Good day, ladies and gentlemen, and welcome to the Q2 2018 Parker Hannifin Corp. Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, today's conference is being recorded.
I would like to introduce your host for today's conference call, Ms. Kathy Seabree. You may begin, ma'am.
Thank you, Kevin. Good morning, and welcome to Parker Hannifin's Q2 fiscal year 2018 earnings release teleconference. 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 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 financial measures.
Reconciliations for any reference to non GAAP financial measures are included in this morning's press release and are also posted on Parker's website atphstock.com. Today's agenda appears on Slide number 3. To begin, our Chairman and Chief Executive Officer, Tom Williams, will provide highlights for the Q2. Following Tom's comments, I'll provide a review of the company's Q2 performance together with the guidance for the full year fiscal 2018. Tom will then provide a few summary comments and we'll open the call for a question and answer session.
Please refer now to slide number 4 as Tom will get us started with the highlights.
So thank you, Kath and good morning everybody. Thank you for joining the call and of course your interest in Parker. So let me just make a few general comments and then I'll get into the quarter specifically. So a top focus of the company continues to be safety and the engagement of our people. These are obviously interconnected as we improve safety for all of our team members and we have higher levels of engagement across the company.
We're going to continue to drive higher and higher operating improvements. When you look at orders for the quarter, very strong momentum across a wide range of markets and geographies, very excited about that. Organic growth was very strong, much faster than industrial production growth and this is our 4th quarter in a row that we exceeded industrial production growth. The ONE strategy initiatives when you look at the improvements in growth and operating margins continue to evolve and we really feel we've got a bright future ahead of us. If you look at the progress the last 3 years, remarkable progress.
But I would just characterize that we're still early days of implementing the new Win Strategy. So my thanks to everybody around the world, all the Parker team members for all your hard work and your efforts and looking forward to a bright future. So let's get into the quarter. It was a solid quarter and really a great first half of the fiscal year. And I'll go through a couple of key stats.
Safety performance 22% reduction in recordable injuries, which is very nice. Sales was an all time record for the 2nd quarter up 26%. Organic growth was approximately 10% increase significantly outpacing industrial production growth. And order entry rates increased 13%, making the highest order entry rates that we've seen since Q4 of FY2011. So a couple of comments on margins, because it's difficult to look at margins year over year as prior period did not have CLARCOR in it, this period has CLARCOR in it.
So when you look at adjusted segment operating margins, they continue to improve. We came in at 14.9%. But if you were to add back the incremental depreciation and amortization from the CLARCOR acquisition, you would add 90 basis points back to that number. So what comes into 15.8 percent segment operating margin is really the true underlying operating margins of the company and that represents 110 basis point improvement versus prior year. Another way of looking at it is you look at EBITDA margins for the quarter came in at 16.3%, again 110 basis point improvement if you also adjust out for the divestiture gain that we had in last year's Q2.
When you look at adjusted EPS, it increased 26%, again excluding the divestiture gain that we had last year. And the new tax legislation was a $225,000,000 net one time negative adjustment. Kathy will go through that in more detail in her comments. So when you look at cash and capital deployment, our goal is to be great generators and deployers of cash. You've heard me talk about that before.
It's really an overarching theme of the company. And we remain on track to deliver significant cash flow over the next several years. When you look at the new U. S. Tax reform, clearly in the quarter it was a negative one time adjustment.
However, many long term positives for us. 1st, it creates a more competitive environment really levels the playing field with our foreign competitors. This creates a nice share gain opportunity for us. It's going to encourage our customers' investment decisions because the way CapEx is treated in the new tax law is clearly going to encourage CapEx and in turn will drive through more Parker content as part of that. And then there's greater flexibility mobility moving cash around the world which is a big advantage for shareholders.
So when we think about deployment priorities, they really remain the same. However, we have greater flexibility obviously. So first on the list is continuing our history of increasing annual dividends paid. So maybe to help clarify why that is so important to us. Obviously, our long standing record is important.
We don't want to break that. However, it really speaks to our ability over the cycle to consistently generate cash, which emphasizes why we are such a great long term investment for shareholders. Our target on dividends is 30% of net income over a rolling 5 year period of time. So obviously as our net income grows which it will our dividends will grow in corresponding fashion. 2nd priority is CapEx for organic growth, the most efficient way to deploy capital back on behalf of our shareholders.
So that will be at the top of the list. The beauty of our business model and our cash flow generation when you take those first two priorities you complete them, we have roughly half of our cash still available to deploy. So here in the near term, we're going to reduce leverage with the Clark Ward deal. We're also going to continue our 10b5-1 share repurchases. But then as the debt reduces, we're going to reevaluate acquisitions and discretionary share repurchases with the goal always being that we're going to deploy capital in the best long term fashion that we can on behalf of our shoulders.
I would just remind people that we utilized overseas cash to help fund CLARCOR, so we put most of that overseas cash to work already. So I want to talk about the outlook. And let me maybe just start with some headlines of the new guidance when I look at it from a full year. Now safety, it's hard for me to predict a full year there, but injury is down 22%. Obviously, we want to continue that trend.
Sales up 17% versus prior year. Adjusted EPS up 21% versus prior and adjusted EBITDA margins forecasted to be 17.6% for the full year versus 16.3% last year. So that's 130 basis points improvement again excluding the divestiture gain that we had last year. Now specifically regarding EPS, we're increasing EPS adjusted EPS by $0.45 at the midpoint. So our new range is $9.65 to $10.05 reflects the reduction in the U.
