Donaldson 4Q16 Earnings Call Notes

Tod Carpenter

Restocking but urge caution

“In the quarter, we also saw some positive macro trends with restocking being the most notable. As an aside, I feel compelled to add a bit of restraint to the recent enthusiasm regarding market conditions. Beyond restocking the signs of stabilization are becoming more apparent; key measures like commodity prices, rig counts and industrial production all appear to be moving in the right direction. While these trends are encouraging there is still uncertainty relating to the timing of sustainable demand driven growth.

The mixed outlooks provided by our large customers reinforce the point that it is unlikely that we will see a meaningful turn prior to the end of our fiscal year in July. There is also lingering uncertainty related to policy changes and global economic conditions, which is underscored by the dramatic exchange rate fluctuations in recent months.

While our assessment may seem conservative, we believe a cautious stance is appropriate because it gives us flexibility to react to market changes. Turning back to the recap of engine sales strengthened aftermarket off-road and aerospace and defense, offset continued weakness in on-road.”

Encouraged but cautious

“Thanks Scott. To summarize our sentiment we are encouraged by overall end market conditions but not yet confident that sustainable market growth is right on the horizon. We are however confident in our strategic priorities and our ability to maintain our focus on those things that are within our control. More specifically we continue to act with the future in mind. Our sales teams are in this field building and deepening our customer relationships while our engineers are developing new and innovated filtration techniques and products.”

Not sure where we are in the restocking cycle yet

“Sure, this is Tod. Relative to restocking and where we are in the cycle of restocking it’s really tough to say. What we have seen clearly is good execution and share gain. We’ve seen restocking. As far as the third component end market increase, really unclear at this time. On the restocking I want to remind you that our sales on the independent channel are roughly 60% of our aftermarket and our OES channel is 40% and you’ll see less of a restocking phenomenon in the independent channel than you will on the OES and we are seeing it on the OES. So where we are within that particular cycle of restocking, it’s not sure, we’re not sure.”

Some people getting more positive on mining

“Sure, I think what you see are articles about the actual mining operators and producers like the Rio Tintos of the world coming out a little more positive on their balance sheet recovery et cetera, and so that’s getting people more positive about the mining sector. But for us it’s really about vehicle utilization and overall quantities of that product, that’s been shipped. And so we continue to look for vehicle utilization.”

Scott Robinson

Certainly some inflation coming

Yeah, there is certainly some inflation coming. We monitor our commodity prices every day and they are providing a little bit of a headwind going forward. We work to mitigate that, but that’s something that we are aware of.

Emerson 1Q17 Earnings Call Notes

David N. Farr

I don’t see a snap but I do see strong momentum

“That’s a lot of ask. I mean since I’ve been pretty bad at forecasts in the last couple years, Andrew, I mean you remember I did call that we’d turn last year at this time. But – so keep that in mind. And from my perspective right now, I think that what we’re seeing is the increased investments going on from a – just from pent-up – a situation for many years. We’re starting to see some of that flow out both in the sort of in the Automation space but even also in the Commercial space. So I see a pretty steady recovery here. I don’t see a snap. As I’ve said, I’ve always felt that 2017 would be a good year of building that foundation and see a improvement. I see a much stronger 2018 than I see 2017. But I see right now, based on what I’m seeing from the customer base, based on what I’m hearing from some of our customers and what they’re saying they’re going to spend on capital next year, overall, I think the pressure is upward, as I say. So I see a pretty steady improvement for the trend line. I do not see a strong snap, but I do see pretty good momentum going into 2018 as I look at it right now. Clearly, what goes on in Washington can have a big impact and a major shift in the sentiment around tax policies or trade policies. Those things all could have a big impact. But right now, I think momentum is going the right way, and we’re seeing that. And I don’t see it slowing down at this point in time. But I do not see a snap, as you said.”

It’s slow but there is a pickup

“I think we’ve started seeing the MRO, when I went out and talk – and the shareholders I think in November and December, we started seeing this pick back up. The oil and gas companies, some of our key oil and gas companies, some of our chemical companies, some of our pharmaceutical companies started increasing their spending. They had kept it really, really tight, and I think as they saw, okay, there’s going to be better, favorable policies to spend, encourage it, and to really encourage people to spend money, they started spending. It’s a slow, okay, here’s a little bit more money; you can go ahead and spend it. And I’ve seen the budgets being set the same way.”

