Earnings Call Transcript - PH Q3 2024

Operator, 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. 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, CFO

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, CEO

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 divisions utilize all the tools in the Win Strategy to deliver results. Our culture drives an ownership and entrepreneurial mindset, one that I appreciated 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 drives 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, CFO

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 mentioned, Q3 was another strong quarter for Parker. Once again, every number in that highlighted box is a Q3 record for the company. Total sales grew slightly from the prior year, reaching $5.1 billion. Organic growth was just over 1%, with a slight negative impact from divestitures at 0.3%. Sales and currency presented a slight headwind this quarter, not severe at 0.6%, but this is the first time currency has been a headwind. Adjusted segment operating margins improved by 150 basis points versus the prior year, finishing at 24.7%. A similar trend was observed with EBITDA margins, which increased by 130 basis points from the prior year, ending at 25.5%. In terms of adjusted net income, we generated $851 million, representing a decline of 16.8%. Adjusted earnings per share were $6.51, marking a $0.58 or 10% increase from the prior year, with net income also reflecting a 10% increase. Overall, Q3 was a solid quarter when considering sales, segment operating income, net income, and earnings per share, each reaching their highest levels this fiscal year. Moving to Slide 9, we can see the breakdown of the $0.58 or 10% increase in adjusted EPS. The main driver was the increase in segment operating income, which grew by $76 million in the quarter, contributing $0.45 to the EPS growth, nearly 80% of it. Jenny also pointed out the impressive operating performance across the company, particularly from the Aerospace Systems segment, which was a significant contributor this quarter. Interest expense was favorable, thanks to our successful efforts to deleverage after the Meggitt transaction. Tax was favorable as well, at $0.06 better than the prior year. Corporate general and administrative costs were higher compared to the prior year, primarily due to not repeating favorable items from last fiscal year, while other expenses and share count were slightly elevated. The consistent theme this quarter, as it has been in the first half of the year, is that our team is achieving strong operating performance that drives margin expansion in a challenging top-line industrial environment. Our debt paydown efforts are effectively lowering our interest costs, which is encouraging to see as the team collaborates to achieve these results. On Slide 10, we see the segment performance. Positive growth continues, bolstered by the higher concentration of Aerospace in our portfolio, with margin expansion across all our businesses. Order dollars have remained robust despite challenging comparisons from the prior year, and orders improved sequentially from last quarter. In our North American businesses, sales volume reached $2.2 billion, though organic growth was down 4.6%, which aligned with our expectations, driven by softness in off-highway and transportation markets. We observed continued destocking throughout the quarter, albeit at a decelerating rate. Despite the decrease in volume, margins increased by 120 basis points to a record 24.1% in the North American business, exemplifying operational excellence as teams continue to find ways to enhance margins. Order rates in North America remained stable from the last quarter, finishing at minus 4. Turning to our international businesses, sales volume reached $1.4 billion, with organic growth down 3.1%, consistent with our guidance. In EMEA, the decline was most significant at negative 5.1%, reflecting some contraction in highway transportation and plant industrial markets. Asia Pacific growth was down 2.8%, and while China remains generally soft, Latin America exhibited strong growth at 19% compared to the prior year. We are proud that even with lower volume, the team expanded margins by 10 basis points, achieving a third quarter record of 23.5%. The focus remains on improving productivity and controlling costs in the international businesses, with orders at minus 8. In EMEA, we are encountering some variability with orders, whereas things are showing some improvement in Asia Pacific. In Aerospace, we delivered another outstanding quarter, with sales reaching a record $1.4 billion, the highest we've ever seen in aerospace. Organic growth was 18% across all market segments within aerospace, marking the fifth consecutive quarter of double-digit organic growth. Aftermarket strength was notable, with a 26% increase in the commercial aftermarket area, and operating margins reached a new high, increasing by 320 basis points from the prior year to 26.7%. Demand remains strong, with aftermarket performance being exceptional, and the team is successfully driving margins even higher. Aerospace order rates continue to be robust at a plus 15. Overall, this performance reflects a strong showing across all 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 Meggitt 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, CEO

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 deployer 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, CFO

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

Operator, Operator

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

Scott Davis, Analyst

Hey. Good morning, Jenny and Todd and Jeff. Look forward to seeing 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, can you just mark-to-market a little bit on what you guys are thinking on your pipeline, what your comfort level is in stepping forward right now, kind of what good looks like? And are we looking at more bolt-on-type deals at this point? Or are there other kind of Meggitt-type deals that are out there?