S. Federal tax rate, our year to date results. Regarding realignment in CLARCOR cost to achieve, they're going to be at the same levels that we previously anticipated. So now going forward, we're going to continue to drive The Win Strategy and I'm going to just make a couple of comments about each of the goals here briefly. But engaged people is still our first goal.
It's all about creating that ownership culture. And I would remind people that being an owner people think differently when they think and act like an owner and it creates a level of intimacy and accountability with your respective area of responsibility that drives results. And I would characterize our engagement process across the company as being the water that's going to lift performance up for the whole company. 2nd goal is premier customer experience and we're moving from a service mindset to an experience mindset and we're doing that by rolling out a new metric like Ledger recommend and that's now fully deployed and we're getting great customer feedback from that. It's going to give us tremendous opportunities to improve.
And remember the whole purpose behind a great experience is it leads to share gain leads to faster growth. 3rd goal is profitable growth and we have a number of initiatives which I won't go through here all around driving growth faster than the market. Then in financial performance, it's what I would call affectionately the big 4 strategic initiatives at simplification, lean enterprise, strategic supply chain and value pricing and we see tremendous upside really in all four of those categories. Now we're really looking forward to seeing everybody for Investor Relations Day on March 7. So let me just give you a quick commercial on what the high level agenda is going to be.
We're going to give you a progress report on the New Win Strategy. We're going to give you an update on our 5 year targets. We'll give you a much more detailed review of the CLARCOR synergies. Let me just characterize that the integration is going very well. Very happy with what's happening there, but we'll give you more color on that at an IR day.
And then we're going to give you presentations from 3 of our 6 operating groups Aerospace, Engineered Materials and Filtration. First time we've given that level of transparency and detail. So I think you will enjoy that. We're looking forward to sharing that with you. So in sum, we're looking forward to a record year and continuous improvement with the Win Strategy.
So with that, I'm going to hand it back to Kathy for more details on the quarter.
Okay. Thanks, Tom. I'll now refer you to slide number 5 and begin by addressing earnings per share for the quarter. Adjusted earnings per share for the Q2 were $2.15 compared to $1.91 for the same quarter a year ago. When comparing to Q2 fiscal 2017 results, please recall that last year included a $45,000,000 or $0.21 per share gain on the sale of a product line, which was not adjusted out.
Excluding this product line gain, adjusted earnings per share increased 26% from the same quarter last year. The respective adjustments for both years are as follows: fiscal year 2018 second quarter operating income adjustments include business realignment expenses of $0.07 and CLARCOR cost to achieve of $0.07 This compares to $0.04 for business realignment expenses in the Q2 of fiscal year 2017. Other expense in fiscal year 2018 has been adjusted exclude a net gain of $0.05 which includes a gain from the sale of assets offset by the write down of an investment. Prior year other expense was adjusted for $0.09 of acquisition related expenses. Last but not least, fiscal year Q2 2018 has been adjusted for the net one time impact from U.
S. Tax reform of $225,000,000 or 1 point $6.5 I'll discuss this adjustment in more detail on slide 13. If you move now to slide number 6, you'll find the significant components of the walk from adjusted earnings per share of $1.91 for the Q2 of fiscal 2017 to $2.15 for the Q2 of this year. The most significant increase came from higher adjusted segment operating income of $0.62 attributable to earnings on meaningful organic growth, income from acquisitions and increased margins as a result of our new Win Strategy initiatives. I'd like to point out that this $0.62 improvement is net of incremental depreciation and amortization expense of $0.16 taken on with the CLARCOR acquisition.
A lower effective income tax rate equated to a year over year increase in earnings per share of $0.07 Adjusted earnings per share was reduced by $0.31 on the other expense line, primarily due to the non recurring $0.21 per share gain from the sale of product line included in the prior year. Higher interest expense was an equating to a $0.03 per share reduction. Moving to slide 7, you'll find total Parker sales and segment operating margin for the Q2. Total company organic sales in the 2nd quarter increased year over year by 9.5%. This was a 13.3 sorry, there was a 13.3% contribution to sales in the quarter from acquisitions, while currency positively impacted the quarter by 3.4%.
Total segment operating margin on an adjusted basis improved to 14.9% versus 14.7% for the same quarter last year. I'd like to remind you that the second that the fiscal 2018 operating margins include incremental depreciation and amortization from the CLARCOR acquisition. Without this incremental expense, margins would have improved 110 basis points. This margin improvement reflects the benefits of higher volume combined with the positive impacts from our Win Strategy initiatives. Moving to slide number 8, I'll discuss the business segments starting with Diversified Industrial North America.
For the Q2, North American organic sales increased by 12.7% compared to last year. Acquisitions contributed 26.3% to sales, while currency also positively impacted the quarter. Operating margin for the Q2 on an adjusted basis was 15.1% of sales versus 16.6% in the prior year. Current year includes 160 basis points of CLARCOR related incremental depreciation and amortization expense. Without this, margins improved 110 basis points.
I'll continue with the Diversified Industrial International segment on slide number 9. Organic sales for the 2nd quarter in the Industrial International segment increased by 10.7%. Acquisitions positively impacted sales by 6%, while currency positively impacted the quarter by 8.1%. Operating margin for the 2nd quarter on an adjusted basis was 14.2% of sales versus 13.1% in the prior year. This includes 40 basis points of CLARCOR related incremental depreciation and amortization expense.
