Q3 2024 Parker-Hannifin Corp Earnings Call
Operator: Greetings. Welcome to Parker-Hannifin Corporation's Fiscal 2024 Third Quarter Earnings Conference Call and Webcast. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero on your telephone keypad. Please note that today's conference is being recorded. At this time, I'll now turn the conference over to Todd Leombruno, Chief Financial Officer. Mr. Leombruno, you may now begin your presentation. Thank you.
Greetings and welcome to Parker Hannifin corporations fiscal 'twenty 'twenty, four third quarter earnings conference call and webcast.
At this time, all participants are in listen only mode.
Operator: <unk> and answer session will follow the formal presentation.
Operator: If anyone should require operator assistance during the conference. Please press star zero from your telephone keypad.
Operator: Please note that today's conference is being recorded.
Todd M. Leombruno: At this time I'll now turn the conference over to Todd being Bruno Chief Financial Officer, especially in Bruno you May now begin your presentation.
Todd M. Leombruno: Thank you, Rob. And good day, everyone.
Todd M. Leombruno: Thank you, Rob and good day, everyone as Rob said this is parker's fiscal year 2024 third quarter earnings release webcast. This is Todd lean Bruno Chief Financial Officer speaking with me on the call today is our chairman and Chief Executive Officer, Jenny apartments here. We appreciate your interest in Parker and we thank you for joining us today.
Todd M. Leombruno: As Rob said, this is Parker's Fiscal Year 2024 Third Quarter Earnings Release Webcast. This is Todd Leombruno, Chief Financial Officer, speaking. With me on the call today is our Chairman and Chief Executive Officer, Jennie Parmentier. We appreciate your interest in Parker, and we thank you for joining us. If we move to slide two, you will find our disclosures regarding our forward-looking projections and non-GAAP financial measures. However, actual results could vary from our forecast based on the items listed here.
Todd M. Leombruno: If we move to slide two you will find our disclosures on our forward looking projections and non-GAAP financial measures.
Todd M. Leombruno: Actual results could vary from our forecast based on the items listed here.
Todd M. Leombruno: The press release, this presentation, and reconciliations for all non-GAAP measures that we will discuss today were released this morning and are available under the Investor section on Parker.com. We're going to start today with Jenny reviewing the highlights of our strong third quarter performance, and then she's going to highlight how the competitive advantage of our high performance culture is guiding our global team members to deliver consistent results. I will follow up now with some color on the financial results of the quarter, and I will provide some assumptions for our increase in the fiscal year 24 guide.
Jennifer A. Parmentier: The press release this presentation and reconciliations for all non-GAAP measures that we will discuss today were released this morning and are available under the investors section on Parker Dot Com, we're going to start today with Jenny reviewing the highlights of our strong third quarter performance and then she's going to highlight how are the competitive advantage.
Todd M. Leombruno: Of our high performance culture is getting our global team members to deliver consistent margin expansion.
Todd M. Leombruno: I will follow up with some color on the financial results of the quarter and I will provide some assumptions to our increase in the fiscal year 'twenty four guidance, we're going to end the call with a Q&A session and we will try to take as many questions. As we possibly can just a reminder, please try to limit your questions to one and a follow up if needed. So we can get to all of those.
Todd M. Leombruno: In the Q.
Todd M. Leombruno: We're going to end the call with a Q&A session, and we'll try to take as many questions as we possibly can. Just a reminder, please try to limit your questions to one and a follow-up if needed so we can get to all of those in the queue. With that, I now draw your attention to Slide 3, and Jenny, I will hand it over to you. Thank you, Todd.
Todd M. Leombruno: With that I now draw your attention to slide three Jenny I'll hand, it over to you. Thank you Todd.
Jennifer A. Parmentier: Q3 was another quarter where the team delivered outstanding results executing the win strategy. Starting with safety, a 17% reduction in recordable incidents over the prior quarter. Safety has been, and will remain, our top priority. Record sales of $5.1 billion in the quarter, with organic growth of 1.2%.
Todd M. Leombruno: Q3 was another quarter, where the team delivered outstanding results executing the win strategy, starting with safety, a 17% reduction in recordable incidents over prior Q3 safety has been and will remain our top priority.
Jenny: Third sales of $5 1 billion and acquire with organic growth of one 2% record adjusted segment operating margin of 24, 7% at the 150 basis point improvement over prior year with all segments expanding margins.
Jennifer A. Parmentier: Record adjusted segment operating margin of 24.7%. That's a 150 basis point improvement over the prior year, with all segments expanding margin, adjusted EPS growth of 10% along with 12.6% year-to-date free cash flow margin. Aerospace demand remains robust and was again a significant driver of our performance in the quarter. Our transformed portfolio and strong performance are driving an increase to full year guidance. Next slide.
Jennifer A. Parmentier: Adjusted EPS growth of 10%, along with 12, 6% year to date free cash flow margin.
Jennifer A. Parmentier: Aerospace demand remains robust and was again a significant driver of our performance in the quarter.
Jennifer A. Parmentier: Our transformed portfolio and strong performance are driving an increase to full year guidance.
Jennifer A. Parmentier: Next slide please.
Jennifer A. Parmentier: Those of you who know us well know this is the WIN strategy. This is our business system, focused on the fundamentals. It is a proven strategy. We trust the process, and this is how we deliver results. Very simply put, this strategy works. I first used the WIN strategy when I joined Parker 16 years ago as a plant manager. I very quickly learned that it wasn't just words written on a piece of paper.
Jennifer A. Parmentier: Those of you who know US well know this is the win strategy. This is our business system focused on the fundamentals.
Jennifer A. Parmentier: It is a proven strategy.
Jennifer A. Parmentier: The process and this is how we deliver results.
Jennifer A. Parmentier: Very simply put this strategy works.
Jennifer A. Parmentier: My first use the win strategy when I joined Parker 16 years ago with a plant manager.
Jennifer A. Parmentier: And very quickly learned that it wasn't just words written on a piece of paper I.
Jennifer A. Parmentier: I was trusted, empowered, and expected to use the tools in the WIN strategy to improve my plan. I've since used it as a general manager, group president, and as an executive officer of the company. Based on a solid foundation of culture and values, we pursue four goals: engage people, customer experience, profitable growth, and financial performance. Engaged people are the first and most important pillar. As I mentioned on the previous slide, safety is our top priority, and it sits at the top of this first pillar.
Jennifer A. Parmentier: That was a trusted empowered and expected to use the tools in the win strategy to improve my plant.
Jennifer A. Parmentier: And since you said as a general manager group, President and as an executive officer of the company.
Jennifer A. Parmentier: Based on our solid foundation of culture and values, we pursue for golf engage people customer experience profitable growth and financial performance.
Jennifer A. Parmentier: And as people as the first and most important pillar.
Jennifer A. Parmentier: As I mentioned on the previous slide safety is our top priority and it fits in that first physicians at this first pillar.
Jennifer A. Parmentier: One of the keys to our success is our decentralized operating structure. High-performance teams at our 85 operating divisions utilize all the tools in the WIN Strategy to deliver results. Our culture drives an ownership and entrepreneurial mindset, one that I appreciated as a general manager and respect today. We are excited to show you some examples of the WIN strategy in action at our upcoming Investor Day on May 12th.
Jennifer A. Parmentier: One of the keys to our success is our decentralized operating structure high.
Jennifer A. Parmentier: High performance teams at our 85 operating divisions utilize all the tools in the win strategy to deliver results.
Jennifer A. Parmentier: Our culture drives an ownership and entrepreneurial mindset when did I appreciate it as a general manager and respect today.
Jennifer A. Parmentier: We are excited to show you. Some examples of the win strategy in action at our upcoming Investor Day on May 16.
Jennifer A. Parmentier: Next slide please.
Jennifer A. Parmentier: Embedded in the win strategy is our high-performance culture. This is a competitive advantage that has allowed us to build a better and more resilient Parker. The structure of high-performance teams increases engagement and commitment at all levels of the organization. This, coupled with a disciplined operating cadence, drives TAP core child performance. Our approach is strength-based, focused on building relationships and team member development. This structure reinforces our customer-centric mindset and drives continuous improvement across the enterprise. Next slide, please.
Jennifer A. Parmentier: Embedded in the win strategy is our high performance culture.
Jennifer A. Parmentier: This is a competitive advantage that has allowed us to build a better and more resilient Parker.
Jennifer A. Parmentier: The structure of high performance team increases engagement and commitment at all levels of the organization.
Jennifer A. Parmentier: This coupled with a disciplined operating cadence drives top quartile performance.
Jennifer A. Parmentier: Our approach is strengthening.
Jennifer A. Parmentier: Focus on building relationships and team member development.
Jennifer A. Parmentier: This structure reinforces our customer centric mindset and drive continuous improvement across the enterprise.
Jennifer A. Parmentier: Next slide.
Jennifer A. Parmentier: Our people, our high-performance culture that I just spoke about, our strategy, the win strategy, and our transformed portfolio have driven the performance you see on this page. This is a snapshot from FY19 through our FY24 guide. 7% revenue CAGR from $14.3 billion to our FY24 guide of $19.8 billion. 600 basis points increase in adjusted operating margin from 18.6% to our guide of 24.6%. 14% adjusted EPS CAGR from $13.10 to our FY 24 guide of $24.75, and 2 times the amount of free cash flow dollars, $1.5 billion in FY19 to our FY24 guide of $3 billion.
Jennifer A. Parmentier: Our people our high performance culture that I, just spoke about our strategy the win strategy and our transform portfolio have driven the performance you see on this page.
Jennifer A. Parmentier: This is a snapshot from FY 19 through our FY 'twenty for guidance.
Jennifer A. Parmentier: 7% revenue CAGR from $2014 3 billion to our FY 'twenty guidance of $19 8 billion.
Jennifer A. Parmentier: 600 basis points increase in adjusted operating margin from 18, 6% to our guide of 24, 6%.
Jennifer A. Parmentier: 14% adjusted EPS CAGR from $13 10 to our FY 'twenty four guide of $24 75.
Jennifer A. Parmentier: And two times the amount of free cash flow dollars $1 5 billion in fiscal year 19 to our FY 'twenty four guide of $3 billion.
Todd M. Leombruno: A lot of hard work. We are very proud of the global team delivering these results, and we have a very promising future ahead of us. Now, I'll hand it over to Todd for the summary of our third quarter highlights.
Speaker Change: A lot of hard work, we're very proud at the global team delivering these results and we have a very promising future ahead of us and we're not done.
Todd M. Leombruno: This is just a high-level financial summary for the company. As Jenny said, Q3 was another strong quarter for Parker.
Todd M. Leombruno: I'll hand, it over to Todd for the summary of our third quarter highlights.
Todd: Thank you Jamie it's great to see those results, let's take a look at the quarter. This is just the high level financial summary for the company.
Todd: As Jenny said Q3 was another strong quarter for Parker once again every number in that gold highlighted box is a Q3 record for the company. If you will see total sales we did grow it's up slightly from prior year, we reached $5 $1 billion in sales organic growth was just over 1% positive slight.
Todd M. Leombruno: Once again, every number in that gold highlighted box is a Q3 record for the company. If you look at total sales, we did grow. It's up slightly from the prior year. We reached $5.1 billion in sales. Organic growth was just over 1 percent positive.
Todd M. Leombruno: Slight negative impact from divestitures. That's just 0.3 percent of sales. And currency did shift to a slight headwind this quarter. Not terrible.
Todd M. Leombruno: Impact from divestitures, that's just <unk>, 3% of sales and currency did shift to a slight headwind this quarter.
Todd M. Leombruno: It's 0.6, but it's the first time this year that has been a headwind. If you look at the adjusted segment operating margins, that's an improvement of 150 basis points versus the prior year. We did finish at 24.7. And a similar story on EBITDA margins. We finished at 25.5.
Todd M. Leombruno: Terrible 0.6, but it's the first time this year currency has been a headwind. If you look at the adjusted segment operating margins Thats, an improvement of 150 basis points versus prior year, we did finish at $24 seven and similar story on EBITA margins. We finished at $25 five that is an increase of 130 basis.