A little more inflation

“Relative to price cost. As I’ve been talking for the last two quarters, we’ve seen the shift. So our net material inflation is less negative, i.e., we’re not getting as much commodity benefits from the cost benefits from materials as there’s been a slight inflating in the economy which is a good thing in reality. And from a pricing standpoint, we are still, probably, as we usually were six months behind. So as we said, the last four or five years, we’ve been green. Our price costs have been both slightly negative, from a negative price, negative net material inflation and we’re green and they’re offsetting it.”

Currency/competitive environment stable

“No. No. I don’t think the global competitive dynamic’s changed much right now. The euro’s been bouncing pretty tight between $1.06 and $1.08. If it goes to $1.10 it’ll be a real nice wind at my back. We’ve got our European structure right now pretty good, because we went through this process where the euro really weakened. So right now the dynamic world is pretty set and we haven’t had a lot of changes. It’s been more of a, I would say, what’s coming out of the political arena more than anything else is creating some changes. But we’ll see what happens here. Right, we’re all – I’m watching very clearly what the Washington folks decide to do relative to trade, what they do to tax. Because we are in a situation in pretty good from the standpoint of a cost structure and so we’re going to have to adjust and figure out where we go from there.”

Hoping for tax reform clarity by late summer, early fall

“I think we will get clarity as a nation by late summer, early fall. I think it will take time to get it rolled out and so that means that’s why we’re getting ready from the standpoint. I believe we will get some kind of tax reform which will include probably some trade renegotiations around that and what that means relative to how we bring products in and out of the country back-and-forth. But I think it’ll be tied around tax approaches to come up with a more equal tax policy and structure for the U.S. companies which will be good for us. But I think it’s going to take a while for them to get that done because there’s a lot of gives and takes and it will obviously include repatriation type of approach on an ongoing basis around the world so we pay it, no matter where we make the money and get the money back. So I’m looking for clarity by late summer, early fall and that gives me time, as I get into execution later this year, early 2018 based on if I have to change anything.”

Parker Hannifin FY 2Q17 Earnings Call Notes

Parker-Hannifin’s (PH) CEO Tom Williams On Q2 2017 Results

Cut 10,000 people over the last 4 years

” But we have also done a strategic restructuring that focused combination of footprint and SG&A and that combination has dramatically lowered our fixed cost structure of the company. I think probably the best way to visualize that for people is the line we have put in the annual report this year, but we went from 59,000 people on the team, going back probably about 4 years ago, to 48,000 people. And we have done that through a variety of initiatives, responding to the market, looking at footprint, looking at SG&A and in general trying to make the company simpler, faster, easier to do business with, with our customers. And ultimately, that’s what’s driving the margin enhancements that you see. ”

Energy markets have gone from sparks to smoke

“I think the best way to sum it up, too, I was talking to one of our key partners in oil and gas, and he said, Lee, 60, 90 days ago, I would have said we see sparks, and today I am starting to see smoke. And so there is just things happening out there, which are positive.”

Lee Banks

The channel is not inventory heavy at all

No, I would not characterize the channel as inventory heavy at all. And you know some of them that were tied to oil and gas did get stuck with some inventory. I would say, by and large, that’s not 100% gone, but it’s burned off quite a bit. So I don’t consider the channel heavy at all.

Emerson Electric 4Q16 Earnings Call Notes

Emerson Electric (EMR) Q4 2016 Results

If the economy doesn’t grow you’re going to see acquisitions

“Now if the economy doesn’t grow and we continue to struggle for growth, hence you’re going to continue to see acquisitions. That’s why you’re seeing acquisitions. U.S. companies have been going through a lot of restructuring, taking costs out. We’re running at pretty high levels of profitability for the level of sales we have, and hence that’s why you’re seeing acquisitions. That’s why you’re going to see that continue I think in the short term, unless there’s some kind of growth in 2017 which I don’t see at this point in time. So if this thing keeps going and gets sloppy, then we’re going to have to add to our acquisition pool, and that’s why we’re going to be looking at an additional $3 billion to $4 billion of acquisitions over the next two or three years to continue to feed our chance to reposition and restructure and derive top-line growth through acquisitions, because the core economic growth we do not see coming through for the next couple of years.”