I'll now move to slide number 10 to review the Aerospace Systems segment. Organic revenues increased 0.8% for the 2nd quarter, Strength in both commercial and military aftermarket more than offset weakness in OEM activity during the quarter. Operating margin for the Q2 adjusted for realignment costs was 16% of sales versus 13.5% in the prior year, reflecting the impact of a favorable aftermarket sales mix and lower development costs during the quarter. Moving to slide 11, we show the details of order rates by segment. As a reminder, Parker orders represent a trailing average and are reported as a percentage increase of absolute dollars year over year excluding acquisitions, divestitures and currency.
The Diversified Industrial segments report on a 3 month rolling average, while Aerospace Systems are based on a 12 month rolling average. Total orders continue to be strong improving to a positive 13% for the quarter end. This year over year improvement is made up of 15% from Diversified Industrial North American orders, 13% from Diversified Industrial International orders and 8% from Aerospace Systems orders. On slide 12, we report cash flow from operating activities. Year to date cash flow from operating activities was $460,000,000 or 6.8 percent of sales compared to 7.5 percent of sales for the same period last year or 11.5% last year adjusted for a $220,000,000 discretionary pension contribution.
The significant capital allocations year to date have been $176,000,000 for the payment of shareholder dividends, dollars 145,000,000 or 2.2 percent of sales for capital expenditures and $100,000,000 for the company's 10b5-1 repurchases of common shares. On slide 13, I'll now take a moment to discuss the impact of U. S. Tax reform. In the 2nd quarter, we incurred a net $225,000,000 charge that includes a $287,000,000 one time charge for the deemed repatriation of non U.
S. Earnings, offset by a favorable $62,000,000 adjustment to our net deferred tax liabilities to the new 21% federal rate. I need to mention that these one time adjustments are our best estimates at this time. However, the amounts may change as we continue to analyze the impact of tax reform. Due to our June 30 fiscal year, our statutory U.
S. Tax rate for fiscal year 2018 is blended at a 35% rate for the first half of the year and a 21% rate for the second half of the year, which results in a 28% full year U. S. Statutory rate. This reduced rate will have a favorable impact on cash for fiscal year 2018.
As for the long term implications, the U. S. Tax reform will result not only in increased net income, but we can benefit from improved mobility of our non U. S. Cash.
The payments of the deemed repatriation charge will commence in fiscal year 2019. It will be a use of cash over 8 years with significant balloon payments in the last 3 years. Based on our initial analysis, we expect our long term effective tax rate to be approximately 23% beginning in fiscal year 2019. Fiscal year 2018 is still a blended rate. The full year earnings guidance for fiscal year 2018 is outlined on slide number 14.
Guidance is being provided on both an as reported and adjusted basis. Total sales increases are expected to be in the range of 15.3% to 18.9% as compared to the prior year. Anticipated full year organic growth at the midpoint is 6 0.5%, which is 100 basis points higher than our previous guidance. Acquisitions in the guidance are expected to positively impact sales by 8.1% and currency is expected to have a positive 2.5% impact on sales. We've calculated the impact of currency to spot rates as of the quarter ended December 31, 2017.
We've held those rates steady as we estimate the resulting year over year impact for the remaining quarters of fiscal year 2018. For Total Parker, as reported segment operating margins are forecasted to be between 15.3% 15.7%, while adjusted segment operating margins are forecasted to be between 16.1% 16.5%. Full year tax rate is now projected to be 25% down from our previous guidance of 28%. For the full year, the guidance range on an as reported earnings per share basis is now $7.38 to $7.78 or $7.58 at the midpoint. On an adjusted earnings per share basis, the guidance range is now 9.65 $6.5 to $10.05 or $9.85 at the midpoint.
In addition to the full year net loss of $5,000,000 resulting from the combined gain on sale and write down of assets and the net provisional tax charge of 225,000,000 this guidance on an adjusted basis excludes business realignment expenses of approximately $58,000,000 for the full year fiscal 2018. Savings from business realignment initiatives are projected to be $25,000,000 In addition, guidance on an adjusted basis excludes $52,000,000 of CLARCOR cost to achieve expenses. CLARCOR synergy savings are estimated to be $58,000,000 in fiscal year 2018. We continue to remain on pace to realize $140,000,000 run rate synergy savings for CLARCOR by fiscal year 2020. Savings from all business realignment and CLARCOR costs to achieve as well as anticipated full year favorable effects from U.
S. Tax reform are fully reflected in both the as reported and the adjusted guidance ranges. We ask that you continue to publish your estimates using adjusted guidance for purposes of representing a more consistent year over year comparison. Some additional key assumptions for full year 2018 guidance at the midpoint are sales are divided 48% first half, 52% second half. Adjusted segment operating income is divided 45% first half, 55% second half.
Adjusted earnings per share first half, second half is divided 45%, 55%. 3rd quarter fiscal 2018 adjusted earnings per share is projected to be $2.59 at the midpoint and this excludes $0.08 of projected business realignment expenses and $0.09 of projected CLARCOR costs to achieve. Slide 15, you'll find a reconciliation of the major components of fiscal year 2018 adjusted earnings per share guidance of 9.85 percent share at the midpoint compared to the prior guidance of $9.40 per share. Increases include $0.14 from higher segment operating income, dollars 0.41 from a lower effective tax rate and $0.01 from lower projected corporate G and A. Offsetting these increases is an $0.08 per share decrease from higher forecasted interest and other expense and $0.03 per share from increased fully diluted share count.
