Parker-Hannifin Corporation (NYSE: NYSE:PH), a leader in motion and control technologies, has reported a robust performance for the second quarter of fiscal year 2024, achieving record sales and margins. The company's sales reached $4.8 billion, marking a 3% increase year-over-year, while adjusted segment operating margin soared to a new high of 24.5%, a significant rise from the previous year. Adjusted earnings per share (EPS) grew by 29%, and the company generated a strong free cash flow margin of 11.9%. Parker-Hannifin also increased its fiscal year 2024 guidance based on these results.
Key Takeaways
- Record Q2 sales of $4.8 billion, up 3% from the previous year.
- Adjusted segment operating margin reached a record 24.5%, a 300 basis point increase.
- Adjusted EPS grew by 29%.
- Year-to-date free cash flow margin reported at 11.9%.
- Aerospace segment and international business drove strong performance.
- Backlog stands at $10.8 billion with no major cancellations or push-outs.
- Raised full-year guidance for margins and EPS, with a commitment to long-term targets.
Company Outlook
- Parker-Hannifin expects to achieve $200 million in cumulative synergies in FY 2024, aiming for a total of $300 million by FY 2026.
- The company has raised its adjusted segment operating margin guidance to 24.3% at the midpoint.
- Full-year organic growth guidance reaffirmed, with 1.5% for the company, 12% for the aerospace segment, and -2% for the international segment.
- FY '27 targets set at approximately $30 EPS and greater than $3.5 billion free cash flow.
Bearish Highlights
- International business and industrial orders have declined for five consecutive quarters.
- Europe is expected to continue destocking, with ongoing softness in off-highway and industrial markets.
- China is showing a slow recovery.
Bullish Highlights
- Aerospace Systems division experienced a standout quarter with sales up 15% YoY to $1.3 billion.
- Record operating margin of 26.5% for Aerospace Systems.
- Positive organic growth in Europe and strong performance in commercial aftermarket.
- Year-to-date cash flow from operations increased by 26% YoY to $1.4 billion.
- Debt reduced by over $2.2 billion since the Meggitt (LON:MGGT) acquisition.
Misses
- Despite improvements in Q2, international business and industrial orders have been down for five quarters.
Q&A Highlights
- Backlog levels are about twice the usual levels with good quality, no major cancellations or push-outs reported.
- The company has returned to regular pricing cadence with a recent modest increase in pricing.
- Commitment to achieving $300 million in synergies from the Meggitt acquisition by FY '26, with $50 million realized sooner than expected.
- No further questions were asked at the conclusion of the call.
Parker-Hannifin's strong quarter is attributed to the aerospace strength and robust international segment performance. Despite some ongoing challenges in the industrial markets, the company's strategic focus on aerospace and international growth, along with effective cost reduction measures, has positioned it for continued success. The company's commitment to strategic mergers and acquisitions, alongside its disciplined approach to capital allocation and debt reduction, underscores its confidence in meeting ambitious long-term financial targets. With a stable and high-quality backlog, Parker-Hannifin remains poised to navigate through the current market conditions while delivering on its promises to shareholders.
InvestingPro Insights
Parker-Hannifin Corporation (NYSE: PH) has demonstrated a solid financial performance in the last twelve months as of Q2 2024, with a robust revenue growth of 15.39% and an impressive adjusted P/E ratio of 21.94, which suggests a favorable valuation in light of its near-term earnings growth. The company's commitment to shareholder returns is evident from its dividend track record, having raised dividends for 7 consecutive years, and maintaining dividend payments for 54 years in total. This consistent performance is a testament to Parker-Hannifin's position as a prominent player in the Machinery industry.
InvestingPro Tips highlight that analysts are optimistic about the company's future, with 5 analysts revising their earnings upwards for the upcoming period and recognizing the stock's low price volatility. This indicates a potential for stable growth ahead. Additionally, with the stock trading near its 52-week high, investors might find Parker-Hannifin's current market position appealing.
InvestingPro Data further enriches the picture:
- The market capitalization stands at a robust $64.09 billion.
- The company operates with a moderate level of debt, which could be a sign of prudent financial management.
- Investors can also take note of the strong return over the last year, with a 50.51% total return, reflecting the company's ability to generate shareholder value.
For investors seeking more comprehensive analysis and additional insights, InvestingPro offers a wealth of information. Currently, there are over 15 additional InvestingPro Tips available for Parker-Hannifin, which can be accessed through an InvestingPro+ subscription. To make this even more attractive, InvestingPro subscription is now on a special New Year sale with a discount of up to 50%. Plus, use coupon code SFY24 to get an additional 10% off a 2-year InvestingPro+ subscription, or SFY241 to get an additional 10% off a 1-year InvestingPro+ subscription. These offers could provide investors with the tools and insights needed to make informed decisions about their investments in Parker-Hannifin Corporation.
Full transcript - Parkerhannifin (PH) Q2 2024:
Operator: Greetings, and welcome to the Parker-Hannifin Fiscal 2024 Second Quarter Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Todd Leombruno, Chief Financial Officer. Thank you. You may begin.
