Parker Hannifin FY 2Q16 Earnings Call Notes

Thomas L. Williams – Chairman & Chief Executive Officer

Continues to be a very tough environment

“It continues to be a very tough environment in many of our end markets and regions. We have responded decisively to adjust to these conditions and delivered impressive margin return on sales. We have tightened control of discretionary spending, reduced employment levels across all regions in our company and implemented reduced work schedules where necessary.”

Continued to experience general industrial weakening

“We continued to experience general industrial activity weakening due to the knock-on effect from natural resource markets. These challenging markets outweighed positive growth in other markets such as power generation, air conditioning, lawn and turf, rail, and heavy-duty truck.”

Expect environment to continue through the rest of our fiscal year

“We expect the difficult environment to continue through the rest of our fiscal year.”

Valuations are still high. Sellers expectations have not met the new reality of growth rates

“On the balance sheet, the acquisitions – the pipeline is active, but valuations are still high and I think what you’re seeing is a delay in the reality from seller’s expectations to buyers like us as far as setting a new revenue target as far as what they think for the business. That’s the key valuation difference. I think everybody knows we’re disciplined buyers and we buy things that are in our space, so we understand what the growth rates are. And I think the time is on our side with that. I think as time goes on and people see the new reality that they – it’s maybe not going to grow what they thought it was the previous decade, but those valuations will come in more line and I think our pipeline will become more actionable at that point. So, it’s lumpy, it’s hard for us to predict output, but we’re still working on it.”

An example of the IoT in the field

“if you take an air-conditioning contractor today, they have a lot of mechanical tools they have to utilize to measure pressure, humidity, temperatures and so this is a patented sensor that we have. It allows you to diagnose and troubleshoot the conditions of that air-conditioning unit much more rapid, so the value for the contractors as many more calls happens during the call, they can get a print out right on their smartphone or visual on their smartphones and print it out if they want it for the customer, so they can see what’s going on with their unit. So, we launched that. We’ve been very pleased with the initial sales. And that’s a really good example of taking a traditional market and using Internet of Things to make it even better.”

Jon P. Marten – Executive Vice President-Finance & Adminstration and Chief Financial Officer

January has been consistent with what we saw in FY Q2

“This is Jon. I think, James, the pattern is consistent with what we saw during Q2. I think what we’re seeing in January is consistent with what we’re seeing in guidance. January is, of course – the first two weeks of January are a little bit – very difficult to judge, but I think from what we can tell so far that we’re consistent with the guidance that we’ve got together for Q3.”

Lee C. Banks – President and Chief Operating Officer

natural resource markets have remained challenging

“I think one common thread that hasn’t changed is the whole natural resource driven markets, ag, mining, construction equipment, oil and gas, they really by and large continue to be challenging everywhere around the world.”

Residential air conditioning has been strong as housing markets have been strong

“Looking at, really, air conditioning, refrigeration markets in North America, we’ve seen good North America residential air conditioning growth. This is a result, obviously, of the continued strengthening in the housing market.”

Continued topline declines in ag

“Turning to agriculture, we continue to see topline declines, which is consistent I think in contraction and production schedules at our major customers. So, very weak on the agricultural equipment side.”

Heavy duty truck has been strong

“On heavy-duty truck, Class 8 truck, this market has been very good and growing for us. And it was excellent, but consistent with industry forecasts, we are lowering our forecast by at least 20% from the 2015 levels going forward.”

China renewables and rail strong

“On energy, in the region, really I’m speaking to China mostly, renewable, wind, solar and hydro is growing rapidly, but traditional thermal powers, coal, gas, nuclear is still taking a major share. On rail, and this really speaks to China, we continue to be very bullish on the rail market; the Chinese government is making significant investments in this area. ”

Brazil continues to be in dire condition

“talking to Latin America, it’s really about Brazil. I won’t go into the details. I think everybody knows, but Brazil continues to be just in very dire condition and we’ve seen softness in all our end markets, mining, PowerGen, oil and gas, heavy-duty truck, et cetera.”

INventory stocking has stayed about the same, but it’s tough to get a read on that

“Andy, it’s Lee. I would say it just stayed about the same. I mean at the end of the day it’s really hard for us to get a gauge on that. But it certainly didn’t get worse.’