Please remember that the forecast excludes any acquisitions or divestitures that might close during the remainder of fiscal 2018. This concludes my prepared comments. Tom, I'll turn the call back to you for your summary comments.
Thank you, Kathy. So we're pleased with the strong first half of the year that we've had. The combination of our sales growth, the lower cost structure that we've built, integration of CLARCOR and execution of the Win Strategy that combination is projecting for us to have the best fiscal year that we've ever had in this year. The company with an all time sales record. So my thanks to everybody around the world, the Parker team for all your hard work and efforts into creating that.
So at this point, let me hand it back to Kevin. We'll start the Q and A part of the call.
Our first question comes from Joe Ritchie with Goldman Sachs.
Thanks. Good morning, everyone.
Good morning, Joe.
So maybe let's just touch on the North American margins for a second. Clearly, it's going to be the pretty big focal point today. And you guys have talked a little bit about the impact from the CLARCOR and the dilutive impact that's having to your margins. But did that number change at all on a quarter by quarter basis, because the margins were down a little bit more this quarter than they were in the prior quarter? And then my follow on there is, can we maybe just talk a little bit more about like the other potential puts and takes to margins and what impacted them this quarter?
Okay. So Joe, this is Tom. Maybe to help everybody, I'm going to run through the margins and give you back the incremental D and A depreciation and amortization that we have in the Carver deal. Kathy did that. I'm going to summarize it again.
So North America if you add that back 160 basis points of incremental depreciation and amortization North America's operating margin for the quarter would have been 16.7%. International, you add back 40 basis points. International's margins would have been 14.6%. Aerospace obviously not impacted 16.0. Total Parker you head back 90 basis points for 15.8.
So when you look at it all in, North America still was higher by 10 basis points versus prior year. There are some challenges that we faced in the quarter and face a little bit when you just look at the mix of order entry and sales that we have. When you look at our we're tickled pink with the sales growth, but the mobile part of that sales growth is growing at a faster clip than industrial and distribution. So we got mobile growth at approximately 20% for the quarter, industrial high single digits and distribution in the low teens. So that mix is clearly putting a little bit of margin headwind for us.
And we had a number of plant closures. And when you look at our restructuring, restructuring dollars are not always equal level of complexity. If you close down a headquarters like when we closed down Franklin, it's a little more straightforward. That's the headquarters for CLARCOR. Those of you who aren't familiar with that.
It's a little more straightforward as far as how you incur those costs. We are right now in the heat of the restructuring for CLARCOR in particular around the manufacturing footprint consolidations. So to give you some color on that, so plant closures last year, 23 plant closures for the total company. This year, 39. So that level of plant closures and there's inefficiencies that you have that you're impacted by really kind of on both ends of that equation.
So plant A that's getting closed down obviously has some impact when you announce it. Things don't work quite as well after you've announced a plant closure. And then Plant B as it's coming up to speed, inefficiencies, the yields, line rates, etcetera just take a little bit of time to come up. So we've incurred all that and the margin still grew 10 basis points again making it apples to apples with depreciation and amortization. But that gives you some color as to some of the dynamics that we're feeling from a margin standpoint.
That's helpful, Tom. I guess maybe the follow on there is, is this quarter then the trough from that we should expect from like a from an inefficiency perspective, from the plant closure perspective? Or is this something that could potentially be a headwind to North America margins for the next couple of quarters?
Well, it's in our guide North America margins for the full year at 17.2% for the full year which is pretty nice performance with all of this. But yes, we would because we're right now in the throes of this, we experienced it this quarter. You're probably going to see it for the next 2 quarters. Remember this is a 3 year synergy plan that we're laying out. The bulk of the heavy lifting from a footprint standpoint is this last quarter we just experienced and really the next six months.
But even with all that, we've got margins at very nice levels. EBITDA which is a nice way to look at it because it takes out the depreciation and amortization growing to 17.6% versus 16.3% last year. I guess I would just remind everybody when we announced the deal December 1, 2016 not that I remember that date intimately. That was an important date for the history of the company. We announced that we would tackle a 300 basis point EBITDA margin improvement.
And at that time when we made the announcement, we were sitting at 14.7 percent EBITDA margin. So we have almost accomplished that 2.90 basis points. Remember we told you 300 bps was a 5 year look for the combined company. So we've done it basically in 2 years almost. So I'm very proud of what we've done from a margin standpoint.
We have a few of those challenges that I just mentioned, but we're putting up some pretty nice numbers in really the heat of the Clark Ward synergy plan.
That's helpful. If I could maybe sneak in one more just on again just the kind of end of the calendar year. We've been hearing from some of our companies that because organic growth surprised to the upside and clearly like the growth in North America was extremely strong that there were higher rebates as well to distributors that flushed out in the Q4, at least the calendar Q4. Did you guys experience any of that just given 50% of your business fell through distribution?
This is Lee. We did have great sales during the quarter and order entry continues to accelerate, but there's nothing meaningful regarding rebates or anything that's factored into what you've seen.
Okay, got it. Thanks guys. I'll get back in queue.
Thanks, Joe.
Our next question comes from Ann Duignan with JPMorgan.
Hi, good morning.
Good morning, Ann. Clearly, my question has been answered.