Todd M. Leombruno: Thank you, Diego, and good morning, everyone. Welcome to Parker-Hannifin’s Fiscal Year 2024 Second Quarter Earnings Release Webcast. As Diego said, this is Todd Leombruno, Chief Financial Officer speaking. And I'm here today with our Chairman and Chief Executive Officer, Jennifer Parmentier. We know that this is an extremely busy day for everyone, and we appreciate you joining us and we appreciate your interest in Parker. On Slide 2, you'll see our disclosures addressing forward-looking projections and non-GAAP financial measures. Actual results could vary from our forecast based on the items listed here. Our press release, this presentation, and reconciliations for all non-GAAP financial measures were released this morning and are available under the Investors section at parker.com. The agenda for today has Jenny starting with the highlights of our record second quarter. She's also going to reinforce how our portfolio, our team members and the Win Strategy, our business system are driving margin expansion and position Parker for a very bright future. I'm going to add some color on the financial results and a few details on the increase to our guidance that we released this morning, and after that we're going to open up the lines and Jenny and I will take any questions from those in the queue. I’d now ask you to move to Slide 3. And Jenny, I'll turn it over to you.
Jennifer A. Parmentier: Thank you, Todd. Good morning to everyone and thank you for joining our call today. Q2 was a quarter of exceptional results, excellent operating performance driven by all of our team members executing the Win Strategy. Starting with safety, a 16% reduction in recordable incidents over prior Q2. Safety has been and will remain our top priority. Record sales of $4.8 billion in the quarter, a 3% increase over prior year with organic growth of 3%. Record adjusted segment operating margin of 24.5%, a 300 basis point increase over prior year with all segments expanding margins, and adjusted EPS growth of 29% along with 11.9% year-to-date free cash flow margin. Aerospace strength was a significant driver of our performance in the quarter. We now expect to achieve $200 million in cumulative synergies in fiscal year ‘24, a $50 million increase to our original guide for this fiscal year. We remain committed to achieving $300 million in synergies by fiscal year ‘26. And our backlog remains resilient at $10.8 billion. We had a strong finish to the first half and as a result our increasing fiscal year ‘24 guidance, Todd will go over this later in the slide deck. Next slide, please. I'd like to spend a few minutes highlighting the power of the entire Parker portfolio. We have a technology powerhouse of interconnected solutions that delivers value for customers in both aerospace and industrial markets. Today two-thirds of our revenue comes from customers who buy four or more of the technologies you see across the top of this page. And two-thirds of our portfolio product solutions that we have today enables clean technologies. Next slide please. Parker has significant content on leading aerospace programs. We have a comprehensive product offering with proprietary design on premier programs. On the upper left hand side of this page is our first half sales mix by application. You see a nice balance of commercial and military, as well as business jets, regional transport and helicopters. This diverse aerospace and defense exposure allows us to have multiple products and technologies on every major aircraft program globally, many of them seen along the bottom of this page. All of this adds up to be a compelling value proposition for all of our aerospace customers. Next slide, please. And equally compelling is our global distribution network, a competitive differentiator for Parker. 50% of our diversified industrial revenue is through distribution, a high margin channel serving aftermarket and small to medium sized OEMs. Our distribution partners integrate Parker technologies that solve customer problems. They are truly an extension of Parker's sales and engineering team. Building on the success of the North American distribution channel, we continue to drive an increasing revenue mix of 100 basis points per year in international markets. This past December, we held our North America National Sales Meeting for the first time since the pandemic. Nearly 100 distribution partners attended the meeting along with Parker divisions and sales teams. It was great to have everyone together again, and despite the destocking we've been talking about for several quarters, the overall sentiment and tone was very positive for the future. Next slide, please. We continue to be very proud of our margin expansion progress. Our people, our business system, the Win Strategy and our portfolio have truly transformed Parker's performance. The progress can be seen in every segment on this page. In addition to our core strategies on lean, pricing and procurement, Win 3.0 initiatives like Simple by Design, our focus on demand forecasting, zero defects and productivity and automation will take us to 25% adjusted operating margin and beyond. Every strategy and tool in the Win Strategy expands margins. I'll now turn it back to, Todd.
