Ladies and gentlemen, thank you for standing by, and welcome to the Parker Hannifin Fiscal 2020 4th Quarter and Full Year Earnings Release Conference Call. At this time, all participant lines are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kathy Seaver, Chief Financial Officer.
Please go
ahead. Thank you, Sarah. Good morning, everyone, and welcome to our teleconference this morning. Joining me today are Chairman and Chief 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 1 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 measures. Reconciliations for any reference to non GAAP financial measures are included in this morning's press release and also posted on Parker's website atphstock.com. Today's agenda appears on Slide 3. We'll begin with our Chairman and Chief Executive Officer, Tom Williams, providing an update on Parker's response to COVID-nineteen. Tom will then discuss highlights from the Q4 and full year.
Following Tom's comments, I'll provide a review of our 4th quarter performance together with with guidance for fiscal year 2021. Tom will then provide a few summary comments and we'll open the call for a question and answer session. We'll do our best to take all the calls we can today. Please refer now to Slide 4 and Tom will get us started.
Thank you, Kathy, and good morning, everybody. A couple of comments from me before we start Slide 4. First, I hope that everybody listening in that you and your families are safe and healthy. And I'd like to extend our thoughts to those affected by this crisis, and our deepest sympathies go out to those that have lost loved ones as a result of the virus. I have a special thank you for all the Parker team members that are listening in for their hard work and their dedication really delivering 2 high level year results.
And we're living up to our purpose. We're providing products and technologies that are helping society through the crisis. We're helping to our part to create a better tomorrow for people. So on Slide 4, we talk about our response to the pandemic. It starts with safety.
That's the first goal of Win Strategy. And really, when we made that change in 2015, it provided a great foundation for us to respond to this pandemic. We're helping society through the crisis. Our technologies are essential. What was interesting with all the government orders that came out, almost every one of those deemed us as an manufacturer.
Our purpose and action is more clear than ever, and I'll give you a few examples of that. And our manufacturing capacity has stayed near normal levels throughout the pandemic. The governing principle has really been the takeaway on this page, which is our 2 safest places that we want for people is to be at work and at home, and we're doing everything we can to live up to that. So on Slide 5, the performance during this health and economic crisis and the confidence in the results that you saw in Q4 really come from this list that you see. I want to just touch on the very last bullet, the engaged people.
This was a big change that we made in 1,300,000,000 20 15, and we've recognized a strong correlation between safety, engagement and business performance. We are now top quartile in safety, top quartile in engagement, and you can see the significant progress we're making towards being top quartile on our financial performance based on the results that we just turned in. If you go to the next page, I'm going to talk about technologies that we have, those 8 Motion Control Technologies. They are our competitive differentiator. It's how we bring value to customers.
And our customers see it. 60% of our revenue comes from customers who buy from 4 or more of these technologies. Go to by acquiring CLARCOR, LORDA and Exotic. This is $3,000,000,000 of acquired sales. We bought 3 great companies, the 3 largest in our history, and they've increased our resilience because of their technologies and because of their aftermarket content.
And you've seen in the results, they are accretive to growth, margins and cash, and this was especially evident during a crisis. And we've been able to equal or beat our synergy goals despite the macro conditions. Slide 9 is our purpose statement, enabling and doing breakthroughs that lead to a better tomorrow, which has really acted as our compass and our guiding light and provide a lot of inspiration to our team. On Slide 10, just some examples of that purpose in action. On the left hand side is the food supply where basically from the farm all the way to your kitchen table.
Transportation, whether it's truck, air or rail, we're helping the world move products and goods around the various customers. In the middle section there, on life sciences, we're helping patients whether it's in the hospital or in the ambulance. The ambulance. And that probably the poster child for us is the one that's really is probably the signature of the purpose in action for the last quarter was the work we did on the ventilator. So 6 of those 8 technologies that I showed in the prior page or 2 are existing customers and we took on a lot of new customers and could not find suppliers that could keep up with this production demand.
And in some cases, we went from 0 to production in weeks, and it was really a remarkable job by the divisions involved. On the right hand side, on the upper right, we are in the central manufacturer, as I mentioned earlier. And basically, if you look at any plant in the world, you can probably find a partner part somewhere in that plant. So we're in the central manufacturing because we're needed by everybody else. Then on power generation, whether it's traditional renewables, we're there to help customers with their energy source.
Moving and shifting to really a summary of the quarter and the full year. On Slide 12, it was outstanding. It was a difficult time, probably the most difficult in the history of the company. The organic growth came in at 21% decline. So we clearly felt that impact, but we paid down debt by $687,000,000 That was on top of what we did in Q3.
And when you look at margin on the 2 different categories we're going to look at here, it was just terrific performance. On operating margins, it's better to look at it without acquisitions given the acquisitions we've got and not and don't have in prior periods. But if you look at the adjusted ROE there, 18.1% versus 17.6%. So a 50 bps increase Q4 is a 16% decremental, just fantastic, absolutely fantastic job by all the groups and divisions around the company. And then without acquisitions, EBITDA is a good way to look at this apples to apples.
If you go down to the last row, 20 0.4%, 160 basis point improvement, probably the first time, at least in recent memory, that we've ellipsed 20% and bringing on acquisitions that are accretive on margins. If you go to Slide 13, quick summary of the full year, we made continued progress. I would just remind people that we were already in an industrial session before the pandemic in our core incidents. This puts us in a top quartile. And I would just contrast, 5 years ago, we were in the 4th quartile on safety and we're now in the Q1, so remarkable progress there.
Cash flow from operations from a dollar standpoint is an all time record. So that's an all time record in the history of the company, dollars 2,100,000,000 If
you got to hit a record, cash is a
good place to hit a record. 1%, free cash flow converting on a 52%, and 1%, free cash flow conversion on a 52%. And then just some debt metrics, leverage metrics there. You can see that we improved on gross debt down to 3.6x, 3.8x. Then on a net debt standpoint, we stood at 3.3x from 3.5.