We’re as close as we’ve been to price cost pressures, and I’ve told the people at the Fed this

“I’ll give you the best feel I have at this point in time. I fundamentally believe right now we are about as close as we’ve been for a while relative to this price cost pressures, being pricing has been, as you know, has been basically flat for us I think last year, last two years basically slightly up, slightly down, 0.1%, 0.2%. Now we’ve been able to offset that with stronger net material inflation. What I see coming into us right now, either this quarter or next quarter, is our price-cost ratio pressures are going to build. And so we’re factoring into higher cost reduction efforts within the company because I wouldn’t be surprised if we do not go red for one or two quarters on our price-cost ratios in 2017. I’ve told people at the Fed this same issue. There is inflation brewing relative to specific skill set, material deflation is slowing down if not starting to come up and our pricing capability is not that strong right now because there’s plenty of capacity out there and there’s not a lot of demand.”

We’re going to have to come up with cost savings to offset price pressures next year

” in order to hold our margins and improve our profitability next year, we’re going to have to come up with more stronger discretionary cost savings because I think price-cost will be working against us. That’s my call. I’m sure you’ve not heard that from anybody, but that’s my call”

Europe is weaker but it will grow

“But I’ve been openly been telling people – and if anyone’s hear me talk, they’ve heard me say Europe has definitely weakened. Europe is definitely growing. The euro is weaker, so again it’s going to help our European operation. The euro went back down into the $1.09 to $1.10. If it gets back up to $1.15, it’ll make it tougher. But it’s definitely going to weaken. And I think the hoopla around Brexit is hoopla. And so I think from my perspective Europe will grow next year but it won’t be as much growth as this year.”

Parker Hannifin FY 1Q17 Earnings Call Notes

Parker-Hannifin’s (PH) CEO Tom Williams on Q1 2017 Results

Seeing a decelerating rate of decline

“First quarter sales were 2.74 billion, a 4% declined compared with the same quarter year ago. This represents the third consecutive quarter we saw a decelerating rate of decline in sales on a year-over-year basis. Nearly all the decline in sales this quarter was organic.”

NA weak but slowly recovering

” North America is still weak but slowly recovering and our aerospace systems segment and international business order rates were positive. These order rates reinforced our previously communicated view that we’re progressing towards stabilization in many of our key markets.”

Haven’t seen anything unusual in October

“So through the quarter what we saw was that North America orders get less negative, which is a good thing and seeing it progress sequentially that way to the quarter. Internationally and aerospace we are relatively consistent through the quarter. In October we haven’t seen I think that’s unusual and October is consistent with what we’ve put in the guidance.”

Lee Banks

End market rundown

“When I think about positive, we’re still bullish on aerospace, we talked about refrigeration, air conditioning, semicon, and telecom. We continue to see strong activity in all those areas. On a neutral front, we talked about automotive, we talked about power generation in rail. And I think the one thing that we talked about, which it really was a positive in our mind that we saw distribution moving to neutral, and what we see, we’re on track to do that. And I’ll comment on North America too for you when. And then negative year over year, which is consistent, it is decelerating for sure. But whole natural resource and markets construction, farm and ag, forestry, marine, mining, and oil and gas. All have — still have headwinds to them and then heavy duty truck, which we talked about.”

Truck has been worse than expected

“I’d say one market that was a little worse then we forecasted was heavy trucks and trailers. That was a little bit of a headwind for us. And then I would say the automotive market is a little worse and really I’m talking about light truck there. And I think a lot of it has to do with there was some extended summer shutdowns in some of those sectors that impacted us. But when we look at it going forward, we still feel very positive about it for the year.”

Actuant FY 4Q16 Earnings Call Notes

Actuant’s (ATU) CEO Randy Baker on Q4 2016 Results

Markets remain difficult but end demand is more stable

“Most markets remain difficult in the quarter, but end demand is becoming more stable.”