Todd M. Leombruno: Okay. Thanks, Jenny. I'm going to start on Slide 9, and I'm just going to really quickly go through the FY2024 Q2 financial summary. As Jenny mentioned, the second quarter was an extremely strong quarter for us. It was a great finish to the first half of our fiscal year. And once again, the team set an unbelievable amount of records for the quarter. If you look at this slide, every number in that gold column is the second quarter record. We set new highs for sales, segment operating margin, EBITDA margin, net income and earnings per share. Total sales growth was plus 3% in the quarter, all of that 3% was organic. Just a reminder, this is the first full quarter that we have, Meggitt in both the current and prior year periods. The net impact of divestitures and currency basically offset each other. Divestitures was slightly unfavorable at 0.3%, currency was slightly favorable at 0.5%. When you look at the margins, Jenny already mentioned this, that 24.5% was an increase of 300 basis points versus prior year, and adjusted EBITDA margin reached 25.7% that was an increase of 330 basis points versus prior year. If you take a look at net income, we did $802 million on an adjusted basis that is a 16.6% return on sales that was a 30% increase versus prior year. And lastly adjusted earnings per share a record for the quarter $6.15 that was up 29% from prior. Just an exceptional second quarter and again, unbelievable margin expansion and what I really like about it, it was consistent across all of our businesses as Jenny just shared on that last slide. If you go to Slide 10, this is the earnings per share bridge and this chart really shows what a high quality quarter it was for the company. The 29% in adjusted earnings per share that amounted to an additional $1.39 of earnings per share in the quarter, main driver of this continues to be excellent operating performance. If you look at segment operating income dollars that increased by $173 million in the quarter that accounted for just a little over a $1 of that EPS growth and that equated to 74% of the increased earnings per share in the quarter. Clearly, aerospace systems was a major driver of improvement, but what is really impressive is both industrial businesses also contributed to the increase in segment operating income dollars. If you look at tax that was $0.18 favorable versus prior year again just driven by some discrete items, other expense was favorable $0.12 versus prior year. That was mainly the result of currency changes and some favorable pension expense. Interest expense was $0.10 favorable versus prior, that really is a result of our successful efforts to reduce outstanding debt over the last 12 months. I'll talk about that in a little bit later in the deck. Corporate G&A and share count were just both slightly higher than prior year, just a net $0.03. And those are the components of the increase in adjusted earnings per share. Really it's just strong margin performance across the company continue with some great outstanding performance from the Meggitt business. If you go to Slide 11, we'll talk about the segment performance that's detailed on Slide 11. Couldn't be prouder of the broad based margin expansion really driven by the Win Strategy, Jenny mentioned this, but our synergies are ahead of schedule. We did increase that synergy number. Aerospace demand really remains very, very high. So, just a nice consistent execution across our businesses, across all of our global team members. You can see that segment operating margin 24.5% at the bottom of the page, up 300 basis points. Incrementals were stellar at over a 100% and orders remain positive at plus 2% versus prior year and backlog really remains resilient. Total backlog dollars did increase slightly sequentially as well. And Jenny mentioned this, but total backlog remains at near record levels, and aerospace activity remains especially robust. If you look at the North American businesses, sales volume reached $2.1 billion in the quarter. Organic growth was down 1.5% versus prior year. That was driven by continued destocking, some channel rebalancing and really some softness in off highway markets. However, what is impressive out of the North American team is that adjusted operating margins did increase 240 basis points to a second quarter record of 24.2%. That was just really driven by excellent execution, some great efficiency improvements and really some tight cost controls. Orders in North America also remain consistent the prior quarter. They remain at down minus 4%. If you look at the international businesses, sales were $1.4 billion slightly positive versus prior year. Organic growth was essentially flat, which was better than we were forecasting. Organic growth in EMEA was positive at 0.7%, Latin America was positive at 9.2% and Asia Pac did improve, it did come in at negative 2.5% really just being pulled down by the slower than expected recovery in China. But also what's impressive there is adjusted operating margins did expand 110 basis points in these businesses and also finished at a second quarter record of 23%. That international team continues to be focused on productivity improvements, expanding margins and being very resilient across the segment even in a low growth environment, very impressive results. Orders in the international segment did improve. If you remember last quarter, they were minus 8, they did improve to minus 5. And finally on Aerospace Systems, they delivered another standout quarter. Sales reached $1.3 billion a 15% increase from prior year. All of that 15% is organic growth, and volume just continues to be driven by commercial aftermarket growth that was in the quarter up 25%. Operating margins reached a new record increasing by 590 basis points to reach 26.5%. Really the healthy volumes, the favorable aftermarket mix, outstanding performance from the Meggitt business really all contributed to drive these record margins. We are increasing the synergies. Jenny went over that just briefly. Cumulative synergies were increasing from $150 million to $200 [million] (ph) and order rates in aerospace continue to remain plus 21% which is very robust. On the next slide, we'll talk about cash flow. Let's take a look at what we've done there. Year-to-date cash flow from operations is $1.4 billion that's 14% of sales. That is an increase of 26% versus prior year, just fantastic cash flow performance. If you look at free cash flow that was $1.1 billion that's up 11.9% also increasing significantly 29% increase from prior. Our cash flow conversion is year-to-date 86%. We really have the team remaining focused on being great generators and great deployers of cash. You've heard us say that many times. Last week our Board