Parker-Hannifin Q4 2024 Earnings Call Transcript

Yeah, Julian, this is Todd. I can take that. There is some seasonality just going from to Q1, if you look at our historical sales splits and our historical earnings split. What we're modeling here is in line with what we've historically done. Our organic growth guide for the total company is plus 1% for the quarter. That is driven by Aerospace, which continues to be low double-digit organic growth, is what we're expecting, in Aerospace. But in the Industrial businesses, both in North America and International, we are still expecting that to be down from prior year. So it's low-single digits, but it's still down. We expect that to improve throughout the fiscal year, and that is just our best look at rollup. So you're right, it's a little bit of a soft industrial environment, but really offset by strength in Aerospace.

If you look at margins, what we just did in Q4 was an all-time record for the quarter. We are guiding to 25.2%. That would be a Q1 record for the company. So it is not an easy number there. It really is -- it would be a record. And to do that in light of some softness on the industrial side of the business, we're pretty proud about that. There's some below-the-line stuff that just is a first quarter phenomenon, but nothing abnormal. We are experiencing earnings per share growth and net income growth in Q4, and that really supports what we see throughout the balance of the year.

Sure, Julian, be happy to do that. So if you look at implant and industrial equipment, it improved from negative low-single digits in Q3 to neutral in Q4. And as you can see on the slide that you're referencing, our FY '25 guide is forecasting neutral in the first half, low-single digit in the second half, resulting in a low-single digit for the full year.

If you look at transportation, it was mid-single-digit negative in Q4, and that was primarily driven by automotive cars and light trucks. We are forecasting low single-digit negative growth for transportation in the first half, mid-single-digit growth in the second half because we expect automotive to return to growth then. Work truck strength continues and heavy-duty truck is positive now. So full year is at that low-single-digit growth.

If you look at off-highway, it was high-single-digit negative in Q4. And we are forecasting the same for the first half, neutral for the second half, and mid-single-digit negative for the full year. Inside there, we expect ag to be double-digit negative this year, offset by construction, low-single-digit positive. So that's some color there. And then energy is forecasted to be low-single digit for fiscal year '25, neutral in the first half, mid-single digit in the second half. HVAC was low-single-digit negative for Q4, but it is improving. We are forecasting mid-single-digit growth for the first half. This is driven by a recent regulation change on refrigerant. And the second half growth forecast is at low-single-digit growth. But that's dependent on how fast some of these manufacturers get through their inventory and ramp up production under the new regulation. So for the full year, we have them at low-single digits.

Thanks, Julian.

Yeah. So I'll take that, David. So some of the things that Todd mentioned earlier, total company order rates did go positive to 1% in Q4. Industrial North America improved to 0% in Q4 after being negative 4%. So that was a positive sign. And as Todd mentioned, that did end five quarters of negative order entry. International orders improved to negative 1% from negative 8%, and that was driven by Asia Pacific.

When you look at the channel, that destocking in the channel started over a year ago, and we believe that it has pretty much played out. We see the distribution trend going up, but I would say it's not a step change yet. We aren't actually seeing them add inventory. But these are all the things that are into -- are placed into our guide. Todd mentioned also the backlog remains strong. Q4 flat with Q3, dollars at near-record levels. So all of these things are baked into the guide and the reason that we feel good with the organic growth numbers we have in the first half.

David, I agree with everything Jenny said there. As usual, your math is spot on. You mentioned the comps. Comps are 2% easier in Q2 than against the prior. So it's a little bit of all that stuff, but I just wanted to call out the comps.

We're back to a normal pricing environment. So it's more about those comps getting easier. If you look at North America, Todd mentioned that we expect Q1 to be flat to Q4, but that gradual industrial recovery is what we have really baked into the guide. And the growth uptick, mainly in the second half is on easier comps.

No, we're not going to disclose that, David.

You did.

