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. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference may be recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Cathy Suever, 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 at phstock.com for a year following today's call. On slide number two, 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 three. We'll begin with our Chairman and Chief Executive Officer, Tom Williams, providing a few comments and some highlights from the first quarter.
Following Tom's comments, I'll provide a more detailed review of our first quarter 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 four, and Tom will get us started.
Thank you, Cathy. Good morning, everybody. Thanks for your participation today. I hope that you, your family, and your friends are all safe and healthy. Before I go through the quarter results, I wanted to highlight slide four, which is really our strategic positioning slide on one page. It's how we create value for our customers, our shareholders, and our people. I'm going to highlight some of these through the course of my remarks in the opening slides here. Really, the output of all these differentiators is really that last bullet. It enables us to be great generators and deployers of cash over the cycle, which is a proven strength of ours that has only gotten better over the years. This list is what sets us apart.
It is what enables us to be a top quartile company, hopefully a company that you'll want to be a shareholder of. Go to slide five. This is one of those competitive differentiators, which is the breadth of our technologies. This is a portfolio of eight 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 four or more of these technologies. If you go to slide six, we'll talk about the quarter. It was an outstanding quarter. Great results, really, in the face 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.
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 recordable 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. We were pleased to see the progress there. EBITDA margin was 19.5% as reported, or 20.1% adjusted. That makes two quarters in a row that we've been greater than 20% 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, $557 million. Our cash flow from operations was just an outstanding level at 22.8%.
If I call your attention to the little table at the bottom of the page and go to that last row, the total segment operating margin adjusted row, you see we came in at 19.9% for the quarter. That was a 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, Parker without acquisitions, again, on an adjusted basis, was a 14% decremental. Just great results by the operating team. If you go to slide seven, the deleveraging progress has been just dynamite. You can see we paid down $2 billion worth of debt in the last 11 months. We've now paid off 37% of the LORD and Exotic transaction debt.
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. Very proud of that. Move to slide eight. These outstanding results are really underpinned by a couple factors. 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. 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 million year-over-year incremental. The big thing that I want to make a point on this page is the shift to more permanent reductions.
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 at 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 2021, you see $175 million of discretionary. It's a little bit less than what we showed you last quarter, primarily because our volume is better, and 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 1st, with some minor exceptions in countries where those governments support supplementary income for short workweeks, which we've continued. Permanent actions stayed the same at $250 million, and we're right on track to deliver that.
Really, I think this bodes well when you look at this shift to more permanent actions for the remainder of FY 2021, and it sets us up very nicely for FY 2022. If you go to the next slide, we talk about our transformation. Clearly, I'm going to show you a couple of numbers here. Hopefully, you're going to believe the company is definitely transformed. 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. On the performance side, it all starts with the Parker Business System, which is The Win Strategy, and two 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, we acquired three outstanding companies that were accretive on growth, margins, and cash flow, and they're performing very well during the pandemic. I think the best evidence, which is a slide you've seen before, is on slide 11, which is a transformation across the last five manufacturing sessions on how we've been raising the floor on 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. We did that through all the prior periods. The reported in shades, that's in gray, and gold is the adjusted. You can see that the improvement now is even more pronounced, 1,100 basis points over this period of time. Just dramatic improvement, and obviously, we 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. It's going to be all around The Win Strategy 3.0, which we just recently changed, and 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. You start with simplification.
You've seen what we've done on structural things and organization design work continues. Simplification is going to expand into more 80/20 and Simple by Design. Of course, you're all familiar with 80/20. For us, it's still early days with lots of upside. Simple by Design is the realization that 70% of your cost is tied up in how you design the product. What we want for our company is design excellence and operating excellence. We want both of those things. The way you get design excellence is through Simple by Design. It's going to have three major buckets. It's going to be a complexity assessment of our existing and new designs. We're going to use four 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 to 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. Second bullet is innovation. In our stage gate process, we call internally Winnovation. That's taking an idea to launch for a new product. We're making three changes there. One's in metrics, and that's called PVI, Product Vitality Index. Not a new metric for most of you. You're familiar with this. It's the % of revenue that comes from new products and things that we've launched and commercialized over the last five years. We're holding people accountable to that, and we're seeing nice progress. We've also included two key process changes.