Jennifer Parmentier, CEO

We really like Meggitt and wish there were more deals like it available to us. As Todd mentioned, we are committed to reducing our debt and are doing so ahead of schedule. We expect to be at two times debt by the end of this fiscal year. We are actively building relationships and working on our pipeline, which is strong and includes targets of various sizes, including some smaller and larger acquisitions. The focus is on finding the right opportunities that will enhance growth and margins, align with market trends, and fit well with Parker's interconnected technologies. We will continue to pursue this pipeline and will have more updates to share in the future.

Scott Davis, Analyst

I look forward to that. Regarding the commercial aftermarket in Aero being up 26%, those are significant numbers. Can you help us understand if customers are increasing their inventory? How do they typically manage their inventory? Additionally, how do you assist them in managing inventory to avoid issues like double ordering? It would also be helpful to understand the risk profile associated with those growth rates and their sustainability. Thank you.

Jennifer Parmentier, CEO

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, CFO

Scott, our aftermarket business represents 47% of the total aerospace business this quarter. As Jenny mentioned, air traffic has returned to pre-COVID levels, and this growth is driven by an increased aftermarket mix within the company.

Scott Davis, Analyst

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.

Andrew Obin, Analyst

Yes. Good morning.

Jennifer Parmentier, CEO

Good morning, Andrew.

Andrew Obin, Analyst

Just a follow-up on aerospace and aero margins. You guys have really emphasized 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, CEO

The aftermarket mix in Q3 was 48%, and year-to-date, it's at 47%. The combination of our existing portfolio and the addition of Meggitt has significantly increased our performance. We're also seeing excellent growth in our braking business and military aftermarket growth, thanks to our public-private partnerships with the Department of Defense. Overall, we have a lot of positive developments and feel well-positioned with this portfolio of complementary technologies, making us optimistic about the future.

Andrew Obin, Analyst

Got you. And just a question on orders in North America, I think you highlighted softness in off-highway and transportation. Maybe you could just walk us through what you are 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, CEO

I'll provide a brief overview of the markets. Aerospace is very strong, which has led us to raise our guidance. In the energy sector, oil and gas remain positive. The industrial equipment sector is experiencing low single-digit declines, with Europe feeling more of the impact than North America. Transportation shows mid-single-digit declines, particularly in the automotive sector globally, with Europe being more affected. Off-highway is facing high single-digit declines, mostly in construction and agriculture, both equally negative, with Europe again a bit worse off. In HVAC refrigeration, the situation is still challenging with double-digit declines, largely due to tough comparisons to last year when it was positive, primarily from residential business. However, we are seeing improvement, especially in commercial. Destocking in distribution is slightly negative, and we observed that trend throughout the quarter. As we assess the current state, orders in Industrial North America have been negative for five consecutive quarters. Despite this, we remain optimistic and are still guiding for 1.5% organic growth for the company. Historically, orders tend to go negative for an average of six core years, and our total Parker portfolio went negative in the same quarter as Industrial North America. Notably, our backlog remains robust, with dollar amounts nearing record highs. Consistent coverage is holding strong, almost double historical levels. While our Q3 order conditions are reflected in our guidance, I can report that orders in April have started off better, suggesting we might be nearing the end of the destocking phase.

Andrew Obin, Analyst

I’ll take that. Thanks so much.

