Parker-Hannifin Corporation (NYSE:PH) Q3 2024 Earnings Call Transcript

Parker-Hannifin Corporation (NYSE:PH) Q3 2024 Earnings Call Transcript May 2, 2024

Parker-Hannifin Corporation beats earnings expectations. Reported EPS is $6.51, expectations were $6.12. Parker-Hannifin Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. Welcome to Parker-Hannifin Corporation’s Fiscal 2024 Third Quarter Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that today’s conference is being recorded. At this time, I’ll now turn the conference over to Todd Leombruno, Chief Financial Officer. Mr. Leombruno, you may now begin your presentation.

Todd Leombruno: Thank you, Rob, and good day, everyone. As Rob said, this is Parker’s fiscal year 2024 third quarter earnings release webcast. This is Todd Leombruno, Chief Financial Officer speaking. With me on the call today is our Chairman and Chief Executive Officer, Jenny Parmentier. We appreciate your interest in Parker, and we thank you for joining us today. If we move to Slide 2, you will find our disclosures on our forward-looking projections and non-GAAP financial measures. Actual results could vary from our forecast based on the items listed here. The press release, this presentation and reconciliations for all non-GAAP measures that we will discuss today were released this morning and are available under the Investors section on parker.com.

We’re going to start today with Jenny reviewing the highlights of our strong third quarter performance, and then she’s going to highlight how the competitive advantage of our high-performance culture is getting our global team members to deliver consistent margin expansion. I will follow up then with some color on the financial results of the quarter, and I will provide some assumptions to our increase in the fiscal year 2024 guidance. We’re going to end the call with a Q&A session, and we’ll try to take as many questions as we possibly can. Just a reminder, please try to limit your questions to one and a follow-up, if needed, so we can get to all of those in the queue. With that, I now draw your attention to Slide 3, and Jenny, I will hand it over to you.

Jennifer Parmentier: Thank you, Todd. Q3 was another quarter where the team delivered outstanding results executing the Win Strategy. Starting with safety, a 17% reduction in recordable incidents over prior Q3. Safety has been and will remain our top priority. Record sales of $5.1 billion in the quarter, with organic growth of 1.2%, record adjusted segment operating margin of 24.7%, that’s a 150 basis point improvement over prior year with all segments expanding margins. Adjusted EPS growth of 10%, along with 12.6% year-to-date free cash flow margin. Aerospace demand remains robust and was again a significant driver of our performance in the quarter. Our transformed portfolio and strong performance are driving an increase to full year guidance.

Next slide, please. Those of you who know us well know, this is the Win Strategy. This is our business system focused on the fundamentals. It is a proven strategy. We trust the process, and this is how we deliver results. Very simply put, this strategy works. I first used the Win Strategy when I joined Parker 16 years ago as a plant manager. I very quickly learned that it wasn’t just words written on a piece of paper. I was trusted, empowered and expected to use the tools in the Win Strategy to improve my plan. I’ve since used it as a General Manager, Group President and as an Executive Officer of the company. Based on a solid foundation of culture and values, we pursue four goals: engage people, customer experience, profitable growth and financial performance.

Engage people is the first and most important pillar. As I mentioned on the previous slide, safety is our top priority, and it sits in the first position of this first pillar. One of the keys to our success is our decentralized operating structure. High performance teams at our 85 operating division utilize all the tools in the Win Strategy to deliver results. Our culture drives an ownership and entrepreneurial mindset, one that I appreciate it as a General Manager and respect today. We are excited to show you some examples of the Win Strategy in action at our upcoming Investor Day on May 16. Next slide, please. Embedded in the Win Strategy is our high-performance culture. This is a competitive advantage that has allowed us to build a better and more resilient Parker.

The structure of high-performance teams increases engagement and commitment at all levels of the organization. This, coupled with a disciplined operating cadence drives top quartile performance. Our approach is strength based, focused on building relationships and team member development. This structure reinforces our customer centric mindset and drive continuous improvement across the enterprise. Next slide, please. Our people, our high-performance culture that I just spoke about, our strategy, the Win Strategy and our transformed portfolio have driven the performance you see on this page. This is a snapshot from FY 2019 through our FY 2024 guidance, 7% revenue CAGR from $14.3 billion to our FY 2024 guide of $19.8 billion. 600 basis point increase in adjusted operating margin from 18.6% to our guide of 24.6%, 14% adjusted EPS CAGR and from $13.10 to our FY ’24 guidance of $24.75 and 2 times the amount of free cash flow dollars, $1.5 billion in fiscal year 2019 and to our FY 2024 guide of $3 billion.