One is new product blueprinting, which is an outside-in orientation for engineers. 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. Of course, Simple by Design is embedded into the new winnovation as well. Third bullet is digital leadership. We put this on there before the pandemic, but of course, with the pandemic, this is even more important. We got four big areas that when we say digital leadership, we mean four things, digital customer experience, digital products, which would be IoT, digital operations, and then digital productivity. Digital productivity is where we would do include our data analytics and artificial intelligence. Next bullet is growing distribution. We just want to continue the great progress we've been making, especially growing international distribution. The next one is 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, in the offices, and the use of Lean. I would just tell you that COVID has not slowed us down one second on the use of Kaizen. We continue 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 choice and continue to buy great companies like you've seen us do the last several years. Underpinning all this and supporting this is going to be a new incentive program, which is called the Annual Cash Incentive Program, so ACIP for short. We're going to roll this out over the next two years, FY 2022 and 2023.
We've been piloting it over the last 2 years, 2020 and 2021. It's going to replace return on net assets as our annual incentive, it's going to have three simple components, earnings, revenue, and cash. It'll be easy to explain, easy for our people to understand. Those three metrics are highly aligned, total shareholder return, this will provide better linkage to our annual performance. 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 transformations you've seen is going to continue in the future. Moving to slide 14, you probably saw on Monday of this week, we made some important organization announcements. The first one, the lady that's sitting right next to me, strategically positioned six feet away from me, though. Cathy Suever is retiring January 1st.
This is part of Cathy's long-term plan. She has 33 years with the company, and 33 great years. Everything she's done, she's excelled in, and she basically helped us a tremendous amount. Whether it was bad times in recessions or good times with expansions, she's been a big part of The Win Strategy. Her team, her 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. This is Cathy's last earnings call, and I can see she's pretty tore up about that. She's going out in style because these are fantastic results to do as your last earnings call.
Succeeding Cathy on slide 15 is Todd M. Leombruno, and Todd will be our CFO on January 1st of next year. I think a lot of you know Todd. Todd was in 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 the Chief Executive as CFO. Todd, do you want to just make a few introductory comments to everybody?
Yeah. Good morning, everyone. First of all, I just want to say congratulations to Cathy 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. 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. 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 the transformation of the company. Couldn't be happier. 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.
Thank you, Todd. Cathy's not retiring yet. We're putting her to work, and I'm going to turn it back to Cathy 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 first quarter financial results. This slide presents as reported and adjusted earnings per share for the first quarter. Current year adjusted earnings per share of $3.07 compares to the $3.05 last year, an increase despite lower sales. Adjustments from the FY 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 first quarter 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 first quarter of fiscal 2020 to $3.07 for the first quarter 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 million. Decremental margins on a year-over-year basis were favorable, demonstrating excellent cost containment and productivity by our teams. We realized an $0.08 increase from lower corporate G&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 first quarter.
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 initiatives 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 first quarter, North American organic sales were down 14.1%, and currency negatively impacted sales 0.3%. These were partially offset by an 8.5% benefit from acquisitions. Even with lower sales, operating margin for the first quarter on an adjusted basis was an impressive 21.0% 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 initiative. Moving to the Diversified Industrial International segment on Slide 21. Organic sales for the first quarter 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 first quarter 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 Win Strategy. I'll now move to Slide 22 to review the Aerospace Systems segment. Organic sales decreased 20.1% for the first 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 first quarter was 18.1% of sales versus 20.4% in the prior year, for 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 first quarter record of $737 million and an impressive 22.8% of sales.