I would tell you, just look at those -- the Diversified Industrial segment, those margins are -- they're record levels. The International businesses are not that far off from the North America businesses. And it's really just a factor of some softness in Europe and Asia kind of going through a recovery mode. But the margins are strong across all of those verticals, David.

All the businesses are performing really well in margin expansion.

Morning, Scott.

Thank you.

Yeah, you're right. Not a lot different, but obviously, we still have some debt to pay down. That's still our focus. But when we look to acquisitions, we're always working the pipeline. Those relationships, and maintaining and building those relationships is really important to us. And we've been doing quite a bit of that. We're looking for those things where we are the clear best owner, with the interconnected technologies and building on the secular trends.

But the one thing that I'd say the most is that we're looking for deals that are accretive to growth, resiliency, margins, cash flow and EPS. It really has to tick all of those boxes. And in some cases, it really is based on timing. So we like all of the eight core technologies, and we see opportunities to build on the entire portfolio. We have different businesses that we're looking at of all sizes. So a question that I get a lot too is you've built with each one, is the next one going to be bigger than Meggitt? And that's not that's not something that we're focused on. We're focused on the right deal with all of that criteria that I just mentioned.

It's the latter. We have to see that it's part of our core technologies, our core product offering. Obviously, this business was in Aerospace, and that's a market that we're very fond of. But it's the future profile of the business, both margin expansion and growth.

Thanks, Scott.

Yes. So thanks for the question, Mig. So if you think back to the on-purpose strategy that we had with our acquisitions to double the size of filtration, double the size of engineered materials and Aerospace, we've done that with the last four acquisitions. So if you take filtration, for instance, with the acquisition of CLARCOR, we greatly increased our aftermarket exposure in filtration. And that business has become more resilient than it was in the past. And when you look at LORD into engineered materials, that's where we picked up a lot of that longer cycle business. And so you see those two groups behaving a little bit differently than the other two that you mentioned. That is definitely the main reason.

The margin impact is accretive, just like the criteria that we give to the acquisitions that we would do in the future. These have been -- those have both been very successful deals where synergies were hit. And they continue to use The Win Strategy to improve margins.

Mig, let me give you a little color on this. If you're worried, we agree with you, the top line has acted exactly as we expected it. But I would tell you the margin expansion has been equally generated by all of these businesses. When you look at that record that we put up for the quarter, 25.4%, that motion systems platform, that flow and process control, those were equally contributing to those margin revenues.

Yeah. Wouldn't have happened without those two areas.

Yeah. And when you look at the cash that we generate, those businesses are stellar cash flow generators as well. So it's all part of the mix. It's all why we love the portfolio as it sits, and it's helped generating all-time record numbers.

Those technologies are a very important part of our portfolio and participate in the secular trends that we talk about.

Yeah, Jamie, let me start on the incrementals. This is Todd. Thank you for the recognition of the quarter. We appreciate that. You're right. The incrementals are a little bit higher than what we have historically forecast. That 30% is really kind of over the cycle, so sometimes we think we could do better, sometimes it might be a challenge on the top line. But the way the math works is a little bit funny, right? Aerospace, with the strong growth in Aerospace and the margin profile that Aerospace is operating at, it is driving the incrementals for the company a little bit higher than normal.

We also are committed to the $300 million in synergies that we have promised for Meggitt. We expect $50 million of incremental synergies in FY '25 versus FY '24. So that's putting Aerospace a little bit higher than historically where we've been at. And when you look at the Industrial businesses, we still see margin expansion even in a low-growth top-line environment. So when you put all that together, that's how we came up with the numbers. So we feel really good about that. But the team is energized and focused on making sure that we deliver that.

And from an order standpoint, Jamie, on the May call, I did something that I normally don't do, but made the comment that we were encouraged at the start of the quarter with what we were seeing in orders. And obviously, that continued and we saw ourselves get to the order condition that we're talking about today at the end of Q4. So that played out well for us. But what we have in the guide today is supported by the comments that we've made at those Q4 orders. So no additional color on orders.