What we're very proud of is the cumulative debt reduction in FY 'twenty was 1.3 $1,000,000,000 approximately 25 percent of the transaction debt. So in just a little over 8 months of acquisition ownership, we paid off a quarter of the debt that we took on to acquire the company. So just a great job by the teams here. Then moving on 14 to the full year, just to create margin performance for that. So the full year organic was down about 10%.
And again, same methodology without acquisitions. Look at the operating margin adjusted, we held that flat at 17.2%, which is very hard to do on a volume drop and came in at 17% decremental, which is a best in class performance. With acquisitions, looking at EBITDA adjusted, we raised it to 19.3 percent, again showing the combination of the Win Strategy and acquiring companies that are accretive on margins to help out the total business. So if you move to the transition here. So the Parker transformation, it's happening.
Those numbers that you saw in the prior pages don't happen just by accident or by luck. So what we've been doing to drive that. So if you go to Page 16, all roads lead to the Win Strategy. And I would say it's the combination of our decentralized divisional structure with the Win Strategy that drives this unique ownership culture that's really putting up these kind of results. If you go to Page 17, just to elaborate a little bit more on what's different.
We started off this time period with a major restructuring activity really starting in FY 2014. And if you look at the cumulative restructuring we did for those 3 years, it was approximately 270,000,000 dollars of restructuring. So that really set us on a path of putting the right kind of cost structure in place. We built upon that when we launched simplification in 2015. And remember simplification on a structure and organization design on eightytwenty and simplify design.
But just from a structure standpoint, you can see that we reduced onethree of the divisions of the company and we made 2 major updates to the Parker Business System, which is the ONE strategy. Building on the success of the original ONE strategy, we did 2.0 in 2015 and of course 3.0 just recently. Power of the companies that we acquired, and you see that resilience coming through in the business cycle. I'm going to give you 2 slides coming up that will show you that resilience objectively looking at both margins and growth. But don't underestimate the takeaway.
The purpose statement has really provided great alignment and inspiration. And is a big difference between being at work and being inspired by your work, and purpose does that for you. And that's what our people feel about that. So on Slide 18, talk about the margin side. And I showed you this last quarter.
And this is looking at the last 5 manufacturing recessions. And I would argue FY 2020 has actually got 2 separate recessions in it, the industrial recession we were already in and the pandemic that came in, in March. But you can see whether you look at it on an as reported basis or adjusted, you see the significant step change in performance over these manufacturing recessions time periods, something we're very proud of and something that we intend to keep doing. And if you go to 2019, this is a look at top line resilience. And go to 2019.
Okay. So I recognize that the Great Recession and COVID-nineteen is not the same, but these are two But these are two examples of significant shocks to the system. My view COVID-nineteen is worse. You look at the GDP reduction across the world in the last quarter, it dwarfs, any kind of GDP reduction happened in the Great Recession. Well, let's just say for the sake of argument that the organic that the environment was the same.
And we took the worst period that happened in the Great Recession, happened to be Q4 as well. And FY 'nine was down 32 And then what did we do last quarter? We did minus 21%. Now hopefully, that will be our worst quarter. Time will tell, but we think it's going to be the worst quarter.
So why is it better? There are some distinct structural reasons why it's better. First, the CLARCOR acquisition is now part of our organic revenue that we get from innovative products and the way we calculate that is percent of revenue that's new to the world, new to the market divided by our total revenue. That over the last 5 years, that has more than doubled over this period of time. Innovate products are more resilient, they grow faster, better margins.
And then you've heard us talk about how we move changed the mix in international distribution by raising that by 500 bps over this period of time. And we've had better customer experience. We're not there. We have lots more to do on customer experience, but that's been another contributor. Contributor.
So the top line, we're not immune to the cycle. We felt it obviously, but it is better than we were before, and there's distinct reasons why it's better. And it's only going to get better in the future because LORD and Exotic are not yet in our organic numbers. And you can see by the results we shown so far, they are performing better than legacy Parker. If we move to Slide 20, something we're very proud of, our cash generation history, I mentioned the CFOA record at $2,100,000,000 And then we've just been very, very consistent.
Good times and bad times, you see 19 consecutive years up to double digit CFOA and greater than 100% free cash flow conversion. So I want to move to FY 2021 and the outlook. And we decided to reinstate guidance. And you can make good arguments as to why not to give guidance with the uncertainty. And we're not trying to pretend that we're any smarter than anybody else because we're not.
However, we're 4 months smarter than we were at the last earnings call, and we've proven that we can operate safely and with strong results. And while the future is uncertain, we felt we are in the best position to communicate to shareholders and provide them the insight as to where we're going. And hence, that's why we decided to do guidance. Of course, it's an opportunity we'll have every quarter, and we'll certainly get smarter as order entry comes in, and we'll update your thoughts as we go through. And certainly, we'll go through this in more detail in the Q and A portion of the call.
But I wanted to give you that context as to why we decided to guide before Kathy actually gives you some of the specific numbers. So then you go to 22. A big part of our success in Q4 was our actions on costs. This is a combination, as I've mentioned, in prior period of restructuring, the Win Strategy and all the things we've been doing for years and then the speed and agility of our pandemic response. But what you see here in contrast between what we did Q4 and what we're going to do in FY 2021 is a strategic shift in the cost to a more permanent cost action basis.
So you can see the little donut chart in Q4 of FY 2020, 12% permanent and that's going to move to 55% permanent in FY 2021. If you look underneath the doughnut for Q4, you see permanent actions. Are all savings with $25,000,000 that was spot on what we told you last quarter. And you see the $175,000,000 of savings that was less than what we told you. We told you a range of $250,000,000 to $300,000,000 And it was lower because our volume was better, which was a good thing.
We didn't give you specific guidance last quarter, but we had our own internal planning, we were projecting a 30% decline in volume, and hence that's why we gave you the range in discretionary came in at minus 21, which we were grateful for and we didn't need to do as many discretionary actions. We needed people to work more hours, which was a good thing. Then when you move to 2021, you see discretionary of $200,000,000 That will be mostly in the first half and we'll gradually wean off of that as we go through the first half. There will be some in the second half. It will be more local driven by what the general manager needs based on local conditions and predict predominantly and how balancing plant powers to demand.