A lot of hard work. We are very proud of the global team delivering these results, and we have a very promising future ahead of us. And we’re not done. I’ll hand it over to Todd for the summary of our third quarter highlights

Todd Leombruno: Thank you, Jenny. It’s great to see those results. Let’s take a look at the quarter. This is just a high-level financial summary for the company. As Jenny said, Q3 was another strong quarter for Parker. Once again, every number in that gold highlighted box is a Q3 record for the company. If you’ll see total sales, we did grow — it’s up slightly from prior year. We reached $5.1 billion in sales. Organic growth was just over 1% positive, slight negative impact from divestitures. That’s just 0.3%. Our sales and currency did shift to a slight headwind this quarter, not terrible at 0.6%, but it’s the first time the sheer currency has been a headwind. If you look at the adjusted segment operating margins, that’s an improvement of 150 basis points versus prior year.

We did finish at 24.7%. And a similar story on EBITDA margins. We finished at 25.5%. That is an increase of 130 basis points from prior year. Moving to adjusted net income. We generated $851 million of net income. That is an loss of 16.8%. And adjusted earnings per share were $6.51, and that’s a $0.58 or 10% increase from prior year. Net income is also an increase of 10% from prior year. Q3 was really just a solid quarter when you look at the sales, when you look at segment operating income, when you look at net income and earnings per share, each one of those generated the highest levels that we produced this fiscal year. So a very strong quarter. If we can move to Slide 9. This just shows the walk of that $0.58 or 10% increase in adjusted EPS.

I’m really glad to say again, the main driver of segment operating income dollars increasing. We increased by $76 million in the quarter. That accounted for $0.45 of the EPS growth. That’s nearly 80% of the EPS growth in the quarter. Again, Jenny mentioned this, but it’s just impressive operating performance across the company, but specifically, the strength in our Aerospace Systems segment was again a main contributor this quarter. Interest expense is again favorable. That really is the result of our successful efforts to deleverage after the Meggitt transaction. Tax was favorable $0.06 versus prior year. Simply, that’s just a few discretes that are certainly hard to predict. Corporate G&A was higher from prior year, but really, that’s just more a result of prior year favorable items not repeating this fiscal year and you can see other expense and share count were just a little bit higher than prior year.

So the theme really remains the same this quarter as it has in the first half of the year. Our team members are generating strong operating performance that is driving margin expansion, really in a tepid top line industrial environment. And our debt paydown efforts are really reducing our interest cost. So it’s just great to see the team work together to generate those results. If we go to Slide 10, this is the segment performance. You can see we continue to see positive growth as a result of the higher concentration of Aerospace in our portfolio. Margin expansion does continue across all of our businesses. That is great to see. Order dollars did remain strong against a very tough comp in the prior year. Order dollars did improve sequentially from last quarter.

So we’re happy to see that. If you look at the North American businesses, sales volume reached $2.2 billion. Organic growth was down 4.6%, as you can see on the slide, but that was in line with our expectations. It was driven by softness in off-highway and transportation markets specifically. We did continue to see destocking throughout the quarter, but I will say it did continue at a decelerating rate. Despite the down volume, margins increased 120 basis points to a third quarter record of 24.1% in the North American business. This just really is a shining example of operation excellence and how the teams continue to see opportunities to drive margins even higher. Order rates in North America did remain constant with last quarter. They finished at minus 4 in the quarter.

If we move to the international businesses, you can see sales volume reached $1.4 billion. Organic growth was down 3.1% on those businesses. But again, that was in line with our guidance. If you look at EMEA, that was the most negative at negative 5.1 and just some contraction again in highway transportation and implant industrial markets. Asia Pac growth was minus 2.8%. China remains generally soft. Latin America is a strong point. They continue to be positive at 19% versus prior year. What we’re really proud about is the team, even on that lower volume, expanded margins by 10 basis points, and they also generated a third quarter record of 23.5%. Focus remains on productivity improvements and cost controls in these businesses with orders in the international businesses at minus 8.

