Parker Hannifin FY 4Q16 Earnings Call Notes

Parker-Hannifin (PH) Thomas L. Williams on Q4 2016 Results

North America still weak

“By segment, North America is still weak, but our Aerospace Systems segment and international business order rates were positive on a year-over-year basis.”

Sales will level off this year

” this is going to be year of sales leveling off, which after the sharp reduction that we had last year is going to be a very refreshing change for all of our people around the world. But the way we forecasted this is Q1’s going to be soft, moving to essentially flat in Q2 with 1% to 2% sales growth in the second half.”

Resource related end markets will be less of a drag

” The natural resource related end markets – so construction, ag, mining, and oil and gas – are moderating. Now, they’re going to continue to be, year over year when we finish 2017, negative. But they’re going to get to be less and less of a drag, especially in the second half. ”

Expectations for end markets

“So I have them in three buckets, positive, neutral, and negative. So on the positive side, what makes up our forecast is aerospace, lawn and turf, passenger rail, refrigeration and air conditioning, semicon, and telecom. In the neutral area is automotive, distribution, and life sciences, and power generation. Now, of significance is distribution in neutral now. Well, that’s not an end market, it’s a big channel for us, and the fact that distribution moves to neutral helps the year stabilize quite a bit. And then under negative is construction, farm and ag, forestry, general industrial, heavy-duty truck, marine, mining, and oil and gas.”

Nobody could have anticipated the rig count reduction that happened

“Nobody could’ve anticipated going back 12 months ago the rig count reduction that happened, but now the rig counts have stabilized, and the last several weeks, minus maybe a week or two, have actually improved. We’re not forecasting them to get any better, but just by the comps, and the fact that they’ve decelerated or are starting to hold that level, it makes our second half naturally a little bit better. And we’re still not – I don’t think we’re out on a limb with North America at a minus 1% in the second half, given that we normally have a second half a little bit better, and the fact that I think we’ve seen the worst behind us in the natural resource areas, and those non-natural resource areas that I mentioned starting to show some growth for us. So I think that’s why we picked what we did. And at this point we’re as confident as we can be. Of course every quarter we’ll update you as that changes.”

China has finally flattened out

” the good thing is China has finally flattened out, and we’ve actually saw some new incremental orders in China. And we have all the countries across Asia growing, with the exception of Korea, and Korea just has a little more exposure to some of those global OEMs, and so that will to start to recover as well. ”

Lee C. Banks – President, Chief Operating Officer & Director

Do get an impression that MRO is flattening out

“No, Joe, I’d just say commenting on North America, and I’ve spent quite a bit of time with these guys. There’s just no doubt that there’s still a big hangover from the natural resource markets, oil and gas being a big one. But have we seen that, (44:54) you do get this impression that things are flattening out. We do see some signs of MRO spend taking place, and it’s really a lack of cannibalization of idle rigs that are out there. So we see activity there. And then I think there’s just general encouragement through the channel that with the continued strength in the automotive end markets and continued positive PMI data that they are cautiously optimistic that there’s some positive signs going forward.

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

Pension plan is 65% funded

“Our funded status right now for our pension plans is at 65%, which is a little bit lower than we would want it to be, and that’s pure assets to liabilities. Of course, regulatorily, we’re well over 100% required, but there would be an argument to make that from a voluntary contribution standpoint that it would make sense given our assets and liability funded status at 65% right now.”