But then you see the permanent action rising to $250,000,000 And if you look at when COVID hit and you take the second half of FY 2020 and add to all of FY 2021 and look at our restructuring costs. So we did $65,000,000 we're proposing 65 $1,000,000 of restructuring in FY 2021. We did $60,000,000 in the second half of FY 2020. So that's 125,000,000 dollars of what I would call COVID related restructuring that's going to generate this $250,000,000 of savings. So that might seem a little more efficient than normal.
And the reason for that is it's going to be an asset light restructuring plan. We've got very few plant closures as a result of that's why it's a lot more efficient than normal. So with that, I'm going to hand it back to Kathy for more details on the quarter.
Okay. Thanks, Tom. I'd like you to now refer to Slide 24, and I'll summarize the Q4 financial results. This slide presents as reported an adjusted earnings per share for the Q4. Current year adjusted earnings per share of $2.55 compares to $3.31 last year.
Adjustments from the 2020 as reported results netted to $0.28 including business realignment expenses of $0.37 and lowered acquisition, integration and transaction expenses of $0.05 These were $5 These were offset by the
tax effect of these adjustments of
$0.09 and the result of a favorable tax settlement of 0 point $5 financial measures. Moving to Slide 25, you'll find the significant components of the $0.76 walk from prior year Q4 adjusted earnings per share to 2 point $5.5 for this year. With organic sales down 21%, adjusted segment operating income decreased the equivalent of $0.61 per share or $99,000,000 Decremental margins on a year over year basis were 19%. Decremental margins without the impact of acquisitions were just 16%, demonstrating excellent cost containment and productivity by the teams. Offsetting this decline, we gained $0.07 from lower corporate G and A as a result of salary reductions taken during the quarter and tight cost controls on discretionary spending.
Interest expense cost an additional $0.15 of earnings per share as debt is currently at a higher level because of the acquisitions. Income taxes accounted for an additional $0.08 of expense because we had fewer favorable discrete tax credits in the current quarter. Slide 26 shows Parker segment sales and total Parker sales and segment operating margin for the 4th quarter. The 4th quarter organic sales decreased year over year by 21.1 percent and currency had a negative impact of 1.1%. Acquisition impact of 8.1% partially offset these declines.
Total adjusted segment operating margins were 17.4% compared to 17.6% last year. This 20 basis point decline is net of the company's ability to absorb approximately 100 basis points or $33,000,000 of incremental amortization expense from the acquisitions. On Slide 27, we're showing the impact Lorde and Exotic had on Q4 fiscal year 2020 on both an as reported and adjusted basis. Sales from the acquisitions were $298,000,000 and operating income on an adjusted basis were $32,000,000 The operating income for LORD and Exotic includes $35,000,000 in amortization expense. I'd like to point out that the improvement of 50 basis points in legacy Parker operating income despite the $818,000,000 drop in sales.
The great work the teams did on controlling costs resulted in a 16% decremental margin for the quarter within the legacy businesses. Moving to Slide 28, I'll the business segments, starting with Diversified Industrial North America. For the Q4, North America organic sales were down 24 0.7%, while acquisitions contributed 7.6%. Operating margin for the 4th quarter on an adjusted basis was 16.5 percent of sales versus 18.4% last year. This 190 basis point decline includes absorbing approximately 60 basis points or $9,000,000 of incremental amortization.
North America's legacy businesses generated an impressive decremental margin of 24%, reflecting the hard work of diligent cost containment and productivity improvements, a favorable sales mix, together with the impact of our Win Strategy initiatives. I'll continue with the Diversified Industrial International segment on Slide 29. Organic sales for the Q4 in the Industrial International segment decreased by 15.4%. Acquisitions contributed 5.4 percent and currency had a negative impact of 2.9%. Operating margin for the 4th quarter on an adjusted basis increased to 16.8 percent last year.
This 40 basis point improvement is net of the additional burden of approximately 110 basis points or $12,000,000 of incremental amortization expense. The legacy businesses generated a very good decremental margin of just 9.8%, again reflecting diligent cost containment, a favorable mix and the impact of the Win Strategy. I'll now move to Slide 30 to review the Aerospace Systems segment. Organic sales decreased 22.3% for the quarter, partially offset by acquisitions contributing 14.3%. Declines in commercial OEM and aftermarket volumes were partially offset by higher sales in both military OEM and aftermarket.
Operating margins for the for A the quarter. Good margin performance from Exotic and hard work by the teams on cost containment and productivity improvements helped contribute to solid performance in the quarter. On Slide 31, we're showing the impact LORD and EXOTIC has had during fiscal year 2020 on both an as reported and adjusted basis. Sales from the acquisitions for the year totaled $949,000,000 and operating income on an adjusted basis contributed $114,000,000 The Lord team was able dollars The Lorde team was able to pull forward synergy savings, reaching a run rate of $40,000,000 by the end of the year. These savings, plus a great deal of hard work by the teams productivity and adjusting to lower volume due to the pandemic, helped the acquisitions be $0.04 per share accretive for the year after absorbing $100,000,000 of amortization expense.
Adjusted EBITDA from Lord and Exotic is 26.3%. With this meaningful contribution from acquisitions, fiscal percent for fiscal year 2019. Note that the legacy Parker business was able to improve EBITDA margin 60 basis points to 18.8 percent despite lower sales of nearly $1,600,000,000 On Slide 32, we report cash flow from operating activities. We had strong cash flow this year, resulting in record cash flow from operating activities of $2,100,000,000 or 15.1 percent of sales. This compares to 13.5 percent of sales for the same period last year after last year's number is adjusted for a $200,000,000 discretionary pension contribution.
Free cash flow for the current year is 13.4% of sales and and the conversion rate to net income is 152%. Moving to Slide 33, I'd like to discuss our current leverage and liquidity position. Based on the continued strong free cash flow generation and effective working capital management, we a sizable $687,000,000 reduction to our debt during the quarter, which brought our full year debt reduction to 1,300,000,000 dollars which is approximately 25 percent of the debt issued for the Lord and Exotic Metals acquisition. I apologize for a typo on the slide. The second bullet should be $1,300,000,000 rather than $1,300,000 With this 31, despite a drop in EBITDA.