approved a quarterly dividend of $1.48 per share. That is our 295th consecutive quarterly dividend. Just a nice solid testament to our belief that we can be great generators and great deployers of cash. When you look at the full year, we are increasing our expectations for free cash flow, we've increased that range to $2.8 billion to $3.1 billion. That's moving the midpoint up $150 million to approximately $3 billion and of course free cash flow conversion will be over a 100% for the full year. On the next slide, let's take a look at our progress on deleveraging. We did reduce debt another $400 million in the quarter. And just a reminder, since we closed Meggitt just five quarters ago, we have reduced debt by over $2.2 billion now, and we've improved our leverage by 1.4 turns, both of those figures are ahead of what we've originally committed to. If you look at the metrics gross debt to adjusted EBITDA is now 2.4. Net debt to adjusted EBITDA is 2.3. And we continue to forecast just approximately $2 billion of debt paid out in the fiscal year. And now based on the performance we've got year-to-date, we expect to achieve net leverage of 2.0 times by June of 2024, just great performance across the board. Okay. On guidance, just a few details on guidance, you saw the increase to guidance we are reaffirming our full-year organic growth midpoint and increasing our margin and our earnings per share expectations for the year. Our reported sales growth for the year is forecasted to be in the range of 3% to 5% or roughly 4% at the midpoint and they are modeled 49% first half 51% second half. In respect to organic growth, we are raising the aerospace organic growth midpoint by 200 basis points to 12% for the full year. We are also raising the international organic growth midpoint by 100 basis points to minus 2%. That's slightly better than what we gave you last quarter. Those increases are offset by a decrease in the North American organic growth midpoint by 200 basis points to minus 1.5%. Full year organic growth for the entire company remains the same as last quarter at plus 1.5%. Moving on to margins, adjusted segment operating margin guidance is being raised to 24.3% at the midpoint that's up 70 basis points from prior guidance. And if you look at it on a year-over-year basis that would be 140 basis points of margin expansion versus prior year. Meggitt synergies we talked a lot of that, we're moving that to $200 million. Corporate G&A interest and other are relatively unchanged from our prior guide. Tax raised, tweaked just a little bit. We expect the full year to be 22.5% that's really based on the performance in the first half. We expect the second half to be 23.7% from a tax rate perspective. Full year as reported earnings per share increased to $20.30 and full year adjusted earnings per share has increased to $24.20 both of those are at the midpoint. And finally for FY2024 Q3, adjusted earnings per share we expect that to be $6 even at the midpoint. And as usual, we've included some more specifics in the appendix. So, that's it on the increase to guide. Jenny, I will hand it back to you, and ask everyone to move to Slide 15.
Jennifer A. Parmentier: Thank you, Todd. A few key messages to close this out. Q2, as we stated many times, was an exceptional quarter that closed a strong first half. We'll continue to drive positive results and accelerate our performance using the Win Strategy. Our portfolio and strengthened customer value proposition, along with growth from secular trends, will deliver organic growth of 4% to 6% over the cycle. We remain committed to our FY ‘27 targets of approximately $30 earnings per share and greater than $3.5 billion free cash flow. We expect another year of record performance and we have a very promising future ahead of us. We look forward to talking to you about our promising future at our Investor Meeting on May 16, of this year. Back to you, Todd.
Todd M. Leombruno: Okay. Diego, we are ready to open the lines for Q&A, and we'll take whoever is first in the queue.
Operator: Thank you. [Operator Instructions] Our first question comes from Joe Ritchie with Goldman Sachs. Please state your question.
Joe Ritchie: Hi, good morning, everyone, and great quarter.
Jennifer A. Parmentier: Good morning, Joe.
Todd M. Leombruno: Thanks, Joe.
Joe Ritchie: Hi, the first place I'd like to start is just around North America. So clearly, good color, Todd. And what the guidance now implies, but it looks like your order rates are at least stabilizing there even though you took down the growth guidance for the year. So maybe just talk a little bit about what you're seeing across those end markets and whether you're seeing any stabilization or green shoots on your North America industrial business?
Jennifer A. Parmentier: Sure, Joe. This is Jenny. So, yes, we did see, as Todd said, a negative 1.5% of organic decline in Q2. We've had four consecutive quarters with negative orders now, but as Todd stated, the orders did remain the same as last quarter at minus 4%. What I would say is that, destocking in the channel continued. We saw weakness in off highway, primarily construction in Q2, some weakness in transportation and automotive and in heavy duty. We did talk last quarter about this inventory rebalancing and destocking, not only through distribution, but also at the OEM level with customers, dealerships, dealers, and that we did anticipate this to go into calendar year ‘24. So I would say overall, destocking is in-line with our expectation for Q2, but North America was just a little worse. It's been a year since it started and it's going to continue into the second half here and that's what we have in the guide. But backlog remained strong. We had this longer horizon of backlog strength and I would say that, as I mentioned earlier, distribution sentiment is very positive. We haven't seen any major cancellations or push-outs out there right now. So, we lowered the guide, to 2.5% on this continued destocking and the softer off highway, we think was going to continue. We see, it'll be construction again and AG2 this quarter, but we're feeling good about this guide right now.
Todd M. Leombruno: Hi, Joe, this is Todd. I would just add, if you look at the total industrial business, right, in total it kind of came in exactly as we're expecting. You're exactly right. There was a little bit of a shift from North America into the international markets, but when you look at the total reported sales, at least what we're guiding to, these are really very, very close to all-time highs when it comes to volume. So, we feel really good about that. We think we can continue to expand margins despite what's going on with the choppiness in the order market. So, we feel really good about that.
