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Rob
Operator
Greetings. Welcome to Parker Hanif Incorporation's Fiscal 2024 Third Quarter Earnings Conference Call and Webcast. At this time all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. Please note that today's conference is being recorded. At this time I'll now turn the conference over to Todd Liam Bruno, Chief Financial Officer. Mr. Liam Bruno, you may now begin your presentation.
Todd Liam Bruno
Chief Financial Officer
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 Liam Bruno, 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 two, 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 investor 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 now with some color on the financial results of the quarter and I will provide some assumptions to our increase in the fiscal year 24 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 three, and Jenny, I'll hand it over to you.
Jenny Parmentier
Chairman and Chief Executive Officer
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 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 wind 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 wind 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, engaged people, customer experience, profitable growth, and financial performance. Engaged 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 wind 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 wind strategy in action at our upcoming Investor Day on May 16th. Next slide, please. Embedded in the wind 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. 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 FY19 through our FY24 guide. 7% revenue CAGR from $14.3 billion to our FY24 guide of $19.8 billion. 600 basis points increase in adjusted operating margin from 18.6% to our guide of 24.6%. 14% adjusted EPS CAGR from $13.10 to our FY24 guide of $24.75, and two times the amount of free cash flow dollars, $1.5 billion in fiscal year 19 to our FY24 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 Liam Bruno
Chief Financial Officer
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 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% of sales, and currency did shift to a slight headwind this quarter. Not terrible, it's 0.6, but it's the first time this year 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 a ROS of 16.8%. And adjusted earnings per share were $6.51. That's a 58 cent 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 is segment operating income dollars increasing. We increased by $76 million in the quarter. That accounted for 45 cents 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 system 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 mega transaction. Tax was favorable, $0.06 versus prior year. Simply, that's just a few discreets 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 lower. 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 pay down efforts are really reducing our interest costs. 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. Ordered dollars did remain strong against a very tough comp in the prior year. Ordered 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 four 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 off-highway transportation and in-plant industrial markets. Asia pack 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 volumes, 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. Border rates in aerospace continue to be very strong at plus 15. So just great performance across all of our business. 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, $2.1 billion of cash flow from operations. That's 14.6% to sales. That is a 20% increase over prior year. And I said it already, but it is a record. When you look at pre-cash flow, we did $1.9 billion. That's 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. You know, since we closed the mega transaction, you know, 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 two 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. 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's actual results. We expect that to be 22% now. Full year as reported EPS is increased to $20.90, and full year adjusted EPS is increased to $24.75. Both of those are at the midpoint, and there's a range narrowed to plus or minus 10 cents 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. Now, I'm going to hand it back to you, Jenny, and I ask everyone to turn to slide 14.
Jenny Parmentier
Chairman and Chief Executive Officer
Thank you, Todd. A few key messages to close us out as we near the end of our fiscal year 24. Our high-performance culture builds a better and more resilient Parker. We will continue to drive operational excellence through the wind strategy. As mentioned a couple times already, aerospace demand remains robust, and our transform portfolio drives growth. 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 Liam Bruno, 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 Liam Bruno
Chief Financial Officer
Rob, we're ready to open the lines for Q&A, and we'll take whoever you got first in the queue.
Rob
Operator
Thank you. Our first questioner in the queue today is Scott Davis with Mellie's Research. Please proceed with your question.
Scott Davis
Analyst at Mellie's Research
Hey, good morning, Jenny and Todd and Jeff. Good morning, Scott. Good morning. I look forward to seeing you in a couple weeks. I've got a bunch of questions, but I'll try to keep it brief and pass it on. Just as it relates to M&A, just mark the market a little bit on what you guys are thinking on your pipeline, your comfort level in stepping forward right now, kind of what good looks like, and are we looking at more bolt-on-ish type stuff at this point, or are there other kind of mega-type deals that are out there?
Jenny Parmentier
Chairman and Chief Executive Officer
often say, Scott, we really like MEGIT and we wish there were a lot of MEGIT-like deals out there for us. You know, listen, we, you know, first and foremost, as Todd was talking about, you know, we're committed to paying this debt down, right? We're going, 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, you know, we're always working on that pipeline, building the relationships. The 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. We continue to work that pipeline. You know, we'll have more to talk about that in the future.