Our net debt to EBITDA reduced to 3.3 times from 3.5 times at March 31. We've continued to suspend our 10b5-1 share repurchase program, and we remain committed to paying our shareholders a dividend, and we intend to uphold our record of annually increasing the dividend paid. Moving to Slide 34, we show the details of current order rates by segment. Total orders decreased by 22% as of the quarter ending June. This year over year decline is a consolidation of -29 percent within Diversified Industrial North America, -21% within Diversified Industrial International and -5% within Aerospace Systems orders.
Just a reminder that we report Aerospace Systems orders on a 12 month rolling average. The full year earnings guidance for fiscal year 2021 is outlined on Slide 35. Guidance is being provided on both an as reported and an adjusted basis. Beginning with this fiscal year 2021 guidance, as we've previously announced, we are revising our disclosures for adjusted segment operating earnings and adjusted earnings per share. With this guidance, we will now start to include acquisition related intangible asset amortization expense in our adjustments.
We think these adjusted results will provide a better representation
of our
core operating earnings year over year. In the appendix of today's you can find the impact of the acquisition related asset amortization expense on fiscal year 'nineteen fiscal year 2020. In today's pandemic environment, total sales for fiscal year 2021 are expected to decrease between 10.7% and 6.7% compared to the prior year. Percent, while currency is projected to have a marginal negative 0.1% impact. We've calculated the impact of currency to spot rates as of the quarter ended June 30, 2020, and we have held those rates steady as we estimate the resulting year over year impact for fiscal year '21.
You can see the forecasted as reported and adjusted operating margins by segment. At the midpoint, total
in a range
of 17.8 percent to 18.4 percent for the full fiscal year. The full year effective tax rate is projected to be 23%. For the full year, the guidance range on an as reported earnings per share basis is 7 point $0.41 or $7.91 at the midpoint. On an adjusted earnings per share basis, the guidance range is $9.80 to $10.80 or $10.30 at the midpoint. The adjustments to the as reported forecast made in this guidance at a pretax level include business realignment expenses of approximately 65 $1,000,000 for the full year fiscal 2021 with the associated savings projected to be 120,000,000 dollars in the current year.
We anticipate integration costs to achieve of $19,000,000 synergy savings acquisition related intangible asset amortization expense of $321,000,000 will be included in our adjustments. Some percent first half, fifty 3 percent second half. Adjusted segment operating income is divided 43 percent first half, fifty 7 percent second half. Adjusted earnings per share first half, second half is divided percent, 60%. Q1 fiscal 2021 adjusted earnings per share is projected to be $2.15 per share at the midpoint, and this excludes $0.67 per share or 115 $1,000,000 of projected acquisition related amortization expense, business realignment expenses and integration costs to achieve.
On Slide 36, you'll find a reconciliation of the major components of fiscal year 20 adjusted earnings per share compared to the adjusted fiscal year 2021 guidance of $10.30 at the midpoint. Fiscal year 2020 adjusted earnings per share was reported as $10.79 to make it comparable to the fiscal year 2021 guidance, which includes an adjusted for which includes an adjustment for acquisition related asset amortization expense, we show the adjustment of
$6.8 to get
to a comparable $12.47 With organic sales down over 11%, adjusted segment operating income is expected to drop approximately $1.95 This would result in decremental margins of 27% on a year over year basis. Corporate G and A and other expense is projected to negatively impact earnings per share by 0 point $3.6 because of gains achieved in fiscal year 2020 that are not anticipated to repeat. Offsetting these declines, interest expense is projected to be $0.29 lower in fiscal year 2021. An income tax rate of 23% will reduce earnings per share by 0.10 $1 year over year. And the assumption of a full year of suspending share buybacks is projected to result in a $0.05 dilution due to an increase in average shares outstanding.
We ask that you continue to publish your estimates using adjusted guidance, which should now include adjusting for acquisition related amortization expense. This concludes my prepared comments.
Obvious question on most people's minds is how do you feel about the FY 'twenty three targets that you just outlined in IR Day given the pandemic and what it's done? And the short answer is we're still committed to them. We've made tremendous on margins and our top line is clearly becoming more resilient. While the top line revenue that Kathy articulated in IR Day was $16,400,000,000 that will be very hard to hit. But we can still grow faster than the market, which is our intention.
So these targets you see this page, growing faster than Global Industrial Production Index, the margin targets of 21% at the op margin and EBITDA, free cash flow Barring a recession in FY 'twenty three and recognizing that we have 3 full fiscal years left to get here and provided we get some modest growth as we go in FY 2022 and 2023, we believe we can hit these numbers. So again, I want to just close by saying thank you to the Parker team. Especially thank you for keeping each other safe and for what you've been doing on all of our safety protocols and for the great results we had in FY 2020. And I'll turn it over to Sarah to start the Q and A.
Thank you. Our first question comes from the line of Nicole DeBlase with Deutsche Bank. Your line is now open.
Yes, thanks. Good morning, guys.
Good morning, Nicole.
So maybe starting with the expectation for decremental margins, Saw on the slide that you guys are anticipating 30% decremental. I think that's inclusive of the cost savings plan you laid out. So I guess just maybe frame for us why decrementals should step up from here since the performance this quarter was so impressive?
Yes, Nicole, it's Tom. So I'll start. Our decrementals, if you look at the quarters for FY 2021, our projection, flowed in a range of 25% to 30%. So still best in class type of performance. The difference between, say, where we were in Q4 and that is a couple of things.
1, in Q4, we had a little bit of help with mix. We had a lot less mobile business than we had in the past, and that business is typically significantly lower margin than distribution and industrial. So the distribution and industrial portion of the company's revenue in Q4 was disproportionately higher than it normally is. So that is not going to sustain itself. It's going to go back to more normal levels as mobile comes back as we go through the full year.
