Q1.
Every number that we talked about was a record.
Kind of hard to keep that going into your lowest volume quarter.
Youre right, we do anniversary Mega so that from a year over year standpoint, it's now in the base.
Or it will be in the base for Q2, so that is it but theres no. Other one time items that are abnormal.
We would expect to see in Q2, it's really just a volume and seasonality around our business.
I think that Greg.
That's a good answer I'll take it and the other question just North American orders.
Could you just provide a little bit more visibility by cube.
Key verticals.
They are holding in a bit better.
Than I would've expected, what's coming in better than expected what's weaker.
And maybe you know a lot of focus on orders this quarter, maybe just talk a little bit about the cadence of orders throughout the quarter. Thanks, So much.
Andrew actually up.
Take this so maybe I'll just take a step back.
I think all the all the reports that I've read I think the narrative is right you know if you will.
Look at it globally and I'll get into North America here in a second.
But underlying demand in North America is still fairly positive there is definitely.
Inventory balance sheet, taking place not only through the distribution channel, but I would also argue it OEM levels too with their customers dealership dealers et cetera.
And I think that's going to continue to play out through this through the second half of this.
Calendar 2024.
But theres a lot of I mean, just look at all the infrastructure spending taking place there has been a lot of money flooded into the economy in North America.
Would still say it's good.
When you look at the rest of the World who was a story is China China.
Really tough comps, but it just hasn't rebounded like I thought it would have rebounded.
Maybe three or four quarters ago.
And it's got a it's probably got a bigger impact on what's happening in Europe, right now, especially.
In Germany would be a key market. So that's that's off if I look at the rest of Asia.
The rest of Asia Southeast Asia, India are still strong.
But if you look at Japan, and Korea, there, they're pretty soft too I think tied to China.
When I think about the north American markets and I'll lump.
Aerospace in there.
I mean, you can't find any weakness what's going on in aerospace commercial military OEM MRO, all really strong and I don't see that stopping for some time. If you look at those three indicators that Johnny talked about.
You're hard pressed to find a time in history, where you've had all those three indicators.
Available seat kilometers dod's spend.
And then aircraft coming into service, where they've all lined up that well land based oil and gas in North America is still really strong there's less rig count, but theres a lot of MRO activity, taking place, which keep people busy.
And again, our distribution if you look at all of our end markets yester balanced inventory, but things are not falling off a cliff it's still real good so.
The short way, Tony I feel pretty positive about North America end markets.
We've just got a little bit of a balance sheet, taking place right now.
Excellent. Thanks, so much.
Thanks, Andrew.
Our next question comes from Joe Ritchie with Goldman Sachs. Please state your question.
Hi, good morning, everyone. Congrats on a great start to the year and then Lee trips to Cleveland won't be it's Bob.
Have a great retirement.
Okay.
So maybe maybe following up on Andrew's question.
If you think if you take a look across your industrial end markets today.
What portion of those end market do you think are continuing to decelerate and then as you kind of think about that.
The Destocking commentary just any any color on like how long do you think certain end markets will continue to destock for you guys.
I'll take a stab at this and maybe I'll, let Julian its Todd.
Pile on but I think.
In North America.
Sure.
You've got things like automotive or somewhat flat heavy duty trucks flat AG.
Agricultural flat construction in North America, it's really kind of flat for the most part again I think there's some.
Dealer inventory that people are working through but it's still there's still good overall demand. There I think things that were tied to Covid production life sciences or still some big overhang from the ramp up we had during that.
That period of time, so that's just tough comps and the demand is down a little bit.
Yes, I'll leave it at that material handling is still really strong.
Yes got it.
Go ahead Jamie.
Echo.
<unk>.
These comments to Andrew's question in years.
I think you know.
With this backlog as strong as it is although that we see this destocking continuing we see a bit of.
Supply chain normalizing and that's helping things.
And.
Is that is that heals, we'll we'll start to see.
I think a bit of a better environment, but yeah.
Yeah, just echo <unk> comments, one other thing I meant to say when I was talking to Jos.
I think what everybody forgets about everybody is focused on aerospace and Mega which had been a huge positives, but don't forget about that we bought Lord and we bought CLARCOR. When we bought those two kind of.
We knew they would not be as cyclical as the core legacy Parker business and I think you're seeing that in the numbers, it's panning out that way to be true.
