Parker-Hannifin [PH] Conference call transcript for 2021 q3
2021-11-04 16:02:04
Fiscal: 2022 q1
Operator: Good day and thank you for standing by. Welcome to the Parker Hannifin Corporation, Fiscal 2022, first-quarter earnings release, conference call and webcast. At this time, all participants are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session. Thank you. I would now like to hand the conference over to your first speaker today, our Chief Financial Officer, Todd Leombruno. Sir, please go ahead.
Todd Leombruno : Thank you Rachel. And good morning, everyone. And thanks for joining our FY 22 Q1 earnings release webcast. As Rachel said, this is Todd Leombruno our Chief Financial Officer. And joining me today is Tom Williams, our Chairman and Chief Executive Officer, and Lee Banks, our Vice Chairman and President. If I could direct you to Slide 2, you will see our disclosure statement addressing our forward-looking statements and Non-GAAP financial measures. As usual, we've included all reconciliations for any Non-GAAP measures in today's materials. Those reconciliations and our presentation are accessible under the investor section on Parker.com. and will remain available for 1 year. The agenda is as usual, Tom is going to begin with some highlights on the quarter. He's got a few strategic comments to you that he'd like to add. And then I'll follow-up with a very brief financial summary of our quarter and provide some color to the details on the increase in our guidance that we released this morning. Tom will close with a few closing summary comments, and then we'll open up the lines and take your questions. Just one reminder regarding the pending mega acquisition. We are still bound by the requirements of the UK takeover code. And respect to discussing certain transaction details. So that's just a reminder for everyone with now, I'll ask you to move to slide 3. And I'll hand it up to Tom.
Thomas Williams: Thank you, Todd. And good morning, everybody. And welcome to the call. We turned into an outstanding quarter and it's a great start to FY '22. My thanks to the global team for delivering such a record quarter against the backdrop of strong demand, inflation, and supply chain disruptions. So a couple I'll highlights, safety performance continued to improve 17% reduction or equivalents and a rolling 12-month basis, very strong growth, in particular, organic growth is 16% year-over-year. Was an extensive list of records. We had seven first quarter records, sales, total Company operating margin, net income, and EPS. And then each reporting segment, all 3 of them had all-time operating margin records. EBITDA margin, you can see the reported number was 22.1% adjusted. We're 210 basis points higher than the prior year. And then down at the bottom, last rows segment operating margin adjusted was 22. Again, a 210 basis points improvement versus the prior year. Just a great quarter. I'm very proud of the team and thank you for your hard work. Going to Slide 4, there's really 3 things that drive the Company Living up to our purpose, and create generators and deploy us the cash, and being a top quartile performer. If you go to Slide 5, I wanted to spend a minute, you're familiar with our purpose statement, enabling engineering breakthroughs that lead to a better tomorrow. And we've been trying to show you examples of our purpose in action after the Company come to life. And one of the secular trends that the pandemic is accelerating is standardization. And in investor day, we're going to highlight our content as you look at the whole digital supply chain. As example, things like 5G, infrastructure, electronics, manufacturing, clean rooms, data centers, electronic devices, shielding and thermal management that we do there. And of course, transportation to get these products around the world. But the application on a monitor to cover today is semiconductors, given especially the importance of chip demand around the worlds, if you go to slide 6. There's going to be a significant amount of investment as we all aware of in the semiconductor space. And that's going to drive for us double-digit growth over the next several years. Now, we are -- we have strong expertise in semiconductor manufacturing about a quarter of our divisions shipped some kind of content in the semiconductor space. So the orientation on the slide, on the left-hand side, or the applications that we go into. In the right-hand side are our technologies for just a second on applications. Those 6 bullets that you see there are really -- are made up of a combination of what we call fabs and tools. The fabs would be the infrastructure or the transportation part of the process. And then tools are the various tools that are in the factory helping to make the semiconductors. On the left-hand side is picture of a wafer and on the center there that's picture of an etch tool, a 6-chamber etch tool. On the right are our technologies that we bring to create a distinct value for our customers. First segment is process controls. Think of that as precise control of gases and liquids in the process. Fluid and gas handling provides cooling system for the tools, electro -mechanical is helping with a wafer movement, and then engineering materials is doing shielding and ceiling. The shielding is helping to protect the wafer from electromagnetic static issues which would destroy the chips. So we are essential to supply chain in this supply chain and related technologies and markets around digital. If you combine that will be part of four major secular trends for the Company driving long-term growth. That'd be aerospace, ESG, electrification, and digitization. If you go to Slide 7, speaking of the breadth of technologies, these 8 motion control technologies, 2/3, as you heard me talk about in the past of our revenue, come from customers who buy for 4 more of these technology. So again speaks to the interconnectedness the technologies, the value proposition system and subsystem work that we do. But then, and coincidently, 2/3 of our portfolio is also helping to enable our customers with our clean technology journey. And that 2/3 is going to continue to evolve to virtually a 100% over time. I'll give you a classic example. The seal work that we did today, a combustion engine for transmissions of Parker sales, eventually gets replaced for sales promoters, and batteries and electric vehicles. So the takeaway on the bottom here is really our brand promise, helping our customers increase their productivity and their profitability. And we do that really in two ways. It's that interconnected tissue, in the value proposition that we offer. And we're going to be a big part of helping our customers on their sustainability journey as we helped with our clean technologies. Go to the next slide, Slide 8 of our favorite slides. It's kind of -- you wanted to know whether profits were really different or not, a picture's worth a thousand words. On the left hand side is the EPS trend that we've updated that now for our current guidance for FY '22. And you can see that's virtually a 45 degree angle there. Tremendous amount of year-over-year improvement and a 2.5 times EPS growth from the $7 we were doing in FY '16. On our right-hand side is EBITDA margin. Again, you can see an almost 45 degree angle to that trajectory. And while we don't guide on EBITDA margin, our performance in the actual quarter just completed for EBITDA margin was 22.1%. So you can see that will continue to show the expansion we're doing on margins. So the question might be how? The how is really in the header there. It's been our people, their engagement, the ownerships that they are taking, the portfolio changes that we made, and then strategy changes. One strategy is 2.0, and now most recently 3.0. If you go to Slide 9, just a quick update on the mega transaction. We had a very strongly favorable shareholder vote. We're working with the UK government on both economic and national securities; they are underway. The anti-trust and FTI filings are proceeding as planned, and we still anticipate a Q3 calendar 2022 close. And this is as we've described before as a really compelling combination that's going to double the size of our aerospace business. And when you couple this with the other acquisitions we've done, CLARCOR, LORD, Exotic, and now Meggitt. Our portfolio is now much more long-cycle, less cyclical, and faster growing. And with that I will hand it over to Todd for more details on the quarter.
