Good day, ladies and gentlemen, welcome to the Q1 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 be given at that time. If anyone should require operator assistance during the conference, please press star then zero on your telephone keypad. As a reminder, today's conference is being recorded. I would now like to turn the call over to Ms. Catherine Suever, Chief Financial Officer. Ma'am, you may begin.
Thank you, Chelsea. Good morning, welcome to Parker-Hannifin's first quarter fiscal year 2018 earnings release teleconference. Joining me today are Chairman and Chief Executive Officer, Thomas 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 one year following today's call. On slide number two, you'll find the company's safe harbor disclosure statement addressing forward-looking statements as well as non-GAAP financial measures. Reconciliations for any reference to non-GAAP financial measures are included in this morning's press release and are also posted on Parker's website at phstock.com. Today's agenda appears on slide number three. To begin, our Chairman and Chief Executive Officer, Thomas Williams, will provide highlights for the first quarter of fiscal year 2018.
Following Tom's comments, I'll provide a review of the company's first quarter performance, together with the guidance for the full year fiscal 2018. Tom will provide a few summary comments, and we'll open the call for a question and answer session. Please refer now to slide number four as Tom will get us started with the highlights.
Thank you, Kathy, good morning to everybody, thanks for joining the call. We appreciate your interest in Parker. Let me just make a few comments about general business conditions, we'll talk about the quarter. First on safety, that continues to be a top priority for the company. Not only is it the right thing to do, obviously, but the focus on safety is driving an increased engagement from our people, which is in turn driving safety improvements across the company, which also is impacting our operational improvements across the company as well. We're very encouraged by all that. You saw the announcement we had on orders, broad-based increase across markets and regions. The organic growth was greater than industrial production growth for the last three quarters in a row, we're excited about that.
The Win Strategy initiatives continue to generate improvements in both growth and operating margins. If I would characterize business confidence in general, feedback from our customers and our distributors are very positive. There's a nice general business confidence out there from an environmental standpoint. It's actually been about 2 years since we announced and introduced the new Win Strategy, I thought I would reflect back on that. It's kind of hard to imagine it's just been 2 years, but a lot has happened in 2 years. I think back to 2 years ago, we were in the depth of a pretty tough industrial climate, actually our second-biggest downturn in sales in the history of the company, and we performed better than we've ever had in any previous downturn.
If you're looking for evidence on whether the new Win Strategy is working, I think if you look at the results over the last 2 years, I think there's clear objective evidence that the strategy is working. You can see it in the numbers. The good news for all of our people that are listening, the people within Parker and our shareholders, that this is still early days of the implementation. There's lots of upside with the new Win Strategy, and we're excited about that. I wanted to say, first of all, thank you to all the Parker team members around the world for the great progress after 2 years from the launch and for being part of creating the new Win Strategy, because when we went around and introduced it, they were a big part of creating the strategies that we're now rolling out.
Let's move on to the quarter. Great start. It's always nice to come out of the blocks well. Starting with safety, as we normally do, 24% reduction in recordable injuries, which was great performance. You look at the key performance indicators for the quarter, really solid performance across all those. Sales was a first quarter record for us, up 23%, organic growth slightly above 7%. Order rates increased at double digits, and this is the highest level of order growth that we've had for a quarter since Q4 of fiscal 2011. The segment operating margins continue to make nice improvements, and EPS for the quarter, that was a first quarter record as well.
When you look at the change in EPS increased 36% as reported and 40% on an adjusted basis, really nice increases there, and we're on track to deliver strong operating cash flow going forward. Just a quick comment or two on capital deployment priorities. Dividends continues to be our number one focus, increasing the dividends and maintaining our long-standing track record of dividend increases. We're going to continue to invest in organic growth with our CapEx. It's the most efficient way to grow the company. We're going to maintain the Rule 10b5-1 plan that we have in place for a consistent share buyback program, and we're continuing to focus on bringing down the debt. I want to talk about the outlook. Outlook was increased from an adjusted EPS standpoint by $0.60 at the midpoint from $8.80 to $9.40.
For that, we've increased total Parker organic growth from our previous guide at 3.7% to now the new guide is 5.5% organic growth total company. Now going forward, obviously, we're going to continue driving the new Win Strategy, and I'm going to just make a quick comment or two about each one of the four goals, starting first with engage people. This is really all about creating an ownership culture, because if you're an owner and you think like an owner and you act like an owner, it creates a level of intimacy, level of accountability with your area of responsibility that drives much better results. Second is premier customer experience.
We're going to focus on going from a service mindset to an experience mindset, that holistic experience interaction with our customers and our distributors. Obviously, it's great quality and delivery, but it's being easier to do business with and it's being digital leaders in our space. That's Internet of Things, that's e-business, those type of areas. Third goal is profitable growth. We want to grow organically faster than the market. That's the Global Industrial Production Index. We're doing that through our growth initiatives on the Win S trategy, as well as the new incentive plan that we rolled out a couple of years ago that really underpins driving the right kind of behavior on growth. Goal is financial performance. 17% segment operating margins is still our focus, growing EPS 8% year-over-year or higher.
