Ladies and gentlemen, thank you for standing by, and welcome to the Parker Hannifin Corporation Fiscal 2021 First Quarter Earnings Conference Call and Webcast. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. Please be advised that today's conference maybe recorded. I would now like to hand the conference over to your speaker today, Kathy Seaver, Chief Financial Officer.
Please go ahead, ma'am.
Thank you, Sonia. Good morning, everyone. Welcome to our teleconference this morning. Joining me today are Chairman and Chief Executive Officer, Tom Williams and President and Chief Operating Officer, Lee Banks. Today's presentation slides, together with the audio webcast replay, will be accessible on the company's investor information website atphstock.com for a year following today's call.
On Slide number 2, you'll find the company's Safe Harbor disclosure statement addressing forward looking statements as well as non GAAP financial measures. Reconciliations for any reference to non GAAP financial measures are included in this morning's materials and are also posted on Parker's website at phstock.com. Today's agenda appears on Slide 3. We'll begin with our Chairman and Chief Executive Officer, Tom Williams, providing a few comments and some highlights from the Q1. Following Tom's comments, I'll provide a more detailed review of our Q1 performance together with the revised guidance for the full year fiscal 2021.
Tom will then provide a few summary comments, and we'll open the call for a question and answer session. We plan to end the call at the top of the hour. Please refer now to Slide 4, and Tom will get us started.
Thank you, Kathy, and good morning, everybody. Thanks for your participation today. I hope that you, your family and your friends are all safe and healthy. So before I go through the quarter results, I wanted to highlight Slide 4, which is really our strategic positioning slide on one page. It's how we create value for our customers, our shareholders and our people.
And I'm going to highlight some of these through the course of my remarks and the opening slides here. But really the output of all these differentiators is really that bullet. It enables us to be great generators and deploys the cash over the cycle versus a proven strength of ours has only gotten better over the years. This list is what sets us apart, what is what enables us to be a top quartile company, hopefully a company that you'll want to be a shareholder of. So go to Slide 5.
This is one of those competitive differentiators, which is the breadth of our technologies. This is a portfolio of 8 motion control technologies that are all interconnected and complementary to each other. It's how we bring value to customers. It's how we solve problems for our customers. Our customers see the value in it too because 60% of our revenue comes from customers who buy from 4 or more of these technologies.
So if you go to Slide 6, we'll talk about the quarter. It was an outstanding quarter, great results in the pace of unprecedented times and a big thank you goes out to our entire global team for all their hard work, dedication and the great results here. So starting with the first bullet, something that we take great pride in, we are a top quartile safety performing company. In addition to that, we continue to reduce our corporal injuries and incidents by 31%. Sales declined 3%, organic decline was 13% year over year, but that showed nice improvement versus the prior quarter, which was a 21% decline.
So we are pleased to see the progress there. EBITDA margin was 19.5% as reported or 20.1% adjusted. That makes 2 quarters in a row that we've been greater than 20 percent EBITDA margins we're excited about and it was a 100 basis point improvement versus the prior year. We did a great job on debt reduction. We paid down debt in the quarter of $557,000,000 and our cash flow from operations was just an outstanding level at 22.8 percent.
So if I call your attention to a little table at the bottom of the page and go to that last row, the total segment margin adjusted row, see we came in at 19.9% for the quarter. That was 110 basis point improvement versus the prior year. Our decrementals were just terrific. If you look at our decrementals on an adjusted basis with acquisitions, they were favorable, meaning that we had less sales and we had more income versus the prior year. On a legacy basis, so Parker without acquisitions again on an adjusted basis was a 14% decremental, This creates results by the operating team.
So if you go to Slide 7, the deleveraging progress has been just dynamite. You can see we paid down $2,000,000,000 worth of debt in the last 11 months. We've now paid off 37% of the LORD and Exxio transaction debt. And you can see the multiples, whether it's on a gross basis or on a net basis, we continue to make nice progress reducing those leverage multiples. So very proud of that.
Move to Slide 8. These outstanding results are really underpinned by a couple of First is the prior period restructuring that we've done, the Win Strategy and the performance enhancements that it's driving and the speed and agility of our pandemic response. And just for clarification, when you look at these numbers, these are cost out actions that represent the savings that are recognized in the year as a result of our pandemic response. The incremental amount is footnoted at the bottom of this page. That was $210,000,000 year over year incremental.
But the big thing that I want to make a point on this page is the shift to more permanent reductions. And while we didn't put it on here, we didn't put Q4, but if you go back and look at your Q4 notes, we were 90% discretionary, 10% permanent. This quarter Q1, we are now 30% permanent and moving to a full year of 60% permanent. If you just go to that full year section of the page and look under FY 'twenty one, see $175,000,000 discretionary. A little bit less than what we showed you last quarter, primarily because our volume is better.
We didn't need to enact as many of those discretionary type of actions. Most of our wage reductions have been restored to normal effective October 1, with some minor exceptions in countries where those government support supplementary income for short work weeks, which we've continued. Permanent actions stayed the same at $250,000,000 and we're right on track deliver that. And really, I think this bodes well when you look at the shift to more permanent actions for the remainder of FY 'twenty one and sets us up nicely for FY 'twenty two. So if you go to the next slide, we'll talk about our transformation.
And clearly, I'm going to show you a couple of numbers here. Hopefully, you're going to believe the company is definitely transforming. We'll talk about how and we'll talk about more importantly where we're going to go in the future. Next page is on the how portion of it. It's been a combination of portfolio things we've done as well as just sheer performance improvements.