So that will become a headwind. The other part in Q4 is we had, as you saw from the results, a terrific performance by Aerospace, which was helped with some seasonal help on the international military MRO where we had a very sharp increase versus prior periods and that's very high margins that comes with that. So those would be the 2 key reasons. But even with that, I would suggest to you that with these kind of volume drops, 25% to 30% decremental, and I looked at all of our peers before we came into this, would still put us in the top quartile position.
Yes, absolutely. Thanks for that, Tom. And just as my second question, I know you guys had said that you didn't see a ton of improvement from April to May when you spoke previously. But can you maybe characterize what you guys saw in June and anything quarter to date in July?
Yes. So I'll continue on, Nicole. So the quarter, we saw Industrial North America International bottom in May, improved in June. And July's orders are indicative of what I'll give you kind of how we feel with the first and second half splits for our And then Aerospace weakened through the quarter, and I'll give you more color on Aerospace here in a second. So when you go to the full year, you saw our guide of minus 11%.
So that minus 11% is made up of our first half of minus 19% and and second half of minus 3. So what was our thinking as we thought through that? So if you look at it by segment, North America, and I'll start with how Q4 ended and kind of parlay that into how we're thinking about the first half. So Q4 North America ended at minus 25%. Based on the orders we saw in June July, we see some modest improvement going into the first half.
We forecasted a minus 21% for the first half, then it gets to flat for the second half of FY 'twenty one. International came in at minus 15% organically, again, based on order entry in June July. We had that going to a minus 12%, modest improvement and going to almost flat in the second half as well. And Aerospace was minus 22, helped a little bit because of that high international military MRO. We see that weakening a little bit in the first half at minus 26% and then improves but still be in a tough environment, a longer cycle at minus 15%.
So again, you get the first half at minus 19%, second half at minus 3%. But we get to Q4 when we anniversary the pandemic and we show high single digit positives. The thing that I would point our view on this is that and our thinking behind the whole guidance is that the industrial recovery has started, but it's going to be uneven and there's going to be a fair amount of demand uncertainty. And I think that, that improvement is going to follow, more or less, a lag behind how the virus improves. And that's hence why we forecasted a modest improvement in the first half, and we still had Aerospace declining as it's a longer cycle, taking a while to adjust out those orders.
In the second half, we see things slowly starting to build. And what I would say is positioning for a really good Q4, but really positioning ourselves for an excellent FY 'twenty two. Industrials are obviously going to outpace Aerospace here as far as performance, and Asia is going to run faster than North America and India. So that's just a little color so far on what we think for the guide.
Got it. That's really helpful. I'll pass it on and let someone else Thanks, Tom.
Thanks, Nicole.
Thank you. Our next question comes from the line of Jeff Sprague with Vertical Research. Your line is now open.
Thank you. Good day, everyone.
Also maybe a little clarification on how the cost actions work through, if we could, Tom or Kathy. I guess the nature of my question, first, just looking at Slide 22. So should we think of discretionary actions then as a headwind in the Q1 of roughly $125,000,000 So we're going from $175,000,000 in Q4 to $50,000,000 in Q1 and running $50,000,000 a quarter through 2021 to get to that 200
Jeff, it's Tom. No. Most of the discretionary things will continue in Q1 and we'll start to slowly muted them off in Q2. And I would so most of it's going to happen. So Q1 will look a lot like Q4 or less, and Q2 will have a small amount.
And then you'll have just a very little valve that might trickle into the second half of 'twenty one. That portion is hard to predict because it will be very much sensitive to demand just like how you saw what we did in Q4, how it flexed based on demand. It will flex based on what happens on demand as we go forward. But we're going to continue the discretionary pretty much full steam for Q1, but the permits start to compensate for that based on what we did in the second half and what we're doing in FY 2021 to cover those total costs that need to come out, plus at the same time, our volumes is starting to get better as we move through those quarters.
Yes. So on the permanent then, Tom, it sounds like those build over the course of the year. Is that can you give us a little color on that trajectory? And is that indicative of the run rate also as you exit? Or do
you actually exit at a
higher run rate than that $250,000,000
Well, the splits on the $250,000,000 is approximately 57% in the first half, 43% in the second half. And so part of what's making up to $250,000,000 is we got $130,000,000 that's carryover from FY 2020's actions, and then we got $120,000,000 coming from the new $65,000,000 of cost that we're incurring in FY 2021. So it's a combination of the 2 coming in there.
And just one last one, if I could. On cash flow, greater than 10% now doesn't sound like a real high bar. But are you assuming now given the performance that you've put up recently, but are you assuming some kind of negative working capital swing into next year that would be muting the cash flow?
No. Again, Jeff, it's Tom. We don't want to go backwards on that percent. The dollars become tougher because we're forecasting $1,200,000,000 less revenue. However, from a percent standpoint, COA margin and recognize we had that was a really great year at 15%.
It's not saying we can always do that every time, but I would I can tell I would not be happy if we came in at 10%. So we're going to be looking to be well north of that. And when we come in, we'll see what happens. But expectation is we will continue to work the working capital. We have opportunities still on inventory.
We have opportunities with our acquisitions on inventory. We're going to work receivables and payables like we normally do. So I would see it being a team effort on the cash flow, just like we've always done.
Thank you.
Thanks, Jeff.
Thank you. Our next question comes from the line of Joe Ritchie with Goldman Sachs. Your line is now open.
Thank you. Good morning, everybody.
Thank you. So
Tom, maybe just digging in a little bit further into the end market trends. And I know, a lot of your business is short cycled, so there isn't a tremendous amount of visibility. But it seems like, if I heard you correctly, the modest improvement in both North America and international, I mean, there's a way to think about it that July then for North America was down, let's say, north of 20%, international still down double digits, mid teens. And then I guess just I guess the second part of the question is really as you talk to your distributors, what are they saying about inventory levels and the potential for restock?
Yes. So let me start with a restocking question. So right now, we're forecasting that distribution will continue to probably have some mild destocking for the first half, not as much as what we saw obviously in Q4 with some mild destocking. To maybe give you a little bit more color on the markets, we for so the minus 11 at the midpoint is North America at minus 11 international at minus 7 aerospace at minus 20. But I want to give you a little bit more insight on international.