David Raso, Analyst

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, CEO

Yes. Thank you, David. Orders declined from minus 5 in Q2 for international to minus 8, which is reflected in our guidance. Destocking has persisted, particularly due to softness in off-highway, transportation, and industrial equipment. The macroeconomic indicators in Europe remain in contraction. Sales for the quarter met our expectations, but the decline in orders prompted a revision for Q4 and a slight adjustment for the year. We initially projected a negative two for the year, now updated to negative 2.5%. Unlike North America, we are not witnessing an improvement at the beginning of this quarter, and we are monitoring the situation closely.

David Raso, Analyst

I'm trying to understand if you feel more optimistic about North America in April. I want to make sure that international factors don't overshadow your belief that North America's organic growth could become positive in a few quarters. Could you address that thought?

Jennifer Parmentier, CEO

Historically, the average in North America has been six quarters before we see a turnaround. However, the international situation has been quite inconsistent over the last several quarters. It's difficult to determine when that might align with North America. We will continue to monitor the situation closely and provide a more detailed update next quarter.

David Raso, Analyst

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, CEO

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, Analyst

Thank you.

Joe Ritchie, Analyst

Hi. Good morning.

Jennifer Parmentier, CEO

Good morning.

Joe Ritchie, Analyst

We’ve received many questions regarding the situation in North America. It's encouraging to hear that April shows some improvement and that we might be nearing the end of destocking. I'm interested in how you anticipate this potential change will unfold. Specifically, what are the discussions like with your distributors? Do you feel that the recovery might be slow, considering we've experienced this destocking for several quarters? Any insights on this would be appreciated.

Jennifer Parmentier, CEO

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, 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, Analyst

It's great to hear that. I am thinking about the questions regarding the international industrial business as well. You've done a commendable job of expanding margins even when volumes have been declining. I'm curious about the margin trajectory of that business moving forward, especially if the international segment picks up more slowly.

Jennifer Parmentier, CEO

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, are 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, Analyst

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

Jamie Cook, Analyst

Hi, good morning. Congratulations on a great quarter. Jenny, when we look at your implied margins for this year, the 24.6% is around your targeted margins, which I assume you will discuss at your Analyst Day. I'm thinking about how you focus on driving organic growth for Parker-Hannifin across the entire portfolio. To what extent do you need to balance the potential for further margin improvement? For most industrial companies, achieving a 25% margin is considered quite good. I'm curious if we need to set a limit on the margins in order to foster organic growth.

Jennifer Parmentier, CEO

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.

Jamie Cook, Analyst

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, CEO

Nathan Jones, Analyst

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, CEO

Yes. I believe we are experiencing a shallower situation compared to the past, primarily due to changes in our portfolio. We currently have longer lead time business in our industrial segment. Additionally, we have a greater focus on aftermarket services through CLARCOR and also longer lead times with Lord. It's important to note that some aerospace business falls under the industrial segment, which relates to certain technologies within those groups. This shift in the portfolio is why the current situation is not as deep as it has been historically. Looking ahead, it's challenging to predict how things will evolve, but I am optimistic that the ongoing secular trends and current projects will positively influence our growth. While I can't definitively state whether the recovery will be slow and steady or involve some spikes, I wanted to communicate that the beginning of the quarter appears promising. We may finally be observing an end to this extended period of destocking.

Nathan Jones, Analyst

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, CEO

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.

Julian Mitchell, Analyst

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?

Todd Leombruno, CFO

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, Analyst

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?

Todd Leombruno, CFO

Julian, thank you for pointing that out. We believe that those businesses could and should grow differently from the motion systems and flow and process platform. The motion systems and flow and process sectors are most tied to the distribution network, with the highest percentage of distribution sales. We have observed ongoing destocking in that space over the past couple of quarters, but we think that is coming to a close. As Jenny mentioned, filtration, heavy aftermarket, and engineered materials represent longer cycle businesses, particularly in automotive and some transportation markets. This aligns with our strategy over the years aimed at ensuring the company performs well regardless of conditions in the global industrial market. If you look back over the past 18 months, this is why the order downturn has been less severe and why we've been able to achieve positive organic growth, even in the face of negative orders in the industrial sector. This reflects our efforts to shape the portfolio.