In EMEA, we are seeing some choppiness on orders, while Asia Pac we are seeing some improvements. If we look at Aerospace, Aerospace delivered another stellar quarter for the company. Sales reached a record of $1.4 billion, that’s the highest we’ve ever had in the aerospace business. Organic growth was 18% across every market segment we have in aerospace. This is the fifth quarter of double-digit organic growth within Aerospace. Aftermarket strength continues to be outstanding. This quarter, we were up 26% in the commercial aftermarket area and operating margins are fantastic, reaching a new record, increasing by 320 basis points versus prior year to come in at 26.7%. Demand just remains robust, aftermarket strength continues and the team is just doing great driving margins ever higher.

Order rates in aerospace continue to be very strong at plus 15. So just great performance across all of our businesses. If we go to Slide 11, let’s talk about cash flow. So first of all, I think most of you have probably seen this last week, our Board approved a quarterly dividend payout of $1.63 per share. That is a 10% increase over the prior dividend payout. With that increase, this does increase our annual record of paying higher dividend dollars per year from 67 years to now 68 years, just an unbelievably impressive record. Looking at cash flow. We’ve got a record on cash flow of $2.1 billion of cash flow from operations, that’s 14.6% of sales. That is a 20% increase over prior year. And I said it already, but it is a record. When you look at free cash flow, we did $1.9 billion that is 12.6% to sales and that also is a 22% increase versus prior year.

The team really remains focused on being great generators and great deployers of cash. We are reaffirming our full year target of free cash flow dollars of over $3 billion, and we certainly are committed to free cash flow conversion of over 100 for the full fiscal year. So great performance on cash. Let’s move to Slide 12. I’m happy to give an update on our deleveraging progress. We did reduce debt by over $420 million in the quarter. Since we closed the Mega transaction, it was just six quarters ago. We have reduced debt by over $2.6 billion. That, coupled with the continued expansion in EBITDA growth, we have reduced our leverage by over 40% just since the close. Both of those are ahead of our original commitment. And you can see on the slide here, gross debt to adjusted EBITDA is now 2.3 times and net debt is down to 2.2 times.

We still feel confident that we will get the $2 billion of debt paid down in this fiscal year and we certainly are on track to achieve net leverage of 2 times by June of this fiscal year, just in two months. So if we go to Slide 13, just some color on our guidance. We are reaffirming our full year organic growth midpoint and increasing our margin and earnings per share expectations for the year. Our reported sales growth for the year is expected to be 4% at the midpoint. And on organic growth, we are increasing aerospace once again. We’re increasing it by 300 basis points to 15% for the full year. Both North America and international diversified industrial businesses. Organic growth is now forecasted to be negative 2.5. But for the company, full year organic growth remains the same at 1.5% positive.

So you can see how aerospace is helping the portfolio on our top line. We’re raising adjusted segment operating margins. We’re raising that to 24.6. That’s 30 basis points higher than prior guidance, and that now forces the full year margin expansion to be approximately 170 basis points versus prior year. Corporate G&A and interest, unchanged from prior guide. Tax rate is down a little bit, just really based on Q3 actual results. We expect that to be 22% now. Full year as-reported EPS has increased to $20.90 and full year adjusted EPS has increased to $24.75. Both of those are at the midpoint and there’s a range narrowed to plus or minus $0.10 for the fourth quarter. Finally, if you look at the fourth quarter, our adjusted EPS is expected to be $6.13 at the midpoint.

So as usual, we’ve got some more specifics in the appendix if needed. And now, I’m going to hand it back to you, Jenny, and I ask everyone to turn to Slide 14.

Jennifer Parmentier: Thank you, Todd. A few key messages to close this out as we near the end of our fiscal year 2024, our high-performance culture built a better and more resilient Parker. We will continue to drive operational excellence through the Win Strategy. As mentioned a couple of times already, aerospace demand remains robust, and our transformed portfolio drives growth. And finally, Parker is and will continue to be a great generator and deplorer of cash. Next slide, please. We are looking forward to sharing our story at our investor meeting on May 16th. I will be joined by our President and Chief Operating Officer, Andy Ross, our Chief Financial Officer, Todd Leombruno, and our Vice President of Investor Relations, Jeff Miller.

