Parker Hannifin FY 4Q17 Earnings Call Notes

Thomas L. Williams – Parker-Hannifin Corp.

Positive, neutral, negative markets

“Positives are aerospace, agriculture, construction, distribution, forestry, general industrial, heavy-duty truck, lawn and turf, mining, oil and gas, refrigeration and air-conditioning, semicon and telecom. So, as I said, it’s a long list but that’s a great thing to have a long list of positives. On the neutral side is automotive, power gen, rail and life sciences, and really the only market that we see as negative year-over-year is marine. Now, one comment I want to make is context to overall that end market, that’s how we are doing in the end markets. I’m not trying to make a comment about the whole end markets, kind of what it’s doing. It’s just our projection of Parker within that end market.”

Feel pretty good about the global economy right now

“I feel pretty good about the global economy right now. We’ve already experienced, as you’ve seen in our orders the last couple of quarters, this is pretty good activity right now and we look forward to continue. And the splits kind of is what drove the second half. But we feel very good. I mean, if you look across the regions, this is a great environment for Parker right now.”

China continued to do very strong

” China continued to do very strong, mid-teen growth in the quarter and virtually every end market as you get go down the list, being positive. And the Asia team in general across – in addition to China, we’ve got every country in positive territory, every country growing. And Asia was the first region for us that turned and had a terrific year for us last year and it looks like it’ll be another strong year as well.”

Lee Banks

Some modest restock taking place

” On the distribution level, I would say there is some modest restock taking place. There’s been a surge in activity and I have North America mostly in mind when I make that comment. And then on the OE side, I would say modest but it’s pretty much pull-through demand, the best we could tell at this point in time.”

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.

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.”

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.”

Parker Hannifin FY 3Q16 Earnings Call Notes

Parker-Hannifin’s (PH) Thomas L. Williams on Q3 2016 Results

Saw a moderation of declines

” So orders during the quarter sequentially got better as we saw January going through March, and obviously what we saw in April is consistent with the guidance that we gave you. As far as the markets go, I finish all my comment and will let Lee give you some deeper color, but I made the comment about that we saw a number of markets move from accelerating declined to decelerating declined. So I think the theme of what we are seeing is this moderation of decline and the movers from accelerating to decelerating have really lead to charge or distribution general industrial ag, mining and similar account and you asked for some of a positive markets”

Lee C. Banks

Oil companies appear to be restructuring to try to be profitable at $40

“The story around oil and gas, I guess major OEMs really continue to indicating no significant improvement until the end of calendar 2016 early 2017 and this is really massive and I’m sure you have covered this restructuring plans taking place. It looks like everybody is trying to restructure and look to be profitable around $40 per barrel.”

Inventories have normalized outside of oil and gas

“here is the consensus when I checked this not only from our guys and then I just go out and cal our contacts. If you are involved in oil and gas and you had a lot of OEM exposure, you are still sitting on a lot of inventory. If you get away from that inventory is pretty much normalized at this point in time. I think some of the guys may have gotten hit a little bit by some side effects from oil and gas, but that’s fairly normalized. I would say on OEM inventory where I still see this kind of construction equipment, mining markets especially Asia comes to mind. If you tour some of the equipment yards, I mean there is just excavators and wheel loaders that go on for miles so. But our North American distribution, I’m most comfortable that outside of oil and gas, it’s not a big issue.”

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.’

Parker Hannifin FY 1Q16 Earnings Call Notes

Taking down guidance for full year because orders weaker than expected, not expecting any recovery and now anticipating more softness in EM

“order entry levels are weaker than anticipated and have worsened sequentially through the quarter. Second, we are not forecasting any meaningful recovery in our natural resource-related end markets through the remaining of our fiscal year. And, third, we are now anticipating more softness in emerging markets and our distribution channel. ”

September was much worse than we expected

“what really changed during the quarter was order entry levels weakened more than we anticipated and September was much more worse than we had expected.”

September is usually a key month

“September is always a key month. It’s really a key indicator for how the quarter is going to be. July and August are always somewhat suspect because of the levels of vacation and holidays between North America and Europe. And September is your first good indicator for the quarter and also it’s a really good indicator for what the rest of the year potentially is going to look like. So September turned worse; that was the first influence.”

Not forecasting recovery in materials markets

“oil & gas, construction, ag, and mining are soft and actually are softer than we had expected and they’re going to continue that way through the remainder of the fiscal year.”

China and Brazil were soft and softened more

“We had anticipated China and Brazil; they were soft. They have softened worse through the course of the quarter. ”

Seeing destocking in the channel, expecting that to continue

“We do continue to see destocking in the channel. Our best bet is we’ll continue to see that destock through Q2.”

Seen continued weakness in construction equipment markets in China

“We’ve seen continued weakness in construction equipment markets there. I’m not sure it can go to zero, but it is getting close.”