Okay, Great that's helpful and then.
This quarter.
Mega project timing of orders.
Can you, maybe just talk a little bit about.
How you see things kind of playing out with all the investment that's happening in the U S.
Do you think parker's well positioned to see.
Like inflection in orders when you start to see.
A lot more equipment and stuff that's coming inside the factory.
<unk> come through.
Absolutely I mean, when you think about as I mentioned earlier at the Underinvestment that has happened the last decade, and what will happen in the next decade, I mean, we were in a great position to participate.
We've said a couple of times, it's still early days, but in speaking with some of our.
Our channel partners, where there is some factories going in for Semicon and and some of these other big projects.
They are starting to participate in that.
We've said we're there when the land is perhaps when the wells go up and when the equipment goes inside the factory and some of our distributors have been able to.
Talk to us about how they are already enjoying that business. So we're in a.
We're in a really good position with those as well as.
As the secular trends that I mentioned earlier.
Great. Thank you.
Thanks, Joe.
Our next question comes from Mig <unk> with Baird. Please state your question.
Thank you good morning, and congratulations Lee and all the best to you going forward.
Hi, My question going back to the.
Industrial backlog.
Discussion I'm sort of curious as to how you think about this elevated level of backlog.
Is this sort of a function of.
A change in the way your customers are.
Our ordering or is this more of a function of really what we've been going through over the past couple of years with supply chains, and so on and so forth and safety stock being built out.
Make this is Jenny.
I think it's all.
All of the things you mentioned, but as we just stated with the acquisitions that we've made.
We're getting longer cycle business here, so we see a longer demand that the longer demand horizon than we've seen in the past so the transformation of the portfolio.
Definitely impacting the backlog and I do think that what we've been through the last couple of years of of course, youre going to see some people just kind of sharpening.
Their pencils on how they order and making sure that.
They have the right lead times out there. So I think that's part of it but more of it it's really about a shift of our our portfolio.
I've said many times.
No from the past that backlog is in bullet proof, but we've.
We've seen this now for the last several quarters and.
A declining order environment in North America orders have been negative for three quarters of.
With its backlog has remained resilient.
And we believe that while it might go down a little bit.
Our portfolio is going to drive us to have this kind of backlog going forward.
Alright.
And my follow up is.
He is an arrow.
Can you be a little more specific on that contractual settlement.
Benefit in the quarter and then in terms of the guidance raise.
Talk a little bit maybe about that as well the organic as well as the market.
A function of aftermarket really driving that guidance raise or is there something else in there. Thank you.
Hey, Mike This is Todd on the guidance raise.
You, obviously can see the orders activity across all of those platforms has been extremely strong.
Aftermarket was a big standout in the quarter that was a big driver of the growth and it was a big driver of the margin performance. So we just feel a little bit more complement with another quarter in there that we feel that we are able to raise that so we've moved to 200 basis points from eight to 10 for the full year and we feel pretty confident about that.
I don't want to make a big deal about those things I said, they were small and minor those one time items.
I just wanted to call it out so that it would make a little bit more sense. If you look at our margin guide going forward for the rest of the year. So.
It's just a little of that.
Just just a little more color on.
On aerospace like Todd said very strong aftermarket.
Commercial and military and if we look forward in this guidance and.
We said it a couple of times already but just just to look at each for each of these areas commercial OEM.
As in the mid teens.
Narrow body rate increases they've happened and we see that theyre going to continue to do so.
Commercial MRO is in the mid teens.
Narrow body aircrafts are almost at pre pandemic levels.
Lot of engine repair and component restocking going on so.
So very positive there and then military OEM mid single digit.
As demand for legacy programs continue.
And then military MRO mid to high single digit near term, we have tailwind with some of our department of defense repair demos.
Continue to.
I really enjoyed our public private partnerships. They are growing and there is no fleet upgrades and service extension. So just all in all just a great.
Environment across all four of these areas.
Thank you.
Thank you Eric and our next question comes from David Raso with Evercore ISI. Please state your question.
Hi, Thank you very much and obviously congratulations Lee.
Good luck.
When it comes to the North American orders, just given two quarters ago right down eight now some second derivative improvement we just saw.
Given the comps are starting to ease I'm just curious if you'd be willing to say do you think we've seen the bottom in the year over year orders in North America.
And then I have a question.