Scott Davis
Analyst at Mellie's Research
Okay, I look forward to that. And a smaller issue, but when you think about commercial aftermarket in Aero being up 26%, those are big numbers. And help us understand, you know, at the customer level, are they taking on more inventory? How do they generally manage their inventory? Or how do you guys at least manage? 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.
Jenny Parmentier
Chairman and Chief Executive Officer
Yeah, 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 orderings. You know, as we go through this balance of air traffic returning to pre-COVID levels, you know, different manufacturers ramping up to higher rates, you know, it's a balance. And MRO, I believe, will continue to be strong. So, you know, for the foreseeable future, we see that as strong.
Todd Liam Bruno
Chief Financial Officer
Hey, Scott, one thing I would say, you probably know this, Scott, but, you know, with MEGIT specifically in the corridor, 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
Analyst at Mellie's Research
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. Thanks, Scott.
Rob
Operator
Our next question is from the line of Andrew Obin with Bank of America. Please receive your questions.
Andrew Obin
Analyst at Bank of America
Yes, good morning. Good morning, Andrew. Just to follow up on aerospace and aero margins, you know, you guys have really emphasized one-time mix over the past, one-time mix benefits over the past couple of quarters, I guess highest bear impact. But, you know, we're up sequentially from 1Q, 2Q. What's going so well?
Jenny Parmentier
Chairman and Chief Executive Officer
Well, as we were just talking about, you know, the mix, Q3 was actually, aftermarket mix, was actually 48%. Year-to-date, we're at 47%. So, you know, the combination of what we had in our portfolio and adding to what we got with Megit, it's been a big increase. And it is excellent growth from our breaking business and 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
Analyst at Bank of America
Gotcha. And just a question on borders in North America. I think you highlighted softness in off-highway and transportation. Maybe you could just walk us through what are you seeing on a 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? Thank you.
Jenny Parmentier
Chairman and Chief Executive Officer
Yeah. 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. In plants, industrial equipment, low single-digit negative. More negative in Europe, less in North America. Transportation, 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, you know, are equally negative, Andrew. Again, Europe a little more negative. When we take a look at HVAC and refrigeration, it is still double-digit negative, but it's some pretty tough cops to prior. It was, you know... 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, you know, where we're at today, industrial North America orders have been negative for five quarters now, and we're still, you know, very proud of this, still guiding to 1.5% organic growth for the company. And historically, you would see that orders go negative for an average of six quarters. And old portfolio, total Parker went negative the same quarter as industrial North America. So 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
Analyst at Bank of America
Well, I'll take that. Thanks so much.
Rob
Operator
Thank you. Our next question is from the line of David Brasso with Evercore ISI. Please receive your questions.
David Brasso
Analyst at Evercore ISI
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'd like to take us through that cadence? And is there any sort of visibility on when those declines start to lessen?
Jenny Parmentier
Chairman and Chief Executive Officer
Thank you, David. So, you know, obviously orders went from minus five in Q2 in the international to minus eight So that is definitely what is reflected in the guide. Destocking continued, as I was mentioning earlier, softness and 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 really what has driven us to take that down in Q4, and slightly for the year. We had it at a negative two for the year, and now we have it at a negative two and a half. So, you know, we're not seeing the same thing that we're seeing in North America at the start of this quarter. So, you know, not signaling any turn there yet, but we're keeping a close eye on it.
David Brasso
Analyst at Evercore ISI
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 quarters. Maybe sort of if you kind of address that thought, if you could.
Jenny Parmentier
Chairman and Chief Executive Officer
Well, so like I said, usually North America, you know, historically the average has been six quarters, and then we see it turn. Right? And, you know, international has just – it's been choppy. It's been really choppy over the last several quarters. So it's hard to call, you know, 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 Brasso
Analyst at Evercore ISI
And then lastly, price-cost. Can you give us an update on how that's trending? And I'll hop off. Thank you.