So we're forecasting EMEA and these are put a plus or minus on these numbers at minus 10%, Asia Pacific at flat and Latin America at minus 10%. So it's a small part of the portfolio. But we have a number of markets that if I just give you I'll give you a couple comments and I'll try not to make this too lengthy. Our view of end markets for the FY 2021 and again my comments are not trying to position the entire market. I'm just speaking on how Parker is going to do.
But what we saw as positive is life sciences, and we're going to continue to see a pretty good first half on that based on the ventilator, but that will decline as we go into second half. Power generation coming off bottom still being positive, semiconductor being positive. And then we'll have aerospace military OEM and aerospace second half as we see both combustion engine volume and in particular our content on EV and AGV being such a strong build of material there that, that will drive a lot of growth for us in our engineering refrigeration and forestry. Then on the negative portion for FY 'twenty one, we've got slight recovery except for those distributors that support oil and gas. I mentioned my comment about destocking.
So it will be down probably high single digits in the 5% to 10% range in the first half. Some regions could be worse, turning positive in Q4. But we look at Asia being positive for distribution for the full year. And then on the Aerospace, which is probably where people have a lot of questions, what did we assume on the Aerospace side? So commercial OEM, we assumed a minus 25 to 30, something in that range for the full year.
And how we came up with that is we took current anticipated production rates, so the rates that you see published by the airframers and the engine makers and times our bill of material. Obviously, that's subject to change, but that's based on current production rates that we know of right now. And then on commercial MRO, we forecasted that down at minus 35 to minus 40. And recognizing that, that tends to follow available sea kilometers, and so we got our first half being obviously more stressed on commercial MRO of minus 50 and the second half of minus 20 to minus 30. And then rounding out the rest of the negative markets, I think construction and truck, machine tools along gas, rail, tires and mills and pounders.
So that's a quick spin to the end markets and how we came up with the guidance. I would tell you that our process, we use a process which is similar to what we've done in the past, where we take all the end markets, the top 20, we look at external forecast and we build it up kind of by end markets. We take our divisions and groups and build it up. We also take our customer distributors. But this year, we built an AI model, which is the first time we've ever done this, and we used the last 10 years with the data in our history to help come up with what are the interdependencies on things that predict our future forecast.
Now recognizing we never had a pandemic in the past 10 years, so that's new. And while the AI model was helpful, until we have more months of the pandemic in there, it will continue to be refined. So there's been a fair amount of science, but I would just tell you this is a forecast and we all know what happens with forecast. This is our best effort at this point to tell you what we think is going to happen. Thanks, Simon.
That was very helpful. And my quick follow-up, apologies if I missed it because I got cut out of the last question. I think Jeff asked this question. But just thinking from a quantification perspective on the cost out, so just want to make sure it's clear. So for fiscal 2021, you've got $450,000,000 in cost benefits.
We netting that number against the $175,000,000 in discretionary actions from fiscal year 2020 Or what's the right number to think of it as a net benefit in fiscal 2021?
So maybe I can help you out a little bit. We're keeping the permanent savings separate from the temporary action savings. So they're independent of each other. We did about the total year of fiscal year 2020 had about 76 dollars 1,000,000 of costs and we see carryover savings into fiscal 2021. A lot of those costs came through the Q4 and we see the benefit coming into 2021.
So of the savings you see in fiscal year 2021, some comes from the actions we already took. The rest will come about $120,000,000 will come from the actions we plan to take in fiscal year 2021. Those actions will be heavily weighted into the first half, 75% of the dollars will come through the first half and 25% in the second half. So you'll see most of the savings coming into fiscal year 2021 from those actions.
Okay, got it. Thank you.
Thank you. Our next question comes from the line of Nigel Coe with Wolfe Research. Your line is now open.
Thanks. Good morning. And lots of great detail. So no free cash flow forecast for FY 2021. So should we take the cash EPS as the best estimate for free cash flow, but we do have cash restructuring to think about?
And I guess my real question is, do you think that working capital will come down in line with sales? Or are we getting to a point now where we have to start rebuilding some during the second half of fiscal?
Good question, Nigel. Yes, you can expect that cash flow would see what we like to say for our target is more than percent. As Tom described, 10% only would be disappointing for us at this point. If sales decline as we're projecting, then we would expect working capital to come out just accordingly as we typically do. We're very good at pulling that working capital down as the volume comes down.
The improvements that we talk about in the second half or the Q4, keep in mind, is talking against some pretty low comparables. So it shows improvement year over year, but it's not a significant dollar increase in terms of volume. So it would not require significant working capital in the Q4.
Great. Thank you. And then my follow on is on price. It doesn't feel like there's a lot of price pressure across cap goods right now. And clearly, your margin performance suggests you're not seeing much price either.
But commercial aero is an area where we there are some concerns. So I'm just curious if you are seeing some price concession requests or some givebacks to your OEM customers in commercial aero?
Nigel, it's Lee. I would maybe I'll just couple that with commodity material inflation. We do see some modest material inflation across the channels. But our goal always has been from a cost price standpoint to be margin neutral. Thanks,
Nigel.
Thank
you.
Thanks, Nigel.
Thank you. Our next question comes from the line of Andrew Obin with Bank of America. Your line is now open.
Yes. Good morning.
Good morning, Andrew.
Great quarter, by the way. Just first question, I guess, on supply chains, A, both global and North America, a, have you seen any disruption shipping stuff from Asia to North America and also Mexico to the U. S? And have you made any adjustments to your supply chains post COVID? Or are you thinking about making structural adjustments?
Thank you.
Andrew, it's Tom. So I would take you back to really our strategy, which has been a long term strategy in supply chain that we make, buy, sell local and local. It helps us a lot on this and that we do not have a tremendous amount of cross continent type of activity. We've not seen any disruption that's been material in nature. The supply chain team has done a really great job.
And part of our protocol is always we look at shape. And we don't see any major things to worry about there. But this is an shape and we don't see any major things to worry about there. But this is an opportunity for us as our customers look at this and they may have supply chains that are different than the way we're structured. And as that happens and I've not really seen it from any material standpoint yet, that will provide a revenue opportunity for us as they move plants or relocate things.