Free cash flow for the current quarter was 21.5%. With a drop in net income of just $17 million, the free cash flow conversion from net income jumped to 216%. 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 -11% within Diversified Industrial North America, -4% within Diversified Industrial International, and -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 2021 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 2021. 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%-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 million versus the adjusted estimate of $500 million. In October, as a subsequent event to the quarter, we reached a gain on the sale of real estate of $101 million pre-tax, or $76 million after tax, that will be recognized as other income. Since this is an unusual one-time 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 on an as reported basis is now $9.93-$10.53, or $10.23 at the midpoint. On an adjusted earnings per share basis, the guidance range is now $11.70-$12.30, or $12 even at the midpoint. The adjustments to the as-reported forecast made in this guidance at a pre-tax level include business realignment expenses of approximately $60 million for the full year fiscal 2021. Savings from current year and prior year business realignment actions are projected to result in $210 million in incremental savings in fiscal year 2021. Also included in the adjustments to the as-reported forecasts are integration costs to achieve of $18 million. Synergy savings for LORD are projected to be an additional $40 million, getting to a run rate of $80 million by the end of the year.
For Exotic, we anticipate a run rate of $2 million savings by the end of the year. Acquisition-related intangible asset amortization expense is forecasted to be $322 million for the year. Some additional key assumptions for full year 2021 guidance at the midpoint are, sales are now divided 48% first half, 52% second 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%. Second quarter fiscal 2021 adjusted earnings per share is projected to be $2.38 at the midpoint, and this excludes $0.63, or $106 million, 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 million.
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 first quarter'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% 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, Cathy. The portfolio, our motion control technologies, gives us a clear competitive advantage versus our competitors. We keep continuing to transform it with the three acquisitions, and we really feel strongly with The Win Strategy 3.0 and our purpose statement that our best days are ahead of us. With that, I'll hand it over to Sonia to start the Q&A.
Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the hash key. 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 raised the top line a little relative to before in the margins. 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? Should we expect a greater lag than usual in terms of how we think about Parker's pickup versus those two items? Obviously, the margin performance was very strong in the quarter. I guess you'll attribute that to Win, 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, but I'll start with the aerospace. When we look at aerospace, we think, again, this is just our initial look, is that it will bottom out next quarter for us. When you look at the components for our full year forecast through the four major segments, I'll go one at a time here. Commercial OEM, we've got in the guide assuming a 25%-30% reduction, 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-35 and the F135 engine tied to that. Commercial MRO, which is one of the questions you're asking, we have at a -35%- -40%, and that compares to we were at -40% in the last quarter.
We see a little bit of improvement there, but not significant improvement, a vailable Seat Kilometers are currently around 55%, that's not unusual to see our MRO run a little bit better than the Available Seat Kilometers. Airline departures are supportive of that kind of forecast that we've given you there. 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. 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. A very attractive business for us. Longer run, this will be a longer return. If it 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'll be a very attractive business for us, and will just show nice gradual growth before it eventually gets back to where it was, which will obviously take time. Margins for Q1, in general, obviously, you're right. The Win Strategy is 2.0 and now 3.0, so all that restructuring we've done in the past, et cetera. 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. Then we also still had the peak discretionary actions that we were able to have in Q1. With restoring salaries, that will come down. I think that was part of what helped Q1. 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. 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. Our next question comes from Nathan Jones of Stifel. Your line is now open.
Good morning, everyone.
Morning, Nathan.
I'd just like to start with the top-line guide, Cathy. 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? 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 2021 guidance could be a little bit better than where you're at at the moment?
Nathan, this is Tom. Maybe I'll start. Part of what we looked at when we looked at improving the organic guide from -11- -7.5, was that we looked at our Q2 as being very similar to Q1. The industrial piece may be a little better, aerospace a little worse, as I mentioned, bottoming out. We'll see Q3 get better and Q4 be a positive, or forecast for our Q4 is positive, high single digits. When you look at the second half as a whole, we'll have industrial up, because I'm combining North America and international, as a positive low single digits. Aerospace around a -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 while we have a lot of positive trends with order entry, PMIs moving in the right direction, and markets moving to more of a decelerating decline, or shifting more to accelerating decline. They were accelerating, not decelerating. The realization that there's risk in the next two quarters tied to the virus activity, we're not assuming that it's getting any worse, 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. You've got COVID and the flu season together, which creates a bit of an unknown. We still are very positive, we think the next two quarters will be a little bit of a slower sequential.
These are still better quarters, top line that we had guided to just last quarter, so we are reflecting that improvement, but we're just a little bit, I think, realistic as far as what's going on.
