Parker-Hannifin Corp
NYSE:PH
| US |
|
Johnson & Johnson
NYSE:JNJ
|
Pharmaceuticals
|
| US |
|
Berkshire Hathaway Inc
NYSE:BRK.A
|
Financial Services
|
| US |
|
Bank of America Corp
NYSE:BAC
|
Banking
|
| US |
|
Mastercard Inc
NYSE:MA
|
Technology
|
| US |
|
UnitedHealth Group Inc
NYSE:UNH
|
Health Care
|
| US |
|
Exxon Mobil Corp
NYSE:XOM
|
Energy
|
| US |
|
Pfizer Inc
NYSE:PFE
|
Pharmaceuticals
|
| US |
|
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
| US |
|
Nike Inc
NYSE:NKE
|
Textiles, Apparel & Luxury Goods
|
| US |
|
Visa Inc
NYSE:V
|
Technology
|
| CN |
|
Alibaba Group Holding Ltd
NYSE:BABA
|
Retail
|
| US |
|
3M Co
NYSE:MMM
|
Industrial Conglomerates
|
| US |
|
JPMorgan Chase & Co
NYSE:JPM
|
Banking
|
| US |
|
Coca-Cola Co
NYSE:KO
|
Beverages
|
| US |
|
Walmart Inc
NYSE:WMT
|
Retail
|
| US |
|
Verizon Communications Inc
NYSE:VZ
|
Telecommunication
|
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
450.68
708.15
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
|
|
Johnson & Johnson
NYSE:JNJ
|
US |
|
|
Berkshire Hathaway Inc
NYSE:BRK.A
|
US |
|
|
Bank of America Corp
NYSE:BAC
|
US |
|
|
Mastercard Inc
NYSE:MA
|
US |
|
|
UnitedHealth Group Inc
NYSE:UNH
|
US |
|
|
Exxon Mobil Corp
NYSE:XOM
|
US |
|
|
Pfizer Inc
NYSE:PFE
|
US |
|
|
Palantir Technologies Inc
NYSE:PLTR
|
US |
|
|
Nike Inc
NYSE:NKE
|
US |
|
|
Visa Inc
NYSE:V
|
US |
|
|
Alibaba Group Holding Ltd
NYSE:BABA
|
CN |
|
|
3M Co
NYSE:MMM
|
US |
|
|
JPMorgan Chase & Co
NYSE:JPM
|
US |
|
|
Coca-Cola Co
NYSE:KO
|
US |
|
|
Walmart Inc
NYSE:WMT
|
US |
|
|
Verizon Communications Inc
NYSE:VZ
|
US |
This alert will be permanently deleted.
Parker-Hannifin Corp
You don't have any saved screeners yet
Thank you for standing by, and welcome to the Parker-Hannifin Fiscal 2023 First Quarter Earnings Conference Call and Webcast. [Operator Instructions]. As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Mr. Todd Leombruno, Chief Financial Officer. Please go ahead, sir.
Thank you, Jonathan. Good morning, everyone, and thank you for joining Parker's fiscal year 2023 Q1 earnings release webcast. As Jonathan said, this is Todd Leombruno, Chief Financial Officer speaking. And joining me today is our Chairman and Chief Executive Officer, Tom Williams; our Vice Chairman and President, Lee Banks; and our current Chief Operating Officer and Chief Executive Officer elect, Jenny Parmentier.
We will be addressing forward projections and non-GAAP financial measures today. Slide 2 provides details to our disclosure statement in these areas. Actual results could vary from our projections for the items listed in these forward-looking statements and also detailed in our SEC filings.
The presentation today will address non-GAAP measures, and reconciliations for those non-GAAP measures are available in this presentation and all of this is available on the Investors section at parker.com and will remain available for 1 year.
Tom is going to begin the call today with a couple of highlights on the quarter and also provide an update to the Meggitt integration. I'll follow with a brief summary on the financials and review the increase to our guidance that we issued this morning. And then we'll touch on the leadership transition that we announced last week, and we'll finish the call with Q&A.
So if I could ask you to reference Slide 3, and I'll hand it over to Tom to begin.
Thank you, Todd, and good morning, everybody. Thanks for joining the call today. We had an impressive first quarter -- first quarter record sales, net income, EPS and several margin records. And we closed the Meggitt acquisition, which was a big accomplishment. So if you look at this slide, the first bullet, safety is our top priority. We leverage the high-performance teams, Lean and Kaizen.
We had a 17% reduction in incidents versus the prior year. If you look at that on a safety incident rates, there would be a number of incidents per 100 team members, that will put us in the top quartile versus our proxy peer group, which is fantastic results.
Sales were $4.2 billion, an increase of 12% versus the prior year. Organic was very strong at a plus 14% versus the prior, and we had strength across all regions and segments. Segment operating margin was 19.8% as reported or 22.7% adjusted. We had a 70 basis point improvement versus prior year, again, excellent improvement in pretty tough conditions.
As I mentioned, we completed the Meggitt acquisition integration, is well underway. We're off to a good start. I'll talk more about that in a second. So if you look at the quarter and really the last several years, is that takeaway that you see in this slide, The Win Strategy, the portfolio changes working together to deliver record performance.
Go to Slide 4, some pictures from day 1. We showed you some of these in our last call, but it was a great day 1. We had Parker executives at every Meggitt site globally, 34 sites around the world. Very positive meetings, and we're off to a good start putting the 2 companies together.