We have an opportunity since we have a global footprint to satisfy them as they move.
Ken, I guess a follow-up question on inventory from the channel and both distributors and sort of OEs. A, we really since the great financial crisis, we really haven't seen a big restocking cycle. Do you think we're going to get one after COVID? And I know you said people have sort of destocked a little bit, but are we going to see anything material coming out of it? And second thing, what can you tell us about sort of the bullwhip effect in your OE customers?
How much this sort of distorts sales and what you see in the channel?
Andrew, I can start. If Lee has anything to add, he can add on it. I think what you see with both the OE a lot of your question will be the trajectory of any kind of recovery. At this point, based on what we're just giving you this guidance, we're projecting a modest recovery, not some sharp type of recovery. If it's sharper, then I do think you'll see some restocking type of opportunities.
But based on what we're projecting, I think you're going to see just normal kind of end pull through type of stocking. So we saw a pretty major destocking in Q4. We think some of that will continue at a lower rate in both OE and distribution in the first half. But I think the restocking opportunity, we're not projecting or counting on any of that right now. But if the trajectory of the recovery was to be a lot more sharp, then obviously, I think people would be looking at that as something they need to do.
Thank you.
Thank you. Our next question comes from the line of David Raso with Evercore ISI. Your line is now open.
Hi, good morning. I'm trying to better understand the margin guide for the year. Now you're looking at the guidance with amortization excluded. So you're guiding $18,900,000 goes down to $18,100,000 which that seems, let's say, reasonable. Given amortization this year, is going to be a lot more helpful to the margins than last year.
Last year, it added 2 10 bps. Given your sales guide, it adds 260. So when you strip that away and we have more history looking at before this change of how you're reporting, you're implying the margins before amortization being pulled out at 15.5 percent. That's on a $12,500,000,000 sales base. The last time you had margins that low, revenues were $1,000,000,000 or $500,000,000 less than what you're guiding.
And just given the improvement the company has been showing on margin, I'm just making sure, is that what we're trying to suggest that the margins, the old way you used to report it before you pulled out amortization, the margins are going to be down at 15.5 percent. That just seems $500,000,000 or $1,000,000,000 less than some years back when you're doing 15.8 percent or 14.8 percent. I'm just trying to understand why would the margins be that low? I mean, aerospace mix issue a little bit. But can you just help us level set why it would be lower than even years ago when revenues were even lower?
David, it's Tom. I'll start. I'll let Kathy add on. First of all, it's a little bit difficult. You do have to back out acquisitions because acquisitions in the Q1 do throw off the MROs a little bit.
So if you and we can share this with you more privately in the 101 you'll have with Robin and an uncertain times, that in uncertain times, that is a really good guide on MROs. So the MROs MROS has come out to be appropriately positioned. When you look at the respective segments, so North America at 18.9% versus 19.3%. Again, this is making apples to apples amortization put back in both years. We had 11% volume drop and we have mobile mix headwind.
So that seems dropping 40 bps seems reasonable. International, we've got lower volume, and so that's dropping 30 bps, 17.1 versus 17.4. And Aerospace drops the most, which is what helped a lot here in FY 2020, 20.5% to 17.9%. And the big difference there is the international military MRO that we had, which really gave us a strong Q4. And then they had the most severe volume drop for the full year at 20 percent organically.
So I think these are really good numbers. The MROs is, for an August guide, are best in class as far as what we would guide to. I can tell you, we've never ever guided to a 25% to 30% MRR was always typically guided to higher to that 30% range. So we are reflecting how the business has gotten better, but also forecasting into a very uncertain period of time, hence, why we didn't go down to the teens because that's a difficult thing to repeat.
Yes. I think, Tom, when you strip out the change and you look at a pre adding back amortization, what really sticks out is international, which just put up margins year over year through the amortization add back and last year in total did 15.9%, you're guiding at around 14.8 percent with a decremental of around 40%. I'm just trying to understand, is there something unique going on internationally pre adding that more amortization. Is something going on international with the mix?
Yes, part of it
Is that
something I'm missing?
Yes, for me, international has a lot less amortization that's getting allocated. You got to look at both years with amortization in. And that's why I was articulating FY 2020 with amortization all is 17.4%. It's only dropping to 17.1%. So it is not much of a drop at all for international and it matches what you would expect with the kind of volume drop.
So I think part
of the
We'll talk offline about the add backs per by SKU.
You're throwing in international amortizations if it has the bulk of the amortization, bulk of the amortization would reside in North America.
Yes. I'm just taking the quarter, you just reported and timesing it by 4 essentially keeping it as a run rate by quarter. So maybe Robin or Kathy offline, we can get the exact add back by segment for 'twenty one would be great.
Yes. Okay.
Thank you so much. Appreciate it.
Thank you. Our next question comes from the line of Nathan Jones with Stifel. Your line is now open.
Good afternoon, everyone. I guess it is now.
Good afternoon.
I've got one that's probably for Lee. Can you guys talk about what kind of friction you're seeing in your own operations from safety protocols that you've had to put in as part of your processes, whether that's changing how the U shaped cells are laid out or anything like that or additional costs that you've incurred and if that's meaningful to your results? And then are there plans for you to be able to improve those processes and eliminate some or all of those frictions as we go forward?
Well, Nathan, that's a great question. First off, because I know there's a lot of team members listening, I can't say enough about what our worldwide team has done in putting in these safety protocols. We've been audited by a lot of outside governments and they've always applaud what we're doing internally to separate things out and keep our workers safe. But yes, there's a cost. It's not material to put things up.
But it's remarkable what our teams continue to do in terms of reconfiguring ourselves, still getting the same productivity flow, but separating our workers from each other, giving them the space, giving them the, in many cases, plexiglass separations and just organizing a production system that is consistent with our lean production system that gives us excellent flow and keeps everybody safe. So nothing meaningful to talk about, doing a great job and the results, I think, prove it out.