It would have been on the North American margin. So the color was helpful at least. Maybe switching gears a little bit to Aerospace. Can you talk about your mix of business today and where you see that going? If I recall, you were pretty strong in the 747, pretty strong in the A380, I mean, programs that might be ending and also very strong with Embraer and whether your relationship with Embraer would change if Boeing were to acquire Embraer.
So just a little bit of background on the aerospace business, please.
Anne, I'll start out. In the quarter, we had an unusually strong mix of aftermarket both commercial and military and that came with our higher margins since our aftermarket typically has higher margins, but it was also a very favorable mix of aftermarket. It was a little unusual in the quarter. However, in the Q3, we see our strongest aftermarket activity. So 3rd quarter should be a similar mix, but it's not necessarily a full year mix that we would normally see.
Yes, we have platforms that are slowing down wide body. We see a lot of slowness in the market. But keep in mind that we're very diverse in our portfolio and there are also new programs coming on. So as some of them are shutting down or slowing down, we're also seeing growth in like the A350 and in platforms like the Global 5000. And so I think our portfolio mix helps balance the impact that you're describing and won't be a you won't see a significant impact.
Okay. So you're suggesting that fiscal Q3 should be strong margins and then taper off, is that what I should read in the near term?
Q3 tends to be our strongest quarter for aftermarket. It's when the OEs, the large airlines are typically having the planes brought in for repair. So 3 will be good, yes.
Okay. I'll leave it there and get back in queue. Thank you.
All right. Thanks, Dan.
Our next question comes from Joel Tiss with BMO. Hey, guys. How's it going?
Hi, Joel.
I'll just glue both of
my questions together. I just wonder if maybe Tom or whoever, if you could talk a little bit about it seems like the order strength is a lot higher than what you were hinting at earlier in the year for your second half. I think your implied order growth was pretty close to flat. And I just wondered why more of that. Is there anything happening that would undercut your confidence on the sustainability of that?
And then second, if Lee could just kind of run around the world and give us some of the highlights of the different businesses? Thank you.
Okay, Joel. I'll start off with Stomm and I'll hand it to Lee in a second here. On the order entry, I think in our sales forecast, so we revised our guidance basically up 100 basis points on organic from 5.5 to 6.5 kept acquisitions, kept currency, same assumptions. So the new guide up 100 bps. In the second half in particular, we raised it from the previous guide was 3.7% to 5.0%.
So that's what we're forecasting for the second half of the year. And I would just remind everybody, we don't feel anything weakening from a macro standpoint. We will cover that momentarily. We feel good about the macro markets and all that. Our sales numbers were based on the comps that we have versus the prior year.
Last year, second half of FY 'seventeen was a plus 6% organic growth. So our plus 5% forecast is building on top of the plus 6%. So that's just the comparable math that makes the numbers. We feel good about the macro conditions. I'll let Lee kind of take you through the world.
Joel, it's Lee. So I'm not going to comment on aerospace. I think Kathy did a great job on that. I would just say industrially, as we look through all our end markets, it's really hard to find any significant markets to not continue to show positive year over year order entry growth during the quarter. And some of these markets fell a long ways, especially when it comes to natural resource end markets.
And they continue to show grow during the quarter. We saw strong growth in construction equipment, mining, oil and gas, which is mostly land based, almost all land based, frankly. And then other markets like semiconductor, microelectronics, heavy duty truck and distribution was strong. Land based oil and gas, if I think about the Americas, the amount of active rigs continues to expand. And I think what's really positive is we continue we are starting to see quote activity with some customers that we haven't seen much in the past.
So they're doing more than just refurbishing what's in the field. We also saw a great continued rebound from our distributor partners around the world. Almost every region double digit order entry which is really nice and they continue to be very optimistic. The only notable market that we've seen contraction in and it's been significant has been large fame power gen. I mean that's gotten a lot of press and it's real.
So that's had a negative impact. And just commenting on the regions, I won't take you through all the markets, but North America continue I continue to be very encouraged by all the increasing end market activity. It just seems that it's somewhat firing on all cylinders. I think there's some worry about maybe implant automotive activity, but we haven't seen much dampening on that yet, but we're keeping an eye on that. Throughout EMEA, continued strong order entry growth.
I think this will be the 2nd year we're forecasting organic growth, which there was a long trough there. We didn't see that. And then in Asia, Japan, Korea, China continue all to be very strong. Southeast Asia is really good. So I'm encouraged by what's happening there.
And then just lastly on Latin America, it seems that there's some good positive momentum in Brazil despite all the politics. So we're hopeful that continues to turn around. So I would just say we're really happy with what's happening in the M both domestically and internationally. And I think in some cases we're pretty early stages because of how far some of those industries have fallen.
That's really super. Thank you.
Thank you.
Thanks, Joel.
Our next question comes from John Henn with Deutsche Bank.
Thank you. Good morning, everyone. Kathy, what hi, the tax rate was a little lower in the second quarter. I don't think anyone I don't think you talked about it. What was that about?
Sure. So we're let me just reiterate for the year we expect it to be 25%. We're at a 28% blended rate for U. S. Federal.
In December, we adjusted everything to that new blended rate. So as part of that, you do a catch up of what you had booked provisionally in the Q1 and you catch up the year for the 6 months to your assumed effective rate for the full year. So you get a little bit of a double benefit in December from the lower tax rate for the year.
