Parker-Hannifin Q3 2024 Earnings Call Transcript

Good morning, Scott.

Good morning.

Well, I often say, Scott, we really like Meggitt, and we wish there were a lot of Meggitt like deals out there for us. Listen, we - first and foremost, as Todd was talking about, we're committed to paying this debt down, right?

We're doing it earlier than we said we would. We're forecasting to be at two times by the end of this fiscal year. But we're always working on that pipeline, building the relationships. The pipeline is robust. There are 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, margins, follow the 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.

Yes. It's a good question, Scott. I haven't heard of any concerns of double ordering in aerospace. I think there's still supply chain constraints out there that everybody has their orders. There's long lead times but no, I've heard nothing about double ordering. As we go through this balance of air traffic returning to pre-COVID levels, different manufacturers ramping up to higher rates, it's a balance and MRO, I believe, will continue to be strong. So for the foreseeable future, we see that as strong.

Scott, one thing - you probably know this, Scott. But with Meggitt, specifically in the quarter, our aftermarket business is 47% of the total aerospace business. So it's up Jenny mentioned the air traffic is back to pre-COVID numbers. And it's really a combination of expanded aftermarket mix within the company.

Thanks.

Good morning, Andrew.

Well, as we were just talking about the mix, Q3 was actually - aftermarket mix was actually 48%. Year-to-date, we're at [Indecipherable]. So the combination of what we had in our portfolio and adding to what we got with Meggitt, it's been a big increase. And it is excellent growth from our braking business in other areas. Also military aftermarket growth is higher because of these public private partnerships we have with the Department of Defense. So a lot of things going well really pleased and well positioned with this portfolio of complementary technologies, so really positive about this going well into the future.

Okay. So I'll just - I'll do a little run-through of the markets. Obviously, we know aerospace is very strong, and we've raised our guidance because of that. If you take a look at energy, oil and gas, that remains positive. Implant industrial equipment, low single-digit negative, more negative in Europe, less in North America. Transportation, mid mid-single-digit negative, Automotive is down globally. And I would again say that Europe is more negative there. Off-highway, high single-digit negative, primarily construction and Ag and both of them are equally negative, Andrew. Again, Europe a little more negative. When we take a look at HVAC refrigeration, it is still double-digit negative, but it's some pretty tough comps 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 and as you were just mentioning, destocking, distribution is slightly negative, and we saw that destocking 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 very proud of it, still guiding to 1.5% organic growth for the company. And historically, you would see that orders go negative for an average of six core years. And both portfolio, total Parker went negative 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 quarters past, 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.

Yes. Thank you, David. So obviously, orders went from minus 5 in Q2 in international to minus 8. So that is definitely what is reflected in the guide. Destocking continued, as I was mentioning earlier, softness in off-highway and transportation and industrial equipment. We just really see that the macroeconomic indicators are still in contraction in Europe. 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 - had a negative two for the year, and now we have it at a negative 2.5%. So we're not seeing the same thing that we're seeing in North America at the start of this quarter. So not signaling any turn there yet, but we're keeping a close eye on it.

Usually, North America, historically, the average has been six quarters, and then we see a turn, right? And international has just - it's been choppy. It's been really choppy over the last several quarters. So it's hard to call at what point that would follow North America. We're just going to have to keep a close eye on it, and we'll have a better update for you next quarter.

Yes. So we're back to what we would call a normal pricing environment. We're doing our twice a year price increases. As a reminder with price, 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 team has done a good job at maintaining our margin neutrality. So we're back to more of a normal environment right now.

Thanks, David.

Good morning.

Well, 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 some nice work with some reinvestment in some factories, maybe some early days on some of these mega capex projects. But it's really a positive sentiment. I wouldn't tell you at this point, is indicating a slow move or a steep climb. It's just what we're seeing early in this quarter. It's just really kind of looking like we might be seeing bottom.

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, their practitioners of the Win Strategy, and they know what levers to pull. 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 margins.

Yes.

Thanks, Jamie. So first of all, I would say we're really proud of our teams in this margin expansion that we have achieved. And as I mentioned earlier, we're not done. We feel like there's still a lot of runway, no pun intended in Win Strategy 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 trends. And 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, complementary technologies. 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. No magic number on a percentage of aerospace. We obviously like the aerospace business, but we like all of our technologies. We think there's real power in these technologies being together, and that's why we often talk about them being interconnected and most of our customers buying 4 or more of these at a time.

Yes. I think it's been - to use your terms, we're shallow 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 with CLARCOR. We have longer lead time business with Lord. And as a reminder, we have some aerospace business that sits in the industrial segment, where it belongs to some of those technologies in those groups. So I think the portfolio is the reason that it's not as deep as maybe as 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 if it's going to be slow and steady or some spikes, but just really wanted to share with everybody today that the start of the quarter looks better. And we might be seeing - finally seeing an end to this lingering destocking.