And on the performance side, it all starts with the Parker Business System, which is the Win Strategy and 2 major updates that we've made that you're familiar with, which is really propelling our performance, we simplified the organization from a structure standpoint, and we acquired 3 outstanding companies that were accretive on growth, margins and cash flow, and they're performing very well during the pandemic. And I think the best evidence which is the slide you've seen before is on Slide 11, which is a transformation across the last 5 manufacturing sessions on how we've been raising the floor and operating margin. We wanted to put this slide in again because we've updated it based on the latest adjustments where we include deal related amortization in our adjustments. And we did that through all the prior periods. So the reported in shades that's in gray and gold is the adjusted.
And you can see that the improvement now is even more pronounced, 1100 basis points over this period of time, just dramatic improvement and obviously intend to keep moving in this direction. Go to Slide 12, we're going to talk more about the future now and where we're going. And it's going to be all around Win Strategy 3.0, which we just recently changed in our purpose statement, which is in that blue box down at the bottom. Both of these changes have created excitement within the company and an inspiration from our people on that higher purpose that we're all trying to live up to. Slide 13, where I'm going to spend a little bit of time going through 3.0 to give you a little more context and color as to why we think our future performance is going to continue to accelerate.
I'm going to make a comment on each one of these. So, start with simplification. You've seen what we've done on structural things and organization design work continues. The simplification is going to expand into more eightytwenty and simplify design. And of course, you're all familiar with eightytwenty, but for us, it's still early days with lots of ups.
A simple by design is the realization that 70% of your cost is tied up in how you design the product. And what we want for our company design excellence and operating excellence. We want both of those things. And the way you get design excellence is through symbol by design. It's going to have 3 major buckets.
It's going to be a complexity assessment of our existing and new designs. We're going to use 4 guiding principles on how we design products. We're going to design with forward thinking. We're going to design to reduce how we use material. We're going to design to reuse things that we use across the company, we're going to design the flow.
We're going to enable all this with the use of AI, which is going to allow our engineers to be able to do these things in a much faster and knowledgeable fashion. 2nd bullet is innovation. In our stage gate process, we call internally innovation. So that's taking an idea to launch for a new product. And we're making 3 changes there.
1 is in metrics, and that's called PBI, Product Vitality Index. Not a new metric for most of you who are familiar with this. It's the percent of revenue that comes from new products and things that we've launched and commercialized over the last 5 years. So we're holding people accountable to that and we're seeing nice progress. We've also included 2 key process chains.
1 is new product blueprinting, which is an outside in orientation for engineers. So spending more time with customers and end users to understand their pain points and their needs, so that we design and develop better products to solve those. And of course, simplified design is embedded into the new innovation as well. 3rd goal is digital leadership. Now we put this on there for the pandemic, but of course with the pandemic, this is even more important.
We got 4 big areas that when we say digital leadership, we mean 4 things: digital customer experience digital products, which would be IoT, digital operations and then digital productivity. And digital productivity is where we would do include our data analytics and artificial intelligence. Next bullet is growing distribution. We just want to continue great progress we've been making, especially growing international distribution. The next one is Kaizen.
Kaizen our brand at Kaizen is unique and it's really combining Kaizen, our high performance team structure, which is how we build the company, our natural work teams and that ownership that creates in our plants, warehouses and the offices and the use of lean. And I would just tell you that COVID has not slowed us down one second on the use of Kaizen. We're continuing to have the same activity and the same results. We're very pleased with that progress. On the acquisition front, we want to be the consolidator of choice and continue to buy great companies like you've seen us do the last several years.
And then underpinning all of this and supporting this is going to be a new incentive program, which is called the Annual Cash Incentive Program, so ACIP for short. And we're going to roll this out over the next 2 years, FY 'twenty two and 'twenty three. We've been piloting it over the last 2 years, 'twenty and 'twenty one. And it's going to replace return on net assets as our annual incentive and it's going to have 3 simple components: earnings, revenue and cash. So it will be easy to explain, easy for our people to understand.
Those three metrics are highly aligned to total shareholder return and this will provide better linkage to our annual performance. So we feel very excited to continue the performance changes we've been making and the performance lift we're going to get with 3.0 that the transformation you've seen is going to continue in the future. Moving to Slide 14, you probably saw on Monday we made Monday this week we made some important organization announcements. And the first one, the lady that's sitting right next to me, strategically positioned 6 feet away from me though. Kathy Sievers retiring January 1st, this is part of Kathy's long term plan.
And she has 33 years with the company and 33 great years. And then everything she's done, she's excelled and she's helped us a tremendous amount. Whether it was bad times in recessions or good times with expansions, it's been a big part of the Win Strategy. And her team, the work we did in those acquisitions is a huge lift by the finance team and really made a big difference for us. A great example of values and results and a great example for the rest of our leadership team.
So this is Kathy's last earnings call and I could see she's pretty tore up about that. But she's going out of style because these are fantastic results to do as your last earnings call. Now succeeding Kathy on Slide 15 is Todd Lambruno and Todd will be our CFO on January 1 next year. I think a lot of you know Todd. Todd was Investor Relations and knows the company extremely well, 27 years with the company.
He's been a division controller, group controller, now corporate controller, and he'll be joining Lee and myself in the office of Chief Executive as CFO. So Todd, if you want to just make a few introductory comments to everybody?
Yes. Good morning, everyone. First of all, I just want to say congratulations to Kathy on a wonderful 33 year career with Parker Hannifin. There are so many people across the company that have you to thank for all you've done for the company and that includes me. We've worked so closely and so well together for so many years.