So even though tax okay, so I'm just trying to understand. Tax reform though is a calendarized impact. This is you're saying this is actually a function of tax reform. Is that what you're saying?
Yes, correct. So and it was effective January 1, but for us it becomes half effective. So what they require us to do is take the number of days that we would be at a 35% rate and the number of days we'd be at a 21% rate and that comes to a 28% effective rate for our full fiscal year.
Okay. That makes more sense. That's I got it. Thank you.
Okay.
What about the mix of orders? Tom, you talked about stronger OE, right? And that's you talked about the ramp down, I guess, in terms of the plants, but the stronger OE is sort of biasing margins a little bit to the downside. Is that embedded in the mix of orders that you're seeing, so we would expect that kind of OE mix to still prevail over the coming quarters?
Yes, John, it's Tom. Yes, it would. And that's what's factored into our guidance. Part of why we left margins the same as our prior guide because of that. But over time that's going to start to stabilize and those things the high spike in mobile activity is going to start to stabilize at a lower number.
And I think this imbalance I guess I would call it of order entry being shifted a little bit more to mobile will become more in check as we go throughout the next several quarters.
Right. So mobile is clearly accelerating and I think you did make that claim globally. What's happening with respect to distribution then? At the high single digit, I think you called out that run rate, Is that actually accelerating at a lesser cadence or is it sort of steady?
I would characterize and I can let Lee chime in. Distribution is in the low teens is what it's at. But I would characterize it as stable. High levels of growth stable and it will glide down into something in the mid single digits in the second half mainly just because of comps to prior year.
Mark, also I think we took your guide from what $0.20 to $0.33 Was that all tax? Or is the business actually getting better?
I'm sorry, I didn't quite understand what you're asking, John.
The EPS accretion from CLARCOR, I calculated it was it looks like it's about $0.33 for fiscal 2018. I thought you had said it was going to be about $0.20 Maybe that's not true. I'm just wondering, are you expecting CLARCOR accretion benefits to improve from what you had last said, I think last year, right?
So Yes, John. We're still at about a $0.20 accretion for CLARCOR for fiscal 2018.
For fiscal 2018, okay.
Yes.
Last, I guess, I wanted to ask Tom just a strategic question. Is there an opportunity to maybe migrate if you look at your sort of the distribution of your customers, maybe some of your smaller ones at the tail? Is there an opportunity to migrate those in your OE bucket more to the distribution side to perhaps free up some of your own overhead and other operating costs, you know what I mean, to try and drive further Parker Hannan productivity over time?
Clearly John you hit the nail on the head. What you're referring to is really part of our simplification program and the element in particular that you talked about was the revenue complexity side of things that the eightytwenty look at all of our revenue and our products. And clearly when we look at that tail that's one of the areas we're looking at is can we move some of that product to distribution distributors do a better job of servicing the customers in that regard. Could we look at self-service there? Can we look at alternative part numbers that might be higher running part numbers that run through the plant?
So there's a variety of tools that we're looking at. But yes, you nailed one of the things we're looking at.
I'm assuming like where are you at in terms of beginning to implement that? Is this still very preliminary? Or have you actually already started? Just trying to obviously, you've done a great job with respect to the margin expansion that you called out. So we're all trying to think about the next level and we can obviously compare Parker versus ITW or other companies with higher margins.
So the thought process is really around just various levers you may be able to pull over time to help drive your overall profitability higher from here.
Yes. We see more opportunity obviously and that's something we'll go into more detail at IR Day. But when I think about simplification, lean, strategic supply chain, value pricing, all those things underneath the financial performance initiatives, I would characterize them as all having lots of upside. The revenue complexity piece that we just were talking about, the first inning, clearly the first inning. So lots of upside there.
Got it. Thanks much. Appreciate it.
Thanks, John.
Our next question comes from Andrew Obin with Bank of America Merrill Lynch.
Hi, yes. Good morning, still, I guess.
Good morning, Andrew.
Just a question on yes, it's been a long day. Just a question on international margins. It just seems in your outlook, you're actually modeling them now a little lower than before. And I was wondering if that's the impact of mobile mix, and what else is going on there, if the dynamic there is similar to what you guys are seeing in North America?
Yes. Andrew, it's Tom. It would be the mobile mix because most of our heavy plant closures are in North America a little bit in Europe. But North America is feeling more of the plant closures. So Europe, the international piece, we changed the guide by 10 bps.
It's mainly the mobile mix.
And just a question in terms of dealing with higher volumes and maybe it's just sort of a 3 pronged question. Just focus on distributors, do they need to change their behavior? Do you have enough capacity? And finally, working capital impact just because volumes are going up a lot faster than you guys thought?
Andrew, it's Lee. I think if I understood your question is we have to do anything different to handle the
That's exactly right. Yes. And working capital requirements, exactly.
No. I'd say from a working capital requirement standpoint, I mean, obviously, when you have a huge influx in business, it taps receivables for a period of time. But I would say the biggest working capital requirements we've had throughout the quarter really the first half of the year have been with all these plant closures. So there's been a conscious build of inventory in some areas so we don't impact the customers. I would say with revenue with our OEM customers, there's nothing that we do differently.
Some of these customers we categorize our products high runners running through the shop and distribution would follow many times too in the same category. So there'd be nothing different. It's just a level of activity would heighten up with the value streams running at not at capacity, but running a lot higher demand than they've run-in the past.
Good problems to have. Thanks a lot. Thank you.