Our key themes for the meeting are transforming the company, how we are positioned for growth from secular trends, operational excellence and financial performance. Thank you again for joining the call today. And I’ll turn it back over to Todd for Q&A.

Todd Leombruno: Rob, we’re ready to open the lines for Q&A, and we’ll take whatever you got first in the queue.

Operator: Thank you. Our first question in the queue today is Scott Davis with Melius Research. Please proceed with your question.

See also Jim Cramer is Recommending These 10 Stocks Heading Into May 2024 and Democrats and Corporate Insiders are Buying These 10 Stocks.

Q&A Session

Scott Davis: Hey. Good morning, Jenny and Todd and Jeff.

Jennifer Parmentier: Good morning, Scott.

Todd Leombruno: Good morning.

Scott Davis: Look forward to you in a couple of weeks. I got a bunch of questions, but I’ll try to keep it brief and pass it on. Just as it relates to M&A, what just mark-to-market a little bit on what you guys are thinking on your pipeline, what your comfort level and stepping forward right now, kind of what good looks like? And are we more — are we looking at more bolt-on-ish type stuff at this point? Or are there other kind of Meggitt type deals that are out there?

Jennifer Parmentier: Well, I often say, Scott, we really like Meggitt, and we wish there were a lot of Meggitt like deals out there for us. Listen, we — first and foremost, as Todd was talking about, we’re committed to paying this debt down, right? We’re doing it earlier than we said we would. We’re forecasting to be at two times by the end of this fiscal year. But we’re always working on that pipeline, building the relationships. The pipeline is robust. There are targets in there of various sizes, some bolt-ons, some larger ones. Really, it’s about making sure that we have the right one. It has to be accretive to growth, margins, follow the secular trends and really be the right fit for Parker, fit with our interconnected technologies and be the right business. So we continue to work that pipeline, and we’ll have more to talk about that in the future.

Scott Davis: Okay. I look forward to that. And a smaller issue, but when you think about commercial aftermarket in Aero being up 26%, that is — those are big numbers. And help us understand at the customer level are they taking on more inventory? Do they — how do they generally manage their inventory? Or how do you guys at least help them manage our inventory so that you don’t experience double ordering and things like that. And perhaps just making sure we understand the risk profile of those types of growth rates and the sustainability? Thanks.

Jennifer Parmentier: Yes. It’s a good question, Scott. I haven’t heard of any concerns of double ordering in aerospace. I think there’s still supply chain constraints out there that everybody has their orders. There’s long lead times but no, I’ve heard nothing about double ordering. As we go through this balance of air traffic returning to pre-COVID levels, different manufacturers ramping up to higher rates, it’s a balance and MRO, I believe, will continue to be strong. So for the foreseeable future, we see that as strong.

Todd Leombruno: Scott, one thing — you probably know this, Scott. But with Meggitt, specifically in the quarter, our aftermarket business is 47% of the total aerospace business. So it’s up Jenny mentioned the air traffic is back to pre-COVID numbers. And it’s really a combination of expanded aftermarket mix within the company.

Scott Davis: Yes. Well, it looks like they certainly need to replace some wheels and brakes based on what we read out there. So good luck guys. Thank you.

Jennifer Parmentier: Thanks.

Operator: Our next question is from the line of Andrew Obin with Bank of America. Please proceed with your question.

Andrew Obin: Yes. Good morning.

Jennifer Parmentier: Good morning, Andrew.

Andrew Obin: Just a follow-up on aerospace and aero margins. You guys have really emphasized one-time mix over the past one-time mix benefits over the past couple of quarters I guess, high spare impact. But you know, we are up sequentially from 1Q, 2Q, what’s going so well?