Joe Ritchie: Yes, that's great color from both of you. I guess my quick follow on there is, look, the margin performance despite the kind of weaker growth expectations in North America and really across your industrial businesses have been incredible. Last couple of quarters, you're above 24%. So, I guess the question is like, is 24% kind of a new baseline for the industrial businesses going forward?
Todd M. Leombruno: Joe, it's a great question. Like I said in the comments, couldn't be prouder of the team. We talk about this all the time, the Win Strategy, every single item on that Win Strategy is a margin enhancing set of tools, and it really is rewarding to see the team put up numbers like that. We have a target set out there. We want the company to be at 25%. Segment operating margin, we have not achieved that yet. We will achieve that, there is no doubt. But we're just keeping an eye on what's happening with the topline and obviously we're doing everything we can within the four walls of our facilities to make sure that we keep pushing that number higher.
Jennifer A. Parmentier: And Joe, I would just add, I mean, our culture is one of continuous improvement. And we're just, we're never waiting for a downturn. We're using all of the tools in the Win Strategy to expand margins. And again, I have to echo Todd's comments. We couldn't be prouder of the team. They're just really doing a really nice job in a slower growth environment. We expect that to continue.
Joe Ritchie: Great. Thank you, both.
Todd M. Leombruno: Thanks, Joe.
Operator: Our next question comes from Julian Mitchell with Barclays. Please state your question.
Julian Mitchell: Hi, good morning. Maybe just wanted to understand on the international business in industrial, orders have been down I think for five quarters now. You slightly took up the sales guide, what's your impression of sort of where we are in that orders downturn? Maybe help us understand sort of what on the revenue side changed a little bit? And are we thinking it's sort of a very gradual maybe we and a floor in the next couple of quarters and then a very gradual recovery thereafter across those main regions in international.
Jennifer A. Parmentier: Thanks, Julian. This is Jenny. So, listen, we've been saying it's just been choppy in international now for several quarters. But, flat call it flat organic growth in Q2. As Todd said, orders did improve from minus 8 in Q1 to minus 5 in Q2. Europe, EMEA had positive organic growth of 0.7%. It was better than our forecast, as you said, really due to some resilience in our filtration business and favorable project business timing. We did see destocking continue. We see some softness in off highway and industrial markets. In Asia Pacific, Todd mentioned a 2.5% organic decline. China recovery is still slow. I mean, we did see some low-single-digit positive growth for China in Q2, but again, it was against a much easier comp from the COVID shutdown last year. So, off highway construction remains soft in Asia Pacific, transportation, truck. I would say that India does remain a bright spot in Asia Pacific. When we look forward, that full-year organic growth improved to 100 basis points really due to the strength we saw in Q2, and an improvement in orders in Asia Pacific. We do expect that Europe destocking will continue and that softness that I mentioned in Q2 off highway and industrial markets will continue. Again, China recovery is still slow, but the team is doing a great job controlling the cost and giving margin performance in the region. And I would say that, when you look at the rest of Asia, Japan and Korea still pretty soft in semicon, but again, Southeast Asia and India, look good right now.
Julian Mitchell: That's helpful. Thank you. And then just my follow-up on aerospace systems, maybe help us understand sort of is it more volume or price perhaps in commercial that drove the revenue guide uplift for aero? And on the synergies point, it came in with a much stronger margin than I think people were expecting for the second quarter in aerospace. Maybe help us understand kind of any bucket of those synergies that's coming in ahead of plan?
Todd M. Leombruno: Yes, Julian, this is Todd. I'll start on the increase to the topline. Obviously, you could see demand across all verticals in the aerospace business is extremely strong. If you look at what we did in the quarter, 15% organic growth in the quarter, that gave us the confidence to raise the second half. That has been a big plus. If you look at within the business, the mix, it's 47% aftermarket, that was higher than we were forecasting. So that was a part of driving that margin expansion. And we've talked about this now for a year on Meggitt and our base aerospace business. It really is the volume has certainly helped to that, but it's really the team working through the efficiency. The supply chain is still a little noisy on the aerospace side of the business, but it's really the team is starting to perform in a normalized environment when it comes to that. So, that's what gave us comfort in aerospace.
Jennifer A. Parmentier: Yes, we've obviously with pulling the synergies ahead, we've had some great performance by the team. We've done a really nice job de-layering the organization and getting it into the Parker division structure. And now we're really starting to see the benefits of implementing the Win Strategy. So, the team is really doing a nice job and as Todd said, we expect this to continue. Volume always helps.
Julian Mitchell: Great. Thank you.
Operator: Thank you. Our next question comes from Scott Davis with Melius Research. Please state your question.
Scott Davis: Hi, good morning, everybody. Good morning, Jenny and Todd.
Todd M. Leombruno: Good morning.
Scott Davis: Just kind of a nuanced question and excuse if I think it's weird, but your gross margin is just has gone up a ton, right? Pre-COVID kind of 25% today 35% plus op margins have gone up, call it 500 basis points or so that same timeframe. But is the future margin improvement that you guys see, do you think it'll come more from gross margin and kind of SG&A leverage or would we expect a balance there. I guess it's a nuanced question but I'm kind of fascinated with it feels like there could be some upside to operating margins perhaps beyond even what you've shown today?