Thanks, Andrew.
Our next question comes from Jamie Cope with Credit Suisse.
Hi, good morning. I guess two questions. 1, in the quarter and I guess as you look at your the remainder of the year, are there any different assumptions around price cost or your ability to get price in the market? Can you just talk about how that's going? And then my second question, sorry, back to North America Industrial.
Tom, I appreciate the comments you made about CLARCOR and closing more plants and stuff like that and that will impact margins or incrementals over the next two quarters. But as we shift to fiscal year 2019 with most of that done, can we start to think about North America achieving above more normalized incremental margins? Or given where we'd be in a cycle, could you get above average incremental margins versus your longer term target? Thanks.
Jamie, it's Tom. I'll start with your last question and let Lee talk about price cost. So yes, once we get through a lot of this heavy lifting, we would expect things to normalize. The other part that's going to help is once we anniversary CLARCOR and we can look at the total company apples to apples, it's going to be a lot easier. And our Q4 is the first time when we get apples to apples.
And even with all the plant closures in that which will still be happening in Q4, we see that getting to the 30% MROS type of level. So, yes, the short answer is you'll see us get back to normal type of marginals. So I'll let Lee talk about go ahead, Jamie.
Sorry. Now just to clarify, so 30% or given where you are in the cycle and with some of the restructuring, could we theoretically do better than that? Because 30% I would assume is like more of your normalized, but given the restructuring and you're still early in the cycle, I would think because it would still be the back half of calendar year 2018. You know what I mean that we could get to better than that?
Well, the number I gave you 30% in Q4 is with all that noise and all the plant closures with the mobile mix not necessarily helping us. So I think to the underlying margins at a pretty high level.
Okay. That's helpful. Thank you, Tom.
And then Jamie on price cost, I would tell you that there clearly is inflation on the horizon. I mean you can see materials indexes. We've seen it in copper. We've seen it etcetera. We've been through these cycles before.
I would say at this point in time from a price cost standpoint at a corporate level we're good. But we're definitely taking actions to stay ahead of this as we go forward.
Okay. That's helpful. Thanks. I'll get back in queue.
Thank you. Thanks, Jamie.
Our next question comes from Nathan Jones with Stifel.
Good morning, everyone.
Good morning, Nathan.
I'm going to beat the North American margin horse one more time. Tom, you talked about the facility closures up from 20 to or 23 to 39 this year. Is it possible for you to quantify the impact of the disruption that that's had the need to build inventory that kind of stuff? And are you going to be back down to, I don't know, 23 in 2019? Will you be done through this?
What's the kind of step down in the facility closures that you're looking at for 2019?
For 2019, obviously, we haven't worked all that. But clearly, the bulk of the CLARCOR activity will be through. There might be some residual things that we're doing plant closures on CLARCOR in 2019. But we haven't obviously looked at the rest of the business at that point. But clearly this is a spike in plant closures with them.
Now we have a real strict policy on how we count for making adjustments. And so we only count adjustments that you can put clear plant closure costs on severance and those kind of things. So we don't try to add up manufacturing inefficiencies and production rates and yields and all that kind of things. And to be honest with you, it would be I'd be just giving you a number that would be out to see to my pants and wouldn't be a good factual number. But I think anybody that's closed a plant knows exactly what I'm talking about.
And you feel it on the sending plant and you feel it on the receiving plant. So it's real. And typically any plant closure even a well laid out plant closure feels that for 3 to 6 months. And so that's we're in the middle of that now. That's we fully expected that.
This is the biggest acquisition we've ever done with the largest synergies we've ever done and we feel very good about it. But you're kind of right now in the heat of the battle. The supply chain savings, SG and A, logistics, those are more straightforward. If I was to characterize, it's like the slope of the treadmill. Those are at a lower slope.
When you close a lot of factories, it's a higher slope of the treadmill. And I would just commend the teams that I know is listening to this, closing these number of factories and what we've done from a margin standpoint and taking care of customers is really terrific work that the team is doing.
Okay. And then my follow-up is on one of your prepared comments where you said you thought that the change in the tax bill would open up share gain opportunities for you and drive customer CapEx. Can you maybe talk a little bit about a little bit more about where you see those share gain opportunities? And I know it's very early on the customer CapEx side, but maybe what your
encourage people with the kind of tax laws with an immediate expensing for tax purposes of CapEx for the next 5 years that has to be somewhat additive to the current macro environment. So I take a current very favorable macro environment add that encouragement there and I think it bodes well for CapEx in general how it all plays through and exactly what areas that's yet to be determined. But we feel good about that. As far as the gaining share, the point there is we have a number of foreign competitors which I won't highlight which have had a distinct advantage forever. And now that we have a level playing field, I like our chances.
I like our chances going toe to toe with them with a level playing field and I'll take out bet on us any day of the week. So that's all I was referring to share gain is that we don't have one arm behind our back anymore and let the better person win the order.
Okay. Fair enough. Thanks very much.
Thanks, Nathan.
Our next question comes from Jeff Sprague with Vertical Research.
Thank you. Good morning.
Good morning, Jeff.
A lot of talk obviously about integration and plant closures, CLARCLAR related. I wonder now if you just step back and look at the Parker footprint. You've also done a lot of restructuring here over the last several years. And now we're hitting a pretty big business inflection. How do you feel about the footprint right now, actually adequacy of the footprint?
And what's the trajectory of your own CapEx looking like the next year or 2?