Jennifer Parmentier: Well, as we were just talking about the mix, Q3 was actually — aftermarket mix was actually 48%. Year-to-date, we’re at [Indiscernible]. So the combination of what we had in our portfolio and adding to what we got with Meggitt, it’s been a big increase. And it is excellent growth from our braking business in other areas. Also military aftermarket growth is higher because of these public private partnerships we have with the Department of Defense. So a lot of things going well really pleased and well positioned with this portfolio of complementary technologies, so really positive about this going well into the future.

Andrew Obin: Got you. And just a question on orders in North America, I think you highlighted softness enough highway and transportation, maybe you could just walk us through what are you seeing on the mobile, and I mean, it’s been a while since we used those terms. But mobile and stationary and am I correct just to think that it’s a lot of Ag and Class A trucks? And just how much visibility do you have because you are saying the stock can continue at a decelerating rate. But where do you see the bottom?

Jennifer Parmentier: Okay. So I’ll just — I’ll do a little run-through of the markets. Obviously, we know aerospace is very strong, and we’ve raised our guidance because of that. If you take a look at energy, oil and gas, that remains positive. Implant industrial equipment, low single-digit negative, more negative in Europe, less in North America. Transportation, mid mid-single-digit negative, Automotive is down globally. And I would again say that Europe is more negative there. Off-highway, high single-digit negative, primarily construction and Ag and both of them are equally negative, Andrew. Again, Europe a little more negative. When we take a look at HVAC refrigeration, it is still double-digit negative, but it’s some pretty tough comps to prior it was quite positive this time last year, mainly driven by the residential business.

It is improving. There’s an improvement in commercial and as you were just mentioning, destocking, distribution is slightly negative, and we saw that destocking lingering through the quarter. So when we take a look at where we’re at today, Industrial North America orders have been negative for five quarters now. And we’re still very proud of it, still guiding to 1.5% organic growth for the company. And historically, you would see that orders go negative for an average of six core years. And both portfolio, total Parker went negative same quarter as industrial North America. So a big difference here. What I would also say is the backlog remains strong. Backlog dollars are at near record levels. And as we spoke about in quarters past, consistent coverage really holding in there, as we’ve talked about before, pretty much double what they’ve been historically.

And while we have Q3 order conditions reflected in the guide, I would have to say that April orders are off to a better start, and we might be seeing the end of destocking here.

Andrew Obin: I’ll take that. Thanks so much.

Operator: Thank you. Our next question is from the line of David Raso with Evercore ISI. Please proceed with your question.

David Raso: Hi. Thank you. The implied fourth quarter for international, the organic growth rate weakening from the third quarter. Can you just help us maybe geographically or however you like to take us through that cadence? And is there any sort of visibility on when those declines start to lessen.

Jennifer Parmentier: Yes. Thank you, David. So obviously, orders went from minus 5 in Q2 in international to minus 8. So that is definitely what is reflected in the guide. Destocking continued, as I was mentioning earlier, softness in off-highway and transportation and industrial equipment. We just really see that the macroeconomic indicators are still in contraction in Europe. Really, the sales for the quarter were in line with our expectations, but the orders in the quarter are really what has driven us to take that down in Q4 and slightly for the year, we had — had a negative two for the year, and now we have it at a negative 2.5%. So we’re not seeing the same thing that we’re seeing in North America at the start of this quarter. So not signaling any turn there yet, but we’re keeping a close eye on it.

David Raso: Okay. I’m just trying to get a sense of when, if North America, you sound a little more encouraged for April. I’m just making sure the international doesn’t sort of dampen what — I would suspect you think maybe North America organic can turn positive in a couple of quarters. Maybe sort of if you kind of address that thought, if you could?

Jennifer Parmentier: Usually, North America, historically, the average has been six quarters, and then we see a turn, right? And international has just — it’s been choppy. It’s been really choppy over the last several quarters. So it’s hard to call at what point that would follow North America. We’re just going to have to keep a close eye on it, and we’ll have a better update for you next quarter.

David Raso: And then lastly, price cost. Can you give us an update on how that’s trending? And I’ll hop off. Thank you.

Jennifer Parmentier: Yes. So we’re back to what we would call a normal pricing environment. We’re doing our twice a year price increases. As a reminder with price, we went out early and often. We believe that price to be sticky. We still have inflation out there. And I think we’ve done a really good job. The team has done a good job at maintaining our margin neutrality. So we’re back to more of a normal environment right now.