Todd M. Leombruno: That is an increase of 130 basis points. Moving to Adjusted Net Income, we generated $851 million of net income, that is an ROS of 16.8%, and Adjusted Earnings Per Share were $6.51, that's a 58 cent or 10% increase from the prior year. Net income was also an increase of 10% from the prior year. Q3 was really just a solid quarter.
Todd M. Leombruno: Points from prior year moving to adjusted net income we generated $851 million of net income that is a ros of 16, 8% and adjusted earnings per share or $6 51.
Todd M. Leombruno: That's a 58.
Todd M. Leombruno: Or 10% increase from prior year net income is also an increase of 10% from prior year Q3 was really just a solid quarter. When you look at the sales. When you look at segment operating income when you look at net income and earnings per share. Each one of those generated the highest levels that we produced this fiscal year, so very strong quarter.
Todd M. Leombruno: When you look at sales, when you look at segment operating income, when you look at net income, and earnings per share, each one of those generated the highest levels that we produced this quarter. So, a very strong quarter. If we can move to slide nine, this just shows the walk of that 58 cents or 10% increase in adjusted EPS. I'm really glad to say again that the main driver is segment operating income dollars increasing. We increased by $76 million in the quarter.
Todd M. Leombruno: If we can move to slide nine this just shows the walk of that 58 or 10% increase in adjusted EPS.
Todd M. Leombruno: Really glad to say again the main driver of segment operating income dollars, increasing we increased by $76 million in the quarter that accounted for 45 cents of EPS growth Thats, nearly 80% of the EPS growth quarter.
Todd M. Leombruno: That accounted for 45 cents of the EPS growth. That's nearly 80% of the EPS growth in the quarter. Again, Jenny mentioned this, but it's just impressive operating performance across the company. But, specifically, the strength in our aerospace system segment was, again, a main contributor this quarter. Interest expense is again favorable.
Todd M. Leombruno: Again, Jenny mentioned this but it's just impressive operating performance across the company, but specifically the strength in our aerospace systems segment was again a main.
Todd M. Leombruno: Contributor this quarter interest expense was again favorable that really is the result.
Todd M. Leombruno: That really is the result of our successful efforts to deleverage after the MEGA transaction. Tax was favorable, six cents versus the prior year. Basically, that's just a few discreets that are certainly hard to predict.
Todd M. Leombruno: Result of our successful efforts to deleverage after the Mega transaction tax was favorable <unk> versus prior year simply Thats just a few discrete that are certainly hard to predict.
Todd M. Leombruno: Corporate G&A was higher from the prior year, but really, that's just more a result of prior year favorable items not repeating this fiscal year, and you can see other expenses share count higher than prior. So the theme really remains the same this quarter as it has in the first half of the year. Our team members are generating strong operating performance that is driving margin expansion in a tepid, top-line industrial environment, and our debt pay-down efforts are really reducing our interest costs. So it's just great to work together to generate those results.
Todd M. Leombruno: Corporate G&A was higher from prior year, but really that's just more result of prior year favorable items not repeating this fiscal year and you can see other expense and share count, we're just a little bit.
Todd M. Leombruno: Higher than prior year. So the theme really remains the same this quarter as it has in the first half of the year. Our team members are generating strong operating performance that is driving margin expansion really in a tepid topline industrial environment.
Todd M. Leombruno: Our debt Paydown efforts are really reducing our interest costs. So it's just great to see the team.
Todd M. Leombruno: Yeah.
Todd M. Leombruno: Worked together to generate those results.
Todd M. Leombruno: If we go to slide 10, this is the segment performance. You can see we continue to see positive growth as a result of the higher concentration of aerospace in our portfolio. Margin expansion does continue across all of our businesses, which is great to see.
Todd M. Leombruno: If I go to slide 10. This is the segment performance.
Todd M. Leombruno: You can see we continue to see positive growth as a result of the higher concentration of aerospace and our portfolio margin expansion does continue across all of our businesses that is great to see.
Todd M. Leombruno: Order dollars did remain strong against a very tough comp in the prior year. Order dollars did improve sequentially from last quarter, so we're happy to see that. If you look at the North American businesses, sales volume reached $2.2 billion. However, organic growth was down 4.6%, as you can see on the slide, but that was in line with our expectations. It was driven by softness in off-highway and transportation markets specifically. We did continue to see destocking throughout the quarter, but I will say it did continue at a deceleration. Despite the down volume,
Todd M. Leombruno: Order dollars did remains strong against a very tough comp in the prior year order dollars did improve sequentially from last quarter. So we're happy to see that.
Todd M. Leombruno: If you look at the North American businesses sales volume reached $2 2 billion.
Todd M. Leombruno: Organic growth was down four 6% as you can see on the slide but that was in line with our expectations.
Todd M. Leombruno: Was driven by softness in off highway and transportation market specifically.
Todd M. Leombruno: We did continue to see destocking throughout the quarter, but I will say it did continue at a decelerating rate.
Todd M. Leombruno: Despite the down volume.
Todd M. Leombruno: Margins increased 120 basis points to a third quarter record of 24.1% in North America. This is just really a shining example of operation excellence and how the teams continue to see opportunities to drive margins even higher. Order rates in North America did remain constant with last quarter. They finished at minus four in the quarter.
Todd M. Leombruno: Margins increased 120 basis points to a third quarter record of 24, 1% in the North American business. This just really is Shining example of operation excellence and how the teams continue to see opportunities to drive margins, even higher order rates in North America did remain constant with last.
Todd M. Leombruno: Quarter.
Todd M. Leombruno: Finished at minus four in the quarter.
Todd M. Leombruno: If we move to the international businesses, you can see sales volume reached $1.4 billion. Organic growth was down 3.1% on those businesses, but again, that was in line with our guidance. If you look at EMEA, that was the most negative, at negative 5.1. And just some contraction, again, in off-highway transportation and in-plant industrial markets. Asia-Pacific growth was minus 2.8. China remains generally soft.
Todd M. Leombruno: If we move to the international businesses, you can see sales volume reached $1 4 billion organic growth was down three 1% on those businesses, but again that was in line with our guidance.
Todd M. Leombruno: If you look at EMEA that was the most negative at negative five one and just some contraction again in off highway transportation and in plant industrial markets.
Todd M. Leombruno: Asia Pac growth was minus two eight China remains generally soft Latin America is a strong point.
Todd M. Leombruno: Latin America is a strong point. They continue to be positive at 19% of return. What we're really proud about is the team, even on that lower volume, expanded margins by 10 basis points, and they also generated a third quarter record of 23.5. Focus remains on productivity improvements and cost controls in these businesses, with orders in the international businesses at minus eight. In EMEA, we are seeing some choppiness on orders, while in Asia-Pacific, we are seeing some. If we look at aerospace, aerospace delivered another stellar quarter for the company, and sales reached a record of 1.4 billion.
Todd M. Leombruno: They continue to be positive at 19% versus prior year.
Todd M. Leombruno: We're really proud about is the team even on that lower volume expanded margins by 10 basis points and they also generated a third quarter record of 23, 5% focus remains on productivity improvements and cost controls in these businesses with orders in the Internet international businesses at minus eight.
Todd M. Leombruno: In EMEA, we are seeing some choppiness on orders, while Asia Pac we are seeing some improvements.
Todd M. Leombruno: If we look at aerospace aerospace delivered another stellar quarter for the company sales reached a record of $1 4 billion.
Todd M. Leombruno: That's the highest we've ever had in the aerospace business. Organic growth was 18% across every market segment we have in aerospace. This is the fifth quarter of double-digit organic growth within Arizona.
Todd M. Leombruno: That's the highest we've ever had in the aerospace business organic growth was 18%.
Todd M. Leombruno: Across every market segment, we have in aerospace.
Todd M. Leombruno: This is the fifth quarter of double digit organic growth within aerospace aftermarket strength continues to be outstanding this quarter, we were up 26% in the commercial aftermarket.
Todd M. Leombruno: Aftermarket strength continues to be outstanding. This quarter, we were up 26% in the commercial aftermarket area, and operating margins are fantastic, reaching a new record, increasing by 320 basis points versus the prior year to come in at 26.7. Demand just remains robust, aftermarket strength continues, and the team is just doing great, driving margins ever higher. Border rates in aerospace continue to be very strong at plus. So just great performance across all of our.
Todd M. Leombruno: Area and operating margins are fantastic, reaching a new record increasing by 320 basis points versus prior year to come in at $26 seven.
Todd M. Leombruno: And just remains robust aftermarket strength continues.
Todd M. Leombruno: And the team is just doing great driving margins ever higher.
Todd M. Leombruno: Order rates in aerospace continued to be very strong at plus 15. So just great performance across all of our businesses. If we go to slide 11, let's talk about cash flow. So so first of all I think most of you probably seen this last week, our board approved a quarterly dividend payout of $1 63.
Todd M. Leombruno: If we go to slide 11, let's talk about cash flow. So first of all, I think most of you have probably seen this, last week our board approved a quarterly dividend payout of $1.65. That is a 10% increase over the prior dividend payout. With that increase, this does increase our annual record of paying higher dividend dollars per year from 67 years to now 68 years. Looking at cash flow, we've got a record for cash flow, $2.1 billion of cash flow from operations, that's 14.6% of sales, that is a 20% increase over the prior year. And I said it already, but it is a record.
Todd M. Leombruno: Per share that is a 10% increase over the prior dividend payout with that increase this does increase our annual record of paying higher dividends $1 per year from 67 years to now 68 years, just unbelievably impressive record.
Todd M. Leombruno: Looking at cash flow, we've got a record on cash flow of $2 $1 billion of cash flow from operations.
Todd M. Leombruno: 14, 6% percent of sales that is a 20% increase over prior year.
Todd M. Leombruno: And.
Todd M. Leombruno: I said it already but it is a record when you look at free cash flow. We did $1 9 billion is 12, 6% to sales and that also is a 22% increase versus prior year.
Todd M. Leombruno: When you look at pre-cash flow, we did $1.9 billion. That's 12.6% of sales. And that also is a 22% increase versus prior. The team really remains focused on being great generators and great deployers of cash. We are reaffirming our full-year target of free cash flow dollars of over $3 billion, and we certainly are committed to free cash flow conversion of over $140 billion. Great performance on cash. Let's move to slide 12.
Todd M. Leombruno: The team really remains focused on being great generators and great to players of cash we are reaffirming our full year target of free cash flow dollars of over $3 billion and we certainly are committed to free cash flow conversion of over 100 for the full fiscal year. So great performance on cash.
Todd M. Leombruno: I'm happy to give an update on our deleveraging progress. We did reduce debt by over $420 million in the quarter. Since we closed the megatransaction just six quarters ago, we have reduced debt by over $2.6 billion. That, coupled with the continued expansion EBITDA growth, we have reduced our leverage by over 40% just since the close. Both of those are ahead of our original commitment.
Todd M. Leombruno: Let's move to slide 12, I am happy to give an update on our deleveraging progress we did reduce debt by over $420 million in the quarter.
Todd M. Leombruno: Since we closed the Mega transaction it was just six quarters ago.
Todd M. Leombruno: We have reduced debt by over $2 6 billion.
Todd M. Leombruno: That coupled with the continued expansion and EBITDA growth, we have reduced our leverage by over 40% just since the close both of those are ahead of our original commitment and you can see on the slide here gross debt to adjusted EBITDA is now two three times and net debt is down to two two times, we still feel confident that we will get to bill.
Todd M. Leombruno: You can see on the slide here that gross debt to adjusted EBITDA is now 2.3 times, and net debt is down to 2.4. We still feel confident that we will get the $2 billion of debt paid down in this fiscal year, and we certainly are on track to achieve net leverage times by June. So if we go to slide 13, just some color on our guidance. We are reaffirming our full-year organic growth midpoint and increasing our margin and earnings per share expectations for the year.
Todd M. Leombruno: A debt paydown in this fiscal year and we certainly are on track to achieve net leverage of two times by June.
Todd M. Leombruno: For this fiscal year, just two months.
Todd M. Leombruno: So if we go to slide 13, just some color on our guidance, we are reaffirming our full year organic growth midpoint, and increasing our margin and earnings per share expectations for the year.