If you go to Slide 5, I went through this in a fair amount of detail on the September 28 investor call, but just to orientate you on the page on the left-hand side, the blue bars of the synergies, gold is cost achieved. This is by fiscal year, it shows you the walk to a $300 million worth of synergies in FY '26. That would take us to approximately 30% adjusted EBITDA margin over a period of time, so a significant improvement in profitability.
On the right-hand side, is really the how, how we'll get to $300 million synergies. And again, I went through that in a lot of detail. Suffice it to say, it all sits on at the umbrella of The Win Strategy. Those 4 boxes that you see underneath there. And we've had -- we're now 7 weeks into it. I've had a chance to spend time with the teams. I feel very good about our ability to deliver these synergies.
If you go to Slide 6, really, the combination of the portfolio changes that we've made so the doubling of filtration, doubling of Engineered Materials and the doubling of Aerospace over the last 8 years. If you put that together with our technology offering, which is very much aligned to the secular trends of today and the future aerospace, digital electrification and clean technologies, that combination is going to have a profound shift in our sales mix. And that's what you see illustrated on these pie charts at the bottom here.
So if you look at where we were in FY '15 and you go out to FY '27 on an illustrative basis, you'd see we have 85% of the company, either industrial aftermarket or a longer cycle. That mix shift is what has allowed us to change our FY '27 target on growth to grow 4% to 6% organically over the cycle.
Go to Slide 7. If I was only allowed one slide on these earnings calls, this is probably the slide I'll show up. It demonstrates that the company is distinctively different and better over quite a period of time here. So on the left is adjusted EPS, and we've updated that for the FY '23 guide, you see the $18.95 at the midpoint. And the adjusted EBITDA margins on the right-hand side, an almost 800 basis point improvement over this period of time.
This slide really speaks for itself. It's hard to make metrics go at a 45-degree in a little rate, but it's a fantastic job by our people, portfolio changes and the strategy of the company. Arguably, the most improved industrial company over this period of time and a great company to invest in.
And with that, I'm going to hand it over to Todd to talk more about the quarter.
Thanks, Tom. I'm going to start on Slide 9. Obviously, it was an impressive quarter. Tom mentioned that. It's a really strong start to our fiscal year. And our team members just really globally continue to execute and deploy The Win Strategy, and we're very proud of the results that they were able to put up.
Tom mentioned this, but sales are up 12.5% versus the prior year. That was a record of $4.2 billion. The organic growth in Q1 was extremely strong, 14%. Everyone is seeing the strengthening of the dollar, and that has created a currency headwind for us. That's about 5.5% of sales. And we're very happy that we closed Meggitt. We also close the Aircraft Wheel and Brake divestiture. All in, net of that, it added 4% to our sales for the quarter.
Adjusted segment operating margins, 22.7%. That's an increase of 70 basis points from prior year. Adjusted EBITDA margins came in at 23.3%. That's an even bigger increase. That's 120 basis points up from prior year. And really, this year-over-year margin, both the adjusted segment operating margins and the EBITDA margin improvements, really just demonstrate the power of Win Strategy 3.0.
When you look at adjusted net income, the number is $616 million, that's a 14.5% ROS. Adjusted earnings per share is $4.74. That is a Q1 record. It's up $0.48 from prior year, and that's really despite some currency headwinds that we saw in the quarter. Both adjusted net income and earnings per share have increased 11% versus prior year.
I would say I just want to make a couple of notes. There were a number of several onetime items incurred this quarter as a result of the Meggitt acquisition and the Wheel and Brake divestiture. We've included a reconciliation to all those items in the appendix. Those are mostly over but some large onetime items. And I really want to thank our global finance and accounting teams for getting all this done with just 2 weeks of ownership and closing the quarter really well. So all in, this is a really a fantastic start to our fiscal year.
If you go to Slide 10, this is just a bridge on the year-over-year EPS improvement. I've already mentioned it, but the strong Q1 operating performance, obviously, the main driver there. We generated $133 million or 16% additional segment operating income Q1 versus Q1 last year. That equated to $0.80 of the earnings per share improvement. Incrementals were extremely strong, excluding acquisitions and divestitures. Total company did about 36% incrementals.
When you look at everything else, the net of corporate G&A, other tax and shares outstanding, all of that nets to $0.03. And you can see the big line there, interest expense is $0.35 headwind. But 100% of that is related to the Meggitt acquisition, and we knew that, that was going to be a headwind. So all in, that's $4.34, that's 11% increase from prior year.
If we go to Slide 11, just looking at the segments, you can see organic growth, again, very strong in the quarter. Orders remained positive in every segment, despite some notably tough comps versus prior year. Total company orders are up 5%, and we continue to see broad-based demand across all the end markets that we serve.
Strong incrementals drove that margin expansion, that 70 basis point margin expansion versus prior year. And again, our team members just really continue to be agile in the current environment, and I'm very proud that they were able to generate record sales and operating margins.
Looking at North America, the organic growth was extremely strong in North America. Nearly 18% sales came in at $2.1 billion, significant margin expansion, 200 basis points over prior year, that reached 23.74%. Volumes obviously were a big driver here. But again, we've talked over the last couple of quarters about the specific regional supply chain challenges. Our team has just been very resilient, working on our operational efficiencies, and that really is the main driver on driving this strong margin performance. Incrementals in North America, ex acquisitions, was 38%. Orders are positive at plus 3. And again, just operating in all cylinders in North America broad-based demand.