May be two planting seasons until improved end market activity in ag

“Off-highway mobile equipment continues to be very weak, particularly in agriculture. While major manufacturers are reducing their inventory due to low crop prices and weak model year 2017 order writing. I expect we will now have at least two full planting seasons before we see improved end market activity”

General industrial market stabilized but little signs of growth

“The general industrial market appears to have stabilized, but shows little signs of growth. Industrial distributors continue to report sluggish retail order demand. The impact of weak oil, construction, general manufacturing markets have constrained with level of sales improvements throughout the world. ”

US is the most challenged region

“Regionally, the U.S. remains the most challenged, while Europe does not seem meaningfully impacted by the Brexit panic. On a positive side, the truck – on-road truck market in Europe and China remains supported by good registrations on an aged fleet.”

Destocking has occurred

” I think largely the destocking has occurred. And I think what will happen is the dealers and the larger distributors wind up having more line of sight to more demand. They are going to bring more inventory in. They have been very, very cautious with bringing any stock in and which is probably a good thing for us in the market that they are not filling their distributors and their shelves with inventory that’s going to take multiple quarters to use. So, I really think as we move through ‘17, we are going to see some improvement in that general industrial market.”

Ag equipment makers are sitting on a lot of inventory

” I think you follow the ag market pretty close like we do. And what we have seen is that the major distributors around the world are sitting on a lot of inventory. And so as the major OEMs have completed their order writing campaigns for combines, spring equipments, planting and seeding equipment it is a weak order demand. And I think you would have heard that from our major customers”

No green shoots of any major OEM in construction

“on the construction machinery side, literally, we see no green shoots yet of any major OEM getting movement in either excavators or ladder equipment that we sell into it.”

Andy Lampereur

Stabilizing at these lower levels

” I will provide color on my segment reviews, but can summarize overall market demand as weak due to sluggish economic conditions, which is being exacerbated by related OEM destocking impacting our engineered solutions in particular. With the exception of the anticipated step down in energy core sales trends from the third to the fourth quarter, things did not get worse sequentially, but instead appear to be stabilizing at these lower levels. We expect these trends will continue in the first quarter, with the exception of the energy segment, which will decline further on a core basis due to very tough first half comps from a year ago.”

Weakness in ag but bright spot in on highway vehicles

“The second half of fiscal 2016 has been defined by weakening Ag sales, which is the combination of both lower farm income and end market demand as well as excess inventory at our OEM customers and their dealers. This de-stocking and overall weakness was also evident in other off-highway markets and was slightly worse than the pace that we have predicted on our last quarterly earnings call. The bright spot has been on-highway vehicles, such as trucks and autos, which were up and flat for the year, respectively.”

CLARCOR 3Q16 Earnings Call Notes

CLARCOR’s (CLC) CEO Christopher Conway on Q3 2016 Results

Expect continued challenges in 4Q

“Many of the markets we faced remained challenged most significantly in our oil and gas related businesses and to a lesser extent, agriculture and industrial air markets. And we anticipate these challenges continuing through the fourth quarter, such that we are reducing the midpoint of our 2016 guidance to $2.60.”

David Fallon

Some say oil and gas has stabilized but we’re not seeing it

“We put guidance out there just like any company, there’s a level of uncertainty. The thing that most significantly impacted our look into this year compared to where we said in January was the oil and gas business, and quite frankly, we got it wrong. I think our initial guidance had that business down 10%, and it’s probably going to be down more than 20%. Now there has been some favorable offset.

But I think going into next year, there will be that similar uncertainty with oil and gas. There are some that say that that market has stabilized. Quite frankly, we’re not seeing it. And we’ve talked at the end of the second quarter and we can reiterate again today that it could be another down year in oil and gas for us next year. I think that’s probably the most significant variable. There is always positives and negative surprises as you go through the year. But most of our businesses aftermarket and there is a sense of stability with that aftermarket.

For the Engine/Mobile side of things, we’re definitely impacted by the ag and construction equipment markets. In general, we’ve got that somewhat right. I think it maybe has been a little worse than we anticipated but it’s within the range of what we think is reasonable.”

Donaldson FY 4Q16 Earnings Call Notes

Donaldson Company’s (DCI) CEO Tod Carpenter on Q4 2016 Results

The impact form destocking is becoming less significant

“Overall, we still believe the impact from destocking is becoming less significant; however, there is still enough variability in week-to-week ordering to suggest that both off- and on-road customers have yet to find a stable bottom.”