Todd M. Leombruno: Reported sales growth for the year is expected to be 4% at the midpoint. On organic growth, we are increasing aerospace once again. We're increasing it by 300 basis points to 15%. For both North America and international diversified industrial businesses, organic growth is now forecasted to be negative 2.5, but for the company, full year organic growth remains the same at 1.5% positive. So you can see how Aerospace is helping the portfolio on our top line.
Todd M. Leombruno: Reported sales growth for the year is expected to be 4% at the midpoint and on organic growth we are increasing aerospace once again we're.
Todd M. Leombruno: We're increasing it by 300 basis points to 15% for the full year.
Todd M. Leombruno: Both North America, and international diversified industrial businesses organic growth is now forecasted to be negative $2 five but.
Todd M. Leombruno: But for the company full year organic growth remains the same at.
Todd M. Leombruno: At one 5% positive. So you can see how aerospace is helping the portfolio on our topline.
Todd M. Leombruno: We're raising adjusted segment operating margins; we're raising that to 24.6, that's 30 basis points higher than prior guidance, and that now forces the full year margin expansion to be approximately 170 basis points versus prior year. Corporate G&A and Interest unchanged from prior guidance. The tax rate is down a little bit just really based on Q3's actual results. We expect that to be 22% now. Full year as reported EPS is increased to $20.90 cents, and full year adjusted EPS is increased to $24.75.
Todd M. Leombruno: Raising adjusted segment operating margins were raising that to $24 six that's 30 basis points higher than prior guidance and that now forces the full year margin expansion to be approximately 170 basis points versus prior year.
Todd M. Leombruno: Corporate G&A and interest unchanged from prior guidance tax rate is down a little bit just really based on Q3's.
Todd M. Leombruno: Actual results, we expect that to be 22% now.
Todd M. Leombruno: Full year as reported EPS has increased to $20 90.
Todd M. Leombruno: And full year adjusted EPS has increased to $24 75, both of those are at the mid point and there is a range.
Todd M. Leombruno: Both of those are at the midpoint, and there's a range narrowed to plus or minus $0.10 for the fourth quarter. Finally, if you look at the fourth quarter, our adjusted EPS is expected to... $6.13. As usual, we've got some more specifics in the appendix, if needed, and now I'm going to hand it back to you, Jenny, and I ask everyone to turn to slide 14.
Todd M. Leombruno: <unk> narrowed to plus or minus <unk> four for the fourth quarter.
Todd M. Leombruno: Finally, if you look at the fourth quarter, our adjusted EPS is expected to be $6 13.
Jenny: At the midpoint.
Todd M. Leombruno: So as usual we've got some more specifics in the appendix if needed and now I'm going to hand, it back to you Jenny and I ask everyone to.
Jenny: Turn to slide 14.
Jennifer A. Parmentier: Thank you, Todd. A few key messages to close us out as we near the end of fiscal year 24. Our high-performance culture builds a better and more resilient Parker. We will continue to drive operational excellence through the wind strategy. And, as I have mentioned a couple of times already, aerospace demand remains robust, and our transformed portfolio drives growth. And, finally, Parker is and will continue to be a great generator and deployer of cash.
Jenny: A few key messages to close us out as we near the end of our fiscal year 'twenty four.
Jenny: Our high performance culture, built a better and more resilient Parker.
Jennifer A. Parmentier: We will continue to drive operational excellence through the win strategy as mentioned a couple of times already aerospace demand remains robust and our transform portfolio drives growth and finally Parker is and will continue to be a great generator and the player in cash.
Jennifer A. Parmentier: We are looking forward to sharing our story at our investor meeting on May 16th. I will be joined by our President and Chief Operating Officer, Andy Ross, our Chief Financial Officer, Todd Leombruno, and our Vice President of Investor Relations, Jeff Miller. Our key themes for the meeting are transforming the company, how we are positioned for growth from secular trends, and how we can make a difference through operational excellence and financial performance. Thank you again for joining the call today, and I'll turn it back over to Todd.
Speaker Change: Next slide please.
Jennifer A. Parmentier: We are looking forward to sharing our story at our Investor meeting on May 16th I will be joined by our President and Chief Operating Officer, Andy Ross, Our Chief Financial Officer, Todd Liam Bruno and our Vice President of Investor Relations, Jeff Miller.
Jennifer A. Parmentier: Our key themes for the meeting are transforming the company, how we are positioned for growth from secular trends operational.
Todd: Excellent and financial performance.
Todd: Thank you again for joining the call today, and I'll turn it back over to Pat for Q&A.
Todd M. Leombruno: Rob, we're ready to open the lines for Q&A, and we'll take whoever you got first in the queue. Thank you.
Todd: Rob we are ready to open the lines for Q&A and we will take.
Todd: <unk> got first in the queue. Thank you.
Operator: Thank you. Our first questioner in the queue today is Scott Davis from Mellies Research. Please proceed with your question.
Jennifer A. Parmentier: Our first questioner in the queue today is Scott Davis with Melius Research. Please proceed with your question.
Scott Reed Davis: Hey, uh, good morning Jenny, and Todd, and Jeff. Good morning.
Scott Reed Davis: Hey, good morning, Jenny and Todd and congestion.
Scott Reed Davis: I look forward to seeing you in a couple weeks. I've got a bunch of questions, but I'll try to keep them brief and pass them on. Just as it relates to M&A, just mark-to-market a little bit on what you guys are thinking about your pipeline, your comfort level with stepping forward right now, and what good looks like. Are we looking at more bolt-on-ish type stuff at this point, or are there other mega-type deals that are out there?
Scott Reed Davis: Good morning, Scott morning look forward.
Operator: A couple of weeks.
Scott Reed Davis: I've got a bunch of questions, but I'll try to keep it brief.
Scott Reed Davis: And pass it on just just as it relates to M&A what.
Scott Reed Davis: Just mark to market a little bit on what you guys are thinking on your pipeline.
Scott Reed Davis: What your comfort level in stepping forward right now.
Scott Reed Davis: What good looks like and are we are we more.
Scott Reed Davis: We're looking at it.
Scott Reed Davis: At more bolt on ish type stuff at this point or are there other kind of mega type deals that are out there.
Jennifer A. Parmentier: Well, as I often say, Scott, we really like Meggitt and we wish there were a lot of Meggitt-like deals out there for us. You know, listen. We, you know, first and foremost, as Todd was talking about, we're committed to paying this debt down, right? We're going, we're doing it earlier than we said we would. We'll, we're forecasting to be at two times by the end of this fiscal year.
Speaker Change: Well often.
Scott Reed Davis: Often say Scott.
Scott Reed Davis: We really liked nugget and we wish there were a lot of mega deals out there for us.
Jennifer A. Parmentier: Listen.
Jennifer A. Parmentier: First and foremost.
Jennifer A. Parmentier: Tom was talking about we're committed to paying this debt down right. We're going we're doing it earlier than we said, we would well we're forecasting to be at two times by the end of this fiscal year.
Jennifer A. Parmentier: But you know, we're always working on that pipeline, building relationships. The pipeline is robust. There are, you know, targets in there of various sizes, some bolt-ons, some larger ones. Really, it's about making sure that we have the right one. It has to be accretive to growth and margins, follow secular trends, and really be the right fit for Parker, fit with our interconnected technologies, and be the right business. So we continue to work that pipeline, and we'll have more to talk about that in the future.
Jennifer A. Parmentier: But we're always working on that pipeline building the relationships. The pipeline is robust there are.
Jennifer A. Parmentier: There are targets in there.
Jennifer A. Parmentier: Various sizes and bolt ons.
Jennifer A. Parmentier: Some larger one.
Jennifer A. Parmentier: Really it's about making sure that we have the right one.
Jennifer A. Parmentier: Has to be accretive to gross margins followed the secular trends.
Jennifer A. Parmentier: And really be the right fit for Parker fit with our interconnected technologies.
Jennifer A. Parmentier: B the right the right business so.
Jennifer A. Parmentier: We continue to work that pipeline and.
Jennifer A. Parmentier: We will have we'll have more to talk about that in the future.
Scott Reed Davis: Okay, I look forward to that. And a smaller issue, but when you think about the commercial aftermarket... and Aero being up 26%. Those are big numbers. And they help us understand, at the customer level, are they taking on more inventory? How do they generally manage their inventory? Or how do you guys at least help them manage their inventory so that you don't experience double ordering and things like that? And perhaps just making sure we understand the risk profile of those types of growth rates and their sustainability. Yeah, I...
Speaker Change: Okay look forward to that.
Jennifer A. Parmentier: A smaller issue, but when you think about commercial aftermarket.
Jennifer A. Parmentier: And <unk> being up 26%.
Scott Reed Davis: Is are big numbers.
Scott Reed Davis: Help us understand at the customer level or are they taking on more inventory to date, how do they generally manage their inventory or how do you guys at least help them manage their inventories so that.
Scott Reed Davis: <unk> experienced double ordering and things like that in and perhaps.
Scott Reed Davis: Just making sure we understand the risk profile of those types of growth rates and the sustainability.
Todd M. Leombruno: Yeah, I think it's a good question, Scott. I haven't heard of any concerns of double ordering in aerospace. I think there's still, you know, supply chain constraints out there that everybody has their orders. There's long lead times, but no, I've heard nothing about double ordering. You know, as we go through this balance of air traffic returning to pre-COVID levels, you know, different manufacturers ramping up to higher rates, you know, it's...
Scott Reed Davis: Yes.
Speaker Change: It's a good question Scott I haven't heard of any concerns of double ordering in aerospace I think there is still supply chain constraints out there that.
Todd M. Leombruno: Everybody has their orders.
Todd M. Leombruno: Long lead times, but no I've heard nothing about double ordering.
Todd M. Leombruno: And as we go through this balance.
Todd M. Leombruno: Air traffic returning to pre Covid levels.
Todd M. Leombruno: Different manufacturers ramping up to higher rates.
Todd M. Leombruno: <unk>.
Todd M. Leombruno: It's a balance and MRO I believe will continue to be strong so.
Todd M. Leombruno: For the foreseeable future, we see that as strong.
Todd M. Leombruno: Hey, Scott, one thing I want to say, you probably know this, Scott, but, you know, with MEG-IT specifically in the quarter, our aftermarket business is 47% of the total aerospace business, so it's up. Jenny mentioned air traffic is back to pre-COVID numbers, and it's really a combination of the...
Speaker Change: Hey, Scott one thing I will add your own view.
Todd M. Leombruno: You probably know this scott, but with Meg it specifically in the quarter, our aftermarket business is 47% of the total aerospace business. So.
Todd M. Leombruno: It's up Jenny mentioned the.
Todd M. Leombruno: The.
Todd M. Leombruno: Air traffic is back.
Todd M. Leombruno: Back to pre Covid numbers, and it's really a combination of expanded aftermarket mix within the company.
Todd M. Leombruno: I certainly need to replace some wheels and brakes based on what we read out there.
Scott: Yeah, well it looks like they certainly need to replace in wheels and brakes based on what we read that out there. So good luck guys. Thank you.
Todd M. Leombruno: Scott.
Operator: Our next question is from the line of Andrew Obin with Bank of America. Please answer your questions.
Todd M. Leombruno: Our next question is from the line of Andrew <unk> with Bank of America. Please proceed with your question.
Andrew Burris Obin: Yes, good morning. Good morning, Andrew.
Todd M. Leombruno: Hey, good morning, good morning, Andrew.
Andrew Burris Obin: Just to follow up on airspace and air margins, you know, you guys have really emphasized one-time mix over the past couple of quarters, I guess high spare impact. But, you know, we're up sequentially from 1Q to 2Q. What's going so well?
Andrew Burris Obin: Just to follow up on aerospace on Aero margins, you guys have really emphasized onetime mix over the past one time mix benefits over the past couple of quarters, I guess highest impact.
Andrew Burris Obin: But we are up sequentially from Q to Q.
Andrew Burris Obin: What's going so well.
Todd M. Leombruno: Well, as we were just talking about, the mix, Q3 was actually, the aftermarket mix was actually 48%, year-to-date we're at 47%. So, you know, the combination of what we had in our portfolio and adding to what we got with MEG-IT, it's been a big increase, and it is excellent growth from our booming business in other areas. Also, military aftermarket growth is higher because of these public-private partnerships we have at the Department of Defense. So a lot of things are going well. We're really pleased and well-positioned with this, you know, this portfolio of complementary technologies. So I am really positive about this going well into the future.