Thanks, Jamie.

Thank you, Jamie.

Thank you.

Well, Joe, I'll start. I'm looking at Jenny, she's smiling. We just a few months ago gave you the FY '29 targets. And if you look at this, this is right on track with those FY '29 targets. Aerospace, we're going to expand 100 basis points off of an all-time record for that business. And when you look at the Industrial businesses, we're showing margin expansion there as well, and really an unbelievably low growth top-line number. So we feel really good about that.

If you look at the cadence throughout the year, every one of these quarters would be a record margin number for us, and it increases, outside of Q2, which is a little bit of seasonal volume. They're aggressive numbers. So that's what we feel today. That's what we have confidence in. And that was kind of all that went into our guide.

Yeah. I would just back that up by saying, obviously, it was a fantastic year, it's a fantastic exit rate. But this guide is realistic. And this isn't a slam dunk for our teams. We believe in The Win Strategy, we believe in our ability to continue to expand margins, but this is a -- this isn't easy.

We'll try.

Yeah, Joe, it's a great question. It's something we talk about constantly here. We've been very clear, our target was to get to and operate around a 2.0 times net debt to adjusted EBITDA leverage. We got there, we're very proud about that. It was not easy, but the team worked really hard to get there. The way our debt is structured, we have a serviceable debt that goes all the way out into 2026. So we feel good that we will not -- we'll be putting our cash to good work as we continue to pay down that debt.

But I would tell you, our preference continues to be to deploy our capital optionality towards deals. And Jenny mentioned it earlier, it's going to be the right deal. It's not going to be one that just happens to be available. It's got to be able to grow the top line differently. It's got to be accretive to our margins. It's going to have to be EPS accretive. And it's going to have to help generate cash in a way that's different than what the company has been able to generate. And if we can't get those done, we have no worries about deploying that elsewhere. We're going to keep our dividend record going. And our share buyback is $200 million a year. We're going to do that at a bare minimum, and we will be active, I could assure you that.

And if the timing and the deal don't line up the way we'd like one to in the future, we'll always buy back shares, like Todd said. I mean, we believe in Parker.

Yeah. We increased those Meggitt synergies. I think that was in the second quarter or the third quarter. $200 million is what the accumulated synergies were at the end of FY '24. We're committed to the $300 million number. That would be $50 million in FY '25 and an additional $50 million in FY '26.

Yeah. I mean everything in Aerospace is really booming right now. Aftermarket is especially strong. You know the profile of that business. That is the highest-margin business we have, and it's been really robust. So if you look at what they did for the quarter, I think it was 27% margins. If you look at what we are forecasting for FY '25, it's another 100 basis points of margin expansion in Aerospace. And that gets us 27.5% ballpark. So really strong margins in Aerospace.

No. When you look at our team -- of all of the forecast tools that we have that we've improved across the company, our best tools remain in the Aerospace verticals. And I would tell you, our team, we've had multiple discussions with the team. We feel really good about that. And I don't want to speak outside of FY '25, but we feel really good about what '25 has in store.

Yeah. We feel very positive about air traffic growth. So we're not concerned about that.

Good morning.

Morning, Nathan.

Well, just to run through it a little bit, obviously, for Aerospace, as we talked about, we have 8.5% organic growth guide out there. And the first half is at 11%, second half is at 6%, and that's really because the comps get pretty tough when you get into the second half. So obviously, we feel really good about Aerospace. We have good visibility over -- we have a high backlog there, right? So no concerns there. When you look at North America, as Todd mentioned, we're guiding to 2% organic growth, minus 1% in the first half.

And we -- as we've talked about, that's based off of a typical Q1 and based off of what we see today in the orders and the information that we have from our customers. Again, we expect continued softness in off-highway all year and transportation in the first half. So kind of going back to those forecasts for the market verticals. We do expect a gradual industrial recovery, as we've mentioned here, and that's what we have baked in. So again, the growth uptick is mainly in the second half, and it is somewhat on easier comps. Those are the inputs that we're looking at.