Todd Leombruno : Okay. Thank you, Tom. I'll ask you to go to Slide 11. I know Tom mentioned a number of these numbers, so I'll try to move quick. The quarter was fantastic, right? 7 records. Sales were up almost 17% versus prior year. We finished at $3.8 billion in sales. Organic sales are roughly 16%, that's almost all of the total. And currency had a small favorable impact of less than 1%. The growth this quarter was really driven across-the-board strong, broad-based demand across all our industrial businesses. And really a rebound in the commercial aerospace market. So we were happy to see that. And as Tom mentioned, we continue to benefit from strong growth from those recent portfolio additions we didn't CLARCOR lord and exotic, Both segment operating margins and adjusted EBITDA margins expanded by 210 basis points from prior year. We're really proud of that number. The adjusted segment operating margin came in at 22%., and really just another strong quarter of margin performance. Really proud of our teams, not only responding to the increased demand, but also executing through a number of various well documented supply chain challenges. And I want to give them credit. There was a great effort to maintain costs in the quarter and you could see that in our results. Incrementals are 35% year-over-year, which is really impressive, but even more impressive considering last year, we had a $125 million of discretionary savings, really, based on the actions we took during the pandemic. So if you account for that, the difference in Incrementals would be 58%. So we're very proud of those results. If you look at adjusted net income and adjusted EPS, both of those numbers increased by 40% versus prior year. Adjusted net income is $557 million, that's a 14.8% return on sales. And adjusted EPS were $4.26. That's a $1.21 increase from prior year where we finished at $3.05. If you jump to Slide 12, this is really just that breakdown of the $1.21 increase in adjusted EPS. And really the story here is just very strong, solid operating performance across every segment. Adjusted segment operating income increased by a $184 million or almost 30% from prior year. That really is the first leg in this bridge that's $1.10 or 91% of the increase in earnings per share. All the other items netted to another $0.11 of favorable items and interest expense. Other expense and tax were all favorable and that helped us to offset just a slightly higher corporate G&A that was really based off of some of those temporary savings we took action with last year. If you go to Slide 13, just looking at the segments. The takeaway on this page is every segment generated record margins in the quarter. The other big thing I want to note is we were able -- we've always talked about trying to maintain our neutral price cost position. We were able to do that in the quarter across all of the segments. And I already mentioned Incrementals are already, but I think it really highlights our efforts on covering inflation costs and really managing through the supply chain inefficiencies. So 35% is the MROS, but 58% if you exclude those discretionary savings. And demand continued to be very robust. Orders for the total Company are up 26% from prior year. Just diving into the segments really quickly, Diversified Industrial North America sales were $1.8 billion, that's up 17% from prior year. Adjusted operating margins did improve by 30 basis points from prior year and finished at 21.3%. Really sound performance in that segment considering it's pretty clear that the supply chain challenges are more difficult in the North American region. Order rates also very healthy at 32% positive, And it's really just continuing to show a strong rebound off of those prior year incomes. If I look at our international businesses and diversified industrial international, great quarter here for that team. Even higher organic growth, 21% organic growth. Their sales came in just under $1.4 billion and adjusted operating margins, significant expansion, 360 basis points improvement from prior year and they did reach 22.8%. I'm very proud of that team, volume obviously was a big driver here, but also, we've talked about this before our focus on international distribution that helped our mix, that continues to expand. And really some disciplined price cost management across that segment, very important drivers for the quarter. And order rates also very strong at 25% plus prior year. If we move to Aerospace Systems, fantastic quarter from that team, sales were almost $600 million. Organic sales did turn positive for the segment 3.4%, but it did turn positive. And we were very pleased to see that commercial markets are trending pop. And notably the commercial aftermarket came in very strong at 33% over prior year. So it's glad to see some rebound in those markets. Operating margins, a great story here, 400 basis points improvement. That segment came in at 22.1%. And I just want to note, it's really nice to see that level of performance. We are still well below pre-COVID volume levels. So there is room to grow here, at that volume returns. So we're looking forward to see that as well. And an order rate turned positive plus 16%, that is on a 12-month rolling basis. But if you remember last quarter it was minus 7, so we did see a fraction to positive orders in the aerospace segment. And that's really this is further proof of a slow but steady recovery in that segment. So it really, thanks to all of our global team, very great execution and really just continuing to live up to our purpose and performed extremely well. I've asked you to go slide 