Jenny Parmentier
Chairman and Chief Executive Officer
Yeah. So we're, you know, we're back to what we would call – a normal pricing environment with 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 teams have done a good job at maintaining our margin neutrality. So we're back to more of a normal environment right now.
Scott Davis
Analyst at Mellie's Research
Thank you.
Jenny Parmentier
Chairman and Chief Executive Officer
Thanks, David. Thanks, David.
Rob
Operator
Our next question is from the line of Joe Ritchie with Goldman Sachs. Please, Joe, see you with your questions.
Joe Ritchie
Analyst at Goldman Sachs
Hi. Good morning. Good morning. And so, Gary, so we're getting lots of questions, obviously, on the turn in North America. And I'm just curious, you know, so really helpful to hear that April's a little bit better and that maybe we were towards the end of destocking. Just curious, like, how do you think that this you know, potential inflection actually will work. And what I'm asking specifically is, you know, with your distributors, you know, what are the conversations like? Do you feel like, you know, things could be low and slow just given we've been, we've seen this be stocking now for several quarters? Just any comment around that would be really helpful.
Jenny Parmentier
Chairman and Chief Executive Officer
Well, I would tell you that the distributors have been, you know, positive for a couple quarters now, right? You know, they've been sharing with us how they've been able to participate in, you know, some nice work with some reinvestment in some factories, you know, maybe some early days on some of these mega CapEx projects. But, you know, just really a positive sentiment. I wouldn't tell you at this point anybody's 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 at Goldman Sachs
Yeah, no, look, that's great to hear. I guess, you know, 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, you know, volumes have been negative. I'm just curious, like, if it's slower to pick up in the international business, how do you feel about, you know, the margin trajectory of that business from here?
Jenny Parmentier
Chairman and Chief Executive Officer
I have a lot of confidence in these teams. I mean, in this, you know, 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, they're practitioners of the wind 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 at Goldman Sachs
Awesome. Thanks, Jenny. Look forward to seeing you in a couple weeks.
Jenny Parmentier
Chairman and Chief Executive Officer
Same here.
Rob
Operator
Thank you. Our next question is from the line of Jamie Cook with Truist Securities. Please proceed with your question.
Jamie Cook
Analyst at Truist Securities
Hi, good morning and congratulations on a nice quarter. I guess, you know, Jenny, if you look at your implied margins for this year, the 24.6% were sort of already at, you know, 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 you know, igniting organic growth, you know, for Parker Hannafin 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, you know, most industrial companies having a, you know, 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, you know, just back to the M&A question again. I mean, obviously, Meg, it's been a big positive for you guys. You know, longer cycle business has given you guys the ability to grow organically as industrial is weaker. Do we need sort of more long, late cycle aerospace businesses, do you think, to have a more balanced portfolio? I'll get back to you after that.
Jenny Parmentier
Chairman and Chief Executive Officer
Thanks, Jamie. First of all, I would say we're really proud of our teams in this margin expansion that we have achieved. 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. 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 acquisitions that we've done and is one of the reasons that I believe that we've been so successful with them. 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, you know, most of our customers buying four or more of these at a time.
Rob
Operator
Our next question is from the line of Nathan Jones with Stiefel. Pleasure to see you with your questions. Good morning, everyone.
Nathan Jones
Analyst at Stiefel
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 a a shallow or upturn or just kind of your expectations on, on what the recovery looks like when it comes.
Jenny Parmentier
Chairman and Chief Executive Officer
Yeah, I think, you know, I think it's been, um, to use your terms, you know, we're shallow than the past, obviously because we've changed the portfolio. We do have longer lead time, uh, business in the industrial part of our business today. We have higher aftermarket with Clark core. We have longer lead time business with Lord. And, you know, as a reminder, we have some aerospace business that sits in the industrial segment. where it belongs with some of those technologies in those groups. So I think the portfolio is a 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, you know, some spikes, but just, you know, really wanted to share with everybody today that, you know, the start of the quarter looks better and we might be seeing, finally seeing an end to this lingering de-stacking.