Todd M. Leombruno: Yes, Scott, it's a great question. It's something that we look at intensely across the organization. I think there's upside on both areas to totally honest with you. But you're right, if you look at what we've done, and it depends on if you're looking at the as reported gross margin number, there is a lot of noise in there from the purchase accounting transactions over the last year, but this quarter was fairly clean. So, I expect it to stay at the high levels that it was at this quarter and obviously improve from there. We are constantly looking at SG&A and reinventing ourselves everywhere that we do business. So, I really do think that there is potential in both areas.
Jennifer A. Parmentier: Yes, I, just pile on a little bit there. The Win Strategy tools apply to the entire business, right. So, I agree with Todd, to be in both places. And I mentioned earlier some of the Win Strategy initiatives that came with 3.0 and, you look at Simple by Design just yielding benefits everywhere up and down. And then some of the initiatives that we have around, demand forecasting, allowing us to better analyze demand, better staff our factories, really be able to serve the customer better, really reduce our overall cost of service to the customer. So, that's really a plus. And then, our zero defect initiative, a lot of, a lot of activity around producing a product 100% quality the first time and that's a lot of cost reduction there. So, just a lot of tools in our toolbox to continue to expand margins and a lot of nice work done across the Board by all the teams. The high performance team structure really lends itself to improvements throughout the whole organization. So, it's not going to be in just one area, it'd be across the Board.
Scott Davis: Okay. That's super helpful. I'm going to leave it at that. You guys are doing a great job and best of luck in 2024. Thank you.
Todd M. Leombruno: We appreciate it, Scott. Thank you.
Jennifer A. Parmentier: Thank you, Scott.
Operator: Our next question comes from Nicole DeBlase with Deutsche Bank. Please state your question.
Nicole DeBlase: Yes, thanks. Good morning, Jenny. Good morning, Todd.
Todd M. Leombruno: Good morning.
Nicole DeBlase: Just maybe starting with the cadence of EPS through the year, I think just looking back at normal seasonality, you do typically see like a step up in the second half from either the first half or 2Q however you want to look at it, I guess what are the key puts and takes that you're embedding more of like a step down at the midpoint this year?
Todd M. Leombruno: Nicole, that's a great question. We looked at that a lot as we put this guidance together. What I like about the guide is the EPS is evenly split now first half, second half, it's fifty-fifty. So there's big ramp in the second half that should be concerning. I would call out that Q1 and Q2, obviously, those were both record numbers when it comes to EPS. So, I think that's a little bit of the driver there. Aerospace business remains strong. We have no concerns about that business whatsoever. But we did see some softness in the North American businesses and obviously international got a little bit better, but it's still a little choppiness out there. So, that's really the elements that went into our guide. If you look at both of those quarters and really the second half of the year, I mean, we really are still guiding at record levels of earnings per share.
Nicole DeBlase: Totally understood. Thanks, Todd. And then just going back to some of the order trends, you guys gave really good color around the international revenues that you saw, but what actually improved sequentially in the orders going from the down 8 to the down 5 in 2Q? Thank you.
Jennifer A. Parmentier: Asia Pacific orders improved in the quarter.
Nicole DeBlase: Got it.
Jennifer A. Parmentier: That’s [indiscernible]
Nicole DeBlase: Thanks Jenny, I’ll pass it on.
Todd M. Leombruno: Thanks, Nicole.
Operator: Our next question comes from Nathan Jones with Stifel. Please state your question.
Nathan Jones: Good morning, everyone.
Todd M. Leombruno: Good morning, Nathan.
Jennifer A. Parmentier: Good morning, Nathan.
Nathan Jones: I'm going to start off on capital allocation now that the balance sheet is in much better order post paying down a lot of the debt off Meggitt. Being back to maybe around two turns in net leverage at the end of 2024, can you talk, about your willingness to get back into the M&A market, we're in a bit of a different interest rate environment than we were when you bought Meggitt. You went up to a little over 3.5 tons of leverage to buy that. What your appetite is for potentially levering up given the different interest rate environment and priorities for debt versus M&A?
Jennifer A. Parmentier: Thank you, Nathan. This is Jenny. Well, first of all, as we've said, debt pay down is our number one priority. But as Todd mentioned, we are ahead of schedule for achieving around that 2.0 number by the end of this fiscal year. One thing I would say is that, we never let the pipeline go dry. We're always working the pipeline. We've built a lot of relationships over the years. That's how we've wound up with these great companies in our portfolio, and we continue to do that. We have the right deal. It has to be the right property out there. We still want to be the consolidator of choice. We like all of our eight technologies, we do see an opportunity to build on the entire portfolio. We want that to be driven by secular trends and longer cycle, faster growing, more resilient businesses. And we wanted to be accretive to margins, to EPS, to cash flow. So, we'll keep this pipeline going and we'll be looking for that right deal.