14. This is just, I will touch on cash flow. Cash flow from operations was $424 million or 11.3% of sales, free cash flow was $376 million or 10% of sales, and our conversion for the quarter was 83%. So I just want everyone to know working capital management continues to be a very strong story here. We continue to tightly manage this and really we're just responding to the inflection and growth here. The increased level of demand, coupled with really our efforts to provide continuity of supply for our customers, drove working capital be a use of cash in the quarter. It accounted to be at 3.6% use of cash in the quarter. And if you just look at that compared to prior year, prior year we were in the second quarter of a significant downturn. Today we are in the second quarter of a significant upturn. Last year, working capital was 6.1%, source of cash last year. But just importantly, I want to be clear on this for the full year, we are forecasting mid-teens cash flow from operations and our free cash flow will be well over 100%. So you'll see that strong cash flow performance for us as we go throughout the year. On slide 15, just really a quick update on capital deployment. I think everyone saw this, but last week our board approved a dividend payout of $1.03 per share. That is our 286 consecutive quarterly dividend. And then payout is in line with our announced target of 30% to 35% of 5 year average of Net Income. And on share repurchases, we did purchase $50 million in the quarter through our 10B51 program, But we also deployed an additional $180 million to purchase shares on a discretionary basis. And essentially, what that does is that discretionary purchase makes up for the 3 quarters that we paused the 10B51 program from FY '20 Q4 through FY '21 Q2. and our goal there is to eliminate dilution in FY '22. And then I just want to give a final update on the Meggitt financing. In the quarter, we did secure a $2 billion deferred drop term loan, that together with $215 million cash deposit into escrow positioned us to take down our initial bridge facility, so that was successful. And I want to be clear here. In October, after the quarter end, we also deposited another $2.3 billion into escrow from a combination of proceeds from commercial paper, issuance and also some cash on hand. And that really allowed us to further reduce that bridge to 3.2 billion pounds. Lastly, on Meggitt financing, we did complete a deal contingent forward hedge contract in the amount of $6.4 billion. And that really was just a lock in our pound to dollar rate as we continue to work through financing on the Meggitt acquisition. So great work by the team there. If I go to Slide 16. Just looking at guidance, obviously you saw we increased our guidance this morning. As usual, we're going to give this to you on an as-reported and an adjusted basis. The sales range now for the year is approximately 6% to 9% or just under 8% at the midpoint. The breakdown of that is really all organic. It's a 8.4% organic growth. We do expect currency to turn on us in Q3 through Q4. And that will create just a minimal drag about a half a point to top-line sales and obviously that's going to impact the international segment. There is no impact from acquisitions. We still do not expect Meggitt to close in our fiscal year. We're targeting Q3 of calendar year 2022, but we have no impact from Meggitt acquisition sales or segment operating income. And the split on sales is 48% first half, 52% second half. If you move down the segment operating margins, we did increase our adjusted segment operating margin forecast for the full year by 30 basis points from our prior guide. And that full-year now gets us to 21.9% at the midpoint. There is a range of 20 basis points on either side of that. And segment operating margin is split 47% first half, 53% in the second half. No change to adjustments at a pre -tax level, you see all those numbers, those are exactly the same that we guided last quarter. And in corporate G&A and other expense, we expect that to now be $513 million on as-reported basis. And for 461 million on an adjusted basis. Really the only difference there is some transaction-related costs with the Meggitt acquisition. And just a reminder, we will continue to adjust. transaction related expenses as they are incurred until we get through all of those transactions. No change of tax rate, we expect that to be 23%. And our EPS guidance on an adjusted basis it's now $17.30 it's the midpoint. We did narrow the range a little bit, $0.35 on either side of that. The first half, second half split is 46% first half, 52 -- excuse me or 54% second half. And then finally, I will just say for Q2, we are expecting adjusted EPS to be $3.74 at the midpoint. So that's just the real brief summary of the quarter. With that, I will turn it back over to you, Tom to present his comments. Thank you, Todd. And I think the first floor that kind of sums up our thoughts. A big thank you to the global team a highly engaged team delivering outstanding performance. And couple that with this very bright future, propelled by the wind strategy at 3.0 and our strategic long cycle acquisition as part of our capital deployment strategy. With that kind of a quick comment, he wants to make logistics before we start the Q&A. Yeah, just one comment before we start the Q&A portion of the call, we'd like to respond to as many analysts as we can today on the call. So if you could ask one question, a follow-up, if necessary, and then jump back in the queue, it would be appreciated. So with that, Rachel, I'll turn it back over to you and we can start the Q&A session.