Okay, thanks. 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?
Yeah, Nathan, this is Cathy. I'm glad you asked. We had a tremendous first quarter. 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 first quarter as the working capital will be, there'll be more need, for example, for inventory, and then payables will also have an impact, and receivables. Yes, it will slow down. We still confidently believe we'll be at over 100% conversson each quarter. 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.
You think it'll be over 100% each quarter for the year?
Yeah, I do.
Okay. Well, congratulations, Cathy, and congratulations and welcome back, Todd. I'll pass it on.
Thanks, Nathan.
Thank you. Our next question comes from John at Gordon Haskett. Your line is now open.
Thank you. Good morning, everybody. Hey, congratulations, Cathy. Great to see that. Tom, I wouldn't worry about the coronavirus. Joe Biden's gonna defeat the virus anyway.
Thank you, John.
Hey, 64,000 question in industry is like, when the economy normalizes, is CapEx, not OpEx, but CapEx likely to prospectively come back? If so, how do you see the landscape across the multiplicity of your end markets in terms of customers' predisposition to spend CapEx? Obviously, I would leave out commercial aerospace and oil and gas, because we know those are pretty challenged. It kind of is a framework to even understanding, are there verticals operating commonly kind of close at, if not even above pre-COVID levels? You'd have a lot of visibility into that, and we don't have the same kind of visibility. If you could share your thoughts, that would be great.
John, it's Tom. I think what you're getting at is what does the future hold? Obviously, CapEx is a key ingredient to potentially driving more industrial activity. When we get through FY 2021, the way I characterize FY 2021, we have two quarters where I think there's still a fair amount of uncertainty, Q2, Q3. Q4, we have an easy pandemic comparison. By then, I think we will have rounded a corner. I'm very optimistic about FY 2022, so really for everybody else, the second half of the calendar year 2021 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 there. 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'll shift it into accelerating growth. Our forecast for global industrial production growth, which is a good indicator of CapEx spending, is positive. 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 two recessions together and a pandemic, it can't be any worse than that. All indicators that this is a much better environment. I do think CapEx and people making more strategic, longer-term investments will come back more into play, and that will just add to it.
Yep. I think that makes a lot of sense. You called out 80/20 as part of your framework. Just in the spirit of another 80/20 company, ITW has been probably realizing and targeting some share gains to kind of take the offense. Do you envision opportunities for Parker for share gains across your businesses and perhaps because, say, 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 the prior quarter, share 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. 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 we were and doing extremely well, and they're adding to our offering to customers and creating more value when we go to them. Yes, I do think there's a share shift here opportunity.
Perfect. Thanks very much.
Thank you, John.
Thank you. Our next question comes from Jeff Sprague of Vertical Research. Your line is now open.
Thank you. Good morning, everyone, and congrats to Cathy. Two from me, if I could. First, just on the margins, Tom, a couple of questions around that. 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 get you don't have quite as much discretionary actions. It seems like there's still a lot of positivity flowing through. The year guide is below kind of what you did in Q1, right? As revenues are expected to build as the year progresses. Understand you might want a little dose of conservatism going into the winter here. Is there really something going on, mix or otherwise, that we should think about to kind of understand that margin profile?
Jeff, it's Tom. Couple of comments. The implied change from Q1- Q2 is a 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 are right. In Q1, we had the benefit of all the permanent actions because we were pretty much at our permanent action run rate, and we had almost all the discretionary actions, so that was a big opportunity. The guide right now is still 30 basis points better than last year. If I look at just the first half, second half, we go from 18.5%, talking about the total company now, 18.5%- 19.8% in the second half. We see an improvement, and obviously Q4 will be better than Q1. The improvement's there.
We do have a little bit of mix headwind as mobile, you look at our end markets that have come back, this is not unusual. Mobile has come back faster than any other end market, that's lower margins. 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.
Yeah, no, the absolute numbers are solid. Second, just on channel, did you actually see a normalization of channel inventories, or where are we in that progress? What do you see distributors doing here as you look forward the next couple quarters?