Looking at the international businesses. Organic growth, again, strong there at 12% organic growth. Sales reached $1.4 billion. Organic growth was positive low to mid-teens in every region in our international businesses. And adjusted operating margins expanded 30 basis points from prior year and reached 23.1%. And again, that's all in light of some currency headwinds that obviously more heavily impact this segment.
Our Asia Pacific team continues to outperform. We've talked about that. They have done a great job recovering from those shipment delays that were a result of COVID shutdowns, and we feel that, that is kind of mostly played out in Q1 here. Orders are positive in the international business to plus 6. And that clearly reflects a rebound, obviously, from China as well.
Looking at Aerospace Systems. Sales are $746 million now. That's obviously up 26%. If you remember, about 82% of the Meggitt transaction does get reported in this segment. There's about $150 million of sales for Meggitt in Q1 in our Aerospace Systems segment. That makes up 19.5% of the sales increase. But if you look at organic growth, very strong there as well, 7.4%. We just continue to see a strong OEM and MRO commercial volumes continuing throughout the year.
When you look at operating margins, that was impacted really by Meggitt coming in, Wheel and Brake coming out and then there were some nonrecurring program timing charges that were in respect to our OEM business. So all in, that's a onetime issue, and we don't see that continuing going forward.
If you look at Aerospace orders on a 12-month rolling basis, it's plus 5. But you remember, we've talked about these multiyear military orders. That will anniversary next quarter if we adjust for that, orders were positive 29% in Aerospace. And Aerospace dollars continue to remain at extremely high levels. So all in, great performance across all of our segments. We're really happy with the way the team has outperformed there.
Looking at cash, another good story here. If you look at our cash flow from operations, that was 10.8% of sales. Free cash flow was 8.8% of sales. Our CapEx did hit 2% as we have been signaling and free cash flow conversion was 96%. The transaction costs that we've talked about did impact CFOA and free cash flow pretty significantly in the quarter, it's about 450 basis points of impact. Those will minimize as we go on throughout the year, but I just wanted to call it out that, that was a drag in our Q1 cash flow. We do still expect free cash flow for the year to be in the mid-teens, so no worries on that.
On Slide 13, I just want to give you a couple of updates on the capital deployment. I'm sure everyone has seen this. Last week, our Board approved a quarterly dividend payout of $1.33 per share. That is our 290th consecutive quarterly dividend payment and our record of continuing to increase the dividends paid is now at 66 years.
And I want to address leverage because I know that's a number that's been on people's mind. At the end of Q1, leverage now reflects all Meggitt-related debt for the transaction. If you look at our gross debt to adjusted EBITDA at 3.8%, net debt is 3.6%. And those numbers are presented on a trailing 12-month basis, and they do not include any Meggitt pre-closed EBITDA. So that is basically base Parker adjusted EBITDA, doesn't really include any Meggitt EBITDA, and we fully expect that to improve as we go throughout the year and we start to include that Meggitt EBITDA.
We are fully committed to our delevering plan, and I'm really proud to say since we made this announcement last August or really August of 2021, we've applied over $2 billion of cash towards the purchase price of Meggitt. So great work on that.
Okay. Looking at guidance, you saw this. We are now including the Meggitt acquisition, and we are excluding the Wheel and Brake divestiture in our guidance. We're providing this on an as-reported and an adjustment basis. And Tom mentioned this, we're increasing the sales growth range now to a range of 11% to 14% or 12.5% at the midpoint. Organic growth forecast has been increased to 6% at the midpoint.
Acquisitions net of that divestiture is going to be plus 11. And we do see currency being a larger headwind now. We are now increasing that unfavorable impact of currency of 4.5% and that is using spot rates as of September 30.
When you look at adjusted segment operating margins, the range is now 21.7 to 22.1 or 21.9% at the midpoint. So that is all-in, includes Meggitt and excludes Wheel and Brake obviously, our strong Q1 performance.
Just a few other items to note. On an adjusted basis, corporate G&A is expected to be $207 million. Interest expense, that's all in, including everything from Meggitt 5 10. And the other income expense line is actually going to be income of $23 million for us. Really no change to the tax rate. We expect that to be 23%. And you can see the full year as reported EPS is now $13.20 at the midpoint or $18.95 adjusted and there's a range of $0.35 on either side of that. And just looking a little bit more forward into Q2, we see adjusted EPS to be $4.46 at the midpoint for our second quarter.
Lastly, all the adjustments that we've been talking about on a pretax level are listed in this table, which now includes at least the current estimate we have for the Meggitt-related intangible amortization of 220. So you can see the total is now 520. And it also includes integration costs to achieve, specifically for Meggitt of $70 million for the remainder of the year. Especially with the acquisition expense to date, we've adjusted for all of those. The majority of those are over, but we will adjust those as they come through.
Okay. Last, on the guidance bridge, let me just give you some details to that. Obviously, we started the year with our initial guidance of $18.50. We had the call at the end of September, which included Meggitt and excluded Wheel and Brakes. So that was another $0.33 of additional EPS that we saw for the year that got us to the $18.83.
Really our strong Q1, there's a little bit of moving pieces here because of Meggitt coming in and Wheel and Brake coming out. We calculate that to be about a $0.54 beat to our original guide. And for the remainder of the year, we've really increased the Q2 organic growth just slightly, and we've held the second half to exactly what we said in our original guidance.