In International, 1.5% organic growth, again, negative 1% in the first half. second half at 3.5%. As we mentioned, order rates improved, but they're still in negative territory. Our guidance assumes that Asia Pacific turns positive, offset by continued weakness in Europe. So that's what we're looking at right now. Again, softness around end markets in Europe, neutral growth in the guide for the full year. So that's what we have built into the guide.

Yeah. Nathan, this is Todd. Those certainly would be helpful, there's no doubt about it. What we have baked into the numbers is really -- again, you've heard us talk about our AI forecast. So we have a variety of macroeconomic forecasts that we're using. There's nothing outside of anything that you're not seeing yourself. It really is driven by great Aerospace performance, a gradual recovery in the industrial markets, mainly in the second half of the fiscal year. And that's based off of what we've seen orders do for many, many, many years. We were really glad to see North American orders turn not negative, and we were really happy to see the industrial orders move to minus 1%. So all of that is what we've been using to build our forecast.

Yep. Thanks, Nathan.

Thank you.

Yeah. At Investor Day, we mentioned that we would continue to trim around the portfolio, but not anything significant. All of our businesses have to perform. Every year we go through an analysis of our businesses, a best owner analysis. But again, nothing significant, Jeff. It would be just some trimming around the portfolio.

Absolutely. So on commercial OE, we are forecasting high-single digit, really based off of narrow-body rates and wide-body ramp-up. Commercial aftermarket, low-double digits. And again, air traffic recovery, broad-based growth there, been very strong as we've talked about today. Defense OE mid-single digit increase -- increasing defense budget and continued demand for legacy fighters. And then defense aftermarket, high-single digit. And again, pointing to those public-private partnerships we have with the depots, that's really proved to be great growth for us. And again, retrofits, repairs, upgrades. So really, it's going to be a strong year for Aerospace, high-single digit at 8.5%.

Thank you.

Appreciate it, Jeff.

Good morning, Nicole.

Hi, Nicole.

Yeah, Nicole, this is Todd. It will all come out of the Industrial North America segment businesses. We do expect that to close sometime in Q2. It will be margin accretive, there's no doubt about it. I'd rather wait until we get the actual close date to give you exact color on that. Jenny talked about it. It's a great business, just maybe not perfectly aligned with our core products.

If you look at the enterprise value that we got for that business, it's $560 million of enterprise value. So that -- there will be a gain on that. And like I said, we'll be looking to share more of that once it finally closes.

Yeah. So the guide does assume that Asia Pacific turns positive, offset by continued weakness in Europe. So the full year for Europe is neutral to fiscal year '24. So just continued softness there. What I would say in China, growth improved to negative low-single digits in Q4, and Q4 orders increased due to some project orders. So there's some positive in there.

Thanks, Nicole. Thank you. Kevin, I think just in light of time, I think we have five minutes left, maybe one last question.

Thanks, Brett.

Morning. Thank you.

Yeah. Brett, this is Todd. Thanks for noticing that. We've been working hard on all elements of profitability for a long time here. When you look at that 50 basis points of segment operating income expansion, the vast majority of that will come in the gross margin line.

I don't have a good picture of that that I could share with you today, but perhaps we can pick that up in a callback.

Appreciate it, Brett.

Okay, Kevin, thank you. This concludes our earnings webcast. Thanks to everyone for joining us today. As always, we do appreciate your attention, interest and support of Parker.

If anyone's got any more follow-up questions, whether that's on the quarter, the year or the FY '25 guide, Jeff Miller, our VP of Investor Relations; and Yan Huo, our Director of Investor Relations, will be available throughout the day and even if tomorrow, if needed. I hope everyone has a great day. We appreciate it.