Nathan Jones: And I mean, would you be willing to do something like 3.5 tons of leverage and de-lever after that, again, given the change in the interest rate environment, as a lower number kind of you're sealing these days given the interest rate environment?
Todd M. Leombruno: Hi, Nathan, this is Todd. I'll take a stab at that. So, listen, we're not trying to do anything bigger than what we've done. Jenny said it, I think very well. We're trying to make sure we do the right deal for the company, for the shareholders. What we have proven is, is we have proven that we can de-lever quickly. We generate cash like we've never done before. And I think what we've been is we've been creative with the way we structured those deals that allows us some flexibility on that. So, I don't think we wouldn't be afraid to do something like what we did before, but we don't necessarily have to do that if it doesn't present itself.
Nathan Jones: Fair enough. Thanks for taking the questions.
Todd M. Leombruno: Thanks, Nathan.
Jennifer A. Parmentier: Thank you, Nathan.
Operator: Our next question comes from Mircea Dobre with Baird. Please state your question.
Mircea Dobre: All right. Good morning. Thank you for the question. Just to follow-up on that discussion with Nathan, when you're approaching M&A at this point, first, are you sort of just looking at the eight technologies that you currently have in your portfolio, are you willing to look more broadly beyond that? And also how do you sort of think about your specific vertical or end market exposure? You've done some sizable things obviously in aerospace. Is that still an area that you're looking at or are you frankly willing to look to further diversify your portfolio beyond the end markets that you currently have exposure to.
Jennifer A. Parmentier: We like the, the eight core technologies. We think that that is where we do really well. We don't have a specific aerospace mix number that we target. Right now we have a nice balance between the segments, but we're going to continue to keep growing the industrial business, as well. So, we're going to be looking at the markets that we know, customers that we know and technologies that we're familiar with. So, that's our current focus.
Mircea Dobre: Okay.
Todd M. Leombruno: Hi, Mic, I would just add, you're right, we have expanded the aerospace exposure pretty significantly. But those are the same technologies that we have throughout the entire company. So, they just happen to be in aerospace end markets, the applications are part of those right technologies. So, that's why we like to say technologies.
Mircea Dobre: Understood. And then I know a lot of people asked about margins. I guess I'll ask one as well. The performance in industrial, really kind of stood out to me given everything that's going on in those end markets. And I'm sort of curious as to what are you effectively doing there? Is this margin expansion that we're seeing more of a cost mitigation in an environment in which the volumes are frankly not that great? Or is there something more structural in nature? If we see reacceleration, for instance, in fiscal ‘25, should we assume normal incremental margins at that point on this space or will some of these costs that you've taken out eventually come back with volume? Thank you.
Jennifer A. Parmentier: I think you can, we can say that you would see normal incremental margins with an acceleration. It's a lot of what we've talked about this morning, the Win Strategy is very effective across all the businesses and our teams are doing an excellent job with some of our legacy tools around lean and supply chain, as well as some of those newer initiatives that are driving cost out. And, we'll continue to see that in the industrial business. We've said a couple of times, Win Strategy 3.0 still has room in it and we'll continue to expand margins.
Mircea Dobre: Appreciate it. Thank you.
Operator: Thank you. Our next question comes from Andrew Obin with Bank of America. Please state your question. Andrew Obin, your line is open. Please go ahead. We'll move on to the next question. [Operator Instructions] The next question comes from Jeff Sprague with Vertical Research Partners. Please state your question.
Todd M. Leombruno: Yes, Diego, it's a busy day out there. I know people might be stacked up on multiple calls.
Operator: Thank you. We'll move to the next question.
Todd M. Leombruno: Yes.
Operator: We have Joe O’Dea with Wells Fargo. Please state your question.
Joe O’Dea: Hi, good morning. Thanks for taking my questions. Jenny, I wanted to circle back. You talked about sort of recent meetings with distributors and a broadly sort of positive tone. Can you just expand on that a little bit in terms of how maybe that tone has changed over the last several months? What they're pointing to trying to understand bigger picture thematic elements versus a little bit more near-term kind of on the ground and what folks are talking about seeing out there.
Jennifer A. Parmentier: I would have to tell you that visiting distributors and talking with distributors over the last several quarters, I've never felt, a negative tone. They've all felt rather positive and bullish on the future. A slowdown in orders, but never and overall concern about what was in front of us. What I would say about the meeting in December is that, there was just a lot of talk about a return to acceleration. Not seeing it yet, but very positive that it would come. And commentary on, it's been almost four quarters now, now it has been four quarters and we usually see that turn coming in front of us. So, just a very overall positive sentiment. Some of them are participating in some of these, what we would call Meggitt CapEx projects. They've commented on how they're working with some local and national contractors on new plants that are being built, site prep and some of the walls going up. So, some feel really positive about that. So, again, really good sentiment, good tone about the future.
Joe O’Dea: I appreciate the color. And then also wanted to ask on international margins. I think you commented about ongoing progress in terms of the distribution side of the margin profile improving on the international segment. But those international margins are pretty close to North America margins too. So, just if we think specifically about the distribution side, what does the margin gap look like sort of international versus North America? How much more upside should we think about in terms of navigating higher on international distribution margins?