Operator: Thank you. . . Please standby while we compile the Q&A roster. Your first question comes from the line of Mig Dobre from Baird. Please proceed with your question.
Todd Leombruno : Good morning Mig.
Mircea Dobre: Good morning everyone and congrats on a very strong quarter. Tom, I guess where I was thinking we'd start. You highlighted for big trends that benefit your business, aerospace, ESG, electrification, digitization. The first one, Aerospace is perhaps clearest to observe. But I'm curious. The other three, can you give us some context in terms of how all of this plays into your business? How is it driving incremental growth? And more importantly, are all these items driven by new product introduction from Parker, or is this using the existing solutions that you have in new ways that are helping your customer achieve these goals?
Thomas Williams: Thank you, Mig. I appreciate you picked up on that comment during on the -- toward my opening comments. But yes. So what I would characterize, these are secular trends that feel longer than a normal business cycle. This is going to take decades to unfold electrification or living kind of a subset of that. And digitization continues to just transform out. We interface with each other and how we interface with the supply chain. So these are things that I view as being bigger, longer than a typical business cycle. For us, it's going to be a combination of infrastructure. So the infrastructure goes around the world to put these in place, things that are also onboard equipment in both of these are bill of material plus type of additions for us. And then also the fact that they should be faster-growing environments as a result of. We are doing innovation in this space but a lot of our portfolio today, which is what I mentioned on that one slide, 2/3 of today is already clean technology-related. Yes, we're adding some motors and motor controllers and software in addition to our current portfolio. But our current portfolio was already designed to be very energy source and be able to respond to these changing dynamics. We will try to give a little more context of this in Investor Day. But we just started before the call to try to last couple of days, quantify digital and the threat that it cuts to the Company and it's surprisingly large. And we'll give you more context on that with some actual numbers when we get to Investor Day, but, it has an opportunity you with -- you think of the Company is being very diverse. And probably no end markets outside of Aerospace being bigger than 5 or 6% digitals are threat to Custer, so many, it's going to be probably second to Aerospace, the biggest spread the Custer the Company. And ESG's unfolding for the next 20-30 years, as the world tries to get to carbon neutrality. So that's what I like if you've got a prior environment thinking on Liza by watch, 7 years to industrial recessions in a pandemic. I think we're facing a much more constructive environment going forward.
Mircea Dobre: Understood. Then my follow-up is on international, which frankly performed quite a bit better than, I guess. Two questions here. One is on the margin side, in terms of Incrementals and maybe some things that might have been unique that helped the quarter. I don't know if there's anything to call that. And on the order front, I'm curious as to how you're seeing the various regions develop, China in particular. I know that geography punches maybe above its weight from a profitability and margin standpoint. So what are you seeing there and what's the impact on a go-forward basis in terms of mix? Thank you.
Thomas Williams: So maybe I'll start with that Mig first. It's Tom again. On the orders, they were strong throughout the quarter and to help people, it's easier to look at it from a dollar value basis. It's dollar value was fairly consistent with what we saw on a prior quarters. We had nice consistency. The numbers in the 26% improvement went down from where we were in the mid 50s just because the prior period was improving. But we saw all regions strong internationally, all 3 of the national regions were pretty much the same. We reported our national as 25, but all 3 regions underneath there were pretty much plus or minus 25, give or take some change. On the margin side, I would say there was nothing in particular that is different other than what we've been doing all along which was when Strategy at 2.0 and 3.0 and a rapid resizing of the Company post-pandemic and then being very careful as we move into a higher demand of feathering costs and a very judicious type of fashion And a much more lean and natural fashion we've had ever before because our cost structure is so much better. I do think international has less supply chain disruptions than North America for sure, and you see that reflected in MROS.
Mircea Dobre: Thank you.
Thomas Williams: Appreciate it, Mig.
Operator: Thank you. Your next question comes from the line of Jeff Sprague from Vertical Research. Your line is open.
Jeff Sprague: Thank you. Good morning, everyone.
Todd Leombruno : Good morning, Jeff.
Jeff Sprague: Good morning. Tom, I wonder if you could address a little bit what's going on with your OE customers. The next of my question is, I thought it would be apparent that maybe in the quarter that there would be some more pressures there. I'm sure there were some sale slippage and the like, but it doesn't jump off the page and the numbers, so to speak. So maybe just a little color on what's going on with the OE s, the shape of their inventory? and just your visibility into the remainder of the year.
Thomas Williams: Yeah, Jeff, so is Tom. So, I'm going to touch on customers and then a little bit about us because what you're referring to is really supply chain issues. And those would be the 2 fronts that it touches obviously. With our customers, I would say the supply chain has been much more acute in a bigger of an issue versus our own supply chain. What we've seen with orders from customers is that much more longer period duration, staggered release dates. Trying to make sure they have a spot in line, so to speak. We've had push-outs on delivery acceptance. So you may have a date as it's due. And due to other challenges they have as far as supply chain with other suppliers, they may not necessarily want that delivery which we fully understand. They don't want to sit on all this inventory. There has been temporary idling of plants. And this isn't really type the OEs, but you've got to rolling energy shutdown we've had and been experiencing in China, which will continue pretty much all the way to the Olympics. We've done pretty well through all that. If I had to use round numbers, it's probably a $50 to $75 million impact as far as the OE customers filling supply chain, things that feathered it to us. I think overall demand with them continues to be strong, as more just sliding to the right and then trying to manage a more complex supply chain. Their inventory -- they've always been just in time and they are being very careful to not accept other inventory that they don't they need to can put together with holes that they might have in for bill material.