I want to personally thank you on behalf of the Parker Finance and Accounting community for all you've done and for me personally as well. So we wish you nothing but the best in retirement and we look forward to hearing all about your retirement adventures and we will stay close. So congratulations and thank you very much. Tom and Lee, thank you for your confidence and your support in me for many, many years. I couldn't be more humbled and appreciative for this opportunity.
We have a fantastic global team and we are committed to delivering top quartile performance and continuing of the company, couldn't be happier. And for the investment community, Tom already mentioned this, but I still remember many of you from my time in Investor Relations. I look forward to reconnecting and also seeing some new faces very
soon. Thanks. So thank you, Todd. Kathy is not retiring yet. According to work, and I'm going to turn it back to Kathy for details on the quarter.
Okay. Thank you, Tom and Todd. I'd like you to now refer to Slide 17, and I'll summarize the Q1 financial results. This slide presents as reported and adjusted earnings per share for the Q1. Current year adjusted earnings per share of $3.07 compares to the $3.05 last year, an increase despite lower sales.
Adjustments from the fiscal 2021 as reported results netted to $0.60 including business realignment expenses of $0.12 integration costs to achieve of $0.03 and acquisition related amortization of $0.63 offset by the tax effect of these adjustments of $0.18 Prior year Q1 earnings per share were adjusted by a net $0.45 the details of which are included in the reconciliation tables for non GAAP financial measures. On Slide 18, you'll find the significant components of the walk from adjusted earnings per share of $3.05 for the Q1 of fiscal 2020 to $3.07 for the Q1 of this year. Despite organic sales declining 13% and total sales dropping 3%, adjusted segment operating income increased the equivalent of $0.09 per share or $16,000,000 Decremental margins on a year over year basis were favorable, demonstrating excellent cost containment and productivity by our teams. In addition, we realized an $0.08 increase from lower corporate G and A as a result of salary reductions taken during the quarter and tight cost controls on discretionary spending. Other income was $0.14 lower in the current year because the prior year included higher investment income and gains on several small real estate sales.
Moving to Slide 19, we show total Parker sales and segment operating margin for the Q1. Organic sales decreased 13% year over year. This decline was partially offset by favorable acquisition impact of 9.1% and currency impact of 0.8%. Despite declining sales, total adjusted segment operating margin improved to 19.9% versus 18.8% last year. This 110 basis point improvement reflects positive impacts from our Win Strategy initiative and the hard work and dedication to cost containment and productivity improvements by our teams.
Moving to Slide 20, I'll discuss the business segments, starting with Diversified Industrial North America. For the Q1, North American organic sales were down 14 0.1% and currency negatively impacted sales 0.3%. These were partially offset by an 8.5 percent benefit from acquisitions. Even with lower sales, operating margin for the Q1 on an adjusted basis was an impressive 21 0.0% of sales versus 19.4% last year. This impressive favorable incremental margin reflects the hard work of diligent cost containment and productivity improvements and the impact of our Win Strategy initiatives.
Moving to the Diversified Industrial International segment on Slide 21. Organic sales for the Q1 in the Industrial International segment decreased by 7.3%. This was offset by contributions from acquisitions of 9.1% and currency of 2.9%. Operating margin for the Q1 on an adjusted basis increased to 19.2% of sales versus 17.0% in the prior year, an impressive incremental margin of 66.5%. The teams continue to work on controlling costs and utilizing the tools of our RIN strategy.
I'll now move to Slide 22 to review the Aerospace Systems segment. Organic sales decreased 20.1% for the 1st quarter, partially offset by acquisitions contributing 10.8%. Significant declines in the commercial businesses, both OEM and aftermarket, were partially offset by higher sales in both military OEM and military aftermarket. The diversity of our aerospace portfolio, which includes business jets, general aviation and helicopters, is providing some additional balance against the current market pressures. Operating margin for the Q1 was 18.1 percent of sales versus 20.4% in the prior year a decremental margin of 43.5%.
Realigning the businesses to current market conditions and strong cost controls are helping to offset the less profitable mix imposed by the pandemic and the lower volumes. On Slide 23, we report cash flow from operating activities. Cash flow from operating activities increased 64% to a 1st quarter record of $737,000,000 and an impressive 22.8 percent of sales. Free cash flow for the current quarter was 21.5 and with a drop in net income of just $17,000,000 the free cash flow conversion from net income jumped to 2 16%. This compares to a conversion rate of 118% last year.
The teams remain very focused and effective in managing their working capital and consistently generating great cash flow. Moving to Slide 24, we show the details of order rates by segment. Total orders decreased by 12% as of the quarter ending September. This year over year decline is a consolidation of minus 11 percent within Diversified Industrial North America, minus 4% within Diversified Industrial International and minus 25% within Aerospace Systems orders. Just a reminder that we report the Aerospace Systems orders on a 12 month rolling average.
Looking ahead, the updated full year earnings guidance for fiscal year 'twenty one is outlined on Slide 25. Guidance is being provided on both an as reported and an adjusted basis. Based on our current indicators, we have revised our outlook for total sales for the year to a year over year decline of 3.5% at the midpoint. This includes an estimated organic decline of 7.3%, offset by increases from acquisitions of 2.8% and currency of 1%. We have calculated the impact of currency to spot rates as of the quarter ended September 30, 2020, and we have held those rates steady as we estimate the resulting year over year impact for the remaining quarters of fiscal year 'twenty one.