Expect continued declines in fiscal 2017

“As we transition to fiscal 2017, our performance on the overall market conditions is still somewhat guarded. We expect that global production of heavy-duty equipment will decline across all of our end markets.”

Decline in agriculture, mining and construction equipment

“Within off-road, we estimate that production of agriculture and mining equipment will continue their multitier slowdowns with declines of another 5% to 10% each. We also expect the year-over-year decline in production of construction equipment, albeit in a bit more modest, flat to down 5% range.”

Pressures are not new, although pace of decline has moderated

“There are a wide range of factors pressuring these off-road markets but they’re not new. For example, depressed commodity prices, the impact from the oil and gas slowdown, and a decline in overall infrastructure spending has been affecting production for some time now. We have definitely seen a moderating pace of decline but it is clear to us that there is still some uncertainty.”

China has been difficult but it’s important

“China’s been difficult due to their end markets and their clear GDP pressures. We have restructured China to align our company with the realities of that market. However, we still believe in China and it’s a very important market for our long-term strategy. We continue to invest in China to make sure that we press forward with our innovated products both on the Industrial and the Engine side, and we continue to have wins in China. So long term, we still stay the course with China because we believe in it and it’s important for us.”

I’m encouraged

“I use the word encouraged because it’s been a tough slog for the last 18 months and it’s been a walk down that has been tough to get through. And I think as I look forward, the range of possible outcomes has certainly narrowed significantly for our company. And so the encouragement is that while I’m not ready to call bottom, I am encouraged by the fact that we’re a little bit more predictable than we have been at any time in the last 18 months.”

Scott Robinson

Repurchasing 2-3% of our outstanding shares

“In terms of capital deployment, we remain focused on our core priorities; invest in the business, pay dividends, and to the extent our balance sheet allows repurchase shares. We are forecasting capital expenditures between 70 million and 80 million and we expect to repurchase between 2% and 3% of our outstanding shares.”

Expecting EPS between $1.50 and $1.66

“Altogether, we expect fiscal 2017 earnings per share between $1.50 and a $1.66. As of today, we are not forecasting any impact from adjusting items, so GAAP and adjusted EPS are expected to be one and the same.”

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.”

Sun Hydraulics 1Q16 Earnings Call Notes

Sun Hydraulics’ (SNHY) CEO Wolfgang Dangel on Q1 2016 Results

Environment continues to be uncertain

“From our perspective the environment continues to be uncertain with economic indicators signifying little trend movement either positive or negative we recognize that we cannot control microeconomic issues. Keeping this in mind we know there are many elements of our business we can control like product development, increasing productivity, maintaining delivery liability and developing new markets and customers.”

China ag and material handling have been very soft as well

“I think in China we have to be careful. So besides construction machinery and mining the two major target end markets for us are material handling and agricultural and both of those segments have been very soft during the first quarter still.”

“Tricia Fulton
Not following normal seasonal pattern, part may be due to weak Korean construction market
You know you’re absolutely right, Mig, we’re not following a normal seasonal pattern and when we looked at this last year which was one of the years that you brought up that we also did not see a normal seasonal pattern we were a bit confused by that as well. This year I believe that a lot of this is driven by what we’re seeing in the Korean Construction market that has been hit very hard and it’s dropping our Asian numbers and we’re also seeing a bit of the slowdown in parts of Europe certainly not all of it but parts of Europe are slow for us.

Korean business tends to be sold into China

“I believe that we had a lot of our Korean business for that type of equipment that was being sold into China. And we’re now seeing a decrease there because I believe some of the equipment is being made in China. Our business tends to be with smaller and medium sized OEMs in China so it’s possible that we’re not seeing the effects of the macro yet”

Some economic indicators are pointing to a stronger second half, but we have limited visibility

“ we have some economic indicators that are pointing toward a stronger second half this year or at least the latter part of the second half maybe stronger and certainly into ’17 show some promise as well. But I don’t think that we’re diverging from our normal pattern here, I really believe that it’s macroeconomic driven and we have a lot end markets that are being challenged, continue to be challenged and we also have geographical regions that are being challenged and it kind of depends on where those play out as we go through the year and at some point maybe they’ll better align but right now it’s kind of a mixed bag what we’re seeing and it’s a bit confusing as well going into the rest of the year especially with the lack of visibility that we have because of our short book to ship cycle.”