David Raso: Thank you.

Jennifer Parmentier: Thanks, David.

Operator: Our next question is from the line of Joe Ritchie with Goldman Sachs. Please proceed with your question.

Joe Ritchie: Hi. Good morning.

Jennifer Parmentier: Good morning.

Joe Ritchie: And so we’re getting lots of questions, obviously, on the turn in North America. And I’m just curious, so really helpful to hear that April is a little bit better and that we maybe were towards the end of destocking. Just curious like how do you think that this potential inflection actually will work? And what I’m asking specifically is with your distributors, what are the conversations like you feel like things could be low and slow just given we’ve been — we’ve seen this destocking now for several quarters. Just any comment around that would be really helpful.

Jennifer Parmentier: Well, I would tell you that the distributors have been positive for a couple of quarters now, right? They’ve been sharing with us how they’ve been able to participate in some nice work with some reinvestment in some factories, maybe some early days on some of these mega CapEx projects. But it’s really a positive sentiment. I wouldn’t tell you at this point, is indicating a slow move or a steep climb. It’s just what we’re seeing early in this quarter. It’s just really kind of looking like we might be seeing bottom.

Joe Ritchie: Okay. Yes. No, that’s great to hear. I guess maybe just kind of thinking through also the questions around the industrial international business as well. Like — you guys have done a really good job of expanding margins even at a time when things haven’t — volumes have been negative. I’m just curious like if we’re if it’s slower to pick up in the international business, how do you feel about the margin trajectory of that business from here?

Jennifer Parmentier: I have a lot of confidence in these teams. I mean in this environment for the last several quarters, they’ve just done a great job with cost control and expanding margins. These teams, as I mentioned earlier, their practitioners of the Win Strategy, and they know what levers to pull. We’ve commented in the past, we’re never waiting for a downturn or a recession or anything that might happen. We’re constantly looking at making sure that we expand margins.

Joe Ritchie: Awesome. Thanks, Jenny, look forward to seeing you in a couple of weeks.

Jennifer Parmentier: Yes.

Operator: Thank you. Our next question is from the line of Jamie Cook with Truist Securities. Please proceed with your question.

Jamie Cook: Hi. Good morning. Congratulations on a nice quarter. I guess, Jenny, if you look at your implied margins for this year, the 24.6% were sort of already at, your targeted margins, which I’m assuming — which you guys will address at your Analyst Day. But I’m just thinking, as you’re focused on igniting organic growth for Parker-Hannifin in total just brought across the portfolio. To what degree do you have to balance the ability to improve margins much more from here just for most industrial companies having a 25% margin or whatever is pretty good. I’m just wondering if we have to put a ceiling sort of on the margins to get the organic growth. And then my second question is — or would you to, I guess, you don’t have to, but would you consider that strategy?

And then my second question, just back to the M&A question again. I mean, obviously, Meggitt has been a big positive for you guys. Longer cycle business is giving you guys the ability to grow the organically as industrials weaker. Do we need sort of more long late-cycle aerospace businesses, do you think to have a more balanced portfolio? Thanks. And I’ll get back in queue after that.

Jennifer Parmentier: Thanks, Jamie. So first of all, I would say we’re really proud of our teams in this margin expansion that we have achieved. And as I mentioned earlier, we’re not done. We feel like there’s still a lot of runway, no pun intended in Win Strategy 3.0, a lot of opportunity to expand margins. We feel very strongly about our ability to grow differently with this portfolio and with the secular trends. And we’ll have some more updates for you at the investor meeting here in a few weeks. But we’re not pulling together a strategy right now that limits us on one or the other. We’re just going to stay focused on margin expansion and growing that top line organically. On your acquisition question, for more aerospace or what the mix needs to be, it does need to be that longer cycle business, accretive to growth, accretive to margins, EPS, complementary technologies.

All of those things have encompassed the last couple of acquisitions that we’ve done and is one of the reasons that I believe that we’ve been so successful with them. So that’s the kind of business we’re looking for. No magic number on a percentage of aerospace. We obviously like the aerospace business, but we like all of our technologies. We think there’s real power in these technologies being together, and that’s why we often talk about them being interconnected and most of our customers buying 4 or more of these at a time.