Yeah. Jeff, it's Tom, and I'll start, and Lee can add on. We felt that what we saw, that it looks like through the quarter, de-stocking 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'll have a little bit of softness still in Q3, but for the full second half, it'll be positive. Asia will be positive for both Q3 and Q4. I think distribution will be a little bit careful in Q2. Most of them are calendar year, fiscal year companies, and 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.
I do think as they go into the second half, that they'll look to probably strategically restock some things. Lee, I don't know if you have anything to add.
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, Jeff.
Thank you. Our next question comes from Nigel Coe of Wolfe Research. Your line is now open.
Thanks. Good morning. Obviously, congratulations to Cathy and Todd. 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. I'd just love to know where you're seeing sort of phase III, phase IV, maybe even phase I, 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, -13%. -20% in aerospace. Distribution was -14%. Industrial as a whole grouping was -7%, and mobile was -13%. If I take it into a depth below that, and I'll give you just various buckets. The positive end markets, and this would be all greater than 10% positive, was 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.
That 10%-20% decline was distribution mills, foundries, construction, heavy-duty truck, lawn and turf, and marine. That 20%-30% decline, machine tools, tires, mining, forestry, material handling. Greater than 30% decline was oil and gas, aerospace commercial OE, and aerospace commercial MRO. Nigel, just on those, the four phases, I would just highlight the big shift. If you look at the last quarter, we had 90% of our end markets. All those end markets I just talked about, 90% of them sat in accelerating decline, which you would expect given where we were. 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 IV, decelerating decline, then you have the opportunity to move into phase I, which is accelerating growth.
That's the spin through the markets.
Yeah, Tom, that's great color as always. Then, it looks like you're going to be at an EBITDA margin of circa 20% for this year. Your long-term target is, well, 19%, 20%, probably on my math, but your long-term target 2023 is 21%. I'm just wondering if you see opportunities to exceed that target. What does this year imply at basically the trough of the cycle, 20%-type margin? What does that mean for margins going forward?
Nigel, it's Tom again. 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. Clearly, we're performing better and at a faster pace than we had anticipated. Those targets are all pretty fresh. We just updated them at IR day, which was just March. To your point, we're doing this in not the best of times. I think this is an indicator. Those were always goalposts. They were not an end destination. 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.
We won't change those until we get a little closer, and we've demonstrated doing it in a more sustainable fashion. Yes, we are pleased with the progress, and we are going to beat those numbers.
Great. Good job. Thanks, Tom.
Thanks, Nigel.
Thank you. Our next question comes from David Raso of Evercore. Your line is now open. 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, nine months over nine months. I can understand aerospace is down a lot. Even the industrial businesses, you don't really have the margins up much year-over-year. I do appreciate some of the cost savings are a little less dramatic than we just saw in the first quarter. When you highlight distribution as 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 basis points year-over-year, and international only up 50 basis points when it was just up 150 basis points. I just want to make sure I'm not missing something. 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&A market a little bit, or however you want to choose to use the balance sheet? If it is M&A, just a little lay of the land, kind of what you're seeing on pricing and so forth. Thank you.
David, it's Tom. I'll give you guys a little more color because the margins are doing quite well. If I just compare the second half of 2021 to second half of 2020, I'll give it to you by segment. 20.5 for Diversified Industrial North America versus 19.8 in the prior period. 19.0 in Diversified Industrial International versus 18.3. Very nice improvement. 19.5 in Aerospace Systems versus a 20.6. Obviously Aerospace Systems is feeling more pressure. We end up at 19.8 versus a 19.5. The margins are improving. We do have, as I mentioned earlier, a little bit of a mix headwind with more mobile, that's very typical at the beginning of a upturn, the mobile end markets speed up faster.
We saw that on order entry in the last quarter. Those markets, and that customer base, have all less margins than when you compare to distribution and industrial. 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, first and foremost is dividends, and our next dividend target to raise the dividend to keep our track record going is Q4. 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, as we glide down there, we have an opportunity to look at reinstating the 10b5-1, and we'll update you all on our thinking of that on the next earnings call.