Andrew Burris Obin: Well as you were just talking about.
Andrew Burris Obin: The next Q3 with actually aftermarket mix was actually 48% year to date.
Todd M. Leombruno: So.
Todd M. Leombruno: The combination of.
Todd M. Leombruno: What we had in our portfolio and adding to what we got with negate.
Todd M. Leombruno: It's been a big increase and it is excellent growth from our braking business in other areas.
Todd M. Leombruno: Also military aftermarket growth is higher because of the public private partnerships. We have the department of defense, So a lot of things going well.
Todd M. Leombruno: Pleased and well positioned.
Todd M. Leombruno: <unk>.
Todd M. Leombruno: This portfolio of complementary technologies, so really positive about this going well into the future.
Andrew Burris Obin: Gotcha. And just a question on borders in North America.
Todd M. Leombruno: Gotcha.
Todd M. Leombruno: Just a question on <unk>.
Todd M. Leombruno: Orders in North America, I assume you highlighted.
Andrew Burris Obin: Softness in off highway and transportation.
Andrew Burris Obin: I think you highlighted softness in off-highway and transportation. Maybe you could just walk us through what you are seeing on a mobile, and I mean it's been a while since we used those terms, but mobile and stationary. And am I correct just to think that it's a lot of Ag and Class A trucks? And just how much visibility do you have, because you are saying this stock can continue at a decelerating rate, but where do you see the bottom? Thank you.
Andrew Burris Obin: You could just walk us through what are you seeing on the mobile.
Andrew Burris Obin: It's been a while since we use those terms, but mobile and stationary antibiotics are anxious to think that it's a lot of.
Andrew Burris Obin: And class a trucks and just how much visibility do you have because you are seeing destocking continuing at a decelerating rate, but where do you see the bottom. Thank you.
Jennifer A. Parmentier: Okay, so I'll just do a little run-through of the markets. Obviously, we know aerospace is very strong, and we've raised our guidance because of that.
Speaker Change: Okay. So I'll just I'll do a little run through of the of the market.
Andrew Burris Obin: Obviously, we know aerospace is very strong.
Jennifer A. Parmentier: And we've raised our guidance because of that I mean, if you take a look at.
Jennifer A. Parmentier: If you take a look at energy, oil, and gas, that remains positive. Implants, industrial equipment, low single-digit negatives; more negatives in Europe, less in North America. Transportation, mid-single-digit negative. Automotive is down globally, and I would again say that Europe is more negative there. High single-digit negative. Primarily construction and agriculture, and both of them are equally negative, Andrew. Again, Europe, a little more negative. When we take a look at HVAC and refrigeration.
Jennifer A. Parmentier: Energy oil and gas that remains positive.
Jennifer A. Parmentier: Plant industrial equipment, low single digit negative more negative and Europe less in North America.
Jennifer A. Parmentier: Transportation midst, it's Matt.
Jennifer A. Parmentier: Mid single digit negative automotive is down globally.
Jennifer A. Parmentier: And I would again say that Europe is more negative there.
Jennifer A. Parmentier: Off highway.
Jennifer A. Parmentier: High single digit negative.
Jennifer A. Parmentier: Primarily construction and AG.
Jennifer A. Parmentier: And both of them.
Jennifer A. Parmentier: Our equally negative Andrew again on Europe, a little more negative.
Jennifer A. Parmentier: Take a look at HVAC and refrigeration.
Jennifer A. Parmentier: It is still double-digit negative, but it's some pretty tough tops compared to prior. It was quite positive this time last year, mainly driven by the residential business. It is improving. There's an improvement in commercial.
Jennifer A. Parmentier: It is it is still double digit negative, but it has some pretty tough comps to prior it was it was.
Jennifer A. Parmentier: Quite positive. This time last year are mainly driven by the residential business is improving there is an improvement in commercial.
Jennifer A. Parmentier: And as you were just mentioning de-stocking, distribution is slightly negative, and we saw that de-stocking lingering through the quarter. So when we take a look at where we're at today, industrial North America orders have been negative for five quarters now. And we're still, you know, very proud of this, still guiding to 1.5% organic growth for the company, and historically, you would see that orders go negative for an average of six quarters.
Jennifer A. Parmentier: And as you were just mentioning destocking distribution is slightly negative and we saw that Todd Destocking lingering.
Jennifer A. Parmentier: Through the quarter, so when we take a look at.
Jennifer A. Parmentier: Where we're at today industrial North America orders had been negative for five quarters now.
Jennifer A. Parmentier: And we're still.
Jennifer A. Parmentier: Very proud of it still guiding at one 5% organic growth for the company and historically.
Jennifer A. Parmentier: You would see that orders go negative for an average of six corners and all portfolio total Parker went negative same quarter as industrial in North America, So big difference here.
Jennifer A. Parmentier: And the old portfolio, total Parker went negative in the same quarter as industrial North America, so a big difference here. What I would also say is the backlog remains strong. Backlog dollars are at near-record levels, and as we spoke about in previous quarters, consistent coverage, really holding in there, as we've talked about before, pretty much double what they've been historically. And while we have Q3 order conditions reflected in the guide, I would have to say that April orders are off to a better start, and we might be seeing the end of destocking here.
Jennifer A. Parmentier: What I would also say that the backlog remains strong.
Jennifer A. Parmentier: Backlog dollars are at near record levels and as we spoke about in quarters past consistent coverage.
Jennifer A. Parmentier: Really holding in there as we've talked about before pretty much doubled what they've been historically.
Jennifer A. Parmentier: While we have Q3 order conditions are reflected in the guide.
Jennifer A. Parmentier: I would have to say that April orders are off to a better start and we might be seeing the end of destocking here.
Jennifer A. Parmentier: I'll take that. Thank you so much.
Speaker Change: I'll take that thanks, so much.
Speaker Change: Thank you.
Operator: Our next question is from the line of David Raso with Evercore ISI. Please answer your questions.
Jennifer A. Parmentier: Our next question is from the line of David Raso with Evercore ISI. Please proceed with your questions.
David Michael Raso: Hi, thank you. The implied fourth quarter for International, the organic growth rate weakening from the third quarter, can you just help us, maybe geographically or however you'd like to take us through that cadence? And is there any sort of visibility on when those declines start to lessen?
Speaker Change: Hi, Thank you the implied fourth quarter for international.
David Michael Raso: The organic growth rate weakening from the third quarter can you just help us maybe geographically or however, you'd like to take us through that cadence and is there any sort of visibility on when those declines start to lessen.
Jennifer A. Parmentier: Thank you, David. So, you know, obviously, orders went from minus five in Q2 to minus eight in international. So that is definitely what is reflected in the guide.
Speaker Change: Thank you David.
David Michael Raso: Obviously orders went from minus five in Q2 to Internet and international to minus eight.
Jennifer A. Parmentier: That is definitely what is reflected in the guide Destocking continued as I was mentioning earlier.
Jennifer A. Parmentier: De-stocking continued. As I was mentioning earlier, you know, softness and off-highway and transportation and industrial equipment, we just really see that the macroeconomic indicators are still in contraction in Europe. You know, really, the sales for the quarter were in line with our expectations, but the orders in the quarter are really what has driven us to take that down in Q4 and slightly for the year. We had it at a negative two for the year, and now we have it at a negative two and a half.
Jennifer A. Parmentier: Softness in off highway and transportation and industrial equipment, we just really see that the macroeconomic indicators.
Jennifer A. Parmentier: Indicators are still in contraction in Europe.
Jennifer A. Parmentier: Really.
Jennifer A. Parmentier: Sales for the quarter were in line with our expectations that the orders in the quarter really what has driven us to.
Jennifer A. Parmentier: Take that down in Q4 and slightly for the year, we had it at a negative two for the year and that we haven't had a negative two and a half.
Jennifer A. Parmentier: So, you know, we're not seeing the same thing that we were seeing in North America at the start of this quarter. So, we're not signaling any turn there yet, but we're keeping a close eye on it.
Jennifer A. Parmentier: No.
Jennifer A. Parmentier: We're not we're not seeing the same thing that we're seeing in North America at the start of this quarter.
Jennifer A. Parmentier: So.
Jennifer A. Parmentier: Not signaling any turned there yet, but we're keeping a close eye on it.
David Michael Raso: Okay, I'm just trying to get a sense of when, if North America, you sound a little more encouraged for April. I'm just making sure the international doesn't sort of dampen.
Speaker Change: Okay, I'm, just trying to get a sense of when if North America you sound a little more encouraged for April I'm, just making sure the international doesn't sort of dampened.
David Michael Raso: What I would suspect you think maybe North America organic could turn positive in a couple of quarters.
Speaker Change: Maybe sort of give you kind of address that thought if you could.
Todd M. Leombruno: Also, if I can say so, we're usually
David Michael Raso: I will start with Michael.
David Michael Raso: Yeah, usually north America historically, the average has been six quarters and then we see a churn right.
Todd M. Leombruno: International has just.
Todd M. Leombruno: It's been choppy, it's been really choppy over the last several quarters. So it's hard to call.
Todd M. Leombruno: What point that would fall in North America.
Todd M. Leombruno: We're just going to have to keep a close eye on it and well we'll have a better update for you next quarter.
Todd M. Leombruno: And then lastly, price costs. Can you give us an update on how that's trending? And I'll hop off. Thank you. Yeah, so we're, you know, we're back to what we would call a normal pricing environment with our twice-a-year price increase. As a reminder, with prices, we went out early and often. We believe that price to be sticky. We still have inflation out there, and I think we've done a really good job, the teams have done a good job, maintaining, you know, our margin neutrality. So we're back to more of a normal environment right now.
Speaker Change: And then lastly price costs, you can give us an update on how that's trending and then I'll hop off thank you.
Todd M. Leombruno: We're back to what we would call.
Speaker Change: A normal pricing environment with doing our twice a year price increases.
Speaker Change: As a reminder, with price.
Speaker Change: We went out early and often.
Speaker Change: We believe that price to be sticky.
Todd M. Leombruno: <unk>.
Todd M. Leombruno: We still have inflation out there and.
Speaker Change: I think we've done a really good job the team has done a good job at.
Speaker Change: Maintaining our margin neutrality.
Speaker Change: Back to more of a normal environment.
Speaker Change: Right now.
Speaker Change: Thank you.
David Michael Raso: Thanks, David.
Speaker Change: Thanks, Dave Thanks, David.
Operator: Our next question is from the line of Joe Ritchie with Goldman Sachs. Please proceed with your questions.
Todd M. Leombruno: Our next question is from the line of Joe Ritchie with Goldman Sachs. Please proceed with your questions.
Speaker Change: Hi, good morning.
Joseph Alfred Ritchie: Good morning. And so, we're getting lots of questions, obviously, on the turn in North America. And I'm just curious, you know, so... Really helpful to hear that April's a little bit better and that we need to work towards the end of de-stocking. Just curious, like, how do you think that this potential inflection will actually work? And what I'm asking specifically is, you know, with your distributors, what are the conversations like? Do you feel like things could be low and slow just given we've been seeing this de-stocking now for several quarters? Just any comment around that would be really helpful.
Speaker Change: Good morning, and so yeah, so we're getting lots of questions obviously.
Joseph Alfred Ritchie: The turn in North America, and I'm, just I'm just curious is yes.
Joseph Alfred Ritchie: Really helpful to hear that April a little bit better and then we need to work towards the end of Destocking just curious like how do you think this potential.
Joseph Alfred Ritchie: Potential inflection actually will work and what I am asking specifically.
Jennifer A. Parmentier: Well, I would tell you that the distributors have been positive for a couple quarters now. They've been sharing with us how they've been able to participate in some nice work with some reinvestment in some factories, you know, maybe some early days on some of these mega-CAPEX projects. But, you know, just really, really a positive sentiment. I wouldn't tell you at this point anybody's indicating... A slow move or a steep climb; it's just what we're seeing, you know, early in this quarter. It's just really kind of looking like we might be seeing the bottom.