Please note our revised guide does not forecast any additional demand pressure caused by further shutdowns as a result of a second wave of increasing COVID infections. You can see the forecasted as reported and adjusted operating margins by segment. At the midpoint, total Parker adjusted margins are now forecasted to increase 30 basis points from prior year. For guidance, we are estimating adjusted margins in a range of 19.0% to 19.4% for the full fiscal year. For the below the line items, please note a significant difference between the as reported estimate of $400,000,000 versus the adjusted estimate of $500,000,000 In October, as a subsequent event to the quarter, we reached a gain on the sale of real estate of $101,000,000 pretax or $76,000,000 after tax that will be recognized as other income.
Since this is an unusual onetime item, we plan to remove this gain as an adjustment to our adjusted earnings per share. The full year effective tax rate is projected to be 23%. For the full year, the guidance range for earnings per share dollars or $10.23 at the midpoint. On an adjusted earnings per share basis, the guidance range is now $11.70 to $12.30 or $12 even at the midpoint. The adjustments to the as reported forecast made in this guidance at a pretax level include business realignment expenses of approximately $60,000,000 for the full year fiscal 'twenty one.
Savings from current year and prior year business realignment actions are projected to result in $210,000,000 in incremental savings in fiscal year 'twenty one. Also included in the adjustments to the as reported forecast are integration costs to achieve of $18,000,000 Synergy savings for LORD are projected to be an additional $40,000,000 getting to a run rate of $80,000,000 by the end of the year. And for Exotic, Exotic, we anticipate
a run rate of
$2,000,000 savings by the end of the year. Acquisition related intangible asset amortization expense is forecasted to be 3.20 $2,000,000 for the year. Some additional key assumptions for full year 2021 guidance at the midpoint are: sales are now divided 48% first half, fifty 2 percent second half adjusted segment operating income is half. Adjusted segment operating income is split 46% first half and 54% second half. Adjusted earnings per share first half, second half is divided 45% 55 percent.
Q2 fiscal 2021 adjusted earnings per share is projected to be $2.38 at the midpoint, and this excludes $0.63 or $106,000,000 of projected acquisition related amortization expense, business realignment expenses and integration costs to achieve, offset in part by the gain on real estate of $0.59 or $101,000,000 On Slide 26, you'll find a reconciliation of the major components of the revised fiscal year 2021 adjusted earnings per share guidance of $12 even at the midpoint compared to the prior guidance of $10.30 The teams outperformed our original estimates, beating the Q1's guidance by $0.92 With this performance and our continuing efforts to control costs, we are raising our estimated margins, which will in turn generate $0.81 of additional segment operating income over the next three quarters. This calculates to an estimated decremental margin of 11.4 percent for the year. Other minor adjustments to below operating income line items reduces our estimate by a net $0.03 All in, this leaves $12 even adjusted earnings per share at the midpoint for our current guide for fiscal 2021. If you'll now go to Slide 27, I'll turn it back to Tom for summary comments.
Thank you, Kathy. So the portfolio, our motion control technologies gives us a clear competitive advantage versus our competitors. We continue to transform up with the 3 acquisitions, and we really feel strongly with the Win Strategy 3.0 in our purpose statement that our best days are ahead of us. And with that, I'll hand it over to Sonia to start the Q and A.
Thank you. Our first question comes from Jamie Cook of Credit Suisse. Your line is now open.
Hi, good morning and nice quarter. I guess just first question on the aerospace side, you narrowed the guide sorry, you raised the top line a little relative to before and the margins. But Tom, any view on how you're thinking about the recovery out of the commercial business and how we think about the correlation between global aircraft miles flown or revenue passenger miles like should we expect a greater lag than usual in terms of how we think about Parker's pickup versus those two items? And then obviously the margin performance was very strong in the quarter. I guess you'll attribute that to win, but were there any sort of anomalies or price cost or mix or anything else that was sort of viewed as favorable to the margin performance in the quarter?
Thank you.
Okay, Jamie, it's Tom. I'll come back to the margins. I'll start with the Aerospace. So when we look at Aerospace, we think, again, this is just our initial look, is that it will bottom out next quarter for us. But when you look at the components for our full year forecast to the 4 major segments, I'll go one at a time here.
Commercial OEM, we've got in the guide assuming a 25% to 30% production and that's basically using the current production rates that our customers have given us times our bill of material. Military OEM will be low single digits, which seems reasonable with the F-thirty five and F-one hundred and thirty five engine tied to that. Commercial MRO, which is one of the questions you're asking, we have at a minus 35 to 40 and that compares to we were at minus 40 in the last quarter. So we see a little bit of improvement there, but not significant improvement. Available sea kilometers are currently around 55%.
And that's not unusual see our MRO run a little bit better than the available sea kilometers. Airline departures are supportive of that kind of forecast that we've given you out there. And then on the military MRO side, we've got positive mid single digits really being supported by fleet upgrades and trying to extend service life of some of the older military aircraft and then the mission critical 80 or MC80 initiative where to make sure the fleet is 80% ready to go and all those things we think. So we still feel good about this forecast. I would tell you one of the things we like about Aerospace is we've been very aggressive on our cost outs.
We've taken 25% of our people out unfortunately given the conditions. And we are in a position from a margin standpoint and return on assets, it's a very attractive business for us. And longer run, this will be a longer return. And the bottoms in Q2 and starts to turn for our second half. Over the next several years with the cost structure we have in place, it will be a very attractive business for us and we'll just show nice gradual growth before it eventually gets back to where it was, which obviously take time.