We have incorporated the recent currency rates and their estimated impact on the segment operating income. Right now, we feel like that's a $0.42 headwind. Really, there's nothing else notably changed to our guide for the full year. And all in, we increased our full year adjusted EPS guide to $18.95 at the midpoint.
So with that, I'll hand it back to you, Tom and it's all yours.
Thank you, Todd. So on Slide 16, we've got the leadership transition. As you saw last week, we announced several leadership changes. In coordination with the Board, I have been planning my transition for many years. I happen to be turning 64 years old tomorrow. It's my birthday so my early birthday present is my last earnings call. So I've been CEO for 8 years and believe this is the right time to step down from the CEO position effective end of this calendar.
I've always had 8 years in my mind. I've used kind of the 2 term as President as kind of the length of tenure that I thought felt about right. And so now is the right time for me to step aside. To help facilitate a smooth transition, I plan to continue as Executive Chairman from January 1 of next year to December 31, 2023. At which time, I plan to intend to retire from Parker and the Board.
It's truly been an honor to lead this great company. And if you'll indulge me, I have a few thank yous I want to mention. First, our shareholders that are listening in. Thank you for the confidence you've shown me to lead the company on your behalf. My thanks to the Parker Board of Directors for just creative advice counsel not just to me, but to our management team.
To the analysts who pretty soon are going to ask me lots of questions, thank you for an open and constructive and a transparent relationship. I've known a number for many years and have always appreciated the relationship. To all the Parker team members, just incredible people who take ownership in everything that they do. It's our culture, it's our people that are the secret behind our success to the Parker leadership team. Without a doubt, the best leadership team that I've had a chance to work with. It's a very deep and talented team that our shareholders take to create comfort in.
And to the office of Chief Executives of people are sitting around the table with me today, Lee, Jenny, Todd and now Andy, thank you for helping me to lead the company. Business leadership is a team sport, and I appreciate their help. And special thanks to Lee. For 19 years, we've been business partners. We talk to each other and together, we hope Parker to be a better company. I really appreciate that's Lee's going to continue on as Vice Chairman and President. Going into the new year, I think it's going to be a big help to the team.
If you go to Slide 17, one of the most important responsibilities of the Board and myself is CEO succession planning. As you saw, the Board elected Jenny Parmentier is our next CEO, effective January 1. Jenny will report to the Board of Directors and be a member of the Board as well. Jenny is currently Chief Operating Officer, has been a Group President Twice and General Manager twice. She's a great person and a great leader, proven track record of success, and I have complete confidence in Jenny to lead the company in the future.
With that, I'm going to turn it over to Jenny to make a few comments and finish the presentation.
Thank you, Tom. I am honored and proud to be appointed the next CEO of Parker Hannifin and very excited about our future. I'm grateful to both Tom and Lee for the support and mentorship over the last several years and to our Board of Directors for their confidence in my leadership.
Moving to Slide 18. Effective January 1, this is the office of the Chief Executive. Lee, Todd and I have been part of this team for some time, and we welcome Andy to the role of Chief Operating Officer. Andy will report to Lee as I do now in my current role. This is a seasoned leadership team that has been part of the company's transformation and an integral part of developing and implementing Win Strategy 3.0. This team will continue to deliver record results well into the future.
Moving to Slide 19. As I look to the new calendar year and the second half of our fiscal year, my priority is to build upon the success of Parker's transformation. We are focused on integrating Meggitt into the Parker family, achieving the synergies we've committed to and delivering a record FY '23. Win Strategy 3.0 will continue to accelerate our performance across the company. and our portfolio transformation, coupled with the secular growth trends, makes us more than confident in achieving our FY '27 goal.
Before we go back to Todd for Q&A, Lee has a few comments.
Okay. I know everybody is anxious to get to Q&A. We're going to get there quickly, but we've got 1 more thank you to have happen here. So Tom, on behalf of 60,000-plus teammates around the world, our management team and really from myself, thank you for 8 exceptional years as leadership and our Chief Executive Officer.
When you came into that role, you had a great vision. And you boil that vision down to 3 key deliverables. You said we're going to be the safest company in the industry, and we're going to have the highest engaged team that thinks and acts like an owner. Since your time in office, we've reduced our incident rate by 73%, and we annually qualify and measure a s one of the top engaged workforces amongst our peers.
You mentioned it in your slides earlier, you drove us to be a top quartile financial performer. Nearly 800 basis points increase in EBITDA margin during your time and a 2.7x increase in adjusted earnings per share. And lastly, I remember us talking about this, we're going to be great generators and great deployers of cash.
Excluding today's numbers, your time and office, we've increased the enterprise value of this company by $30 billion, $48.8 billion. Total shareholder return, not including today, 180%. And dividend increase, quarterly dividend increase, a 111% increase from $0.63 to $1.33. Capital deployed during this time period, $25 billion. But I think most importantly, Tom, is you're leaving us with the company, not only in management, talent but portfolio. It's structured to have its best days ahead of it. So with that, thank you very much.
Thank you.
And now we'll turn it over to Todd.
Should I have retired sooner?
All right. Jonathan, we're going to go to Q&A. I'll let Tom catch his breath here a little bit, but I want to make one clarification. I called out an incorrect number on our Q2 EPS. I read last year's number. The number that we're looking for, for FY '23, Q2 was $4.31 at the midpoint.
So with that, Jonathan, we are ready for Q&A. I'll turn it back over to you.
[Operator Instructions]. And our first question comes from the line of Scott Davis from Melius Research.