Jeff Sprague: Great. Thanks for that. That's very interesting. And then on price costs, it is quite an achievement that not only get the dollar neutrality, but margin rate neutrality, but I wonder if you could just give us a ballpark number of the actual realized price on a year-over-year basis that you're running at. Your nominal price.
Lee Banks : Jeff, it's Lee. I can't give you an actual number, but I will tell you the margin neutrality is a lot of hard work by everybody in the Company. And I think it shouldn't be a surprise. We've had two processes embedded in our wind strategy for going on 20 years, and that's around pricing and it's around supply chain. And those processes give us very accurate indices around our selling price index and our purchase price index. So what it does, it aligns the whole Company and it gives us a way to roll things up about what we need to do going forward. And what you're seeing or the benefits of those processes really embedded in the Company and institutionalized.
Jeff Sprague: Thanks. I'll leave it there. Take care.
Lee Banks : Okay. Thanks.
Operator: Thank you. The next question comes from the line of Scott Davis from a Melius Research. Please proceed with your question.
Scott Davis : Hi, good. Good morning, guys.
Todd Leombruno : Good morning, Scott. Hope you're well.
Scott Davis : Well, great results from you guys make our lives a little easier. So thanks for that. Now that we've had a little bit of time, not post - COVID yet, but a little bit of time. Can we take stock of and exotic kind of where they are at versus the deal models on, imagine, perhaps maybe not quite on the top-line, that your deal model, but perhaps better on the margin line, but I'm just guessing. Some color there would be helpful.
Thomas Williams: Yes, Scott, it's Tom. We cannot be happier with both of these transactions. LORD has proven to be more resilient and faster growing than legacy Parker, and that's what we had hoped for. Its margins are beating what we had expected in -- at this kind of cash flow that we've reviewed with the board. It's performing in the upper 20s EBITDA, so it's accretive on growth, it's accretive on margins, accretive on cash flow, and is exposed to more longer cycle businesses. Then Exotic has performed remarkably well. Remember, when we bought Exotic, nobody would've anticipated the 737 MAX being grounded for as long as it was. And even with that strength of their portfolio than the team, we've put up mid-20s EBITDA. So it's a little light on the top-line, mainly because of 2 things that match grounding and the pandemic. But its margins have held up very consistent to what we had approved for the port and we know we're at the beginning of a long cycle improvement there with Exotic. The aerospace traffic is going to come back and the max ramp up is coming back. So we've gotten through the worst of it and it's going to be quite an exciting transaction for us.
Scott Davis : Sounds good, Tom.
Lee Banks : Just hey, I referred CLARCOR. It's been obviously a few years, but that business is also exceeding our expectations from the model standpoint. So a lot of hard work across the team. And that is flowing through in all those numbers that we just talked about. They're a big piece of that as well. So, didn't want to lose sight of that.
Scott Davis : That was a great deal, but moving on. I love your Slide 6 of the semiconductor example, but how do you -- can you go to market as one when you're looking at content into a semi fab?
Thomas Williams: We do Scott, we have account managers that cover certain accounts and they're representing and looking at the entire business and that's how -- we're so organized operationally around technologies. But our commercial teams are organized around channels to market, either global OEMs, national OEMs, or distribution. And so it's that account management team that brings power -- power of Parker to their customers. Or if we go through our channel partners, these are our distributors. They are bringing the power of Parker and bringing that comprehensive offering together.
Scott Davis : Okay. Encouraging. Good luck the rest of the year, guys. Thank you.
Todd Leombruno : Thanks, Scott.
Operator: Thank you. The next question comes from the line of Ann Duignan from JPMorgan. Please proceed with your question.
Ann Duignan: Hi, good morning. Ann Duignan here after 20 years.
Todd Leombruno : Yeah. Good morning.
Ann Duignan: Maybe first on your guidance for our fiscal Q2, you're guiding to 374 at the midpoint and consensus is that 386. Can you talk about where you think the biggest disconnect is between our sell-side models and what you're guiding to? Where should we be most focused and where do we need to review?
Thomas Williams: At this time, I would say it's probably at the top line. So what we tried to do with Q2, you saw that we raised the organic look full-year from 7% to 8.5%, and that was primarily by raising the second half. Our second half in a prior guide was 4.5% and a new guide is 6%. We left Q2, basically the same. And that's really based on what we saw in Q1 and in particular in October, around just supply chain challenges, more around what I was talking about with Jeff, around our customer demand and kind of the uncertainties or difficulty in predicting, delivery dates of time on this. On that, you also have -- you just look at the raw dollars, the dollars flow very much proportionally from Q1 to Q2. So normally in Q2, we would have less work days, which was what we have. In North America typically if you look is over the last 20 years. Our Q2 is typically a 4% lighter Q1 and their national typically 1% lighter. We lowered North America air more minus 5 from a dollar standpoint versus Q1, mainly because that extra 100 bps of some supply chain uncertainties. And part of what we're looking at is those temporary idling that customers have been doing. And in particular, we haven't had any customers announced yet. You've got the holidays and it would be very easy for them just to extend a day or 1/2 day, those types of things. And so we're just trying to be pragmatic as to what Q2 would look like given the natural progression for Q1 and Q2, putting on a little bit of price changes. And so I think the difference would be on the top line because the incrementals for Q2, if you look at it on an apples-to-apples. again, taking out the discretionary basis that we had in prior Q2, it's another upper 50s, just like Q1. So when you look at the operational excellence, upper 50s incrementals is pretty hard to beat. And so really the only difference you could have is top-line assumptions. I'm giving you the context of how we came up with our Q2.