Joseph Alfred Ritchie: With your distributors what are the conversations like do you feel like it.
Jennifer A. Parmentier: It could be low and slow just given we've been we've seen with Destocking now for several quarters, just any any comment around that would be would be really helpful.
Jennifer A. Parmentier: Well.
Jennifer A. Parmentier: I would tell you that the distributors have been positive for a couple of quarters now right they've been sharing with us how they've been able to participate in.
Jennifer A. Parmentier: Some some nice to work with.
Jennifer A. Parmentier: Some reinvestment in some factories and maybe some early days on some of these mega Capex projects.
Jennifer A. Parmentier: But it's really really a positive sentiment.
Jennifer A. Parmentier: I wouldn't tell you that at this point is indicating.
Jennifer A. Parmentier: A slow move our steep climb it's just what we're seeing early in this quarter.
Jennifer A. Parmentier: It's just really kind of looking like we might be seen bottom.
Speaker Change: Okay, Yes.
Joseph Alfred Ritchie: Yeah, no, that's like, that's great to hear. I guess, you know, in maybe just kind of thinking through the questions around the industrial international business as well, like, you guys have done a really good job of expanding margins, even at a time when things haven't, you know, volumes have been negative. I'm just curious, like, if we're, if it's slower to pick up in the international business, how do you feel about, you know, the margin trajectory of that business? I have a lot of confidence.
Speaker Change: Great to hear I guess.
Jennifer A. Parmentier: Maybe just kind of thinking through also.
Jennifer A. Parmentier: The question is around the industrial international business as well like you guys have done a really good job of expanding margins even at a time when things haven't.
Joseph Alfred Ritchie: Volumes have been negative I'm, just curious like if were.
Joseph Alfred Ritchie: If it's slower to pick up in the international business, how do you feel about.
Joseph Alfred Ritchie: The margin trajectory of that business from here.
Joseph Alfred Ritchie: I have a lot of confidence in these team I mean in this in.
Jennifer A. Parmentier: I have a lot of confidence in these teams. I mean, in this environment for the last several quarters, they've just done a great job with cost control and expanding margins. These teams, as I mentioned earlier, are practitioners of the win strategy, and they know what levers to pull. As we've commented in the past, we're never waiting for a downturn or a recession or anything that might happen. We're constantly looking at making sure that... We expand margin.
Joseph Alfred Ritchie: In this environment for the last several quarters, they've just done a great job with cost control and expanding margins. These teams as I mentioned earlier.
Jennifer A. Parmentier: They're practitioners of the win strategy and they know what levers to Paul We've commented in the past we're never.
Jennifer A. Parmentier: I never waiting for a downturn or a recession or or anything that might happen, we're constantly looking at making sure that.
Jennifer A. Parmentier: We expand margin.
Joseph Alfred Ritchie: Awesome. Thanks, Jenny. Look forward to seeing you in a couple weeks.
Speaker Change: Awesome. Thanks, Andy look forward to seeing you in a couple of weeks.
Jennifer A. Parmentier: Right.
Operator: Thank you. Our next question is from the line of Jamie Cook with Truist Securities. Please answer your question.
Jennifer A. Parmentier: Thank you. Our next question is from the line of Jamie.
Joseph Alfred Ritchie: Jamie Cook with <unk> Securities. Please proceed with your question.
Jamie Lyn Cook: Hi, good morning, and congratulations on a nice quarter. I guess, you know, Jenny, if you look at your implied margins for this year, the 24.6%, we're sort of already at, you know, your targeted margins, which I'm assuming, which you guys will address at your earnings day. But I'm just thinking as you're focused on, you know, igniting organic growth for Parker-Hannifin in total, just across the portfolio, to what degree do you have to balance the ability to improve margins much more from here?
Speaker Change: Hi, good morning, and congratulations on a nice quarter I.
Jamie Lyn Cook: I guess you know Jenny if you look at your implied margins for this year. The 24, 6% were sort of already at your Youre.
Jamie Lyn Cook: <unk> margins, which I'm, assuming you guys will address at your analyst day, but I'm just thinking as you're focused on.
Jamie Lyn Cook: Igniting organic growth for.
Jamie Lyn Cook: Parker Hannifin in total just broad across the portfolio to what degree do you have to balance the ability to improve margins much more from here just for most industrial companies, having a 25% margin or whatever it's pretty good I'm. Just wondering if we have to put a ceiling sort of on the margins too to get the organic growth.
Jamie Lyn Cook: Just for, you know, most industrial companies, having a, you know, 25% margin or whatever is pretty good. I'm just wondering if we have to put a ceiling sort of on the margins to get organic growth.
Jamie Lyn Cook: And then my second question is, or would you, too? I guess, you don't have to, but would you consider that strategy? And then my second question, you know, just back to the M&A question again. I mean, obviously, Meg, it's been a big positive for you guys. You know, longer cycle business has given you guys the ability to grow organically as industrials weaken. Do we need sort of more long, late cycle aerospace businesses, do you think, to have a more balanced portfolio?
Jamie Lyn Cook: And then my second question is or would you to I guess you don't have to you, but would you consider that strategy.
Jamie Lyn Cook: And then my second question just back to the M&A question again.
Jamie Lyn Cook: Obviously, Meg it's been a big positive for you guys.
Jamie Lyn Cook: In our longer cycle businesses given.
Jamie Lyn Cook: Given you guys the ability to grow that organically industrial's weaker is do we need to sort of more long late cycle aerospace businesses do you think to have a more balanced portfolio.
Speaker Change: Thanks, and I'll get back in queue after that.
Jennifer A. Parmentier: Thanks, Jamie. So, first of all, I would say, you know, we're really proud of our teams for this margin expansion that we have achieved. And as I mentioned earlier, you know, we're not done. We feel like there's still a lot of runway, no pun intended, in WinStrategy 3.0, a lot of opportunity to expand margins. We feel very strongly about our ability to grow differently with this portfolio and with the secular trend.
Jamie Lyn Cook: Thanks. And I'll get back to you after that. Thanks, Jane.
Speaker Change: Thanks, Jamie So first of all I would say.
Jamie Lyn Cook: We're really proud of our teams in this margin expansion that we have achieved.
Jamie Lyn Cook: And as I mentioned earlier.
Jamie Lyn Cook: Done.
Jamie Lyn Cook: We feel like Theres still a lot of runway no pun intended in win strategy three pointed out a lot of opportunity to expand margins.
Jamie Lyn Cook: We feel very strongly about our ability to grow differently with this portfolio and with the secular trends.
Jennifer A. Parmentier: And, you know, we'll have some more updates for you at the investor meeting here in a few weeks, but we're not pulling together a strategy right now that limits us on one or the other. We're just going to stay focused on margin expansion and growing that top line organically. On your acquisition question for more aerospace or what the mix needs to be, it does need to be that longer-cycle business, accretive to growth, accretive to margins, EPS, and complementary technologies.
Jamie Lyn Cook: And.
Speaker Change: We will have some more updates for you at the Investor meeting here in a few weeks, but.
Speaker Change: We're not pulling together our strategy right now that limit set on one or the other.
Jennifer A. Parmentier: It's going to stay focused on margin expansion and growing that top line organically.
Jennifer A. Parmentier: On your acquisition question for.
Jennifer A. Parmentier: More aerospace or what the mix needs to be it does need to be that longer cycle business accretive to growth accretive to margin EPS.
Jennifer A. Parmentier: Complementary technologies all of those things have encompassed the last couple of acquisitions that we've done and.
Jennifer A. Parmentier: All of those things have encompassed the last couple of acquisitions that we've done and is one of the reasons that I believe that we've been so successful with them. So that's the kind of business we're looking for. Real power in these technologies being together, and that's why we often talk about them being interconnected, and, you know, most of our customers buy four or more of these at a time.
Jennifer A. Parmentier: One of the reasons that I believe that we've been so successful with them. So that's the kind of business. We're looking for no magic number on a percentage of aerospace, we obviously like the aerospace business, but we like all of our technologies. So we think there's real power in these technologies being together and Thats why we often talk about them being.
Jennifer A. Parmentier: <unk> and <unk>.
Jennifer A. Parmentier: And you.
Jennifer A. Parmentier: You know.
Jennifer A. Parmentier: Most of our customers bank for a more of these at a time.
Operator: Our next question is from the line of Nathan Jones with Stiefel. I'm pleased to see you with your questions.
Jennifer A. Parmentier: Our next question is from the line of Nathan Jones with Stifel. Please proceed with your question.
Nathan Hardie Jones: Good morning everyone. I guess a bit of a follow up on some of the questions on the on-order rates and expected, you know, improvement in those in the short term. I think, by historical standards, this has been a relatively shallow downturn in the industrial businesses for Parker as well. So I was just interested in your commentary on how you anticipate the shape of that recovery as well, just given that it's been a relatively shallow downturn. Should that lead to maybe a shallower upturn or just kind of your expectations of what the recovery looks like when it happens?
Speaker Change: Good morning, everyone.
Jennifer A. Parmentier: I guess a bit of a follow up on some of the questions on the on the order rates and expected improvement in <unk>.
Nathan Hardie Jones: In the short term.
Nathan Hardie Jones: I think for me by historical standard this has been a relatively shallow downturn in the industrial businesses for Parker as well.
Nathan Hardie Jones: So I was just interested in your commentary on on how you envision the shape of that recovery as well just given that it's been a relatively shallow downtime should that lead to maybe.
Nathan Hardie Jones: Shallow our opto and I was just kind of your expectations on what the recovery looks like when it comes.
Jennifer A. Parmentier: Yeah, I think, you know, I think it's been, to use your terms, shallower than the past, obviously, because we've changed the portfolio. We do have longer lead time business in the industrial part of our business today. We have higher aftermarket business with Clark Corp. We have longer lead time business with Lord, and, you know, as a reminder, we have some aerospace business that sits in the industrial segment, where it belongs with some of those technologies in those groups.
Speaker Change: Yes, I think I think it's been.
Nathan Hardie Jones: To use your term.
Nathan Hardie Jones: Our shallow in the past, obviously, because we've changed the portfolio, we do have longer lead time.
Jennifer A. Parmentier: Business in the industrial part of our business today, we have higher aftermarket with CLARCOR and longer lead time business with Lord and as a reminder, we have some aerospace business that sits in the industrial segment.
Jennifer A. Parmentier: Where it belongs with some of those technologies and those groups. So.
Jennifer A. Parmentier: So I think the portfolio is a reason that it's not as deep as maybe it has been in the past. Going forward, it's hard to say how that's going to move, but I do believe with the secular trends, with some of these projects that are out there, that we're going to like the way we grow differently. So no real indication for you today on, you know, if it's going to be slow and steady or, you know, some spikes, but just, you know, really wanted to share with everybody today that the start of the quarter looks better, and we might be finally seeing an end to this lingering downstacking.
Jennifer A. Parmentier: I think the portfolio is the reason that it's not as deep as maybe as it has been in the past.
Jennifer A. Parmentier: Going forward, it's hard to say, how that's going to move but I do believe with the secular trends with some of these projects that are out there.
Jennifer A. Parmentier: We're going to we're going to like the way we grow differently. So.
Jennifer A. Parmentier: No real indication for you today on if it's going to be slow and steady.
Jennifer A. Parmentier: Sure.
Jennifer A. Parmentier: Some spikes, but just.
Jennifer A. Parmentier: Really wanted to share with everybody today at this time.
Jennifer A. Parmentier: During the quarter looks better and we.
Jennifer A. Parmentier: We might be seeing finally, seeing an end to this lingering destocking.
Jennifer A. Parmentier: Okay.
Nathan Hardie Jones: That would be good to see. A couple questions on margins, or a question on margins, you know, obviously North American margins up 120 basis points on down revenue and industrial and international margins up 10 points on a 6% decline in revenue are very strong margin performance. As we anticipate the return to growth and the end to this, you know, destocking and down cycle here, what kind of incremental margins should we be expecting as we see those industrial businesses return to growth?
Speaker Change: That would be good to say.
Speaker Change: Couple of questions on margins or a question on margin.
Jennifer A. Parmentier: Yeah, obviously, north American margins up 120 basis points on down revenue.