Jennifer Parmentier, CEO

Yes, the portfolio is more resilient, and the teams across all of these businesses are doing a great job using the tools to expand margins. That's why, with 1.5% organic growth, we can expand margins by 170 basis points. As I mentioned before, we're really proud of the whole team.

Mig Dobre, Analyst

Thank you for taking the question. Good morning. I also sort of want to talk a little bit about industrial and orders there. I'm curious when you kind of destocking business and you look at the last four or five quarters, how you think about the OE versus distributor demand. It seems to me that in this down cycle, we had lower distributor demand occur maybe earlier than what's been going on with OEMs. The destocking process started earlier for distributors and we're just maybe now really starting to see the OEM production cuts. I'm wondering if that's sort of your experience as well. And if that somehow implies that while the down cycle is shallower, it could actually be longer than the traditional six quarters that you've seen in the past where things were more synchronized.

Jennifer Parmentier, CEO

I would say that I do think we saw destocking start earlier for distribution. But as we've seen with many of our large OEs, they talked about higher dealer inventory, right? And so that's kind of a sense of their own destocking when the dealer inventories are high, they're not placing as big orders as they had in the past. But I would tell you, though, there's nobody canceling orders or pushing them, pushing them out to any great extent. So I don't feel like this is going to last longer. We're not seeing any signs that are telling us that right now. Just the early Q4 signs here that it looks different than it has.

Mig Dobre, Analyst

Okay. And on capital deployment and maybe you'll comment on this at your upcoming Investor Day, but I'm sort of curious as you're evaluating M&A if there is something to be said about expanding the portfolio outside of the core areas that you've been targeting over the past couple of years. So more expansive strategy or if sort of the lanes that you've been active in are still the areas that you're looking to build. Thanks.

Jennifer Parmentier, CEO

Right now, I would tell you that we're not looking to expand outside of the technologies we have. As I've commented a couple of times externally, we really like this set of technologies. They have a connectivity to them, and we think they're the right ones for our portfolio.

Jeffrey Sprague, Analyst

Hi. Thank you. Good morning, everyone. I guess you can tell we're all like hyper focused on orders, right, Jenny?

Jennifer Parmentier, CEO

Thank you. Good morning, everyone. I guess you can tell we're all really focused on orders, right, Jenny?

Jeffrey Sprague, Analyst

Yes. And I may be even a little more hyper focused given the way I'm going to phrase my question, it rhythms a little bit with what a couple of other people brought up. But it is interesting when you look at North America, right? Sales growth has outpaced order growth, I think, for seven quarters until this quarter, and it looks like we've kind of recoupled. You mentioned some backlog, but should we be thinking really that sales and orders are going to be much more tightly correlated here as we try to glean where the upturn might be.

Jennifer Parmentier, CEO

No, I don't think so, Jeff. I don't think we should be thinking that way. I think that, again, if I go back to the strength of the backlog and the change in the portfolio. It's different than it was in the past. It's a different company than it was 10 years ago, five years ago, right? And we really believe that once this turns, we're going to grow differently because of that.

Todd Leombruno, CFO

Yes. Jeff, I would add, obviously, every one of these things we go through is a little bit different. We did come off two years of double-digit organic growth, right? So there was a significant amount of demand that we had to deliver through those industrial businesses. I think if you've seen that inventory levels moderate throughout the year, we've kind of reduced that thing. But as Jenny said, the backlog really pretty strong. It's at near all-time levels. We continue to pressure test that to make sure that it's real and legitimate. I think it's just part of having a longer cycle mix within that portfolio.

Jeffrey Sprague, Analyst

Great. And if you have the numbers handy, can you just tick through the kind of the four aero buckets we got here, commercial aftermarket up 25, but just OE and then military aftermarket and OE, what those numbers were in the quarter?

Jennifer Parmentier, CEO

For Q3, Jeff, you're asking?

Jeffrey Sprague, Analyst

Yes, for Q3.

Jennifer Parmentier, CEO

Yes. Commercial OEM was up 18%, and that was mainly based on strong narrow wide-body growth. MRO up 26%. And same thing. Their traffic recovery, things we've talked about, military OEM 7% and MRO 14%.