Congrats, everybody. Tom, a high integrity 8 years. I think that's the greatest compliment I could probably give you. It's just was exceptional.
Thank you. Excellent.
Jenny, what does the Board want you to do differently, if anything, maybe you can start with that?
Thank you, Scott. Well, my priority, as I said, is to build upon the success of the Parker transformation that is well underway. Our focus is -- our key focus is integrating Meggitt, bringing them into the family and achieving the synergies that we've committed to. And we're obviously, we're going to continue on our journey to top quartile performance and delivering long-term value for the shareholders. So I don't expect that we're going to see big changes in the day-to-day run of the operations and Tom and I are both committed to a very smooth transition.
Jenny, maybe just to follow-up on that. I mean how would you compare your kind of leadership style or differences or strengths and weaknesses versus Tom, if you will.
Well, I think that we have a lot of the same leadership style. And I don't know that I want to get into my weaknesses just yet, but I've had 2 good mentors here who have helped me develop some strength over time. But from a leadership perspective, very passionate about safety and our team members, just the same as Tom is. I'm very passionate about providing a customer experience that stands out amongst our competition and very focused on organic growth in the future and delivering the performance that we delivered in that recent past and even more so in the future.
Scott, it's Tom. If I could just chime in for a second. One of the things that Lee and I did when we were changing the Win Strategy, whether it was 2.0 or recently 3.0, this was very much an inclusive process where it wasn't the 2 of us scrolled away in a corner coming up with all the answers. It was very much bottoms up. Obviously, we had to guide it, but it was very much lots of input and Jenny was part of that. And it was part of all those changes, and she's very capable of driving the ship going forward.
Okay. Well, I'll pass it on. Best of luck to all of you folks and best of luck to in your next chapter.
And our next question comes from the line of Andrew Obin from Bank of America.
And once again, I want to extend my thanks to Tom and congratulations to Jenny.
Thank you, Andrew.
Thank you, Andrew.
So I'm going to ask sort of more near-term question. There are a couple of companies this earnings season that have called out sort of, I think, some clouds in the horizon in terms of short cycle and frankly, these management teams that I do respect. So how do you think -- and I appreciate you have second quarter guidance.
But as you look at your order activity, as you look at lead times, as you look at the backlog, how do you see the interplay of perhaps improving lead times, perhaps improving supply chain, what does it do to the orders? And how do you think about inventory, your inventory and what's happening to the inventory in the channel?
Andrew, it's Tom. So inventory in the channel went up a little bit, I'm referring to our distributor channel, but nothing really sequentially all that material. I think a lot of our distributors are going to probably wait to see how their fiscal year ends and how the new year begins. But maybe what you're getting in and so many words is kind of what's our thinking about the rest of the guidance period, what gives us confidence, et cetera. We were pleased that the order entry was positive against some very tough comps in the prior year.
The dollar volume that we saw through the quarter was pretty consistent across all the regions and segments. We were also really happy that international saw a mid-single-digit order growth. And we saw that in EMEA and in Asia, we have mid-teens in Latin America. So we've got Aerospace in there at around plus 7 as we think about the full year. And the industrial markets are very positive. We had over 90% of our end markets were in a growth phase.
So our guidance really utilizes that input, our backlog, the AI model, feedback from obviously customers and distributors. And we still see broad-based growth. However, to the point you're getting at, it's going to moderate as the fiscal year progresses. Yes, supply chain is healing, but I would say it's healing slowly, and it's not really making, I would say, that big a difference on lead times, at least not yet.
So as a result, we did bump up our guidance -- I'm referring to organic sales guidance. We took our first half, if I compare to prior guide to now, was 5.5%. We bumped it up to 10.5%. We left the same was the second half, and that the second half basically around 2% organic growth. I think for us, even though we've got the backlog and we've got this broad-based strength, we're cautiously optimistic. And the reason I say that is that we'd like to see how the year-end -- I'm talking about the calendar year ends for our OEMs and how do they start with their order patterns, particularly their demand signals to us in January.
Everybody's -- most of our OEMs are fiscal year calendar year type of companies. And so we want to see how they're all running hard to finish. So I think the start of the new year will be a good indicator, which is why we didn't change this. But in general, we're still very positive. And we have a lot of things going for us when we think about the secular trends, the changes we've done from acquisitions. In general, I think there's a decade of better CapEx investments for Industrial. So I feel very bullish in the long term. I think we're just being a little careful in the near term given some of the macro unsurge out there.
Yes. No, look, our survey work is fairly consistent with what you're seeing, but obviously, you have a live view. My follow-up question is, clearly, cash flow has been one of the strongest suits at Parker for a long, long time, and I know you're laser-focused on cash conversion. With rising interest expense, right, it seems that floor financing is getting more expensive, right, just running inventories as more expensive, both for your customers and your distributors.
What things can you do or what things are you doing to continue to have this very strong cash conversion going forward as both your customers and your suppliers and your distributors are probably going to be more conservative with their cash, right, just because it's more expensive to float working capital and inventory, et cetera?
Yes, Andrew, I'll take that. This is Todd. Obviously, the cash flow generation profile of the company is something that we all work extremely hard on virtually every day. We feel like we can do better on inventory. We've been vocal about that. We have -- whether the supply chain challenges globally extremely well. But we have tools in place to further reduce that inventory as we go forward.