Margins for Q1, in general, obviously, you're right, the Win Strategy is 2.0 and now 3.0. It's all that restructuring we've done in the past, etcetera. But I do think we had the advantage in Q1. We're pretty much at our run rate on the permanent savings actions because we came out of the gate very aggressive on the permanent restructuring. And then we also still had the peak discretionary actions that we're able to have in Q1 and with restoring salaries that will come down.
So I think that was part of what helped Q1. But when we look at margins, if you compare our first half to second half, we're going to still show a nice improvement in our second half with this guide versus the first half. And like I said in my closing comments, our best days are ahead of us, both on the top line and on margins.
Thank you. I appreciate it. I'll let someone else ask a question.
Thanks, Jamie.
Thank you. And our next question comes from Nathan Jones with Stifel. Your line is now open.
Good morning, everyone.
Good morning, Nathan. Just like to start
with the top line guide, Kathy. You said you're intending or you're planning for that to split 48, 52, which I think is what it typically splits for you every year and kind of the way that you typically guide at this point in the year, which also then implies that you don't really see any fundamental sequential improvement in the businesses. Is that the way you've gone about framing this guidance? And if we do see the economy gradually get better as we go through the rest of the year, would that tend to suggest that maybe your second half of twenty twenty one guidance could be a little bit better than where you're at at the moment?
So Nathan, this is Tom. Maybe I'll start. So part of what we looked at when we looked at improving the organic EBIT -11 to -7.5 was that we looked at our Q2, it being very similar to Q1. The industrial piece maybe a little better, aerospace a little worse, as I mentioned, bottoming up. Then we'll see Q3 get better and Q4 be a positive.
Our forecast for our Q4 is positive, high single digits. When you look at the second half as a whole, we'll have industrial industrial up, because I'm combining North America and international, has a positive low single digits, Aerospace around a minus 12, so we get to flat because of the Aerospace being negative. I think part of what we're looking at with Q2 and Q3 is just understanding why we have a lot of positive trends with order entry, PMI is moving in the right direction and markets moving to more of a decelerating decline or shifting more accelerating decline. They were accelerating, not decelerating. But the realization that there's risk in the next two quarters tied to the virus activity and we're not assuming that it's getting any worse, but I think there's a fair amount of uncertainty as we go into Q2 and Q3, which are the winter part for most of the world.
And you've got COVID and the flu season together, which creates bit of an unknown. So we still are very positive, but we think it's going to the next two quarters will be a little bit of a slower sequential. It is still better quarters top line than we've guided to just last quarter. So we are reflecting that improvement where it's a little bit, I think, realistic far as what's going on.
Okay. Then on free cash flow, obviously, very good conversion and a lot of free cash flow this quarter. That's going to be typical when you're seeing declining revenue as you liquidate your own working capital. As we get later in the year and you're starting to look at more actual year over year growth, how are you thinking about free cash flow and free cash flow conversion for the full year based on the guidance that you've provided for the top line here?
Yes, Nathan, this is Kathy. I'm glad you asked. We had a tremendous Q1 and a lot of that came from managing the working capital as you suggest. I do not anticipate that it will continue at the pace that we saw in the Q1 as the working capital will be there will be more need, for example, for inventory and then payables will also have an impact and receivables. So yes, it will slow down.
We still confidently believe we'll be at over 100% conversion each quarter and for the year. It was a great start to the year and will remain above that 100% conversion, but it won't continue at the pace that we were able to enjoy this quarter.
But you think it will be over 100% each quarter for the year?
Yes, I do.
Okay. Well, congratulations, Kathy, and congratulations and welcome back Todd. I'll pass it on.
Thanks, Nathan.
Thank you. And our next question comes from John Ange of Gordon Haskett. Your line is now open.
Thank you. Good morning, everybody. Congratulations, Kathy. Great to see that. And Tom, I wouldn't worry about the coronavirus.
Joe Biden is going to defeat the virus.
Anyway. Thank you, John.
Hey, $64,000 question in industry is like when does when the economy normalizes, is CapEx, not OpEx, but CapEx likely to prospectively come back? And if so, how do you see the landscape across the multiplicity of your end markets in terms of customers' predisposition to spend CapEx? And obviously, I would leave out commercial aerospace and oil and gas because we know those are pretty challenged. But it kind of is a framework to even understanding other verticals operating, commonly kind of close at, if not even above pre COVID levels. You have a lot of visibility into that and we don't have the same kind of visibility.
So if you could share your thoughts, that would be great.
So John, it's Tom. I think what you're getting at is what does the future hold and obviously CapEx is a key ingredient to potentially driving more industrial activity. And when we get through FY 'twenty one, where I characterize FY 'twenty one, we have 2 quarters where I think there's still a fair amount of uncertainty Q2, Q3, Q4 we have an easy pandemic comparison. But by then, I think will have rounded the corner. But I'm very optimistic about FY 'twenty two, so really for everybody else, the second half of the calendar year 'twenty one and beyond.
There's low interest rates, there's fiscal stimulus that's in place and maybe more that might come. The vaccine will be fair, air travel is going to slowly resume. Our order entry by then will have turned positive. The end markets are going to continue to shift and we will shift it into accelerating growth. Our forecast for global industrial production growth, which is a good indicator of CapEx spending is positive.
And you couple what I would characterize as a much better industrial environment with our own growth initiatives and I'm pretty optimistic on what the number of years look like. The way I would look at it, John, Lee and I since we took our jobs, we've faced 2 recessions together in a pandemic. And so it can't be any worse than that. And all indicators that this is a much better environment. And I do think CapEx and people making more strategic longer term investments will come back more into play, which is and that will just add to it.