Ann Duignan: Very helpful in there. I guess if I had time to back into all your first half -- back half I would have figured that out. So I appreciate you taking the time to give us that color. Just as a follow-up then. If I look at your sales in diversified industrial North America up 19% versus orders up 32%, which suggests that your lead times are extending. A, can you just confirm that. And B, is that what gives you confidence in the back half revenues or is there still some uncertainty when you're not known for having long lead times. So they have confidence in the back-half and make no change to your revenue outlook for half too. Is some of that back-half contingent on all of these supply chains getting better through the course of Q2 and off to the races thereafter or is there still some lack of visibility -- per back-half for you guys. And I'll leave it there, thanks.
Thomas Williams: And it's Tom, again. So yes, we don't always have complete visibility, but our backlog is increasing sequentially. North America, went up 14% and international went up 6%. So that's part of it. We're also just recognizing that the second half, we don't see -- significant improvement from supply chain. We think you'll get a little bit of most of those supply chain improvements will be more so into our FY '23. We have not been impacted a lot of that, but I think the difference you're seeing between orders and organic growth is what I was referring to earlier as customers putting in orders and having it be over multi-quarters release dates, whereas in the past they would give us orders that were much shorter cycle. These are longer cycle by industrial standards with release dates over multiple quarters.
Ann Duignan: Okay. That's helpful color. I appreciate that. Thank you. I'll get back in queue.
Todd Leombruno : Thanks, Ann.
Operator: Thank you. Your next question comes from the line of David Raso from Evercore. Please proceed with your question.
David Raso : Hi, thank you. Obviously been covering the Company for some years and the international margins have really been impressive now running ahead of North America. And part of it lately maybe it's been a supply-chain issues are a little more acute in North America. But can you help us better understand how we should think about that notable improvement international margins, be it geographic, be it obviously building out more Parker stores, whatever it maybe, bigger distribution there. Just trying to understand. So when we think about -- if you say the upcoming March meeting and we think about margin improvement from here. It just was a major issue years ago about can International get close or equal North America. And now it's been many quarters in a row it's running ahead. And I'm just curious about the drivers and how to think about that going forward. Thank you.
Thomas Williams: Good, David, it's Tom, we could not be happier obviously, because it has been sort of companies been working on for a long time on international margins. So I would say it's started a while even before the changes still wind strategy. At least in my watch, it started with our team working very hard to change the cost structure in all international, in particular in EMEA. And just recognizing that all those different countries and different infrastructures, there was an opportunity to try to simplify that. So that's been going on for multiple years, having a more agile lower cost structure than a concerted effort to grow international distribution from where we started at 35% -- at 35-65% split. Now to 40 and we'll give you the latest when we get to Investor Day, but it's north of 40 now, so you getting some mix help there. We've had -- Asia is always historically been a very strong performer. We really kind of set that region up that we think you can think about over the last 30 years, we set that region up. The latest and so we took all the best practices that we had from everywhere around the world when we set that region up from a cost structure standpoint. But what's helped us a lot the last couple of years is the Europe team and Latin America being small for us, but both of those teams have made a marked improvement. And when we think going forward your other part of your question, David, we see no reason why they can't continue. We'll give you new targets when we get to March. But you see right now our full-year guide. basically North America international margins conversion. We had always hoped that they be basically the same. And so going forward, we don't see any reason why they can't be and they both have equal opportunity to grow to higher levels and we'll give you that vision in March.
David Raso : A quick follow-up. The back-half for the year fiscally speaking, if revenue is only up 4% and I have to believe pricing is running probably at least that. So the idea of volume being essentially flat or down in the back-half of the year. Is that simply a conservatism around the supply chain or just trying to understand why volumes want to be able to grow in the back half.
Thomas Williams: As so just for clarification, the back half organic is 6%. You have about 1% currency headwind. So probably net's to around 5. And there is some -- we're being, what I mentioned earlier, pragmatic about the uncertainties on supply chain or so on our customers. But then we're not immune. We have some of our own challenges. But I think our team has done a particular job weathering it. And probably the best evidence of our ability to weather supply chain is just our ability at the MROS, because if you're struggling with your supply chain initiative, will it ultimately shows up in your marginal return on sales but that's how I'd characterize the second half.
David Raso : Alright, thank you very much.
Todd Leombruno : Thanks for the questions David.
Operator: Thank you. The next question comes from the line of Nathan Jones from Stifel. Please proceed with your question.
Nathan Jones : Good morning, everyone.
Todd Leombruno : Good morning, Nathan.