As we bring Meggitt into the company, we see opportunities there on payment terms and receivables terms. So we see activity on that as well. And the other thing that I would note is, we've talked about the ACIP conversion, right, our annual variable incentive plan. the company is now 100% on that plan. So all of our team members across the globe are all incentivized on achieving their cash flow plans for their respective business.
So I think you'll see us continue that. I feel confident in telling you that we see free cash flow in the mid-teens number, and that is all part of our commitment to that delevering plan that we spoke about. So I feel really strong about our ability to deliver on that.
Once again, Lee, thank you and Jenny, congrats -- not Lee, sorry Tom. Tom, thank you. And Jenny, congratulations. Look forward to working with you. .
And our next question comes from the line of Jeff Sprague from Vertical Research.
Well, I don't want to lay it on too thick. I don't want to tear anybody up here and get all choked up or anything, but Tom really, congrats and thanks. And Jenny best of luck, look forward to watching your tenure here. I wonder if we should...
Jeff, Jeff. If you don't mind, [indiscernible] thick, it's okay.
I love my people in Cleveland, as you know. I wonder if we could talk a little bit just about price cost. Where we're at now, I think Tom said, supply chain is healing a little bit, not materially. Kind of just interested in kind of the friction that might still be going on, both on a price cost standpoint? And also just kind of the factory and efficiency side of kind of the ongoing lack of all, how much maybe pain you had to absorb in fiscal '22 and how you think that might play out in '23.
Jeff, it's Lee. I'll take a stab at that. Look, the slope of the curve price/cost has moderated, but cost is still a real issue. There are some commodities that have come down off their peaks. They're still high if you look on a historical level. There's still a lot of friction in the supply chain where even though raw commodities may have peaked, the finishing of those raw commodities before they get to us sometimes a real supply chain issues.
And there's still lots of inflation up and down, you name it. You can see it just tier MRO supplies coming into our facilities to food to wages, et cetera. So we're on top of it. As you know, I mean, we measure this like crazy, not only just raw commodity costs but also total inflation costs. And we've got great visibility on how we're doing on pricing to make sure that we stay margin-neutral.
I would say in the factories, again, the slope of the complexity has gotten better. But for me to tell you that labor availability is still a non-issue, I would be kidding you. It's still a little bit a deal. I think the thing that helps us through a lot of this is we just use our Parker lean system, and we go in and we just figure out how we're going to reconstruct the value stream and bring out the efficiencies and get better throughput, et cetera. So we're addressing it. I can't put a number on what the difference is going to be, but we're on top of it, and we're making -- you see it in the margins in the company. We're still doing better on a year-over-year basis.
And also maybe just kind of through this cyclical question or just macro outlook question. Clearly, it's actually impressive. The orders are positive against those comps, but I'm just wondering where the backlog stands these days? Do you have more than kind of a quarter's worth of coverage at this point? And just kind of any other like leading indicators that you're trying to stay on top of here as you kind of look around the corner economically.
Yes, Jeff, it's Tom. The backlog went up 16% year-over-year. So we're at almost $8 billion on the legacy portion of the company, had another $2 billion plus for Meggitt so it would be a little over $10 billion of backlog. So obviously, we have well more than a quarter for the backlog. I think the thing that we want to watch, we feel very good about Aerospace's backlog. And we feel good about the industrials. My comment I was making to Andrew just want to watch the demand signals to see if anything changes once we get to the new calendar year. But the backlog obviously gives you a lot of confidence that you'll be fine.
And our next question comes from the line of Joe Ritchie from Goldman Sachs.
And Tom, I guess, my comment to you or you're just going to echo what everybody else has already said. I think you've been such a class act. Congratulations on your 2 tenures.
Thank you. Thank you, Joe.
Okay. So I guess my first question, I know we're all trying to get at this volume question really in the second half of the year. And Tom, I guess, as you kind of look at your curves, it still seems like the environment is healthy. Are you seeing kind of any deterioration across any of your different end markets? I'm just trying to really understand the expectation still for second half volumes to be negative, assuming that is still the expectation across the industrial businesses.
Yes. So it's interesting, Joe -- it's Tom, that forecast in the second half. Because if we look at backlog and we look at the orders that we saw and what we did in the first quarter, it would tend to make you think, well, we could do more in the second half. And there's a chance we could, and we'll have to wait and see how that turns out. But given the amount of uncertainties that we see in some of the AI model data, which we've been building over time and is that [indiscernible] based on the data, we're projecting that things are going to moderate as we go into the second half.
And with the price that's baked in there, the time we get somewhere between the third and the fourth quarter, we probably are going to have some unit volume declines. But when we look at the outlook for '23 on all the end markets, with the exception of aerospace, military and a little bit of weakness in HVAC primarily because of residential, everything is either neutral to strongly positive. Just as we go into the deeper end of the year, we have more end markets guiding to that kind of low single-digit neutral category, which is what makes up our forecast.
Got it. That's helpful and makes sense. I guess the one follow-on. I know you just touched on the backlog increasing. You had another multi-industry company recently seen uptick in cancellation rates out of their backlog. I'm just curious whether you have you seen any of that in the orders that are canceling at this juncture or still kind of steady as you guys?
Joe, it's Tom. Steady as she goes. We haven't seen any cancellations. That's something else that we'll be paying attention to. Most of the time, our customers want to make a change. They won't cancel per se. They'll just push out delivery dates. That's why my comments about watching demand signals from the OEMs at the beginning of next calendar year will be an important indicator right now, our OEMs are very positive about the future.