Nathan Jones
Analyst at Stiefel
That would be good to see. A couple of questions on margins or a question on margins. You know, obviously North America margins up 120 basis points on down revenue and and international margins up 10 points on a 6% decline in revenue, a very strong margin performance. As we envision the return to growth and the end to this, you know, destocking and down cycle here, what kind of incremental margins should we be expecting as you see those industrial businesses return to growth?
Jenny Parmentier
Chairman and Chief Executive Officer
I think you're going to see the normal incrementals that you've seen from us. You know, 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
Analyst at Stiefel
Okay. Thanks very much for taking my questions.
Jenny Parmentier
Chairman and Chief Executive Officer
Thank you.
Rob
Operator
Our next questions are from the line of Julian Mitchell with Barclays. Let's see your questions.
Julian Mitchell
Analyst at Barclays
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, you know, 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 Liam Bruno
Chief Financial Officer
Yeah, 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 Q3. So no, there's no long lingering expectation for negative growth in North America.
Julian Mitchell
Analyst at Barclays
Understood. Thank you. And then just my second question, trying to look at revenue in another way perhaps in industrial would be on the sort of technology platforms basis. We saw around high single-digit declines in motion and flow and process control in the quarter, and sort of flattish in filtration and engineered materials. 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 Liam Bruno
Chief Financial Officer
Julian, we do. Thanks for pointing that out. We do believe that those businesses could and should grow differently than the motion systems and the flow and process platform. You know, those businesses, motion systems and flow and process, those are the most levered to the distribution network, highest percentage of distribution sales. You've seen the stocking continue over the last couple quarters in that area. We do think that that's kind of nearing an end. Jenny already mentioned it, but filtration, heavy aftermarket, engineering materials, a little bit more longer cycle business, both in automotive end markets and in 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. And I think if you look back over the last 18 months, that's why the order downturn has been less shallow. That's why we've been able to post organic growth as a positive, even in industrial, in light of some negative orders. So I think it's part of our shaping of the portfolio.
Jenny Parmentier
Chairman and Chief Executive Officer
Yeah, I mean, the portfolio is more resilient. And the teams across all these businesses are doing a great job using the tools to expand margins. It's the reason why with 1.5% organic growth, we can expand margins 170 basis points. I've said before, we're really proud of the whole team.
Julian Mitchell
Analyst at Barclays
That's great. Thank you.
Todd Liam Bruno
Chief Financial Officer
Thanks, Julian.
Rob
Operator
Our next questions are from the line of Mig Dobre with Baird. Please receive your questions.
Mig Dobre
Analyst at Baird
Thank you for taking the questions. Good morning. I also sort of want to talk a little bit about industrial and the orders there. I'm curious, when you kind of examine your 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.
Jenny Parmentier
Chairman and Chief Executive Officer
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've talked about higher dealer inventories. 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 out to any great extent. So I don't. 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.
Todd Liam Bruno
Chief Financial Officer
You know, Mig, that mix really still remains the same, that 50-50 mix that we talk about in the industrial segment. We think there's a nice balance there.
Mig Dobre
Analyst at Baird
Okay. You know, 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 years, so more expansive strategy, or if, you know, sort of the lanes that you've been active in are still the areas that you're looking to build. Thanks.
Jenny Parmentier
Chairman and Chief Executive Officer
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 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.
Mig Dobre
Analyst at Baird
All right, appreciate it. Thanks, Vic.
Rob
Operator
Our next questions are from the line of Jeffrey Sprague with Vertical Research Partners. Please receive your questions.
Jeffrey Sprague
Analyst at Vertical Research Partners
Hey, thank you. Good morning, everyone. I guess you can tell we're all like hyper-focused on orders, right, Jenny? We are too.
Yan Hua
Director of Investor Relations
We are too, Jeff. You're not alone.
Jeffrey Sprague
Analyst at Vertical Research Partners
You're not alone. Yeah. And I may be even a little more hyper-focused given the way I'm going to phrase my question. It rhymes a little bit with what a couple other people brought up, but You know, it is interesting when you look at North America, right? Sales growth is outpaced order growth, I think, for, you know, seven quarters until this quarter. And it looks like we've kind of recoupled. You know, you mentioned some backlog, but should we be thinking really that, you know, sales and orders are going to be much more tightly correlated here as we, you know, try to glean where the upturn might be?