Nathan Jones : Parker has, over the years, continued to move towards and has always maintained a local for local sourcing and manufacturing structure. Has that given you guys better supply chain here that's allowed you to pick up any market share versus competitors who might have longer supply chains? And do you think that that market share gain will be sticky or trendy when supply chains normalize?
Lee Banks : Yeah, Nathan, it's Lee. Just -- maybe I'll touch the first part. You're right. Our strategy always has been to build and source local, which has been incredibly helpful. And I think the other thing that's benefited us through these disruptions, we worked hard on dual-sourcing strategy where appropriate, which has given us some flexibility. And one of the things it -- is weaved itself into this are simple by design efforts and some key areas where it's been easier for us to do material substitutions than we've done in the past. So all that together is really, I'm not saying we're immune, but has made us to be able to work through the supply chain disruptions. I would say the market share that we pick up is very sticky. 1. You're talking about a lot of engineered products. So I mean, when people take the effort to engineer the product, and it's not something that you quickly change, 2. The reality is if we're taking on new business, we're looking for commitments both -- from both of us to be committed to the volume going forward. And to that's standpoint, I think it's sticky.
Nathan Jones : Thanks. And my follow-up, Tom, was to one of your comments where you talked about customers giving you I guess, orders over multiple quarters, rather than maybe orders over just one quarter. Did that have a meaningful impact on the order rates in the quarter you've just reported first-quarter '22. And should we expect that to have maybe a little bit of a negative impact on the order rates as we go forward with that increased visibility that customers are giving you at the moment or is it not a significant amount?
Thomas Williams: This is Thomas. Hard to quantify if you take the orders and try to some how dissect and separate all of the ones that are multi-quarters, I'd be hazard and just a guess, I don't think it's material. It just -- it's different as far as in the past, at least on industrial and normal business conditions, say normal supply chains and normal order entry patterns, you had a fairly consistent input-output, quarter-to-quarter, maybe a little bit going into the next quarter. This is clearly more over multi-quarters. And actually it's good, it's customers trying to plan for longer, trying to make sure they get their ticket in line, and in a way that help us from a plans point. So when things do stabilize if they continue that way, I think that's a good thing for scheduling our factors and scheduling our supply chain.
Nathan Jones : Great. Thanks for taking my questions.
Todd Leombruno : Thanks, Nathan. Take care.
Operator: Thank you. The next question comes from the line of Nigel Coe from Wolfe Research. Please proceed with your questions.
Nigel Coe: Thanks. Good morning. Thanks for the question. So Aerospace. I wanted to -- maybe unpack the our performance a little bit and maybe focus a little bit more on a military because that's been an area where we've seen, especially in the U.S. market, some noise from some of your competitors in defense. And I'm just curious how you see military over the next fiscal year compared to previous
Thomas Williams: Nigel it's Tom. So on military OEMs, and that's one we mentioned in the last call, we do see that being slightly solved mid-single-digit's decline. And that's primarily because of the repositioning that our customers thankfully did to try to strengthen the supply chain and protect the supply-chain during the pandemic. They didn't want people to go wonder. And so they kind of pull forward demand into last fiscal year, leaving this fiscal year lighter. As you're adjusting inventory. So that should come back into FY '23 and beyond. And I would see that being a lower to mid-single bit. Probably more towards a low-single-digit growth on the military OE side. And then our military MRO, we had some softness in the quarter. We're still forecasting mid-single-digits positive for the full-year. Some -- the only weakness that we're really experiencing for the full-year would be the military OEM based on this supply chain, things I'd mentioned.
Nigel Coe: Okay. That's great. Thanks, Tom. And then you raised your margin by a points at the midpoint of Aerospace. I think the revenue numbers stayed unchanged. So just curious, what's changed since you gave guidance back in August.
Thomas Williams: The Aerospace team has done a fantastic job. There's a couple of factors, Nigel it's Tom again. First of all, a nice commercial MRO uptake. So Todd mentioned that commercial MRO up 33% for the quarter and order entry on a 312 was over 70%. So you're starting to see that replenishment of commercial aftermarket, which is up the 4 elements, the highest margin than, than we would have. And then within that kind of favorable mix of that, within that favorable mix, the spare to repair mix was favorable. So at the beginning that was just typical when customers were trying to maintain assets and minimize costs, they'll do more repair work. And then once that's exhausted and they have to put back in spares. So we've seen an uptake in spare activity. And then the aerospace team has done a great job. If you go back to the beginning of pandemic, we moved very aggressively at the beginning to resize the business for the long cycle. And what's really remarkable here is we're going to put up -- these margins were putting up the guide at 20.9% will be higher than our previous all-time high pre - COVID. And so this business is not even that 80% volume of COVID. And it's putting up margins that are higher than the best we've ever done pre-COVID. This is fantastic job. And to your point, Nigel, if you were to go compare that aerospace performance against other aerospace peers, I think we would do quite well with that.
Nigel Coe: Without to the question on whether you can get some mid-20s longer-term. But I think we'll leave that one for March. But thanks, Tom. Good color.
Todd Leombruno : Thanks, Nigel, take care.
Operator: Thank you. The next question comes from the line of Stephen Volkmann from Jefferies. Please proceed with your question.