Jeffrey Sprague, Analyst

Thanks a lot. I’ll leave it there.

Joe O'Dea, Analyst

Hi. Good morning. I apologize if this seems repetitive, but I want to follow the common theme. I'm looking for more insight regarding the encouraging remarks about North America throughout the cycle and demand. As we consider the implications for the fourth quarter, it appears there's a larger sequential revenue decline from the third to the fourth quarter compared to what we've observed in previous years, excluding COVID. Could you clarify your expectations for the sequential trend? The orders seemed stable from the third to the fourth quarter, and I recall you mentioned an increase in dollars from the second to the third quarter. What might be causing this somewhat softer sequential trend, given that it seems like other aspects are either holding steady or even improving?

Jennifer Parmentier, CEO

Yes. As I mentioned earlier, the guidance is based on Q3 order rates, and you are correct, they remained at negative four. However, if you examine the sales dollars, Q4 figures align with Q3. This is the reason for our indication of minus four compared to the approximately minus one we had previously.

Joe O'Dea, Analyst

Got it. Okay. That's helpful. Just a question regarding pricing sensitivity to better understand customer experience. When a customer walks into a distributor, do they usually know exactly what they want to buy and the Parker product, or are they comparing prices and shopping between Parker and competitors? I’m trying to gauge the extent of price shopping versus predetermined purchases and brand loyalty.

Jennifer Parmentier, CEO

Yes. First of all, I think the Parker brand is very strong and people are looking for Parker products when they walk into a Parker distributor. And they need a part and they need it now, right? So it's not what I would characterize as price shopping, it's availability. And then having that person standing behind the counter who knows how to apply that part, how to help them get the right part if they don't know exactly what they need or they don't know exactly what replacement is an order. So they're walking in to get help and they're walking in to get a product. And that really is what is so special about the partnership that we have with our distributors. They're just an extension of our engineering team, and they provide a great value and service to many customers.

Joe O'Dea, Analyst

That's helpful. Thank you.

Joe Giordano, Analyst

Hey guys. Thanks for taking my questions.

Todd Leombruno, CFO

Hey Joe.

Jennifer Parmentier, CEO

Hi Joe.

Joe Giordano, Analyst

On the aerospace side, considering the current situation, I understand that your aerospace portfolio is quite extensive. However, focusing specifically on the OEM commercial segment and taking into account the challenges Boeing is facing with their reduced build rates, it appears they haven't instructed their suppliers to decrease shipments, despite supply chain complexities. What are your thoughts on when we might start to see risks in this situation, particularly if build rates are declining while shipments remain consistent and inventories start to accumulate?

Jennifer Parmentier, CEO

No, we maintain close communication with all airframe manufacturers, and our aerospace team regularly interacts with the Boeing team. What we're observing aligns with their recent discussions about production in the 30s. They have indicated that a rate increase will not occur at this time. However, we are dedicated to ensuring that we keep pace with them and continue to supply products to assist them in achieving their goals. Currently, we are not seeing any indications of a slowdown.

Todd Leombruno, CFO

Joe, too, we talked about it, but if you think about that mix, it's nearly 50-50 aftermarket versus OEM in the aerospace business. So that's helpful as well.

Joe Giordano, Analyst

Yes, for sure. Just on price, you mentioned you're back to like normalized situation here. I guess inflation is kind of tough to figure, you have some things going up like copper, and some things are going down. If we get into a situation where inflation is more consistently rising than falling again, how do you think about your customers either willingness or ability to accept price to the same extent that they did last cycle?

Jennifer Parmentier, CEO

Well, I think we've talked about how our pricing team, our pricing muscle is strong. And one of the things that I think we even got stronger during these last couple of years is really looking at the total cost of inflation. So it's not just material, right? It's all those things that just hit extraordinary levels all at once. And while those aren't easy conversations, you know their conversations that we had and if we would need to have them again, we would. They're based on facts, they're based on data. And we would cross that bridge when we come to it. But as I mentioned earlier, we're back in more of a normal pricing environment, but I believe it's sticky because inflation is still out there.