Jeff, it's Tom. I think our CapEx will continue to be about 2% of sales. We've been running in a 1.7% to 2% range and I would see it at that level and I'll expand a little bit more upon that at IR Day kind of more of a strategic thought on that. As far as the restructuring going forward, let me just make one comment to kind of calibrate people as to what we've done with the restructuring the company. And I'll start with prefacing this that there's a lot more that we can do.
But anyhow, we're going to circle for the first time in the history of the company hopefully with this guidance crossing $14,000,000,000 So it makes you go back and look, okay, what was the last all time high of the company and how many people did we have? So the last all time high was $13,200,000,000 in FY 2012 and we had 59,000 team members. So with this guidance, we're basically our round number is going to be $1,000,000,000 higher than that and we're going to have 2,500 fewer people than we had at that peak. So an extra $1,000,000,000 of revenue 2,500 fewer people. So clearly speaks to what we've been doing as far as the efficiencies and the structure of the company.
I would just reiterate like I said at the beginning that we still see opportunities to continue to improve that. And it's those big 4 that I referenced simplification, lean, supply chain and value pricing as margin enhancements. Whether we're I doubt that we would continue to be at 100 and $10,000,000 clip on restructuring. I think it's going to stabilize at some level. But I don't think it will be back.
If you look at us historically before the New Win Strategy, we may have been in that $20,000,000 to $30,000,000 type of range in restructuring. And I would see us being a little bit higher than that because I think there's still opportunities for us to continue to simplify the structure of the company, make it faster on behalf of our customers and we're going to continue to work that.
And then just briefly on M and A, obviously you're in a deleveraging and digesting mode here still primarily. But do you see bolt ons coming into your view and anywhere in the portfolio and maybe in filtration in particular?
Yes. Now M and A is obviously something that we stay engaged again Jeff, it's Tom. We stay engaged with us all the time because the relationship building is important to do whether you're in a position to deploy capital towards that or not. So we have that. We have the strategic candidates that we'd like to add to the portfolio and how word fits and complements our strategy.
And we're working that every day every week. So as we start to glide down like I mentioned earlier our debt position we'll clearly look at that. And if I was to characterize our portfolio strategy, 1st we want to be a consolidator of choice. So if it's in our space, we'd like to be at bad. Doesn't mean we'll swing, but we'd like to be at bad to take a look.
But all things being equal, we'd like to invest more in filtration, engineered materials, aerospace and instrumentation part of the portfolio for a lot of strategic reasons, margins, resilience through a cycle, growth capabilities and those type of things. So that would be a little bit of color behind the M and A strategy.
Thank you very much.
Thanks, Jeff.
Our next question comes from Jeff Hammond with KeyBanc.
Hey, good morning.
Hi, Jeff. Can you just
you talked about some of the disruption, but can you speak to kind of how you're thinking about CLARCOR cost synergy savings second half versus first half?
Yes. We're going to have $58,000,000 of savings that we enjoyed this year in fiscal 2018. About 35% of that went in the first half and we expect 60 5% of that in the second half.
Okay, great. And then just Tom, you mentioned kind of the debt pay down. What's kind of the updated timing where you start to transition away from debt reduction?
Well, there's no formal timeline. A lot of it's contingent upon opportunities that present themselves as we're looking at that. But we'd like to get closer to a 2 times EBITDA multiple and we started off at 3.5 when we first did the deal and currently at 2.9. So we're making good progress. And we want to continue to demonstrate that.
And then when we think we're in a better position from a debt standpoint then we'll start to look again.
Jeff, I'll add on to that. We do have some term debt of $450,000,000 due in the Q4 of 2018 and $100,000,000 due in the Q1 of 2019. So you can count on that term debt being liquidated.
Okay. Thanks.
Okay. I think we have time for one more question please.
Our next question comes from Josh Pokrzywinski with Wolfe Research.
Hi, good morning guys. Thanks for fitting me on.
Good morning, Josh.
Just to maybe come full circle on all the North America margin questions. I know that there are usually some corporate true ups that happened in the Q2, I think seasonally always the case. Did those look any different than normal? I know we've beaten this at this point, but I guess we're
Yes. Josh, let me point out that the majority of the impact from those the true ups from incentive comps hits down below the line when you're looking at segments is down in corporate G and A. We did have adjustments, but not anything unusual compared to other years in this quarter. So I don't think that that was a driver of what you're looking at and it's not a margin impact.
Got you. And then just on the tax rate, I guess all that implies the second half that's still above the 25% just given how you had a lower first half. How should we think about kind of the go forward more of an annualized or fiscal 2019, however you want to think about it, rate? Is it still kind of just 26%, 26.5% or are you really at 25 percent once we get through all the initial phase in?
Yes. Let me step through. So for fiscal 2018, we're at a statutory U. S. Rate of 28% blend that with our international rates that gets us to about with all the other discretes that have come through so far.
We're estimating a 25% rate for this year. Starting in fiscal 2019, we'll be at a true 21% statutory rate for U. S. So that will lower our rate. We anticipate our ongoing rate starting in 2019 and forward to be closer to 23%.
Got you. That's helpful color. Appreciate that.
Okay. You're welcome. All right. Thanks, Josh. All right.
This concludes our Q and A and our earnings call. Thank you for joining us today. Robin and Ryan will be available throughout the day to take your calls should you have further questions. Thanks everybody. Have a good day.
Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.