About the organic sales cadence can you just update us on how we get from here to the full year, one and a half and I'm, particularly interested also what do you have for organic and.
In Europe and the guide.
Thank you.
Hey, David This is Jenny.
I don't think.
Any of us really have.
Sure.
Yeah.
That good of a crystal ball.
Right.
I will restate that the backlog is strong and as you said orders were at negative eight and they went to negative four so we.
We feel good about that and there's some uncertainty out there.
And.
All in all if you look at North America, we have the first half slightly lower at about 1%, but full year, mostly unchanged at slightly positive.
No.
I.
Can't give you an exact answer on that but we feel we feel good about where we're at right now.
Can you help with the organic cadence a little bit though.
Maybe for the whole company just to get a sense that the one and a half maybe you can take us through that a little bit detail on and again, maybe a little color on Europe in particular, what's what's in the guide.
I thought the first quarter was a little stronger than expected. So just trying to get a sense. Thanks.
David David I agree with your Europe did outperform in the first quarter I think we called out on the call here up to plus two.
The total company did plus two obviously aerospace was fantastic at 16.
If you look at the cadence, it's really not that much different than what we guided to initially.
It is not second half weighted we expect the comps to kind of moderate a little bit, but if you look at Europe specifically.
Two in Q1, we're expecting about one in Q2 and then.
It goes it turns a little bit negative just again based on comps in the second half I would say for the second half, it's probably about minus three.
I appreciate it thank you.
Yeah.
Our next question comes from Scott Davis with Melius Research. Please state your question.
Hey, good good morning, everybody and also congrats Lee great run, it's been nothing but a pleasure indeed.
Good luck in the future.
I have a tough time picture and you retired.
So do we.
<unk> got a plan.
Yeah.
Guests and we'll see you around.
On boards, and such and even more so but anyways.
Lot of that.
Questions about.
Or is this stuff has been asked so I just wanted to go back to a big picture one on slide four.
Jenny you kind of showed the where do you want to be in 2007 can you get there.
Is the plan kind of further tweaking around with the portfolio.
In our longer cycle, M&A or do you get there just on the the growth rates.
Outsized growth rates in.
Aero and in some of your longer cycle businesses.
It's it's the ladder.
We <unk>.
These illustrations are.
The portfolio that we have today.
And the tailwind that we see not just from aerospace, but from the macro capex investment and the secular trends.
Okay.
Okay Fair enough and then.
Just looking through my notes here the distribution levels and in like Parker stores, you guys have great visibility, but are they.
Is there a new normal above pre COVID-19 levels. I know this has been asked in a different way, but I'm trying to really narrow down whether in this new world everybody holds a little bit more inventory.
Or whether supply.
Supply chains are so held up and people are so comfortable that they are back down to.
What was more of the long term average is pre COVID-19 and obviously the cost of carrying inventory is risen to with higher rates and we haven't had that in.
Sometimes so so any comments there and how that plays into it would be interesting too.
Yes, Scott, It's Lee I would think it's the latter.
The cost of carrying inventory is way up for what's been.
I think the insanity of supply changes started to quiet down so.
No.
I don't expect it to be.
<unk> difference as we go forward about how.
Some of those core industrial products or inventory versus where they were before pre COVID-19.
Okay helpful. Thank you I'll pass it on.
Yeah.
Our next question comes from Jeffrey Sprague with vertical research. Please state your question.
Thank you good day, everyone Lee Congrats and thanks for all the help over the years.
Okay.
Okay.
Just maybe kind of come back to the margins, which have really stood out here.
I think it's probably pretty clear from this other companies we follow that price cost spreads were pretty favorable this quarter.
I don't want to talk about price in isolation, but can you give us some sense of kind of where you're tracking on a price cost basis, how that might differ.
From what you saw in fiscal 'twenty three.
How it's how it's progressing through the year embedded in your guide.
Hey, good morning, Jeff So.
If you recall, we went we went out early and often with price.
And we are now back to more of what we would call a normal pricing environment.
Where we are going out in July in January so, we don't disclose the specifics obviously, but.
Price cost management. It is a core element of the win strategy and.
What we did do is we expanded from just material inflation to total cost of inflation. So we feel good about what we have covered.
And.
We're back to more of a normal environment.
But you are getting some cost relief is that fair or not so much you've got some metals relief, but other inflation, maybe just a little perspective on the cost side of the equation.