Okay. That's great to hear. And Jenny, I look forward to spending more time with you as well. Congratulations.
And our next question comes from the line of David Raso from Evercore ISI.
I was curious for the quarter, the orders in North America, can you give us a little split between the order patterns from distributors versus OEM?
David, it's Tom. We don't split them out, but given it's such a big part of the company, it would have been the orders that we reported for the 312.
And then when it comes to the second half of the fiscal year, I appreciate all the commentary about just being prudent. I'm just curious, though, if you didn't see cancellations in your backlog -- I guess essentially, I'm asking, are you expecting some cancellations in the backlog? Just given the size of the backlog, how it looks like you're going to start at least fiscal second half with a pretty healthy backlog. I'm just curious, what are you factoring in when you have down volumes in your base case for fiscal second half?
Yes. So it's not down by much. It's down small. But I guess, it's just the lack of the unknowns very really seeing a monetary policy with this kind of high inflation land the plane softly on the surface of the aircraft carrier. So hopefully, it happens. And maybe it happens after -- maybe if there's any issue that happens after our fiscal year later into calendar '23. But that's -- I think that's what we're being cautious of.
We're very positive given that are -- the breadth of the end markets that are strong is pretty much across the board and to your point, the backlog. But they won't necessarily cancel the backlog, they just shift dates to the right if they decide that they don't need it. And that's -- we're pausing to just wait to see that indicator. So when we do our next call, it will be in February, at least have January to reflect on how did the OEMs come back in the end of their fiscal year. If they come back the same way, we'll be looking to update this. And that's the benefit of every quarter getting a chance to talk to you and give you a new insight as to what we're seeing.
And I apologize if I missed this earlier. But that thought process for the fiscal second half, how does that dovetail into further price increases from here?
I think on the pricing, and as Lee had mentioned, we'll stay on top of it. A lot of the pricing that we did was we're going to anniversary in the second half. A lot of the big price increases we were catching up the cumulative effect of inflation. It's still there, and we're going to have to continue to look at that and stay on top of them. But as we compare the price increases [indiscernible] '23 [indiscernible] '22, there'll be less. Not necessarily every single part number but in aggregate, a little bit less.
All right. And obviously, congratulations to everybody.
Our next question comes from the line of Stephen Volkmann from Jefferies.
And Tom, happy Birthday. I cannot imagine a better present and not having to do this with us 4 times a year.
Thank you, Steve. Look forward to that part of
So maybe this is a Jenny question, and I apologize, it may be a little bit too early, but sort of one of the feedback things that I hear relative to other sort of premier industrials is that Parker doesn't have at least quite as much an obvious sort of recurring revenue story or SaaS-type revenue story. And secondarily, that you guys don't really do much in the way of divestitures, which have become kind of I guess, fashionable amongst these industrial companies. So I'm curious if maybe those might be a couple of areas where there could be some sort of modest change in the strategy going forward?
Steve, it's Tom. So on the recurring revenue, you're right, maybe a Software as a Service, but if you look at our recurring revenue, with half of our industrial business going through distribution, and that's almost all aftermarket. So that's a recurring revenue stream. With Meggitt and the additions that we made there on the Aerospace side, our aftermarket piece is going to go from 36% to 41%, so that's 500 basis points of improvement that we talked about Meggitt brings.
We've significantly increased the aftermarket. And some of you might remember from the Investor Day, we talked about increasing the international distribution, which we bumped up 100 basis points every year. So that's changed that mix. It's been one of the key ingredients, International's margins are now at parity with North America, which most people that have tracked us for a long time, never thought that would happen.
On the divestitures, we like -- I've always used this tree analogy. We like the tree. There are some branches that we'd like to trim off, and we're working on that as we speak. And when we're ready, we'll announce those, but they're not going to be materially significant. But we'll continue to look at that. We do best on a review internally, and then we share that with the Board. So we'll do divestitures, but we -- this portfolio has been very thoughtfully built and that these technologies are very well interconnected.
The fact that 2/3 of our customers buy from 4 more technologies speaks to interconnected technologies. So they like that we can come in with a strong bill of material, drive their cost ownership down and help them with their sustainability issues. And we couldn't do that if we were a one-trick pony. But you'll see us do more on the divestiture side, but it won't be materially significant.
Our next question comes from the line of Mig Dobre from RW Baird.
Congratulations to everyone. Tom, it has been an honor working with you through all these years. So thanks again.
I remember the first dinner we had together.
So do I. So do I. And I look forward to seeing you in Chicago next week. I just -- my first question on your Industrial segment, Q1 came in better than you expected, and I'm trying to understand what the sources of upside were here. Is it that there's something going on with your customers in terms of the supply chain getting better and production rates increasing for -- what was really the variance sources of your expectations?
Well, I think in Q1, we had a lot of help pretty much across the board. I'm looking at all the inter markets, I'm not going to read all of them to you. But everything was pretty much north of 10%. So it was -- I think we had guided North America to 10. And so we're a little bit off on that. So it just turned out to be -- there's no single market that pulled it forward. Obviously, when distribution comes in, it came in at 15% to 20% range. It has, by the size of it, it automatically pulls a lot of the industrial numbers up. But it was broad-based. And everything was north of 10% that we had a few that were greater than 20. So we were pleasantly surprised and that was a good thing. We kind of guided a little bit lower than a reality.