Yes. I think that makes a lot of sense. You called out eightytwenty as part of your framework just in the spirit of another eightytwenty company. ITW has been probably realizing and targeting some share gains to time to take the offense. Do you envision opportunities for Parker for share gains across your businesses and perhaps because they smaller players have pulled back or conversely I guess have there been tougher competitors emerge let's say in China for instance?
Absolutely, John. It's Tom again. We think that there's a big opportunity there and we track that now. That's part of our quarterly cadence. We have all the commercial leaders present top accounts, share in the prior quarter, share in the next quarter.
And it's going to be a multitude of things and a lot of it's on the Win Strategy. It starts with creating a great customer experience for our customers. That's the first thing you got to do to grow. And then we think with innovation, simple by design and all the other things that we're doing, we have an opportunity to take share. We have obviously gotten stronger through this and we think we can take advantage of that.
Our service capabilities have gotten better. We've acquired companies that are growing faster than and we were doing extremely well and they're adding to our offering to customers and creating more value when we go to them. So yes, I do think there's a share shift here opportunity.
Perfect. Thanks very much.
Thank you, John.
Thank you. And our next question comes from Jeff Sprague of Vertical Research. Your line is now open.
Thank you. Good morning, everyone, and congrats to Kathy. 2 from me, if I could. First, just on the margins, Tom, a couple of questions around that, but I was hoping you could just help us a little bit more understand the cadence. It does appear that on similar revenues, you've got a step down in Q2.
I guess you don't have quite as much discretionary actions, but it seems like there's still a lot of positivity flowing through. And the year guide is below kind of what you did in Q1, right, as revenues are expected to build as the year progresses. So understand you might want a little dose of conservatism going into the winter here. But is there really something going on mix or otherwise that we should think about to kind of understand that margin profile?
So, Jeff, it's Tom. A couple of comments. The implied change from Q1 to Q2 is pretty normal sequential shift that we have. You go back and look at our Q1 and Q2 over the years, it's pretty much in the same neck of the woods. Yes, you're right.
In Q1, we had the benefit of all the permanent actions because we're pretty much at our permanent action run rate and we had almost all the discretionary actions. So that was a big opportunity. But I would just the guide right now is still 30 basis points better than last year. And if I look at just the first half, second half, we go from 18.5, talking about the total company now, 18.5 to 19.8 in the second half. So we see an improvement.
And obviously, Q4 will be better than Q1. So the improvements there, we do have a little bit of mix headwind as mobile, if you look at our end markets that have come back, this is not unusual. Mobile has come back faster than any other end market and that's lower margins. But these are still fantastic numbers for us to be in this kind of environment, putting up a full year at 19.2%. We're pretty proud of that.
Yes. No, the absolute numbers are solid. Just trying to understand the pattern. And then second, just on channel, Did you actually see a normalization of channel inventories? Or where are we in that progress?
And what do you see distributors doing here as you look forward the next couple of quarters?
Yes. So, Jed, it's Tom again. I'll start and Lee can add on. So we felt that what we saw that it looks like through the quarter destocking has pretty much run its course. And that we are anticipating sequential improvement on distribution and that when we look at the whole second half, distribution global will be positive, obviously, especially in Q4, we have a little bit of softness still in Q3, but for the full second half, it will be positive.
Asia will be positive for both Q3 and Q4. And I think distribution will be a little bit careful in Q2. Most of them are calendar year fiscal year companies. I think they'll just be a little bit careful as far as what they do as they go into the end of their fiscal year. So they won't get too ahead of themselves as far as restocking.
But I do think as they go into the second half that they'll look probably strategically restock some things. Lee, I don't know if you have anything. No, I've
got nothing else to add other than the sentiment by and large is positive.
Great. Thanks. I'll pass it.
Thank you, Jess.
Thank you. And our next question comes from Nigel Coe of Wolfe Research. Your line is now open.
Thanks. Good morning. And obviously, congratulations to Kathy and Todd. So I'd like to just kind of explore some of the end market dynamics. You usually give some pretty good details on sort of the puts and takes.
So I'd just love to know where you're seeing sort of Phase 3, Phase 4, maybe even Phase 1 in the end markets?
Okay, Nigel. I'll give you the spin through the markets for everybody. Maybe I'll start at the higher levels. If you want the short version, this is by what we would call sub segments and these are all organic numbers. Total company minus 13, minus 20 in Aerospace.
Distribution was minus 14. Industrial as a whole, the whole grouping was minus 7 and Mobile was minus 13. If I take it into a depth below that, I'll give you just various buckets. The positive end markets, this would be all greater than 10% positive with semiconductor, life science, aerospace military OEM and aerospace military MRO. Positive growth high single digits was power generation and rail.
We had one market that was neutral, that was refrigeration. The remaining markets were declining, and I'll give you those in the various segments. Low single digit decline was telecom and ag, high single digit decline was automotive. And that 10% to 20 percent decline was distribution of mills and foundries, construction, heavy duty truck, lawn and turf and marine. And that 20% to 30 percent decline machine tools, tires, mining, forestry, material handling and then greater than 30% decline was oil and gas, Aerospace Commercial OE, Aerospace Commercial MRO.
And then Nigel, just on those, the phases, the 4 phases, I would just highlight the big shift. If you look at the last quarter, we had 90% of our end markets. So all those end markets I just talked about, 90% of them set an accelerating decline, which you would expect even where we were. And now we have 84% of them in decelerating decline, which is a good sign. That's the first sign of healing.
