The operator introduces the Parker Hannifin Fiscal 2024 First Quarter Earnings Conference Call and Webcast. Todd Leombruno, Chief Financial Officer, thanks everyone for joining and introduces the other speakers. They will be discussing forward projections and non-GAAP financial measures. Jenny Parmentier, CEO, will highlight the outstanding first quarter and the company's portfolio transformation and strong aerospace trends. Todd will provide financial details and an increase in fiscal year '24 guidance. The speakers will then take questions. Jenny mentions a 16% reduction in recordable incidents.

Parker's top priority is safety and they have achieved record sales and operating margins in the quarter. They have also increased their guidance for the future. The company has transformed its portfolio over the last 8 years, resulting in a shift towards longer cycle and secular revenue markets. This is evident in their strong backlog, which has doubled in coverage. The Win Strategy is the company's business system that drives growth and financial performance.

Parker is addressing the past decade of underinvestment and strengthening its supply chain through increased equipment spend and higher levels of automation. The company's new product blueprinting tools and Simple by Design principles have increased its product vitality index and support secular trends. Acquisitions, particularly in the aerospace sector, have contributed to Parker's growth, and the company is well positioned to benefit from the growth related to secular trends. With a comprehensive portfolio of products and services, including those acquired through the Meggitt acquisition, Parker is able to have more strategic discussions with customers in both the OEM and aftermarket sectors.

In summary, the aerospace industry is experiencing a favorable secular trend and we have a balanced portfolio with strong growth drivers in each sector. Our Q1 results have broken records in sales, operating margin, EBITDA margin, net income, and earnings per share. The strong start to FY '24 is a result of our global team's alignment. Sales growth was up 15%, with acquisitions and divestitures contributing 11%. Organic growth remained positive at 2.3% and currency had a slight favorable impact. Adjusted segment operating margin and EBITDA margin also saw significant increases, while net income and EPS improved by 26% compared to the previous year.

The company is extremely pleased with their strong quarter, which was driven by their portfolio transformation and consistent execution across all segments. Earnings per share increased by 26%, with standout operating performance and a strong aerospace business being major drivers. A few discrete items settled in the quarter resulted in favorable income tax, but there were some headwinds in other expenses and interest expenses. The record EPS of $5.96 was achieved through broad-based improvements and the successful integration of Meggitt. All segments delivered operating margins over 24%, a first in the company's history, thanks to strong performance and good volumes.

The Meggitt acquisition has had a positive impact on the company's performance, with 40% incrementals and positive orders. Sales in North America increased by 4.5%, while international sales increased by 2.5%. Organic growth was slightly positive in North America, but negative in the international segment, mainly due to softness in China and tough comparisons from the previous year. The company's operating margins also improved by 150 basis points.

The operating margins for the company have increased by 100 basis points despite a negative 2% organic growth. This is due to the team's focus on productivity and cost control. Aerospace business had a stellar quarter with a 65% increase in sales and a record-breaking operating margin of 26%. However, the company did benefit from some one-time favorable contractual settlements and they do not expect these to repeat in the future. Cash flow from operations and free cash flow also saw significant increases compared to the previous year. The company is committed to maintaining their strong cash flow generation and aims for mid-teens cash flow from operations and a record free cash flow conversion of over 100%.

The company has had a strong start to the year in terms of cash flow and is focused on reducing its leverage. They have already reduced debt by $370 million since the Meggitt close and are ahead of schedule in improving their leverage. The company is reaffirming its full year organic growth midpoint and has increased its margin and EPS expectations. They have also raised their aerospace organic growth guidance and expect a slight headwind from currency. Margins are expected to be 23.6 at the midpoint with a forecasted 70 basis points of expansion compared to the previous year. Incremental margins are expected to be around 40%.

In the earnings call, it was announced that Lee Banks, who has been with Parker since 1991, will be retiring as Vice Chairman and President effective December 31, 2023. During his tenure, sales and EPS have grown significantly, and total shareholder return has been impressive. His impact on the company and team members is described as extraordinary.

The paragraph discusses the achievements and retirement of Lee Banks, a key leader in the transformation of Parker's performance and portfolio. The company has had a successful first year with Meggitt and is focusing on safety, engagement, and The Win Strategy 3.0 to continue accelerating performance. The transformation of the portfolio is delivering a more resilient revenue mix, and the company is on track to achieve its goals for FY '27. The future looks promising, and the call is now open for Q&A.

In response to a question about the decline in EPS for Parker Hannifin, Todd Leombruno explains that Q2 is typically their lowest volume quarter and they have also recently acquired Meggitt. However, there are no other one-time items expected to affect Q2. When asked about North American orders, Lee Banks notes that while underlying demand is positive, there is some variability by vertical.

The CEO believes that there is inventory balancing happening in the distribution channel and at OEM levels. This may continue through 2024 due to increased infrastructure spending in North America. China's slow rebound has had a negative impact on the European market, particularly in Germany. However, the rest of Asia, including Southeast Asia and India, are still strong. In North America, the aerospace market is performing well, with strong indicators in commercial, military, OEM, and MRO sectors. Land-based oil and gas in North America is also strong, with MRO activity keeping people busy. Overall, the CEO is positive about North American end markets.

The company is currently experiencing some balancing in their industrial end markets. They have seen flat demand in North America for automotive, heavy-duty trucks, agriculture, and construction, with some overhang from COVID production in life sciences. Material handling is still strong. They expect destocking to continue, but with a strong backlog and supply chain normalization, they anticipate a better environment in the future. The company also mentions the positive impact of aerospace and Meggitt on their business.