Where we have some of those commodities.
Index, which is it's very few adjustments.
And where we have agreements with customer there is adjustments but.
That's already built in.
And then just just back to make it an arrow.
When I saw the margins. This morning, I thought okay, youre going to be talking up the synergies or you've accelerated them into 2024.
Really no comment about that so I'm sure you're capturing of synergies, but it sounds like the margins are.
Little one offs.
Rod mentioned, but mostly aftermarket mix.
Mix, but maybe just a little bit of color on the synergy pace and is there scope for that to go up and is any of that actually embedded in these results here in the quarter.
So if you recall in fiscal year 'twenty, three we increased the synergies from $60 million to $75 million and then we committed to another $75 million in fiscal year 'twenty four so as Todd mentioned the synergies are in there.
Team is doing a great job, we're committed to the $300 million and.
We're just confident we're going to get there.
A lot of a lot of as Todd mentioned, our two strong aftermarket right that is just a very favorable mix.
Really really helped boost the margin in the quarter.
Great, Yes, I felt like Youre getting it felt like Youre getting after that additional 75 faster, but I'll leave it there. Thanks a lot.
No Jeff It really is a combination of obviously the volumes have helped on the efficiency side, but Jenny mentioned supply chain has eased.
That has taken a lot of noise out of a lot of our operations, it's not totally gone yet, but if you look back to a year or year and a half ago. It has a lot more efficiencies that we're seeing across all the businesses.
Great. Thank you.
Our next question comes from Julian Mitchell with Barclays. Please state your question.
Hi, good morning.
Wish Lee Labatt.
Just wanted to circle back to my first question on the international.
Demand picture, because I guess, if you looked at the last.
Six quarters, you've had orders down in five of those six.
When you think about inventory levels, and it's extremely disparate set of countries and end markets.
That down eight on orders you saw in the most recent quarter and when you think about the duration of this orders downturn.
Just wonder any perspectives on when you think we start to sort of pull out of that.
Orders slump.
If you think that down eight marks the kind of low point of what we should see this downcycle in international orders.
Well you know Julien orders like you said, it's been choppy for a while.
And international.
Q1 organic growth was in line with with our prior forecast at that segment level.
As Lee mentioned in Europe Destocking continues.
In essence, and broad based end markets.
Hello recovery in China is impacting that region.
And you know Theres eurozone macroeconomic indicators remain in contraction territory. So.
I would say hard to tell there but.
And two again, China, if you look at Asia Pacific China recovery remains slow there is continued softness in construction in semicon and automotive as I mentioned earlier, there is a bit of a tough comp.
From last year Q1, because they were rebounding from the Q4 shut down.
So in the guide no big change for the first half and the full year is largely in line with with previous guidance.
About negative 3%.
That's the best view, we have today.
Thanks, very much and then.
On the North America business.
I think a lot of.
Investors still get concerned when they see some of these big sort of mobile OE.
OEM customers talk about backlog down and what does that mean for the inventories for suppliers, such as yourselves and others.
So maybe just remind us of the scale of that kind of mobile piece within North America and.
How do you gauge or what's your assessment of that inventory level that some of those big machine.
Machine on mobile customers.
So.
As Lee mentioned.
There is a certain amount of rebalancing going on there as well as dealers are starting to get some inventory.
It kind of goes in line with the constant analysis, we do on the backlog.
To make sure that there are no push outs there are no cancellations and in discussion with some of our big local customers.
You know they are adamant that.
Yet the orders the backlog.
A real and some have even commented that if if they happen to get.
A cancellation from one customer they have another customer who will take that slot right away. So.
We still feel pretty pretty positive about that.
But again, you know as as the supply chain is improving.
It's a it's helping out so I think I think we're in a we're in a pretty good position there.
Yes, Julian I would just add we brought this up earlier, but you think about the North America portfolio that does include Lord that does include the CLARCOR businesses. There's a significant amount of aftermarket that we benefited from the North America business and I think that's helped offsetting some of those larger Oems callouts.
Longer cycle.
That's great. Thank you.
Okay.
Our next question comes from Joe <unk> with Wells Fargo. Please state your question.
Hi, good morning.
Thanks.
First question is just related to field inventory I think some of the corrections have been going on for several quarters now and what your views are both at the OEM level at the distributor level.