There's an opportunity as we go down the glide path here to look at acquisitions and share repurchase. I think because our cash flow has been so strong that we don't necessarily have to wait till we get to 2.0 again to finally dust off the acquisition pen. There's probably opportunities of properties that are a more reasonable size, say, versus doing a CLARCOR 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 rating agencies and delever to the speed we wanted to. 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.
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 as the cash flow is the visibility of it, the strength of it? Again, maybe not a CLARCOR or a LORD size, but the idea of having to wait till the end of the fiscal year to lean forward with M&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.
Okay.
The acquisition activity is more an FY 2022 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 a fairly good track record of being an acquirer, we work that pipeline all the time. I think we'd like to see the deleveraging go a little bit more. The point I was trying to make is that once we get into 2022, the EBITDA growth has been so high that we can start to look sooner than we probably would've looked in the past.
Terrific. Thank you. Congratulations, Kathy and Todd.
Thanks, David. Thank you. Our next question comes from Andrew Obin at Bank of America. Your line is now open.
Yes. Good. I guess it's still good morning.
Good morning, Andrew.
Congratulations to Cathy, 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? Yeah, month, quarter, however you want to answer it. That's question one.
Okay, Andrew. First, I would just remind everybody our industrial business is not just hydraulics, it's eight motion control technologies. If I was to compare my neighbors across the street, organic decline was 15%, and our industrial decline, if I add North American International, was more like 10%. 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, we had Asia Pacific and Latin America turn positive in the quarter. 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. Just a follow-up question. Aerospace, could you remind us, post the Exotic transaction, what was the mix between commercial and military in the aerospace portfolio, and where are we right now? Thank you.
Yeah, Andrew, it's Tom again. The mix right now is 50/50, and in the past was about 2/3, 1/3. These are round numbers, 2/3 commercial, 1/3 military. You have two things going. You have much higher military content with Exotic, and then of course, you have the commercial market softening. We're about 50/50. 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 20%, 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. 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, biz jet, general aviation, helicopters, regional transportation, it's very diverse. That allows us to kind of weather the storm. Certainly the 50/50 now in the military content being much more stable has helped us quite a bit.
50/50, it's 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. That's like 1,000 different iterations. What assumptions you want to make on commercial improvements, I could give you 12 different answers there. It's probably not going to be 50/50 forever because commercial's going to grow. We will have a much higher military component than what we've historically had. It won't be 1/3 anymore.
Yeah, you guys did even better than Eaton and Moog, so just trying to figure out what's going on here.
Yeah, I think long term.
Congratulations on a great quarter.
Yeah, long term, we're in that 40-50 range probably.
Congratulations. Thank you.
Thanks, Andrew. Sonia, in respect of everyone's time, we'll take one more question.
Thank you. Our last question comes from Ann Duignan of JPMorgan. Your line is now open.
Hi, good morning, and same regards to Cathy 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? 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. 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.
Ann, it's Tom. Maybe I'll just make a couple comments about some of the ag markets and kind of our view for the year. Obviously, this isn't 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, grain prices up. When we get to construction, non-residential is soft in both North America and Europe. Asia Pacific is positive in both residential and non-residential. I think it's the small equipment activity that's been positive that's been offset by weaker large equipment, primarily outside of China. Automotive for us is a soft first half, but a strong second half, and we see combustion engine platforms starting to turn around. 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 are probably the biggest ones.
Maybe mining, since that's mobile, even though.
Yeah, sorry. Mining, we've got neutral, but we see that as a positive second half. I would say for most of these, Ann, when I look through them, my comment is 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. When we look at our second half, with just the minor exceptions of aerospace, oil and gas being negative, everything is either neutral or positive.
Okay. I appreciate that. That's good color. 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?
Yeah, [inaudible] . It's a positive. The Boeing Company had already signaled to us that our production started in May, and we've been at seven per month, and we're going to move to 10 per month starting in January. That signal had already started, so this is a good thing. If you just think about how our Aerospace Systems 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, Ann. I think it's primarily just going to help us on the OE side. The MRO side will be more after the plane's flying and starts to get some flight hours and cycle time on it.
Okay. That's helpful color. I'll leave it there in the interest of time. I appreciate it. Thank you.
Thank you, Ann. This concludes our Q&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.