Fair enough. Thanks for that. Maybe on capital allocation, Tom, we're getting down to net debt in the low 3. Probably by this time next year, it's going to be in the 2.5%, maybe a little bit better than that even depending on how the recovery goes. When how are you guys thinking about when to reenter the M and A market in a meaningful fashion?
What kind of leverage metrics do you need to get down to before you look at that? And how is the cultivation of the pipeline going in the meantime?
Nathan, I'm going to start with that and then I'll turn it over to Tom. I'd like to recalibrate you a little bit. Keep in mind that EBITDA is dropping. So the denominator gets a little bit more difficult. Anticipating we'll be able to do.
So Tom, you want to comment?
But on the yes, so we are probably going to be still north of 3 when we finish, obviously, we're going to do and then we possibly can. You saw the pace of debt reduction we did this last
fiscal year.
But on acquisitions, we continue to get the M and A, get the leverage down into those low 2s. And we're going to work very hard. The sooner we can get there, the better we'll be.
Fair enough. Thanks for taking my questions.
Thanks, Nathan.
Thank you. Our next question comes from the line of John Inch with Gordon Haskett. Your line is now open.
Thank you very much. Good afternoon, everybody. Hi, Kathy. Could you comment a little bit on the Q1 expectations for core growth? And obviously, the genesis of my question is, you've got North American orders and international orders much worse than the core growth you just put up and then an outlook that shows a substantial top line rebound right in all of fiscal 2021.
So I'm assuming we're heading to a pretty tough next quarter or 2. Is there anything you could say about that?
John, it's Tom. So similar to what I mentioned when I went through the first half, the first half is going to be minus 19 for the total company. And North America is going to get a little better, from minus 25 last quarter to minus 21 international, minus 15 to minus 12. So we see that gradual improvement. It will be a little bit in Q1 and a little bit more in Q2.
Only thing that will weaken will be Aerospace as Aerospace is longer cycle will be finding bottom. Probably most likely kind of in the middle of the year is when Aerospace finds a bottom.
And do you expect these businesses to good turn positive by the end of fiscal 2021 just as part of your guide or still hovering negative?
Yes. No, yes. We've got in Q4, it will be probably plus high single digits on the industrial portion. And Aerospace is still trying to get back to even. Yes.
Apologies if you went over this before. There's a lot of moving parts. I wanted to ask you, Jim, as a follow-up, the structural actions. I guess I was under a bit of an impression that the company was not looking to take structural actions based on all of the work that you've done before. So Tom, I'm wondering kind of what perhaps maybe I got that wrong, but was there something that did trigger your thought process to go ahead and take structural actions like you think the outlook merited it as the quarter proceeded?
And can you tell us anything about sort of how you're allocating these actions across, say, aerospace versus international versus the domestic ops?
Yes. I'll give you kind of more strategic piece. I can let Kathy comment as far as within the segments. But when we looked at it, John, we looked at Aerospace, Oil and Gas, it's going to be down for long. And so we needed to take structural actions there.
And we also just looked at the trajectory here and the opportunity between all the things we've been doing for even more continuous improvement regarding the structure of the company. So that's why we're looking at permanent. If this was to bounce back sharply already, we would not be doing it. But based on the fact that this is going to be a little longer trajectory and we have some certain end markets that are down for probably several years. We wanted to take the actions now to get in the right position.
And we really felt that way as we going through it at the end of Q4, and that's why we took those actions. So the actions we took in Q4 are really helping us springboard into FY 'twenty one on the savings. I don't know if Kathy wants to add on as far as how it's going to split between segments or not.
Yes. For FY 2021, John, the split will be about half of the costs will be through the international operations and then the remaining 50% will be fairly evenly split between Aerospace and North America. And keep in mind that these actions are more workforce related than they are asset related.
I guess I would just add on, John. One thing that we did by structuring about a fifty-fifty blend of permanent and discretionary is it gives us the flexibility to move depending on what happens on demand.
I'm sorry, I don't understand. Permanent discretionary gives you the flexibility to what?
To move based on demand. As an example, if we just made all permanent action, you probably have a little less flexibility by doing a mixture of both. We got a little more flexibility. And we're not taking out assets, which gives you even more flexibility. You can obviously add people back in.
Yes. No, the numbers are definitely impressive on the paybacks. Thanks very much. Appreciate it.
Thanks, John. In respect of everyone's day, we're going to take one more question and then let you
go. Thank you. Our last question comes from the line of Andy Casey with Wells Fargo Securities. Your line is now open.
Good afternoon and thanks for taking the question. I guess it dovetails with John's last question on the concept of workforce versus assets within the restructuring. Can you comment on, as other companies may have done similar things, whether your experience with this pandemic has accelerated stuff that you already had in the pipeline and what sort of things might those be?
Annie, it's Tom. So we always look at how to continuously get better as far as our people and how we deploy them. And that's a combination of lean and kaizen and simplification, all those type of things. So I would say we always have a pipeline of those type of ideas, the groups and the divisions do. And when you run into where volume is down, if this volume is going to be down for longer, some of those things get accelerated.
Clearly, when we look at the most distressed end markets, that is causing us to take more aggressive action in there because we don't expect them to come back, aerospace as an example, anytime soon. But we always look at how to get better on the structure of the company. And I would say this is that plus our response to the end markets that are being the most addressed.
Okay. Thanks, Tom. And then the last question, there have been quite a few questions around this. But if I take the midpoint of the first half, second half framework that Kathy put out, the decremental margins with all the adjustments are slightly above 30% in the first half and then kind of high 20s in the second half. Is that difference I know I'm splitting hairs a little bit, but is that difference really mix related and the impact of acquisitions?
Or is there something else?
No. Andy, you summarized it. Because when you take out the acquisitions and only have them when they've lapsed, so it's apples to apples. The decrementals are in that 25% to 30% range that I've been saying. So that's pretty good because to your point, mix is not going to help us next year as well.
Okay. Thank you very much.
Thanks, Andy. Sarah, this concludes our Q and A and our earnings call. Thank you everybody for joining us today. Robin and Jeff will be available to take your calls should you have further questions. We appreciate your time this morning.
Enjoy the rest of your day.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.