You got to go into that, what we call, Phase 4 decelerate and decline, and you have the opportunity to move into Phase 1, which is accelerating growth. So that's the spin to the markets.
Yes, Tom, that's great color as always. And then it looks like you're going to be at an EBITDA margin kind of circa 20% for this year. Your long term target is 19%, 20% probably on my math, but your long term target 2023 is 21%.
So I'm just wondering if
see opportunities to exceed that target. I mean, what does this year imply at basically the trough of the cycle 20% type margin? What does that mean for margins going forward?
So Nigel, it's Tom again. So yes, we're proud of that. We're excited. We won't change those targets yet. We'd like to do them for a full year or at least get close to doing it for a full year before we do that.
But clearly, we're performing better and at faster pace than we had anticipated. And those targets are all pretty fresh. We just want to update them at IR Day, which is just March. And to your point, we're doing this in not the best of times. So I think this is an indicator.
Those were always goal posts. They were not an end destination. So we have lots of room to grow and I'm hoping my page on 3.0, which was kind of the reader's digest of IR Day, gives you indicators that we think there's a lot of gas in the tank here. But we won't change those until we get a little closer and we've demonstrated doing it more sustainability, more sustainable fashion. But yes, we are pleased with the progress that we're going to beat those numbers.
Thank you. And our next question comes from David Raso of Evercore. Your line is now open. And again, our next question comes from David Raso of Evercore. Your line is now open.
Thank you very much. Really two quick questions, if you don't mind. The margins for the rest of the year appear to be sort of flat 9 months over 9 months. And I can understand Aerospace is down a lot. But even the Industrial businesses, you don't really have the margins up much year over year.
And I do appreciate some of the cost savings are a little less dramatic than we just saw in the Q1. But when you highlight distribution is maybe ready to restock a little bit or definitely improve to some degree, is there something else about the mix or something we're missing about price cost that would not allow the margins to improve much industrially? I think when you strip out the A and just do it old school EBIT, you really don't have the North American margins much up at all, maybe 20 bps year over year and international only up 50 bps when it was just up 150 bps. So I just want to make sure I'm not missing something. And the second question simply with the deleveraging pace going this quickly.
When do you expect to be able to lean forward and think about the M and A market a little bit or however you want to choose to use the balance sheet? And if it is M and A, just a little lay of the land kind of what you're seeing on pricing and so forth? Thank you.
So David, it's Tom. So I'll give you guys a little more color because the margins are doing quite well. If I just compare second half of '21 to second half of 'twenty, and I'll give it to you by segment, 20.5 percent for North America versus 19.8% in prior period, 19.0% in international versus 18.3%. So very nice improvement and then 19.5 Aerospace versus a 20.6. So obviously Aerospace feeling more pressure.
And we end up at 19.8 versus 19.5. So the margins are improving. We do have, as I mentioned earlier, a little bit of a mix headwind with more mobile, and that's very typical at the beginning of a upturn in the mobile end markets speed up faster. We saw that on order entry in the last quarter. And those markets and that customer base have all less margins than when you compare to distribution and industrial.
Then on the deleveraging side, yes, that gives us lots of opportunities and as we continue to work down that. Our pecking order, which you'll be familiar with, 1st and foremost is dividends and our next dividend target to raise the dividend to keep our track record going is Q4. And you can rest assured we're going to do that. The next is continue to fund organic growth and productivity, which we'll do that. And that's about 2% of sales.
We will continue to delever, but as we glide down there, we have an opportunity to look at the 10b5-1 and we'll update you all on our thinking on that in the next earnings call. And then there's an opportunity as we go down the glide path here to look at acquisitions and share repurchase. And I think because our cash flow has been so strong we don't necessarily have to wait till we get to 2.0 again to finally dust off the acquisition pin. There's probably opportunities of properties that are more reasonable sized, say, versus doing a Clark or a Lord that would allow us to do and glide down and basically not be impacted at all, still be able to meet our commitment to all the credit rating agencies and deliver to speed we wanted to. And then the EBITDA is so much higher now that we can probably absorb some things as we glide down and not miss a beat as we try to get down there.
So it does give us a lot more opportunities and those opportunities will depend on what's available and that trade off is something we look at every time.
Is it fair to summarize that then as the cash flow is the visibility of it, the strength of it that again maybe not a CLARCOR size, but the idea of having to wait till the end of the fiscal year to lean forward with M and A, that's not necessarily the case any longer, something could occur before the end of the fiscal year?
I don't know if I'd go that far. I think it's going to be the acquisition activity is going on FY 'twenty two type of thing. I think sequentially, you're going to look at the 10b5-1, you're going to look at dividends. Obviously, the thing that we've learned over the years because we're fairly good track record of being an acquirer. We work that pipeline all the time, but I think we'd like to see the deleveraging go a little bit more.
But the point I was trying to make is that once we get into 'twenty two, the EBITDA growth has been so high that we can start to look sooner than we probably would have looked in the past.
Terrific. Thank you. And congratulations, Kathy and Todd.
Thanks, David.
Thank you. And our next question comes from Andrew Obin of Bank of America. Your line is now open.
Yes. Good. I guess it's still good morning.
Good morning, Andrew.
Congratulations to Kathy and thank you and congratulations to Todd. Maybe I will ask you more questions on margin pace in the second no, I will not do that. Just a question on your hydraulics business and just sort of trying to figure out your performance versus your competitors. A, can you talk about the pace of orders throughout the quarter? And when do you think we should hit positive orders for your hydraulics business, industrial business, yes, month, quarter, however you want to answer it.