Okay. But you're not really pointing to something going on in the channel in terms of stocking or something of that nature. And I kind of ask because, again, going back to that second half discussion, it seems to me like a lot of your OEM customers have significant backlogs. And if anything, they're actually trying to increase production volumes in calendar '23 which is a little bit at odds with how you have your guidance structured.
Yes. So on your question about distribution, so that is end market-related, maybe a minor inventory. But back to the point of next year, that's a possibility of what you just described. Part of what we've factored in, especially when we put all the elements into the AI calculation, is just some risk around what does the macro economy do as interest rates go up higher and higher? And does it eventually start to temper demand.
And so that's why we forecasted the way we did. If it doesn't, and maybe it doesn't start to temper within our fiscal year, and we'll update that guidance in February when we have more current data. But that was the thinking now that we're forecast, and we're not any smart than anybody else other than we just want to get a little closer to the target before we get a little more bullish on the second half.
All right. Fair enough. And congrats again. .
And our next question comes from the line of Nigel Coe from Wolfe Research.
And Tom, you've had a hell of a run. So congratulations and Jenny, congratulations as well. So my question really is on the guidance. I think you took down industrial margins by 40 basis points in both North America and international. And normally, 1Q would be sort of the lower point of the -- for both segments. And that's not the way that this year is playing out. So just wondering, maybe Todd, if you could just address sort of like the thinking on the margin cadence here.
Yes. No, it's a great question. Obviously, we -- specifically, we are including the Meggitt acquisition. There's -- roughly 20% of that goes into the Industrial segment. 80% of it goes into Aerospace. That does have a slight negative impact to our margin just for this first year as we get through the integration as we start to realize some of the synergies. Also a little bit on the international side. Currency has been a fairly large headwind. We expect that to get a little bit bigger. But that is essentially the only real adjustments that we made to margins going forward.
Nigel, is a -- it's the legacy portion of the company actually goes up 20 bps on margins and the legacy portion of the company is at mid-30s incremental MROS. So it's all the factors that Todd described, which is causing the slight decline versus the prior year.
No, that's really helpful. That makes a lot of sense. And then just switching to Meggitt. There's obviously hedges in place for U.S. dollar and euro versus British pound, which makes a ton of sense as a British company. But as a subsidiary of a U.S. company with the majority of its revenues in U.S. dollars, maybe not. So I'm just wondering, are you -- have you executed or are you competing any changes to the hedging policy for Meggitt?
Yes. Nigel, that's a great question. We're learning exactly what the Meggitt process was as we get through this. It's a little bit over a month now. We most likely will do something different. We're not rushing to exit out of anything that they have in place. But overall, we're happy with that structure, right? We called it out 70% of the sales dollars are in U.S. dollars. So we feel good about that. And we feel really confident in our macro hedging program across the legacy business, we will obviously integrate Meggitt into that process as well. Jonathan, just in -- taking the time, I think we have time for one more question.
Certainly. Then our final question for today comes from the line of Jamie Cook from Credit Suisse.
Tom, I'm sure you stick of this. Congrats, well done. Thanks for making a lot of us look smart. And congrats to you, Jenny, as well. We look forward to working with you.
Maybe [indiscernible] you never get quite sick of this enough.
I guess just to, I don't think you've commented on trends specifically that you're seeing in Europe or in China. I think I get some pushback on you guys on just concerns over European exposure? And then my second question, obviously, a lot of concerns around the macro, but I'm just wondering even if the macro is a little weaker than you think, is there enough sort of cushion as you think about perhaps supply chain ends up being better, you hold more price cost or just synergies assumptions with Meggitt that if the top line is a little weaker, there's other ways to make up so you can still maintain the guide?
Yes. So the -- Jamie, it's Tom. The comments on China, China in Q1 was a positive approximately 10% organic and the rest of Asia, it was about the same, 10% organic. And we've kind of guide Asia very similar to how we described company moderating to or those low single digits as we go to the end of the year. We have a lot of things we can do. To your point, if the macros were to weaken, we've got backlog, we could use supply chain. I don't think supply chain can get worse, so that's probably going to be a positive side.
We've done this before. We've created an organization that's more nimble and flexible and structured differently. You've seen how we've been improving each recession. At one chart, just for people that have said is my favorite one chart, that was over 2 industrial recessions of pandemic in the current supply chain issues. So this team is pretty good at being flexible and more on its toes than it's on its heels when it comes to -- and so we're already working on those things we can do to be ready in case they got worse. But we're still pretty positive as will be okay.
Okay. Thanks, Jamie. This concludes our FY '23 Q1 webcast. Obviously, we do appreciate all the thanks and congratulations for Tom. He's obviously so very deserving of that. Congratulations to Jenny and Andy as well. But I also want to remind everyone of an announcement we made back in May, and that was Robin Davenport retiring, right?
So this is Robin's last earnings call as well. And she's been a big voice of our investment story really for the entire tenure that Tom has been CEO. So Robin, we thank you for everything that you've done, and we wish you nothing but the best in your next chapter.
A familiar face to everyone. I think everyone knows Jeff Miller, who was our Director of Investor Relations. Jeff has agreed to take the position of Vice President of Investor Relations starting in January. And he will lead our IR program going forward. So congratulations to both Robin and Jeff on those changes as well. And both Robin and Jeff will be here if you have questions or you mean kind of clarification on anything we discuss today. So thank you. Thanks, everyone, for joining us and anything we discuss today and interest in Parker. Thank you.
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.