Nathan Hardie Jones: Industrial and international margins up 10 points on 6% decline in revenue.
Nathan Hardie Jones: Very strong margin performance.
Nathan Hardie Jones: As we envision the return to growth in the end to the Destocking and down cycle here, what kind of incremental margins should we be expecting as you say those industrial businesses reach out to Brad.
Todd M. Leombruno: I think you're going to see the normal incrementals that you've seen from us. We target 30 percent. We still think that that's a good number, but you've seen us outperform that in the past. But I think going forward, that's a good number for us.
Speaker Change: I think youre going to youre going to see the normal incrementals that you've seen from US we target, 30%, we still think that that's a good number but.
Nathan Hardie Jones: You've seen us.
Todd M. Leombruno: Outperform that in the past, but I think going forward Thats a good number for us.
Nathan Hardie Jones: Okay, thanks very much for taking my question.
Speaker Change: Okay. Thanks, very much for taking my questions.
Todd M. Leombruno: You.
Operator: Our next questions are from the line of Julian Mitchell with Barclays. Please use your questions.
Todd M. Leombruno: Our next questions are from the line of Julian Mitchell with Barclays. Please proceed with your question.
Julian C.H. Mitchell: Hi, good morning. Maybe I'm just going to apologize, I just wanted to revisit the DI North America sort of top line color just one more time, if that's okay. And it was really sort of relating to the point about, you know, it seems like de-stocking may be nearing an end in the order intake. But you did take down your fourth quarter organic sales assumption for North America. So is that really reflecting the fact that, you know, you've had a five quarter orders decline behind you, but you've only had a two quarter revenue decline behind you in that region?
Speaker Change: Hi, good morning.
Speaker Change: Maybe apologies I just wanted to revisit the.
Julian C.H. Mitchell: North America sort of top line color.
Julian C.H. Mitchell: One more time, if that's okay.
Julian C.H. Mitchell: Really sort of relating to the point around it seems like Destocking, maybe nearing an end in the order intake.
Julian C.H. Mitchell: But you did take down your.
Julian C.H. Mitchell: Fourth quarter.
Julian C.H. Mitchell: Panic sales assumption for North America. So is that really reflecting the fact that you have had a five quarter orders declined behind you, but you've only had a two quarter revenue decline behind you in that region.
Julian C.H. Mitchell: And so we should expect, you know, several quarters of revenue decline commensurate with the longevity of the orders decline. Is that the right way to think about it? Or is there something moving around with the backlog that means, no, that's the wrong answer. We should have a much shorter revenue downturn than the orders downturn. Thank you.
Julian C.H. Mitchell: So we should expect.
Julian C.H. Mitchell: Several quarters of revenue decline.
Julian C.H. Mitchell: Commensurate with that.
Julian C.H. Mitchell: The longevity of the orders decline is that the right way to think about it or there's something moving around with the backlog that means no thats the romance.
Speaker Change: We should have a much shorter revenue downturn than the orders down. Thank you Julian we're not expecting that to linger like that what we really were just trying to signal was that two.
Jennifer A. Parmentier: Yeah, Julian, we're not expecting that to linger like that. What we really were just trying to signal was that, you know, things look better in the month of April than the way we finished Q. Q3. So no, there's no long-lingering expectation of negative growth in North America.
Julian C.H. Mitchell: Things look better in the month of April than the other way we finished Q Q.
Jennifer A. Parmentier: Q3.
Julian: So no theres no.
Julian: Long lingering.
Julian: Expectation for negative growth in North America.
Julian C.H. Mitchell: understood. Thank you.
Speaker Change: Understood. Thank you and then just my second question.
Jennifer A. Parmentier: And I just want to look at revenue in another way, perhaps in industrial would be on the sort of technology.
Julian C.H. Mitchell: And then just my second question, you know, trying to look at revenue in another way, perhaps in industrial, would be on the sort of technology platforms basis. So we saw, you know, around, I think, high single-digit declines in motion and flow and process control in the quarter and sort of flattish in filtration and engineered materials. Realize there are, you know, different moving parts geographically and so forth. But on the filtration and engineered materials side, do you think that that can sort of hold in there better than what happened with the other two industrial tech platforms? Or does it sort of follow them down and then back up just with a lag?
Julian C.H. Mitchell: Platforms basis. So we saw around I think high single digit declines in motion and flow and process control in the quarter.
Julian C.H. Mitchell: And sort of flattish in filtration and engineered materials realized there's different moving parts geographically and so forth, but on the filtration and engineered materials side.
Julian C.H. Mitchell: Do you think that that can sort of hold in there better than what happened in the other two industrial tech platforms already.
Julian C.H. Mitchell: Just sort of follow them.
Todd M. Leombruno: Thank you. Julian, we do. Thanks for pointing that out. We do believe that those businesses could and should grow differently than the motion systems and the flow and process platform. You know, those businesses, motion systems and flow and process, those are the most levered to the distribution network, the highest percentage of distribution sales you've seen, stocking continue over the last couple quarters in that space. We do think that that's kind of nearing an end.
Julian C.H. Mitchell: Down and then back up just with a lag. Thank you Julian we do thanks for pointing that out we do believe that those businesses could and should grow differently than the motion systems and the flow of process.
Todd M. Leombruno: Platform those businesses motion.
Todd M. Leombruno: Systems and flow process. Those are the most levered to the distribution network highest percentage of distribution sales you've seen the destocking continue over the last couple of quarters in that space. We do think that thats kind of nearing an end journey already mentioned, it but filtration heavy aftermarket.
Jennifer A. Parmentier: Jenny already mentioned it, but, you know, filtration, heavy aftermarket, engineering materials, a little bit more of a long recycling business, both in automotive end markets and in some of the transportation markets. So, you know, it kind of supports our strategy over the last many, many years to help the company perform differently, no matter what's going on in the global industrial market. We can perform differently. And I think if you look back over the last 18 months, that's why the order downturn has been less shallow. That's why we've been able to post organic growth as positive, even in industrial, in light of some negative orders. So, you know, I think it's part of our shaping of the portfolio.
Todd M. Leombruno: Engineered materials, a little bit more longer cycle business both in.
Jennifer A. Parmentier: <unk> end markets and then some of the.
Jennifer A. Parmentier: Transportation markets.
Jennifer A. Parmentier: No.
Jennifer A. Parmentier: It kind of supports our strategy over the last many many years to help the company performed differently no matter, what's going on in the global industrial market that we could perform differently and I think if you look back over the last 18 months. That's why the order downturn has been less shallow that's why we've been able to post organic growth is a part.
Jennifer A. Parmentier: Positive even in industrial in light of some negative orders so.
Jennifer A. Parmentier: I think it's part of our shaping of the of the portfolio.
Julian C.H. Mitchell: Yeah, I mean, the portfolio is more resilient, and, you know, the teams across all these businesses are doing a great job using the tools to expand margins. So it's, you know, it's the reason why, with 1.5% organic growth, we can expand margins to 170 basis points. So it's... I've said it before, we're really proud of the whole team.
Jennifer A. Parmentier: The portfolio is more resilient and.
Jennifer A. Parmentier: The teams across all of these businesses.
Jennifer A. Parmentier: Are doing a great job using the tool to expand margin.
Julian C.H. Mitchell: The reason why.
Julian C.H. Mitchell: One 5% organic growth, we can expand margins of 170 basis points.
Julian C.H. Mitchell:
Julian C.H. Mitchell: And like I said before we're really proud of the whole team.
Julian C.H. Mitchell: That's great. Thank you.
Speaker Change: That's great. Thank you.
Speaker Change: Thanks Julien.
Operator: Our next questions are from the line of Mig Dobre with Baird. Please use your questions.
Julian C.H. Mitchell: Our next questions are from the line of Mig <unk> with Baird. Please proceed with your questions.
Mircea Dobre: Thank you for taking the questions. Good morning.
Speaker Change: Thank you for taking the questions good morning.
Mircea Dobre: I also want to talk a little bit about industrial and orders there I'm curious when you kind of exactly your business and you look at the last four or five quarters, how you think about the OE versus distributor demand.
Mircea Dobre: I also sort of want to talk a little bit about industrial and orders there. I'm curious when you kind of examine your business and you look at the last four or five quarters, what do you think about OE versus distributor demand? It seems to me that in this down cycle, we had lower distributor demand occur maybe earlier than what's been going on with OEMs. You know, the destocking process started earlier for distributors, and we're just maybe now really starting to see the OEM production cuts.
Mircea Dobre: It seems to me that in this down cycle, we had lower distributor demand occur maybe earlier than what's been going on with Oems. The destocking process started earlier for distributors and we're just maybe now really starting to see the OEM production cuts.
Mircea Dobre: I'm wondering if that's sort of your experience as well, and if that somehow implies that while the down cycle is shallower, it could actually be longer than the traditional six quarters that you've seen in the past, where things were more centralized.
Mircea Dobre: I'm wondering if that's sort of your experience as well.
Mircea Dobre: And if that somehow implies that while the.
Mircea Dobre: Down cycle, a shallower it could actually be longer than the traditional six quarters that you've seen in the past where things were more synchronized.
Jennifer A. Parmentier: I would say that I do think we saw de-stocking start earlier for distribution, but as we've seen with many of our large OEs, they've talked about higher dealer inventories, and so that's kind of a sense of their own de-stocking when dealer inventories are high. They're not placing as big orders as they have in the past, but I would tell you though, there's nobody canceling orders or pushing them out to any great extent, so I don't feel like this is going to last longer. We're not seeing any signs that are telling us that right now; just the early Q4 signs here that it looks different than it has.
Speaker Change: I would say that I do think we saw destocking start earlier for distribution.
Mircea Dobre: But as we've seen with many of our large oes they talked about higher dealer inventories right and so that's kind of a sense of their own destocking when the dealer inventories are high.
Jennifer A. Parmentier: They're not placing us big orders as they had in the past, but I would tell you, though there is there's nobody.
Jennifer A. Parmentier: Canceling orders are pushing them pushing them out to any great extent so.
Jennifer A. Parmentier: I don't I don't feel like this is going to last longer we're not we're not seeing any signs that are telling us that right now just the just the early Q4 signs here that.
Jennifer A. Parmentier: It looks different than it has.
Todd M. Leombruno: You know, Mig, that mix really still remains the same, you know, that 50-50 mix that we talk about in the industrial segment, so we think there's a nice balance there.
Jennifer A. Parmentier: Meg that mix really still remains the same to that 50 50 mix that we've talked about in the industrial segment. So.
Todd M. Leombruno: We think there's a nice balance there.
Mircea Dobre: Okay. And, you know, on capital deployment, and maybe you'll comment on this in your upcoming investor day, but I'm sort of curious, as you're evaluating M&A, if there's something to be said about expanding the portfolio outside of the core areas that you've been targeting over the past couple years, so a more expansive strategy, or if, you know, sort of the lanes that you've been active in are still Thanks.
Todd M. Leombruno: Okay.
Todd M. Leombruno: On capital deployment.
Speaker Change: And maybe I'll comment on this at your upcoming.
Todd M. Leombruno: Investor day, but I'm sort of curious as you're evaluating M&A is dairy.
Mircea Dobre: Something to be said about expanding portfolio the portfolio outside of the core areas that you've been targeting over the past couple of years.
Mircea Dobre: So more expansive strategy or <unk>.
Mircea Dobre: Sort of the lanes that you've been active in are still the areas you are looking to build.
Mircea Dobre: Okay.
Mircea Dobre: Okay.
Jennifer A. Parmentier: Right now, I would tell you that we're not looking to expand outside of the technologies we have. As I've commented a couple of times externally, we really like this set of technologies. They have a connectivity to them, and we think they're the right ones for our portfolio.
Speaker Change: Right now I would tell you that we're not we're not looking to expand outside of the technologies we have.
Mircea Dobre: Commented a couple times externally.
Jennifer A. Parmentier: It really like this set of technologies.
Jennifer A. Parmentier: They had a connectivity to them and.
Jennifer A. Parmentier: We think they are the right ones for our portfolio.
Jennifer A. Parmentier: Okay.
Speaker Change: Alright appreciate it.
Speaker Change: Thanks, Craig.
Operator: Our next questions are from the line of Jeffrey Sprague with Vertical Research Partners.