So that's question 1.
Okay, Savannah, it's Tom. First, I would just remind everybody, our industrial business is not just hydraulics, it's 8 motion control technologies. And if I was to compare my neighbors across the street, organic decline was 15% and our industrial decline, if I had North America and international was more like 10%. So again, I think it shows the more diversified portfolio that we have. The order trends in the quarter improved sequentially for North America and international.
And we actually had international with Asia Pacific and Latin America turn positive in the quarter. And when we would turn positive as a total company, it's hard to pin that down exactly, but more than likely sometime in Q3.
Got you. And just a follow-up question on aerospace. Could you remind us post the Xotic transaction, what was the mix between commercial and military in the aerospace portfolio and where are we right now? Thank you.
Andrew, it's Tom again. So the mix right now is fifty-fifty. And in the past, it was about 2 thirds, 1 third, 2 third, I'm just around numbers, 2 third commercial, 1 third military. So you have 2 things going, you have much higher military content with Exotic and then of course you have the commercial market softening. So we're about fifty-fifty.
And I think the thing that's really helped us in Aerospace, if you go look at our sales decline versus other Aerospace businesses, we're at the top of the list. We're not thrilled that we declined 100%. But if you compare our decline to others, we're in the top quartile. Go compare our margins to our Aerospace peers, we're in the top quartile. Go compare our decrementals, we're in the top quartile.
So why the Win Strategy, but it's been the diversification of that portfolio. We have a very diversified technology portfolio. Our percent on engines, commercial, military, bizjet, general aviation, helicopters, regional transportation, it's very diverse. And so that allows us to kind of weather the storm. And certainly the fifty-fifty now in the military content being much more stable has helped us quite a bit.
And fifty-fifty is a normalized revenue mix or is it a revenue mix post commercial crash?
Post the commercial decline. We could probably in the follow-up calls offline give you an approximate what it would be if commercial came back, but that's like a 1,000 different durations. What assumptions you want to make on commercial improvements, so you could have I could give you a dozen different answers there. It's probably not going to be fifty-fifty forever because commercial is going to grow, but we will have a much higher military component than what we've historically had. It won't be a third anymore.
It's going to be
Yes, you guys did even better than Ethan and Moog. So just trying to figure out what's going on here. But congratulations on a great quarter.
Yes. Long term, we're in that 40% to 50% range probably.
Congratulations. Thank you.
Thanks, Andrew. Sonia, in respect of everyone's time, we'll take one more question.
Thank you. And our last question comes from Ann Duignan of JPMorgan. Your line is now open.
Hi, good morning and same regards to Kathy and best wishes. My question is around again the end market demand and particularly on the mobile side. Can you talk a little bit about your mix there? I mean we just heard from CNH Industrial and AgCo and I'm sure from Deere that the order books for agriculture are up double digits. Maybe you're not just seeing that yet.
But just maybe a little bit of color on your mix within mobile, is it more construction versus ag or do you anticipate orders coming through now that the OEMs are beginning to see a pickup in their orders? Thank you.
Anna, it's Tom. Maybe I'll just make a couple of comments about some of the ag markets and kind of our view for the year. And obviously, this is in any particular quarter, just kind of summarizing our view as we get towards the end of the year. Agriculture for us is somewhat neutral. We see U.
S. Government support prices up. When we get to construction, nonresidential is soft in both North America and Europe. Asia Pacific is positive in both residential and non residential. But I think it's a small equipment activity that's been positive, that's been offset by weaker large equipment primarily outside of China.
Automotive for us is soft first half, but a strong second half. And we see combustion engine platforms starting to turn around, but we see a sharp pickup in electric vehicles and we have great content on the whole EV side of things. I'm trying to see if I missed any big mobile end markets. That would probably be the biggest ones.
Maybe mining since that's mobile even though?
Yes, sorry. Mining, we've got neutral, but we see that as a positive second half. I would say for most of these and when I look through them, my comment is it's kind of an aggregate for the full year, but we got ag as a positive second half, mining as a positive second half, rail positive second half, construction getting to neutral in the second half, automotive positive second half. So when we look at our second half, with just a minor exceptions of Aerospace, Oil and Gas being negative, everything is either neutral or positive.
Okay. I appreciate that. That's good color. And then just as a quick follow-up. Can you talk about how you think about the return of the MAX into production and sales?
Is there any early aftermarket opportunities as they take all those parked aircraft and have to rejigger them or do you just have to sit and wait for production volumes to pick up? How do you think about the restarting of that production line?
Yes, Max, it's Tom. I mean, Max, it's Tom. Obviously, it's a positive. And Boeing had already signaled to us that our production started in May and we've been at 7 per month and we're going to move to 10 per month starting in January. So that signal has already started.
So this is a good thing. And if you just think about how our Aerospace business has performed even with no MAX and then just now at a low rate of MAX, it's a good indicator. I don't think there'll be a lot of MRO provisioning. I think it's primarily just going to help us on the OE side. The MRO side will be more after the planes flying and starts to get some flight hours and cycle time on
Okay. That's helpful color. I'll leave it there in the interest of time. I appreciate it. Thank you.
Thank you, Anne. So this concludes our Q and A and the earnings call. Thank you for joining us today. We appreciate your interest in Parker. Robin and Jeff will be available throughout the day to take your calls should you have any further questions.
Stay safe, everyone.
Ladies and gentlemen, this concludes today's conference call and webcast. Thank you for participating. You may now disconnect.