Maybe even if you take it by region, but just how far along that processes are those headwinds actually starting to abate a bit.
Yeah, well I think.
As we've gone through the region.
But what we've.
Talked about here is that you know.
Again backlog coverage remains strong.
Destocking is continuing.
We probably saw a little more of that in North America in Q1 than we than we had anticipated and it is continuing but as Lee pointed out the overall channel sentiment is very positive.
And as I was mentioning before.
For international.
I mean backlog is strong too there but.
The orders have been choppy so Ted.
To try and.
Say, where that's been a well that's going to wind up in the next quarter or two we'll have a better update for you in February but.
As we mentioned.
This is an international is really a story about China recovery remaining slow in <unk> and the impact that it has.
On.
And on Europe, So continued softness there and the industrial market.
And Destocking, it's continuing.
Thanks, and then Jenny I wanted to ask on investment spend and just strategic focus as you think about opportunities over the next one to two years and really in particular on the industrial side of the business but.
Across the regions across technologies, where you're trying to direct the most emphasis right now because of the the biggest opportunities that you see for returns on some of that spend.
Well.
Our our Capex coal has increased from one and a half to two 2%.
We're at 2% little bit above in fiscal year, 'twenty, three and we're forecasting 2% for fiscal year 'twenty four.
It's a pretty big increase from our 10 year average and our focus is on safety.
Automation robotics.
Some some AI tools on AI driven inspection, so things that are really going to.
Help us increase our efficiency and our productivity.
We're investing in the supply chain.
And then we're investing in specific divisions, where we have.
We need to support secular growth.
For instance.
Electrification.
Projects with our customers so.
You know when we when we look at this.
The investing in the supply chain is something that we think.
He will help us well into the future and make sure that we have not only those.
Local for local strategy is intact, but dual sourcing strategy and so that investment, we expect that to pay dividends well into the future.
I appreciate it thank you.
Thanks, Joe.
Our next question comes from Brett Linzey with Mizuho. Please state your question.
Hey, good morning, and congrats totally appreciate all the insight over the years.
Hey wanted to come back to some of the the market Choppiness in the destock I guess, what is Parker doing from a cost containment standpoint in the quarter International volumes down margins up is this just simply throttling back on discretionary or are you taking more structural simplification actions.
How that positions you.
Yeah. So.
We always say that you know.
We were planning.
<unk> for the for the next recession right. So what is evident with our Q1 performance is that executing the win strategy and a slower growth environment works right. So every every tool and.
I say this because I've used the win strategy to run.
Parker divisions, and Parker groups every tool and that win strategy helps to expand margins. So it can be anywhere from.
Adjusting your discretionary spending.
Changing the way you staff the operation.
Two how.
If you order material for your production. So there's a lot of levers that our general managers can pull and they become very agile and flexible.
And they have learned how to look around corners, and see demand changes coming so we're very proud of what they do on the.
The downside as well as the upside to make sure that we get.
The best return.
Yeah, that's great and then right.
Just one more on orders.
Just curious how the sequential evolution of orders played out through the quarter into October any discernible pattern that might give you a confidence that we could be some semblance of a bottom here.
Well I will give you an update on that end in February.
Hey, Brian Alright, great. Thanks, I wanted to just touch on that restructuring comment theres been no change to our restructuring plans for the for the fiscal year. We do this all the time. This is not something that we wait for them I think we have $70 million of restructuring costs in the a and.
And the guide for the year and that's the <unk>.
Beauty of the.
Decentralization of all the markets our businesses are doing what they need to do depending on what's happening in their businesses all around the world. So we're not waiting for any kind of you know high sign too.
Structure, and we constantly do that to Joe's point, it's part of the win strategy and it's part of what we do every day.
Helpful color. Thanks, a lot.
Thanks.
Our next question comes from Nathan Jones with Stifel. Please state your question.
Good morning, everyone.
Congratulations.
Graduations on retirement delay and go Brown.
Yeah.
I'm going to I'm going to ask David Julians question, a little bit of a different way.
<unk> been through many downturns over the years.
And while every downturn is different the math always tends to be the same you say three to five maybe six quarters of negative order rate.
The magnitude of those declines are you know either a mid cycle pause or a recession.
As we've gotten to the point, where we're now.
Three to five quarters.
Gave order right.