Todd M. Leombruno: Yes. Joe, this is Todd. We've been very public that the sales that go through the distribution network are anywhere from 10 to 15 margin points better than our direct shipments and that's just, it's part of the structure of the channel, sort of the value they add. Jenny, I had a slide that kind of went through why that is supportive of that margin mix. What we've been trying to do for many years now is increase that mix in the international businesses, that was on the slide as well. We think we're not done with that yet.
Jennifer A. Parmentier: Yes, we're not done.
Todd M. Leombruno: I think that more room to grow on that. So, we feel like that still has room to grow and that will also be a margin driver out into the future.
Joe O’Dea: Got it. Thank you.
Operator: Our next question comes from Jeff Hammond with KeyBanc Capital Markets. Please state your question.
Jeff Hammond: Hi, good morning everyone.
Todd M. Leombruno: Good morning, Jeff.
Jennifer A. Parmentier: Good morning, Jeff.
Jeff Hammond: Hi, just on second half aero margins, I think you're guiding maybe flat to a little bit down, it seems like synergies are building. Just wondering, I think historically your margins have kind of built through the year. Just how are you thinking about maybe any headwinds within second half versus first half aero margins?
Jennifer A. Parmentier: Yes, I would just start with and I can let Todd add on. We had a really nice, aftermarket mix in Q2 and in the first half, it was really driven by favorable spares. So, we didn't feel comfortable forecasting that into the second half, so that is some of it.
Todd M. Leombruno: Yes. We did call out some one-timers in Q1 that were margin positive. Q2 obviously was another Great margin quarter. Jenny is absolutely right. That mix at 47%. We hope it remains there, but we didn't feel prudent to guide that way. And again, I just go back to if you look at the second half there, those are record numbers when you look at what we're guiding to. So, we feel like we can achieve them. There's just I could see a few more quarters at that level before we get overly confident.
Jeff Hammond: Okay, that's great. And then just the backlog, I think you've said it's stable at a high level. I think you've given some stats around 30% and 50% for industrial and 55% for overall and that was kind of 2x. Are those kind of running at those same levels? Are we seeing any backlog drawdown?
Jennifer A. Parmentier: No, I mean, they're just exactly what you said. They're holding steady at those levels. And it is about twice of what we've seen in the past. So, we feel really good about the quality of the backlog. I would tell you that, we constantly analyze it and, we do a lot of checks with our customers. But, again, not seeing any major cancellations or push outs at this time, so we think it's a good quality.
Jeff Hammond: Okay. Great to hear. Thanks.
Todd M. Leombruno: Thanks, Jeff.
Jennifer A. Parmentier: Thanks, Jeff.
Operator: Our next question comes from Andrew Obin with Bank of America. Please state your question.
Andrew Obin: I guess still good morning, still good morning. And yes, and I apologize for the confusion earlier. Just a question on pricing and inflation. I guess our channel work suggests that just generally fluid power pricing is running higher I think than we would have expected. In the new calendar year, what are your expectations? How are your expectations about pricing are evolving any change to your framework? And what does it say about sort of just general inflationary environment for the industrials?
Jennifer A. Parmentier: So, Andrew, this is Jenny. Just kind of a reminder with pricing, we went out early and often, some of these really historical inflationary times over the last couple of years. We are now back at our regular pricing cadence of January and July. And, I would just say that the increase that we just did was very modest. I wouldn't consider it a higher increase for fluid power. So, and that's what we barring any major changes, that's what we expect to see going into the future. So, we still are in inflationary times, and there's some of those inflationary cost drivers that aren't going to reverse. So looking forward, this is what we see right now, but we'll continue to use the pricing tools that we've always used in the past.
Andrew Obin: Got you. And just a follow-up I think on Meggitt synergies. I guess just to clarify, you've raised the synergies from $150 million to $200 million cumulative. So should we think about it as a pull forward or is the $300 million target going higher because clearly Meggitt has been a big success for you, but just to understand what the formal framework is?
Jennifer A. Parmentier: Consider the pull forward, we originally said $75 million for this fiscal year, now it's going to be That's $50 million higher. So we're in a good position here. We remain committed to the $300 million by FY ‘26. We're just realizing some of that sooner.
Andrew Obin: That sounds like good news. Thanks so much.
Jennifer A. Parmentier: Thank you, Andrew.
A - Todd M. Leombruno: Thanks, Andrew. Diego, I'm being told that that was the last question in the queue. So, unless you see anything different, we will wrap up just a little bit early. I know it's a busy day out there for everyone. If you do need any follow ups, Jeff Miller, our VP of Investor Relations; and Yan Huo, our Director of Investor Relations, certainly will be available if you need any follow ups. And as always, we appreciate your attention. Thank you for your support in Parker, and I hope everyone has a great day. Thanks.
Operator: Thank you. And that concludes today's conference. All parties may now disconnect. Have a great day.
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