Jennifer A. Parmentier: Our next questions are from the line of Jeffrey Sprague with vertical research partners. Please proceed with your questions.
Jeffrey Todd Sprague: Thank you. Good morning, everyone. I guess you can tell we're all hyper-focused on orders, right, Jenny?
Speaker Change: Hey, Thank you good morning, everyone.
Jeffrey Todd Sprague: I guess you can tell we're all like hyper focused on orders right Jonny.
Operator: Yes.
Jennifer A. Parmentier: We are too. We are too.
Jeffrey Todd Sprague: And we are too.
Jeffrey Todd Sprague: Yes.
Jeffrey Todd Sprague: Yes.
Jeffrey Todd Sprague: Yeah. Yeah. Yeah. And I may be even a little more hyper-focused given the way I'm going to phrase my question. It rhymes a little bit with what a couple other people brought up, but, you know, it is interesting when you look at North America, right? Sales growth has outpaced order growth, I think, for, you know, seven quarters until this quarter, and it looks like we've kind of recoupled. You mentioned some backlog, but should we be thinking, really, that, you know, sales and orders are going to be much more tightly correlated here as we try to glean where the return, where the upturn might be?
Jeffrey Todd Sprague: I may be even a little more hyper focus given the way I'm going to phrase my question.
Jeffrey Todd Sprague: Hey, Brian its a little bit with what a couple of other people brought up but.
Jeffrey Todd Sprague: It is interesting when you look at North America right sales growth has outpaced order growth I think for seven quarters until this quarter and it looks like we've kind of re coupled you.
Jeffrey Todd Sprague: You mentioned, some backlog, but should we be thinking really that.
Jeffrey Todd Sprague: Sales and orders are going to be much more tightly correlated here as we.
Jeffrey Todd Sprague: Tried to glean, where the return where the where the upturn might be.
Jennifer A. Parmentier: No, I don't think so, Jeff. I don't... I don't, I don't think we... We should be thinking that way. I think that, again, if I go back to the strength of the backlog and the change in the portfolio, it's different than it was in the past. It's a different company than it was... 10 years ago, five years ago, right? And, you know, we really believe that, you know, once this turns around, we're gonna.
Speaker Change: No I don't think so Jeff.
Speaker Change: I don't think we.
Speaker Change: We should be thinking that way I think that.
Jennifer A. Parmentier: Again, if I go back to.
Jennifer A. Parmentier: The strength of the backlog and the change in the portfolio it's different than it was in the past, it's a different company than it was.
Jennifer A. Parmentier: 10 years ago, five years ago, right and we.
Jennifer A. Parmentier: We really believe that once this turns we're going to grow differently.
Jennifer A. Parmentier: Because of that.
Todd M. Leombruno: Yeah, Jeff, I would add, you know, obviously every one of these things we go through is a little bit different. We did come off two years of double-digit organic growth, right? So there was a significant amount of demand. I think if you've seen that inventory levels moderate throughout the year, we've kind of... that thing, but as Jenny said, the backlog really... It's pretty strong. It's at near all-time highs. We continue to pressure test that to make sure that it's real and legitimate.
Speaker Change: Yes, Jeff I would add to that obviously every one of these.
Jennifer A. Parmentier: Things, we go through is a little bit different.
Jennifer A. Parmentier: We did come off two years of double digit organic growth rates. So there was a significant amount of demand.
Speaker Change: You bet.
Todd M. Leombruno: We had to deliver through of those industrial businesses I think have you seen that inventory levels moderate throughout the year, we've kind of reduce.
Todd M. Leombruno: Reduced that thing, but as Jenny said, the backlog really remains pretty strong.
Todd M. Leombruno: Your all time levels, we continue to pressure test that to make sure that it's.
Todd M. Leombruno: I think it's just part of having a longer cycle mix within that portfolio. Great, and if you have the numbers handy, can you just tick through the, kind of, four arrow buckets? We got air, you know, commercial, aftermarket up 25, but just OE and then military, aftermarket, and OE, what those numbers were in the quarter?
Todd M. Leombruno: Real and legitimate I think it's just part of having a longer cycle mix within that portfolio.
Todd M. Leombruno: Great and if you have the numbers handy can you just tick through the kind of the four arrow buckets, we got air commercial aftermarket up 25, but just.
Todd M. Leombruno: The military aftermarket and OE, what those numbers were in the quarter for Q3, Jeff Youre asking for.
Jeffrey Todd Sprague: for Q3. Jeff, you're asking?
Jeffrey Todd Sprague: Yeah, for Q3.
Todd M. Leombruno: Yeah, commercial OEM was up 18%, and that was mainly, you know, based on strong, narrow and wide body growth. MRO was up 26%. Same thing, air traffic recovery, things we've talked about. Military OEM, 7%, and MRO, 14%.
Todd M. Leombruno: For Q3.
Todd M. Leombruno: Commercial OEM win.
Todd M. Leombruno: 18%.
Jeffrey Todd Sprague: And that was mainly.
Jeffrey Todd Sprague: Just on strong narrow and wide body growth MRO.
Speaker Change: MRO up 26%.
Todd M. Leombruno: Same thing air traffic recovery things, we've talked about.
Jeff: Military OEM, 7%.
Jeff: And MRO, 14%.
Jeffrey Todd Sprague: Thanks a lot. I'll leave it there.
Speaker Change: Thanks, a lot I'll leave it there.
Todd M. Leombruno: Jeff, I would just remind everyone that it's all organic at this point, too. Yes. Thank you, Todd.
Speaker Change: Yes, Jeff I would just remind everyone. That's all organic at this point, yes. Thank you Scott.
Todd M. Leombruno: Organic.
Speaker Change: Thank you.
Operator: Our next questions are from the line of Joe O'Day with Wells Fargo. Please proceed with your questions.
Todd M. Leombruno: Our next questions are from the line of Joe O'dea with Wells Fargo. Please proceed with your questions.
Joseph Alfred Ritchie: Hi, good morning. Sorry to bore you, but I'll stick with the common theme. Just wanted to get a little color around, I mean, certainly encouraging commentary on kind of North America sort of cycle and demand. I guess as it relates to what's implied for the fourth quarter, it looks like a larger kind of sequential revenue decline from 3Q to 4Q than, you know, what we've seen over the last number of years outside of COVID.
Jeff: Hi, good morning.
Speaker Change: Sorry to bore you, but I'll stick with the common theme and.
Joseph Alfred Ritchie: Just wanted to get a little color around I mean, certainly encouraging commentary on North America sort of cycle and demand I guess as it relates to what's implied for fourth quarter it looks like.
Joseph Alfred Ritchie: A larger sequential revenue decline from <unk> to <unk>.
Joseph Alfred Ritchie: <unk>.
Joseph Alfred Ritchie: What we've seen over the last number of years outside of Covid.
Joseph Alfred Ritchie: And so, you know, just kind of sequentially, what you're anticipating there, you know, the orders seemed like they were stable from 3Q to 4Q, I think you said, or from 2Q to 3Q, I think you said dollars up. And so just what's kind of driving maybe a little bit softer sequential trend there, because it sounds like otherwise things are holding and even improving.
Joseph Alfred Ritchie: And so just kind of sequentially.
Joseph Alfred Ritchie: Youre anticipating there the orders seemed like they were stable from <unk> to <unk> I think you said or from <unk> to three <unk> that you said dollars up.
Joseph Alfred Ritchie: And so just what's kind of driving maybe a little bit softer sequential trend there because it sounds like otherwise things are holding and even improving.
Todd M. Leombruno: Yeah, so, as I mentioned earlier, the guide is based on Q3 order rates, and you are right, they did stay at negative four. But if you look at the sales dollars, Q4 dollars are in line with Q3, so that's why we're signaling that minus four versus approximately minus one that we had previously.
Speaker Change: Yes, so as I mentioned earlier.
Joseph Alfred Ritchie: The guide is based off of Q3 order rates you're right. They did stay at.
Joseph Alfred Ritchie: Got it. Okay, that's helpful.
Joseph Alfred Ritchie: At negative four but if you look at the sales dollars Q4 dollars are in line with Q3. So that's why we're signaling that minus four versus the approximately minus one that we had previously.
Jennifer A. Parmentier: And then just a question in terms of pricing sensitivity and just to kind of understand customer experience. When a customer walks into a distributor, are they typically walking in knowing exactly what they want to buy in a Parker product? Or are they kind of looking at prices and shopping between Parker and competitors, just trying to understand how much price shopping goes on versus how much is kind of predetermined and brand loyal?
Speaker Change: Got it okay. That's helpful.
Joseph Alfred Ritchie: And then just.
Speaker Change: Question in terms of kind of.
Joseph Alfred Ritchie: Pricing sensitivity and just to kind of understand customer experience.
Jennifer A. Parmentier: When a customer walks into a distributor right.
Jennifer A. Parmentier: Are they typically walking in knowing exactly what they want to buy and the Parker product or are they kind of looking at prices and shopping between Parker competitors, just trying to understand how much price shopping goes on versus how much is just kind of pre determined and brand loyal.
Jennifer A. Parmentier: You know, first of all, I think the Parker brand is very strong, and people are looking for Parker products when they walk into a Parker distributor. And they need a part, and they need it now, right? So it's not what I would characterize as price shopping; it's availability and then having that person standing behind the counter who knows how to apply that part, how to help them get the right part if they don't know exactly what they need or they don't know exactly what replacement is in order.
Speaker Change: Yes first of all I think the Parker brand is very strong and people are looking for Parker products when they walk into a Parker distributor.
Jennifer A. Parmentier: And they need apart and they need it now right. So.
Jennifer A. Parmentier: It's not what I would characterize as price shopping it's availability and then having that person standing behind the counter who knows how to apply that part how to help them get the right part if they don't know exactly what they need or they don't know exactly what replacement is an order so.
Jennifer A. Parmentier: So they're walking in to get help, and they're walking in to get a product. And that really is... What is so special about the partnership that we have with our distributors; they're just an extension of our engineering team, and they provide great value and service to many customers.
Jennifer A. Parmentier: They are walking in to get help and they're walking in to get our product and that really is.
Jennifer A. Parmentier: What is so special about the partnership that we have with our distributors. There are just an extension of our of our engineering team and they provide a great value and service to many customers.
Jennifer A. Parmentier: Okay.
Joseph Alfred Ritchie: That's helpful. Thank you.
Speaker Change: That's helpful. Thank you.
Jennifer A. Parmentier: Okay.
Operator: Thank you. Our next question is from the line of Joe Giordano with TD Cowen.
Jennifer A. Parmentier: Thank you. Our next question is from the line of Joe Giordano with TD Cowen. Please proceed with your question.
Joseph Craig Giordano: Hey guys, thanks for taking my questions. Hey, on the aerospace side, so you know, given all that's happening, I know you're in your aerospace portfolio is very broad, but if we just kind of narrow into like OEM commercial, like given what's going on with Boeing and the reduction in rates there, like it doesn't sound like they've told any of their suppliers anywhere to slow down what they're shipping to them given supply chains, but like is there, at what point do you see risk to that dynamic where build rates are down but everyone's still shipping the same and inventories must be building over there?
Speaker Change: Hey, guys. Thanks for taking my questions.
Joseph Craig Giordano: Hi, Joe.
Joseph Craig Giordano: Hey, Amit.
Joseph Craig Giordano: On the aerospace side, so given all this happening I know you are in your aerospace portfolio was very broad, but if we just kind of narrow until like OEM commercial like given what's going on with Boeing and the reduction in rates there. It doesn't sound like David told any of their suppliers anywhere to slow down what their shipping to them given supply chains, but like is there.
Joseph Craig Giordano: At what point do you see risk to that dynamic where build rates are down but everyone's still shipping the same inventory must be building over there.
Jennifer A. Parmentier: You know, we stay in close contact with all the airframe manufacturers, and our aerospace team talks to the Boeing team on a regular basis, so what we're seeing is consistent with what they've talked about most recently, production in the 30s. They have signaled that the rate increase isn't going to happen right now, but we are committed to making sure that we are at pace with them and that we continue to supply product to them to help them reach their goals, so we're not seeing any signs of that slowing down right now.