I think you're going to see the normal incrementals that you've seen for us. We target 30%. 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.

Thank you.

Yes, Julian, we're not expecting that to linger like that. What we really were just trying to signal was that things look better in the month of April than the way we finished to Q3. So no, there's no long lingering expectation for negative growth in North America.

Julian, we do - thanks for pointing that out. We do believe that those businesses could and should grow differently than the motion systems and flow and process platform, those businesses, motion systems, flow and 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, that's kind of nearing an end. Jenny already mentioned it, but filtration, heavy aftermarket, engineered materials, a little bit more longer cycle business, both in automotive end markets and then some of the transportation markets. So 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 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 as a positive, even in industrial in light of some negative orders. So I think it's part of our shaping of the portfolio.

Yes. I mean it's -- the portfolio is more resilient. And the teams across all of these businesses are doing a great job using the tools to expand margins. It's the reason why with 1.5% organic growth, we can expand margins 170 basis points. So it's - I guess said before, we're really proud of the whole team.

Thanks, Julian.

I would say that I do think we saw destocking start earlier for distribution. But as we've seen with many of our large OEs, they talked about higher dealer inventory, right? And so that's kind of a sense of their own destocking when the dealer inventories are high, they're not placing as big orders as they had in the past. But I would tell you, though, there's nobody canceling orders or pushing them, 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.

Mig, that mix really still remains the same, that 50-50 mix that we talk about in the Industrial segment. So we think there's a nice balance there.

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.

Thanks, Mig.

[Indecipherable].

No, I don't think so, Jeff. I don't think 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 we really believe that once this turns, we're going to grow differently because of that.

Yes. Jeff, I would add, 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 that we had to deliver through those industrial businesses. I think if you've seen that inventory levels moderate throughout the year, we've kind of reduced that thing. But as Jenny said, the backlog really pretty strong. It's at near all-time levels. We continue to pressure test that to make sure that it's real and legitimate. I think it's just part of having a longer cycle mix within that portfolio.

For Q3, Jeff, you're asking?

Yes. Commercial OEM was up 18%, and that was mainly based on strong narrow wide-body growth. MRO up 26%. And same thing. Their traffic recovery, things we've talked about, military OEM 7% and MRO14%.

Jeff, I would just remind everyone, that's all organic at this point, too.

Yes. Thank you, Todd, all organic.

Yes. So as I mentioned earlier, the guide is based off of Q3 order rates, and they -- 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 4 versus the approximately minus 1 that we had previously.

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. 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 an order. 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 a great value and service to many customers.

Hey Joe.

Hi Joe.

No. 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 make sure that we are at pace with them and that we continue to supply product them to help them reach their goals. So we're not seeing any signs of that's slowing down right now.

Joe, too, we talked about it, but if you think about that mix, it's nearly 50-50 aftermarket versus OEM in the aerospace business. So that's helpful as well.

Well, I think we've talked about how 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 those things that just hit extraordinary levels all at once. And while those aren't easy conversations, you know their conversations that we had and if we would need to have them again, we would. They're based on facts, they're based on data. And 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 sticky because inflation is still out there.

Thank you.

Good morning, Brett.

Good morning.

Yes. It's just a 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 updated it based on the best that we had from the team.

No, you're right. 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 maintains neutral going through everything that's gone on in the last couple of years, and that's where we stand today with price.

Yes. I mean if you're asking about rolling price back, we've not done that, right? Jenny mentioned that we're still in an inflationary environment and a lot of those costs that went up, 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 where our process has been.

Thanks Brett.

Thanks Brett.

Hi Rob. I think we've got time for one more question here if we've got somebody.

Nigel, are you there?

Thanks. Yes. I am here. Can you hear me?

Good to hear you.

Yes. Yes. Good. Thanks for squeezing me in. Okay. So coming back to April, let's look at it again. Maybe could you just hone in the 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 in the on-highway customers, things aren't necessarily getting better. So I'd be curious on which pockets of customer groups are you seeing that improvement? And then if we do move to Europe, are we seeing a similar degree of improvement over there? Or do we still see pretty negative trends?

No, I would say, Nigel, at this point, just commenting on how I see it better in April. I don't really want to go into any detail in markets or specifics. 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, but the comments about April are mainly North America, where we're seeing quite -- might be that this destocking is coming to an end and that we'll see a turn here.

Yes, it's got to come down 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 full year, we're sort of in that 14% zone. Is that the right range going forward? Do you think you can maintain sort of 15% SG&A to sales? That's the question, really. Is there anything sort of like discretionary you're controlling at this point? Or is this a good range going forward?

Nigel thanks for recognizing that. We have always proud of 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? The sales levels are at record levels. But we hold our team to 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 Huo, 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 FY 2024 Q3 earnings release webcast, and I wish everyone a great day. Thank you.