Jenny Parmentier
Chairman and Chief Executive Officer
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, you know, we really believe that, you know, once this turns, we're going to grow differently because of that.
Todd Liam Bruno
Chief Financial Officer
Yeah, Jeff, I would add, you know, 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 – reduce that thing. But as Jenny said, the backlog really remains 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 at Vertical Research Partners
Great. And if you have the numbers handy, can you just tick through the Kind of the four arrow buckets, we got commercial aftermarket up 25, but just OE and then military aftermarket and OE, what those numbers were in the quarter?
Jenny Parmentier
Chairman and Chief Executive Officer
For Q3, Jeff, you're asking?
Jeffrey Sprague
Analyst at Vertical Research Partners
Yeah, for Q3.
Jenny Parmentier
Chairman and Chief Executive Officer
Yeah, commercial OEM was up 18%, and that was mainly based on strong, narrow, and wide body growth. MRO up 26%. Same thing, air traffic recovery, things we've talked about. Military OEM, 7%, and MRO, 14%. Thanks a lot.
Jeffrey Sprague
Analyst at Vertical Research Partners
I'll leave it there.
Todd Liam Bruno
Chief Financial Officer
Jeff, I would just remind everyone that's all organic at this point, too. Yes. Thank you, Jeff. All organic.
Rob
Operator
Thank you. Our next questions are from the line of Joe O'Day with Wells Fargo. Please proceed with your questions.
Joe O'Day
Analyst at Wells Fargo
Hi. Good morning. Sorry to bore you, but I'll stick with the common theme. And just wanted to get a little color around, I mean, certainly encouraging commentary on kind of North America sort of cycle and demand. I guess as it relates to what's implied for fourth quarter, I mean, it looks like a larger kind of sequential revenue decline from 3Q to 4Q than, you know, what we've seen over the last number of years outside of COVID. And so, you know, just kind of sequentially, you know, what you're anticipating there, you know, the orders seemed like they were stable from 3Q to 4Q, I think you said, or from 2Q to 3Q, I think you said dollars up. And so just what's kind of driving maybe a little bit softer sequential trend there, because it sounds like otherwise things are holding and even improving.
Jenny Parmentier
Chairman and Chief Executive Officer
Yeah, so as I mentioned earlier, the guide is based off of Q3 order rates, and you are right, they did stay at negative four. But if you look at the sales dollars, Q4 dollars are in line with Q3, so that's why we're signaling that minus four versus the approximately minus one that we had previously.
Joe O'Day
Analyst at Wells Fargo
Got it. Okay, that's helpful. And then just A question in terms of pricing sensitivity and just to kind of understand customer experience. When a customer walks into a distributor, are they typically walking in knowing exactly what they want to buy in a Parker product, or are they kind of looking at prices and shopping between Parker and competitors, just trying to understand how much price shopping goes on versus how much is kind of predetermined and brand loyal?
Jenny Parmentier
Chairman and Chief Executive Officer
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. They need a part and they need it now. 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 in order. 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.
Rob
Operator
That's helpful. Thank you. Thank you. Our next question is from the line of Joe Giordano with TD Cowan. Please proceed with your question.
Joe Giordano
Analyst at TD Cowan
Hey guys, thanks for taking my questions. Um, Hey, um, on, on the aerospace side. So, you know, given all that's happening, I know you're in your aerospace portfolio is very broad, but if we just kind of narrow into like OEM commercial, like given what's going on with Boeing and the reduction in rates there, like it doesn't sound like they've told any of their suppliers anywhere to slow down what they're shipping to them given supply chains. But like, is there. At what point do you see risk to that dynamic where build rates are down but everyone's still shipping the same and inventories must be building over there?