Lee Banks : Good morning, Steve.
Stephen Volkmann: Good morning, guys. Thanks for fitting me in here. You mentioned, Tom, some of your OE customers were sort of delaying some of their deliveries, certainly understandable. But what are you seeing in the distribution side? our inventory is also really low there. And would they -- rather be building them a little if they could.
Thomas Williams: Absolutely, Steve, as Thomas Williams, I can let Lee Chime in if there's anything extra. Our distributors are flying the same challenges when you talk to them, they would love to be building inventory. This is what would be strategic use of cash for them as they could but they are having a hard time. All of our suppliers are getting out to where they would like them to be. So there's pretty much running hand about. And so that -- when I think about the longer-term opportunities for us on growth here, you've got the pent-up demand that reflects off the towards the bottom. But there will be an inventory replenishment back to normal levels for distribution, which will be -- will help us. And if you go out longer than that, you've got CapEx reinvestment. Two things there, under-investment in I think this whole localization as a giant burner underneath it now, because of this lack of product availability, is going to drive customers and suppliers to add capacity and to create dual capacities which has infrastructure opportunities for us, ESG, and then just the capital deployments. So I think there's long-term secular growth trajectory, but to get to your more near-term question, Yes, the distributors are in desperate need of more material, and we're doing everything that we can to get it to them.
Stephen Volkmann: Okay, great. And maybe just my quick follow-up. You guys obviously did much better this quarter than I think most of us expected, and I think maybe then you even expected, and yet for most of our companies, things are actually deteriorated through the quarter. So I guess I'm just curious really what changed for you from 3 months ago that allowed you to kind of come in with such a strong result?
Todd Leombruno : Well, 3 months ago we we're doing an annual guide, so we're careful of the annual guide, again as Tom, as to getting too far over our skis. We try to factor in an element of uncertainties with supply chain because we were experiencing them already when we did the August guide. I think we weathered the supply chain issues better than we had anticipated, allowing us to generate higher organic growth. And then the operating margins are I think indicative of really multiple years of effort. It's a combination of when 2.0, when 3.0, the capital deployment, buying
Thomas Williams: companies that are accretive on margins and cash and growth. So it's not an overnight sensation it's really you go to that one slide that shows the EBITDA trend it's been building on the pace of that improvement on top of some very quick cost actions that we did in the pandemic. And thankfully, not a lot of those costs have come back. We've been able to run the business differently in a more digital fashion, which is clearly helped us on some of those variable costs.
Stephen Volkmann: Great. Thank you guys.
Todd Leombruno : Thanks, Steve. Rachel, I think we have time for at least one more question. So could you take who's next in line?
Operator: Sure. The next question comes from the line of Jeff Hammond from KeyBanc Capital Market. Your line is open.
Jeff Hammond: Good morning, guys.
Todd Leombruno : Good morning, Jeff.
Jeff Hammond: Appreciate you fitting me in. I know you can't say much on the mega deal, but I just wanted to understand if in Europe, from your perspective, if the review process or the gating factors around getting the deal closed or the timing has changed any -- in any way.
Thomas Williams: Jeff, it's Tom. No, not at all. We're -- we're on schedule. We're always kind of anticipated third quarter, next calendar year. The reviews we're doing with the government on economic, and national security will conclude well before that. And then really the pacing item will be just the anti-trust and FTI filings which are proceeding as planned, but you just can't predict every country as the different process and timing. And it's difficult to project that outcome. So that's our best guess, but everything is on schedule.
Jeff Hammond: Okay, great. And then Tom, I like the slide on the clean tech as well, 2/3 of the product enabling clean tech. But I'm just wondering if you have a sense of what you think your revenue mix is today to clean tech or ESG markets and what you think that might look like 3 to 5 years out.
Thomas Williams: Yeah, it's Tom again. So it's basically that 2/3 numbers. That's how we came up with it, it's 2/3. Our revenue today would be supporting clean tech. I would argue everything we do supports sustainability, even if you take, say, engine and mobile filtration that we've be doing for heavy-duty trucks is helping that fuel run more efficiently and better emissions So even today, we just try to be very conservative in that number, recognizing that that was still a fossil fuel related technology. But it's going to morph into a 100% of the portfolio because everything is -- if you take construction equipment fossil fuel moves to more electric, all you're really doing is changing the power source. You're going from say engine at and a getting engine, diesel engine, to higher Gen Energen or FuelCell or battery or some combination thereof. And all of our technologies are still needed to facilitate the work functions and the propel functions. And if anything, like I had mentioned before, our build material gets bigger because there's much more heat, and you've got a management of all of our engineering materials, technologies. We do have, I think, a bigger bill of material that we'll have -- with our motion technologies as we add more motor content and more software, etc. So we're very excited. It came back to those secular trend for us: Aerospace, ESG, electrification and digitization. I think you're going to see a different Parker if you look at for the next 5.
Jeff Hammond: Thanks so much.
Todd Leombruno : Thanks for the question, Jeff. Alright. I think that concludes our FY '22 Q1 earnings webcast. Thank you to everyone for joining us today. As usual, Robin and Jeff are going to be here for follow-ups if anyone needs any. And I wish everyone has a great remainder of the day. Thanks again.
Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