Speaker Change: We stay in close contact with all the airframe manufacturers in our aerospace team talks to the Boeing team on a regular basis. So.
Jennifer A. Parmentier: What we're seeing is consistent with what they've talked about most recently <unk>.
Jennifer A. Parmentier: Production in the thirties.
Jennifer A. Parmentier: They have to take note that the rate increase isn't going to happen right now but.
Jennifer A. Parmentier: We are we are committed to.
Jennifer A. Parmentier: Make sure that we are at pace with them and that we continue to supply product to them to help them reach their goals. So we're not seeing any signs of.
Jennifer A. Parmentier: That's slowing down right now.
Todd M. Leombruno: You know, Joe, and I talked about it, but, you know, when you think about that mix, it's nearly 50-50 aftermarket versus OEM in the aerospace industry. So, you know, that's helpful as well.
Speaker Change: Joe to what we've talked about it but I just think about that mix.
Jennifer A. Parmentier: It's nearly 50 50 aftermarket versus OEM in the aerospace business. So that's helpful as well.
Joseph Craig Giordano: Yeah. Just on price, you mentioned you're back to, like, a normalized situation here. I guess inflation is kind of tough to figure out. You have some things going up, like copper, and some things going down. If we get into a situation where inflation is consistently rising rather than falling again, how do you think about your customers' either willingness or ability to accept prices to the same extent that they did last year? Well, you know, I think we, you know, we've
Speaker Change: Yes for sure.
Todd M. Leombruno: Just on price you mentioned you're back to like normalized situation here I guess inflation is kind of tough to figure you have some things going up like copper or some things going down.
Joseph Craig Giordano: If we get into a situation where inflation is more consistently rising and falling again, how do you think about your customers either willingness or ability to accept price to the same extent that they did last cycle.
Jennifer A. Parmentier: Well, you know, we've talked about how, you know, our pricing team, our pricing muscle is strong, and one of the things that I think we even got stronger during these last couple of years is really looking at the total cost of inflation. So it's not just material, right? It's all of those things that just hit extraordinary levels all at once. And while those aren't, you know, easy conversations, you know, they're conversations that we had, and if we needed to have them again, we would.
Joseph Craig Giordano: Well I think we.
Joseph Craig Giordano: You've talked about how our.
Joseph Craig Giordano: Our pricing.
Joseph Craig Giordano: <unk>, our pricing muscle is strong and one of the things that I think we even.
Jennifer A. Parmentier: Got stronger during these last couple of years, it's really looking at the total cost of inflation. So it's not just material right. It's all of those things that just hit extraordinary level all at once.
Jennifer A. Parmentier: And while those aren't easy conversations there are conversations that we had and if we would need to add them again, we would.
Jennifer A. Parmentier: They're based on facts, they're based on data, and, you know, we will cross that bridge when we come to it. But as I mentioned earlier, we're back in more of a normal pricing environment, but I believe it's sticky because inflation's still out there.
Jennifer A. Parmentier: They are based on facts are based on data and.
Jennifer A. Parmentier: We would cross that bridge when we come to it but as I mentioned earlier, we're back in more of a normal pricing environment, but I believe it's it's sticky because inflation is still out there.
Speaker Change: Thank you guys.
Speaker Change: Thank you.
Operator: Our next question is from the line of Brett Linzey with Mizuho. Please answer your question.
Jennifer A. Parmentier: Our next question is from the line of Brett Linzey with Mizuho. Please proceed with your questions.
Brett Logan Linzey: Good morning, all. Good morning, Brett. Good morning.
Speaker Change: Hi, good morning, all.
Speaker Change: Good morning.
Brett Logan Linzey: Yeah, the first question is on business realignment charges. So it looks like the 24 expectation dropped to $57 million from $70. Anything to glean there? Is it just timing on projects, or is there, you know, some cost to achieve, perhaps moving lower? Yeah, it's just a minor, minor tweak. I would call it more timing than anything, uh, maybe getting some of those done at a little bit of a lower cost as well. So, we just kind of updated it based on, uh, you know, the best look we had.
Brett Logan Linzey: Yeah first first question is on the business realignment charges. So it looks like the 24 expectation dropped to $57 million from 70.
Brett Logan Linzey: Any anything to glean there or is it just timing on projects or is there some costs to achieve perhaps moving lower any thoughts there.
Brett Logan Linzey: Yes, it's just a minor minor tweak I would call it more timing than anything maybe getting some of those done at a little bit of a lower cost as well. So we just kind of update it based on the best look we have from the team.
Todd M. Leombruno: Okay, great. And then just on pricing, I know you don't disclose the actual price, but was it positive in both those industrial segments? And I'm just curious about any competitive behavior on price in some of the more challenged regions like Europe or Asia.
Speaker Change: Okay, Great and then just on pricing I know you don't disclose the actual price, but was it positive in both those industrial segments and I'm just curious on any competitive behavior on price and some of the more challenged regions like Europe or Asia.
Jennifer A. Parmentier: No, you're right, we don't comment on the exact price, and as I mentioned earlier, you know, we went out early and often, so we've protected our margin to make sure that it remains neutral going through everything that's happened in the last couple years, and that's where we stand today with prices.
Speaker Change: Yes, you are right. We don't we don't comment on the exact price and as I mentioned earlier, we went out early and often so we've protected our margin to make sure that it maintained neutral going through everything that's gone on the last couple of years.
Jennifer A. Parmentier: And that's where we stand today with price.
Todd M. Leombruno: Yeah, I mean, if you're asking about rolling back prices, we haven't done that, right? Jenny mentioned that we're still in an inflationary environment, and a lot of those costs that went up, you know, have not gone back down. So we feel very much tied to the price. We don't do it randomly. We do it when we need to, and that's kind of what our process is.
Jennifer A. Parmentier: Yes, I mean, if you're asking about rolling price back we have not done that right.
Jennifer A. Parmentier: Jenny mentioned that we're still.
Jennifer A. Parmentier: Inflationary environment and a lot of those costs that went up.
Todd M. Leombruno: Have not gone back down so.
Todd M. Leombruno: We feel.
Todd M. Leombruno: Very much tied to the price we don't do it randomly we do it we need to.
Todd M. Leombruno: That's kind of where our process has been.
Speaker Change: Okay, great congrats on the performance.
Speaker Change: Thank you.
Operator: Hey, Rob, I think we've got time for one more. We've got time for one more question here if we've got somebody.
Todd M. Leombruno: Hey, Ross.
Speaker Change: Number one more we've got time for one more question here if we've got somebody sure sure. Our next question will be from 90 to one line of Nigel Coe with Wolfe research.
Operator: Sure, sure. The next question will be from Nigel Coe with Wolf Research.
Nigel Edward Coe: Oh, thanks. Yeah, I'm here. Can you hear me? Okay, so coming back to April, let's talk about April again. Maybe you could just hone in on North America where you're seeing the improving trends? And the spirit of the question is that it feels like in your off-highway and even on-highway customers things aren't necessarily getting better. So I'd be curious about which pockets of customer groups you are seeing that improvement. And then, if we zoom over to Europe, are we seeing a similar degree of improvement over there, or do we still see pretty negative trends?
Nigel Edward Coe: Hi, Joe are you there yes.
Nigel Edward Coe: Yes, I'm here can you hear me.
Nigel Edward Coe: Good to hear you yeah, yeah. Thanks squeezing me in.
Nigel Edward Coe: Okay, So coming back to April if that's the way it broken maybe.
Nigel Edward Coe: Maybe could you just.
Nigel Edward Coe: One in North America, where you're seeing the improving trends there.
Nigel Edward Coe: The question is it.
Nigel Edward Coe: It looked like in your off highway and on even in the on highway customers things necessarily getting better. So I'd be curious on what your pockets of customer groups are you seeing that improvement and then if we do move to Europe.
Nigel Edward Coe: We've seen a similar degree of improvement over there or do we still see pretty pretty pretty Mexicans.
Jennifer A. Parmentier: You know, I would say, Nigel, at this point, I'm just commenting on how I see it better in April. You know, I don't really want to go into any detail about markets or specifics, but I would say that, you know, where we're seeing this is mainly North America. It's not to say that there's nothing positive in Europe or Asia, but the comments about April are mainly about North America, where we're seeing, you know, quite possibly that this de-stocking is coming to an end and that we'll see a turn here.
Speaker Change: I would say Nigel at this point.
Nigel Edward Coe: Just.
Nigel Edward Coe: Commenting on how I see it better in April.
Speaker Change: I don't really want to go in.
Jennifer A. Parmentier: Detail in end markets or specifics.
Jennifer A. Parmentier: But I would say that where we're seeing it is mainly north America, it's not to say that there's nothing positive in Europe or Asia.
Jennifer A. Parmentier: But the comments about April are mainly North America, what we're seeing.
Jennifer A. Parmentier: Quite.
Jennifer A. Parmentier: Might be that the destocking is coming to an end.
Jennifer A. Parmentier: And that.
Jennifer A. Parmentier: That we'll see it turn here.
Nigel Edward Coe: Yes, it's got to come to that at some point, I suppose. And then switching over to margin, and SG&A productivity is really impressive. I think underlying SG&A came in at 13.5% this quarter. So I think for the fall year, we're sort of in that 14% zone. Is that the right range going forward? Do you think you can maintain a sort of sub-15% SG&A for sales? That's the question really, you know, is there anything sort of like discretionary you're controlling at this point, or is this a good range going forward? You know, Nigel, thanks for recognizing that, you know, we
Jennifer A. Parmentier: Yes, it's going to come in at some point and then switching over to some margin and SG&A productivity is really impressive.
Nigel Edward Coe: I think underlying SG&A came in at 13, 5% this quarter.
Speaker Change: So I think for the full year sort of in that 14% zone.
Speaker Change: Is that the right range going forward do you think you can maintain sort of sub 15% SG&A to sales.
Nigel: That's the question.
Speaker Change: Is there anything sort of like discretionary you're controlling at this point. So is this a good range going forward.
Todd M. Leombruno: Nigel, thanks for recognizing that. We have always prided ourselves on being frugal when it comes to SG&A expenses. Quite honestly, we think we can do better. I wouldn't say that there's anything that we've been holding off on, right? I mean, the overall level of the business remains extremely high, right? These sales levels are record levels.
Nigel: So thanks for recognizing that we have always prided ourselves on being frugal when it comes to SG&A expenses quite honestly, we think we can do better.
Todd M. Leombruno: I wouldn't say that there's anything that we've been holding off on rate.
Todd M. Leombruno: The overall level of the business remains extremely high rate. These sales levels are record levels.
Todd M. Leombruno: But we hold our team accountable for constantly assessing and making sure we're making the best investments in the business. So we think we can do better when it comes to SG&A, there's no doubt. Great. Okay, thanks. Thanks so much. I think that's all we have time for, so I want to thank everyone for joining us today. As usual, Jeff Miller, our VP of Investor Relations, and Yan Hua, our Director of Investor Relations, will be available if anyone needs any follow-ups. As always, we appreciate your time, your attention, and your interest. So this concludes our FY24 Q3 earnings release webcast, and I wish everyone a great day. Thank you.
Todd M. Leombruno: But we hold our team to constantly assessing and making sure we're making the best investments of the business. So.
Todd M. Leombruno: We think we can be better when it comes to SG&A. It was no doubt.
Todd M. Leombruno: Great Okay. Thanks.
Todd M. Leombruno: Thanks, so much.
Speaker Change: I think that's all we have.
Todd M. Leombruno: Time for so.
Todd M. Leombruno: I want to thank everyone for joining us today as usual, Jeff Miller, our VP of Investor Relations and <unk>, our director of Investor Relations will be available if anyone needs any follows the follow ups.
Todd M. Leombruno: As always we appreciate your time your attention and your interest. So this concludes our FY 2000 for Q3 earnings release webcast and I wish everyone. A great day. Thank you.
Operator: Thank you. Today's conference and webcast has concluded. You may now disconnect your lines at this time and log off your computers. Thank you for your participation and have a wonderful day.
Speaker Change: Thank you today's conference and webcast has concluded you may now disconnect. Your lines at this time and log off your computers. Thank you for your participation and have a wonderful day.