Jenny Parmentier
Chairman and Chief Executive Officer
You know, we stay in close contact with all the airframe manufacturers, and our aerospace team, you know, talks to the Boeing team on a regular basis. So, you know, what we're seeing is consistent with what they've talked about most recently, production in the 30s. You know, they have signaled that the rate increase isn't going to happen right now, but, you know, we are committed to make sure that we are at pace with them and that we continue to supply product to them to help them reach their goals. So we're not seeing any signs of, you know, that slowing down right now.
Todd Liam Bruno
Chief Financial Officer
You know, Joe, too, we talked about it, but, you know, it's nearly 50-50 aftermarket versus OEM in the aerospace business. So, you know, that's helpful as well.
Joe Giordano
Analyst at TD Cowan
Yeah, 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, some things going down. If we get into a situation where inflation is more consistently rising than falling again, how do you think about your customer's either willingness or ability to accept price to the same extent that they did last cycle?
Jenny Parmentier
Chairman and Chief Executive Officer
Well, you know, 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 of those things that just hit extraordinary levels all at once. And while those aren't easy conversations, they're 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 at TD Cowan
Thank you, guys. Thank you.
Rob
Operator
Our next question is from the line of Brett Lindsey with Mizuho. Please receive your questions.
Brett Lindsey
Analyst at Mizuho
Hi. Good morning, all. Good morning, Brett. Good morning. Yeah, first question is on business realignment charges. So it looks like the 24 expectation dropped to $57 million from 70. Anything to glean there? Is it just timing on projects, or is there some cost to achieve perhaps moving lower? Any thoughts there?
Todd Liam Bruno
Chief Financial Officer
Yeah, it's just a minor tweak. I would call it more timing than anything. Maybe getting some of those done is a little bit of a lower cost as well. So we just kind of updated it based on the best look we had from the team.
Brett Lindsey
Analyst at Mizuho
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 in some of the more challenged regions like Europe or Asia. Yeah.
Jenny Parmentier
Chairman and Chief Executive Officer
No, you're right. We don't comment on the exact price. And as I mentioned earlier, you know, 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 the last couple years. And that's where we stand today with price.
Todd Liam Bruno
Chief Financial Officer
Yeah, I mean, if you're asking about rolling price back, we've not done that, right? Jenny mentioned it. We're still... in a 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 what our process has been.
Brett Lindsey
Analyst at Mizuho
Okay, great. Congrats on the performance.
Todd Liam Bruno
Chief Financial Officer
Thanks so much. Hey, Rob, I think we've got time for one more. We've got time for one more question here if we've got somebody.
Rob
Operator
Sure, sure. Our next question will be from Nigel Coe with Wolf Research.
Todd Liam Bruno
Chief Financial Officer
Nigel, are you there?
Nigel Coe
Analyst at Wolf Research
Thanks. Yeah, I'm here. Can you hear me?
Todd Liam Bruno
Chief Financial Officer
Good to hear you.
Nigel Coe
Analyst at Wolf Research
Yeah? Yeah, good. Thanks. Excuse me. Okay, so coming back to April. Let's talk about April again. Maybe could you just hone in in 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 zoom over to Europe, are we seeing a similar degree of improvement over there, or do we still see pretty negative trends?
Jenny Parmentier
Chairman and Chief Executive Officer
I would say, Nigel, at this point, I'm just... commenting on how I see it, you know, better in April. You know, I don't really want to go into any detail in markets or specifics, but I would say that, you know, where we're seeing it is mainly North America. It's not to say that there's nothing positive in Europe or Asia, but the comments about April are mainly North America, where we're seeing, you know, quite, you know, might be that this destocking is coming to an end and that we'll see a turn here.
Nigel Coe
Analyst at Wolf Research
Yeah, it's got to come to that 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 sub-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 Liam Bruno
Chief Financial Officer
You know, Nigel, thanks for recognizing that. You know, we have always prided 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 record levels. But we hold our team to constantly assessing and making sure that we're making the best investments in the business. So we think we can do better when it comes to S&J, there's no doubt.
Nigel Coe
Analyst at Wolf Research
Great. Okay, thanks.
Todd Liam Bruno
Chief Financial Officer
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 Hua, 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 FY24Q3 earnings release webcast, and I wish everyone a great day. Thank you.
Rob
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.
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