October has been reflective of what we’ve done in our revised guidance

“September worsened. We saw July come out about how we expected. August turned a little bit better, so we were a little bit optimistic. Then September got worse and that continued. And basically what we’ve seen in October is reflective of what we’ve done in our revised guidance.”

Challenging environment for pricing but favorable for material costs

“overall, you’re right; it’s a challenging environment on pricing and it’s a favorable environment on material costs.”

Parker Hannifin FY 4Q15 Earnings Call Notes

Three big headwind themes

“I think there is just three big headwind themes. One is the translational effect currency is having. That is the biggest impact to the top line, no doubt. We have mentioned a couple of times natural resource driven markets. And then lastly, I think there is this — the third drag would be the continued regional/country weakness in Europe, China and Brazil”

Probably 6 more months of destocking in the distribution channel

“distribution did grow organically, but there was absolutely a noticeable slowdown in Q3 and a contraction in Q4 sequentially and year over year. The slowdown was largely attributed to those distributors with significant oil and gas exposure. And as Tom mentioned earlier, we expect another six months of destocking in that channel before it has worked itself out”

Power Gen markets have been strong in North America

“Agriculture, I think we know that is soft. Power generation has been a positive for us, almost completely globally, definitely in North America. Through FY ’15 and Q4, there has been a shift from coal to gas-fired plants and that has really played well for us in terms of opportunities. And then the whole renewable energy has been positive for us.”

Not really seeing green shoots in Europe. Exports have been down, probably because of China

“Switching now to Europe, a lot of news about — a lot of questions around green shoots, PMI, etc. We have not really seen a significant uptick with our customers with some exceptions. The export activity out of Germany hasn’t been what it was. I suspect that is largely due from the historic pull from China which I will get to in a minute. Oil and gas activity has been slow. Many major capital projects that we have been involved with have been pushed out. Distribution performance I would categorize as flat to moderately down throughout Europe. We have seen some positive in construction, although modestly.”

Modest contraction in China

“in China we saw modest contraction in Q4 and year over year. We see continued weakness in construction of machinery. I mean that is down probably 10% year over year off of very depressed FY ’14 levels. ”

Brazil is significantly weak

“Latin America, I will touch on this quickly. The story really is around Brazil. I just returned from there a week ago. Significant GDP contraction and weakness really across almost all sectors with the exception of power generation.”

Commercial aerospace cycle leveling off?

“We’re also seeing some move in our commercial OEM business down slightly. But again, that is from a very high ordering pattern this time last year and really throughout the beginning of the cycle which is now starting to level off to more numbers that are more representative of how we see ourselves going forward which is indicated in our guidance.”

Forecast mining and Ag to be bottoming in 2Q

“as you know, any forecast is usually wrong the day after we send it out. But I think we have some fair assumptions. We have done this through visibility to customer demand, distribution inventory, our own economic modeling and then our bottoms up from our divisions was all basically coalesced along the same thing. So the key assumptions will be that we’re assuming bottoming of some of those end markets that were giving us the most trouble. So mining in the second quarter and Ag in the second quarter and then oil and gas and construction in Q4. So if those were to slip at all that would be a potential risk. But that is our best assumption right now.”

Buying back 2-3B of shares

“we’re still committed to the $2 billion to $3 billion of share repurchase over the timeframe that we communicated.”

Parker Hannifin 3Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“Cars and light trucks are strong, of course. Semiconductor and telecom. One of the strongest segments for us right now is oil and gas, but offshore oil and gas, not land-based oil and gas. Offshore. Farm and ag, forestry and machine tools, those are all solid as well, as far as positives. So then the negative market segments would be the defense part of our business, the aerospace, the OEM and the aftermarket defense. Mining, of course, is a negative. Power gen and oil and gas, but the land-based oil and gas part of the business. And then, residential air-conditioning, commercial air conditioning are all both negative as well. So that — and then anything that I did not mention would be kind of flat, which would include like process industries, heavy-duty truck, off-highway construction, industrial trucks and so forth, those kind of markets.”

“I think that everybody has been managing their inventories pretty good, at least in that channel, for over this cycle. And I think now, they are really seeing end market demand, and I think that’s consistent with the overall order trend and the indices that I’ve kind of highlighted. I think that would be more end market demand than anything.”

“I would have a tendency to agree that usually when you’re up into that 56 territory, which is where the U.S. PMI is now, that you would expect to see more activity. I think there’s a little bit of a lag this time. But when we look at our 3/12 data, which is our more recent 3 months order trends, they’re tending to trend in the direction of that PMI where you expect them to be. So I think that’s just a little bit of a lag here, maybe a month or 2. And I think we’re going to be caught up with it. That’s just really off the top. That’s my gut feel based on looking at our order trends and the current PMI trends that we’re looking at.”

“some of the markets that are down, primarily the construction equipment market, is not coming back quite as quickly as we thought, primarily in our international”