Joe Giordano, Analyst

Thank you guys.

Brett Linzey, Analyst

Hi. Good morning all.

Todd Leombruno, CFO

Good morning, Brett.

Jennifer Parmentier, CEO

Good morning.

Brett Linzey, Analyst

Yes. First question is on business realignment charges. So it looks like the 2024 expectation dropped to $57 million from $70 million, anything to glean there? Is it just timing on projects? Or is there some costs to achieve perhaps moving lower, any thoughts there?

Todd Leombruno, CFO

Yes. It's just a minor tweak. I would call it more timing than anything, maybe getting some of those done at a little bit of a lower cost as well. So we just kind of updated it based on the best that we had from the team.

Brett Linzey, Analyst

Okay. Great. And then just on pricing, I know you don't disclose actual price, but was it positive in both those industrial segments? And I'm just curious on any competitive behavior on price and some of the more challenged regions like Europe or Asia?

Jennifer Parmentier, CEO

No, you're right. We don't comment on the exact price. And as I mentioned earlier, we went out early and often. So we've protected our margin to make sure that it maintains neutral going through everything that's gone on in the last couple of years, and that's where we stand today with price.

Todd Leombruno, CFO

Yes. I mean if you're asking about rolling price back, we've not done that, right? Jenny mentioned that we're still in an inflationary environment and a lot of those costs that went up, have not gone back down. So we feel very much tied to the price. We don't do it randomly. We do it when we need to and that's kind of where our process has been. Hi Rob. I think we've got time for one more question here if we've got somebody.

Operator, Operator

Sure. Our next question will be from line of Nigel Coe with Wolfe Research.

Nigel Coe, Analyst

Thanks. Yes. I am here. Can you hear me?

Todd Leombruno, CFO

Good to hear you.

Nigel Coe, Analyst

Yes. Yes. Good. Thanks for squeezing me in. Okay. So coming back to April, let's look at it again. Maybe could you just hone in the North America, where you're seeing the improving trends. And the spirit of the question is that it feels like in your off-highway and even in the on-highway customers, things aren't necessarily getting better. So I'd be curious on which pockets of customer groups are you seeing that improvement? And then if we do move to Europe, are we seeing a similar degree of improvement over there? Or do we still see pretty negative trends?

Jennifer Parmentier, CEO

No, I would say that at this point, I see things improving primarily in April. I don't want to delve into market specifics, but I can say that the positive signs are mainly in North America. While there are some positive aspects in Europe and Asia, my comments about April focus on North America, where it seems this destocking phase might be concluding, and we could see a positive shift here.

Nigel Coe, Analyst

Yes, it's got to come down at some point, I suppose. And then switching over to margin and SG&A productivity is really impressive. I think underlying SG&A came in at 13.5% this quarter. So I think for the full year, we're sort of in that 14% zone. Is that the right range going forward? Do you think you can maintain sort of 15% SG&A to sales? That's the question, really. Is there anything sort of like discretionary you're controlling at this point? Or is this a good range going forward?

Todd Leombruno, CFO

Nigel thanks for recognizing that. We have always been proud of ourselves on being frugal when it comes to SG&A expenses. Quite honestly, we think we can do better. I wouldn't say that there's anything that we've been holding off on, right? I mean the overall level of the business remains extremely high, right? The sales levels are at record levels. But we hold our team to constantly assessing and making sure we're making the best investments in the business. So we think we can do better when it comes to SG&A, there's no doubt. Thanks so much. I think that's all we have time for. So I want to thank everyone for joining us today. As usual, Jeff Miller, our VP of Investor Relations; and Yan Huo, our Director of Investor Relations, will be available, if anyone needs any follow-ups. As always, we appreciate your time, your attention and your interest. So this concludes our FY 2024 Q3 earnings release webcast, and I wish everyone a great day. Thank you.

Operator, Operator

Thank you. Today's conference and webcast has concluded. You may now disconnect your lines at this time and log off your computers. Thank you for your participation, and have a wonderful day.