Is this starting to feel more like a mid cycle pause then the recession, we've been trying to talk ourselves into for the last 18 months.
And maybe just any comments around the feeling do you guys have about this downturn relative to downturns that you've seen previously.
Well I'll start out by saying that I think as evidenced by.
Past performance.
Where we're able to handle these downturns and we just whether them better each time right. So you know.
With the transformation of the portfolio.
Again, I think we're going to continue to see.
A longer cycle.
View of the backlog and we're going to be less susceptible to to the depth. So I think we're just in a really good position.
Forward to be able to you know to achieve our organic growth targets.
And really perform at a higher level, we're going to keep expanding margins.
In a slower growth environment and be very well positioned.
For when some of this return.
On the industrial side.
You know Nathan too we've said this a couple of times, but we've never had as high a percentage of aerospace exposure across the whole portfolio.
It's over 30% of the portfolio in that part of the business is extremely strong right now so we're benefiting from that as well.
Yeah, I was just talking about the industrial businesses that understand that their space dynamic and then just one on mega.
Guys have talked about that are outperforming.
Clearly seeing better growth the market getting better growth.
Lastly relating to some better margin too you had targeted a year five high single digits ROI is that it is a double digit ROI on this business with the outperformance now within reach than you thought.
You know Nathan we couldnt be more happy with the way that business is performing it still is early days, we just had the one year anniversary.
Growth is robust the margin performance has been good and you know if you remember we had a three year plan here on synergies and our focus is executing that it's kind of performing better than our expectations.
So we're happy with it.
Okay.
Okay, I'll wait wait till the upgrader.
But thank you very much for taking my question Yeah.
Thanks, David.
Diego I think we got time for one more question.
Okay and that question comes from Nigel Coe with Wolfe Research. Please state your question.
Oh, thanks, guys thank that man.
<unk> had a lot of.
Cool.
We will like dream of walking off on a high and that's certainly what youre doing so.
I enjoy enjoy the rest of the year before your time.
So backlog.
I've got to say I'm surprised you didn't consume more backlog based on movie here and elsewhere.
Maybe you can confirm.
I'm talking of maybe $100 million.
Sequential backlog consumption in industrial and in that kind of range.
I'm just wondering are you seeing more like longer cycle lumpier orders coming through the coming through the backlog here I mean, just any color there would be helpful.
Youre, saying specifically on aerospace.
<unk> industrial Oh, excuse me industrial.
I think you're about right on the on the the number that you're talking about.
And again, Jenny and we've talked about this we think it is really just kind of more rebalancing nothing overly concerning at this point.
The cycle yet.
I can't say that we're seeing anything more lumpiness from the industrial orders.
There are some project based things in there, but its nothing.
Significant in comparison to the total.
Okay, Great and that's the last question I guess is the cleanup questions here, but I'm getting.
The the current guide to the previous guidance.
FY 'twenty I'm getting 40 cents from the margin uplift.
About 10 cents and taxes penalties and taxes.
10 send some interest.
Is that is that right that gets me to 60 cents or thereabouts, which is the increase and there is nothing.
Is that right.
You know the only thing we did for it for FX was updated currency rates to September 30th So theres, a little bit of a headwind on the sales line that translates throughout.
The P&L, but it's it's really just an update it's not anything major.
Okay, great well I'm sorry for the.
Low level questions, there, but thanks a lot.
In other words, yes.
What can follow up with you.
Good morning.
I think we're almost with you on here I'm going to pass it back to Todd. This is Lee I just wanted to say thank you for all the nice call outs from everybody. It's 32 years, it's been a long run during that 32 years of work for four Ceos three of them directly.
Every CEO.
He has taken the baton from their predecessor and run the race faster.
And I've got no doubt in my mind. The journey of this team is going to do the same thing so.
So thank you and.
Hopefully, we'll see you around.
We're definitely going to see us around congratulations to you and Elizabeth in your whole family I know theyre going to enjoy more lead times.
We are going to Michelle so.
So congratulations again, thank you to everyone for joining US today. This does conclude our FY 'twenty for Q1, our webcast.
As usual, Jeff Miller, our VP of Investor Relations and again.
Our director of Investor Relations will be available if anyone needs any kind of follow ups.
Thank you all for joining and everyone have a great day. Thanks.
Thank you and that concludes today's call all parties. It disconnect have a good day.