Operator: Our next question is from the line of Nathan Jones with Stifel. Please proceed with your question.

Nathan Jones: Good morning everyone. I guess a bit of a follow-up on some of the questions on the order rates and expected improvement in those in the short term. I think by historical standards, this has been a relatively shallow downturn in the industrial businesses for Parker as well. So I was just interested in your commentary on how you envision the shape of that recovery as well, just given that it’s been a relatively shallow downturn, should that lead to maybe shallow or upturn or just kind of your expectations on what the recovery looks like when it comes.

Jennifer Parmentier: Yes. I think it’s been — to use your terms, we’re shallow than the past, obviously, because we’ve changed the portfolio. We do have longer lead time business in the industrial part of our business today. We have higher aftermarket with CLARCOR. We have longer lead time business with Lord. And as a reminder, we have some aerospace business that sits in the industrial segment, where it belongs to some of those technologies in those groups. So I think the portfolio is the reason that it’s not as deep as maybe as it has been in the past. Going forward, it’s hard to say how that’s going to move, but I do believe with the secular trends with some of these projects that are out there that we’re going to like the way we grow differently.

So no real indication for you today on if it’s going to be slow and steady or some spikes, but just really wanted to share with everybody today that the start of the quarter looks better. And we might be seeing — finally seeing an end to this lingering destocking.

Nathan Jones: That would be good to say. A couple of questions on margins or any question on margins. Obviously, North America margin is up 120 basis points on down revenue. And international margins up 10 points on a 6% decline in revenue, a very strong margin performance. As we envision the return to growth in the end to this destocking and down cycle here, what kind of incremental margins should we be expecting as you see those industrial businesses return to growth?

Jennifer Parmentier: I think you’re going to see the normal incrementals that you’ve seen for us. We target 30%. We still think that, that’s a good number. But you’ve seen us outperform that in the past. But I think going forward, that’s a good number for us.

Nathan Jones: Okay. Thanks very much for taking my questions.

Jennifer Parmentier: Thank you.

Operator: Our next question is from the line of Julian Mitchell with Barclays. Please proceed with your question.

Julian Mitchell: Hi. Good morning. Maybe apologies, I just wanted to revisit the DI North America sort of top line color, just one more time, if that’s okay. And it was really sort of relating to the point around it seems like destocking may be nearing an end in the order intake, but you did take down your fourth quarter organic sales assumption for North America. So is that really reflecting the fact that you’ve had a five-quarter orders decline behind you, but you’ve only had a two-quarter revenue decline behind you in that region. And so we should expect several quarters of revenue decline commensurate with the longevity of the orders decline. Is that the right way to think about it? Or there’s something moving around with the backlog that means no, that’s the wrong answer, we should have a much shorter revenue downturn than the orders downturn? Thank you.

Todd Leombruno: Yes, Julian, we’re not expecting that to linger like that. What we really were just trying to signal was that things look better in the month of April than the way we finished to Q3. So no, there’s no long lingering expectation for negative growth in North America.

Julian Mitchell: Understood. Thank you. And then just my second question, trying to look at revenue another way, perhaps in industrial would be on the sort of technology platforms basis. So we saw around, I think, high single-digit declines in Motion and flow and process control in the quarter and sort of flattish in Filtration and Engineered Materials. I realize there’s different moving parts geographically and so forth. But on the Filtration and Engineered Materials side, do you think that, that can sort of hold in there better than what happened in the other two industrial tech platforms or does it sort of follow them down and then back up just with a lag. Thank you.

Todd Leombruno: Julian, we do — thanks for pointing that out. We do believe that those businesses could and should grow differently than the motion systems and flow and process platform, those businesses, motion systems, flow and process, those are the most levered to the distribution network, highest percentage of distribution sales. You’ve seen the destocking continue over the last couple of quarters in that space. We do think that, that’s kind of nearing an end. Jenny already mentioned it, but filtration, heavy aftermarket, engineered materials, a little bit more longer cycle business, both in automotive end markets and then some of the transportation markets. So it kind of supports our strategy over the last many, many years to help the company perform differently no matter what’s going on in the global industrial market that we could perform differently.