In this paragraph, Joseph Ritchie asks about Parker's recent acquisitions and their impact on the company's cyclical business. Jennifer Parmentier discusses the potential for an increase in orders due to the current investment in the U.S. market. The company is well positioned to participate in this growth, especially in the semiconductor industry. The next question from Mircea Dobre focuses on the elevated level of backlog and whether it is a result of changes in customer ordering patterns.

In this paragraph, Jennifer Parmentier and Todd Leombruno discuss the factors contributing to the company's strong backlog and guidance raise. They mention the impact of recent acquisitions on the backlog, as well as the effects of supply chain disruptions and longer cycle business. They also highlight the resilience of the backlog in a declining order environment and the strong performance of the aftermarket sector. They mention a contractual settlement and strong orders as drivers of the guidance raise, with aftermarket being a standout performer.

The speaker expresses confidence in the company's ability to raise their margin by 200 basis points for the full year and mentions that they have had some one-time items. They also provide more details about the strong performance in the aerospace sector, particularly in the aftermarket, commercial and military segments. They mention that they expect continued growth in these areas and express optimism about the future. The speaker also congratulates Lee and is asked about the North American orders, to which they respond that there has been some improvement and they believe the bottom has been reached in terms of year-over-year orders.

The speaker, Jennifer Parmentier, responds to a question about the company's organic sales cadence and the outlook for the rest of the year. She mentions that the backlog is strong and orders have improved, but there is still uncertainty. The company expects organic growth to be slightly positive for the full year, with Europe performing well in the first quarter but moderating in the second half. The speaker, Todd Leombruno, adds that the cadence is not second half-weighted and Europe is expected to see a slight decline in the second half. Another speaker, David Raso, asks for more detail on the organic cadence and Europe's performance, to which the speakers provide some numbers and explain that Europe outperformed in the first quarter but will see a decline in the second half due to comparisons. The overall organic growth is expected to be about 1.5 for the full year. The call ends with a congratulatory message to Lee, who is retiring.

Jeffrey Sprague from Vertical Research asks about the company's plan for growth and how they will achieve their targets for 2027. He also inquires about the distribution levels and if they will return to pre-COVID levels or if there is a new normal. Lee Banks responds that the cost of carrying inventory has increased and supply chains have calmed down, so he does not expect a significant difference in inventory levels going forward.

Jeffrey Sprague congratulates Lee on the company's success and asks about the margins for the quarter. Lee explains that they are back to a normal pricing environment and have expanded their cost management strategy. He also mentions that they have some cost relief but it is already built into their agreements with customers. Jeffrey then asks about the margins for Meggitt and aero, and Lee explains that they are capturing synergies but the margins were mainly affected by aftermarket mix. He also mentions that the synergy pace is on track and there is potential for it to increase, but it is not reflected in the quarterly results.

In the paragraph, Jennifer Parmentier and Todd Leombruno discuss the company's commitment to achieving $300 million in synergies and the strong aftermarket sales that have helped boost margins. They also mention that supply chain issues have eased, leading to more efficiencies across all businesses. The analysts ask about the international demand picture and the company's outlook for orders, to which Jennifer Parmentier responds that international orders have been choppy but in line with their forecast for Q1.

The paragraph discusses the current state of the global market, specifically in Europe and Asia Pacific. There is ongoing destocking in Europe and slow recovery in China, leading to softness in various industries. The company's guidance for the first half and full year remains largely unchanged, with a projected decline of 3%. In North America, there is concern about inventory levels at big mobile OEM customers, but the company reassures that their backlog is real and they have a positive outlook. They also mention the supply chain is improving.

The speaker discusses the impact of the North America portfolio, which includes LORD and CLARCOR businesses, on aftermarket sales. They also mention that backlog coverage remains strong, but destocking is continuing in both North America and international markets. The speaker explains that the slowdown in China and Europe is affecting industrial markets and that investment and strategic focus will be important for the industrial side of the business in the next 1-2 years.

Parker's CapEx goal has increased from 1.5% to 2% and their focus is on safety, automation, robotics, and AI tools to increase efficiency and productivity. They are also investing in the supply chain and specific divisions to support secular growth. Parker is planning for the next recession and executing The Win Strategy in a slower-growth environment has helped expand margins.

The speaker discusses the various ways in which general managers can adjust their operations to improve returns, and mentions the company's pride in their ability to anticipate and respond to changes in demand. They also mention that the company's restructuring plans are ongoing and not dependent on outside factors. Another speaker congratulates two colleagues on their upcoming retirement. The question is then posed about the typical pattern of order downturns and their duration in relation to the current market situation.

The speaker discusses the current state of the company's order rates and how it compares to previous downturns. They also mention the company's ability to weather these downturns and their confidence in their portfolio transformation. The speaker also mentions the high percentage of aerospace exposure in the portfolio and the strong performance of the Meggitt business. They express satisfaction with the business's growth and margin performance.

The company's 3-year plan for synergies is performing better than expected. They are happy with the progress and are waiting for an upgrade of their target. The speaker, Lee, is retiring and the company is doing well. The backlog in industrial orders has decreased by approximately $100 million, but this is seen as a rebalancing rather than a concerning trend. There is no significant lumpiness in the industrial orders. The speaker, Nigel, asks about the current guidance compared to the previous guidance for FY '24 and calculates that the increase is due to margin uplift, taxes, and interest, with no significant impact from FX.

In this paragraph, Todd Leombruno and Nigel Coe discuss the impact of currency rates on the company's sales. Lee Banks, who has worked for the company for 32 years, is retiring and the team wishes him well. The call concludes with Todd Leombruno thanking everyone for joining and mentioning that Jeff Miller and Yan Huo will be available for follow-ups.

This summary was generated with AI and may contain some inaccuracies.