The focus there for financial performance is those big four initiatives we have underneath financial performance. It's simplification, lean enterprise, strategic supply chain, and value pricing. One comment about CLARCOR, I'm sure it'll come up in the Q&A. Integration is going very well. Synergies are on track to what we've communicated to you. Really, the new Filtration Group is really acting as one team, and we're very proud of how that whole team has functioned. Really, it's one Parker team. It's no longer a separate CLARCOR or a separate Parker team. It's one combined Parker team. In sum, we're looking forward to and anticipating a record year and really driving continuous improvement across the board. With that, I'm going to give it back to Kathy to give you more details on the quarter.
Thanks, Tom. I'd like you to now refer to slide number five. I'll begin by addressing earnings per share for the quarter. Adjusted earnings per share for the first quarter were $2.24 compared to $1.61 for the same quarter a year ago. This equates to an increase of 39%. For year-over-year comparison purposes, first quarter fiscal year 2018 earnings per share have been adjusted by a total of $0.14. Operating income adjustments include business realignment expenses of $0.04 and CLARCOR cost to achieve of $0.03. Below operating income has been adjusted by $0.07 per share for a loss related to an investment. Prior year first quarter earnings had been adjusted for business realignment expenses of $0.06.
On slide six, you'll find the significant components of the walk from adjusted earnings per share of $1.61 for the first quarter of fiscal 2017 to $2.24 for the first quarter 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 taken on with the CLARCOR acquisition. A lower income tax rate, due largely to the stock option expense tax credit, equated to a year-over-year increase of $0.12, while lower other expense, primarily due to lower pension expenses, equated to a favorable $0.06.
Adjusted per share income was reduced by $0.11 due to higher interest expense and $0.06 due to higher corporate G&A, primarily as a result of higher performance compensation expense. Moving to slide number seven, you'll find total Parker sales and segment operating margin for the first quarter. Total company organic sales in the first quarter increased year-over-year by 7.4%. There was a 13.9% contribution to sales in the quarter from the acquisitions, while currency positively impacted the quarter by 1.4%. Total segment operating margin on an adjusted basis improved to 16.0% versus 15.4% for the same quarter last year. I'd like to remind you that the fiscal year 2018 operating margins include incremental depreciation and amortization from the CLARCOR acquisition. A better comparison would be the EBITDA margins.
EBITDA margins for the same periods on an adjusted basis improved to 17.0% in fiscal year 2018 from 15.0% in fiscal year 2017. This 200 basis point EBITDA margin improvement reflects the benefits of higher volume combined with positive impacts from our new Win Strategy initiatives. Moving to slide number eight, I'll discuss the business segments, starting with Diversified Industrial North America. For the first quarter, North American organic sales increased by 9.7% as compared to the same quarter last year. Acquisitions contributed 26.4% to sales, while currency also positively impacted the quarter. Operating margin for the first quarter on an adjusted basis was 16.7% of sales versus 17.5% in the prior year. I'll continue with the Diversified Industrial International segment on slide number nine. Organic sales for the first quarter in the Industrial International segment increased by 11.7%.
Acquisitions positively impacted sales by 7.3%, while currency positively impacted the quarter by 3%. Operating margin for the first quarter on an adjusted basis was 15.7% of sales versus 14.2% in the prior year. I'll now move to slide number 10 to review the Aerospace Systems segment. Organic revenues decreased 5.5% for the first quarter. Reduced volume in OEM sales and commercial aftermarket sales were partially offset by strength in the military aftermarket during the quarter. Much of this reduced volume was timing related, and increased year-over-year volume is anticipated for the rest of the fiscal year. Operating margin for the first quarter, adjusted for realignment costs, was 14.7% of sales versus 13.1% in the prior year, reflecting the impact of greater aftermarket sales mix and timing of development costs during the quarter. Moving to slide number 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 three-month rolling average, while Aerospace Systems are based on a 12-month rolling average. Total orders continue to be strong, improving to a positive 11% for the quarter end. This year-over-year improvement is made up of 10% from the Diversified Industrial North America orders, 15% from the Diversified Industrial International orders, and 4% from Aerospace Systems orders. Slide 12, we report cash flow from operating activities. Year to date, cash flow from operating activities was $239 million, or 7.1% of sales, compared to 4.2% of sales for the same period last year or 12.2% last year, adjusted for the $220 million discretionary pension contribution made in fiscal year 2017.
The significant capital allocations year to date have been $88 million for the payment of shareholder dividends, $79 million, or 2.4% of sales, for capital expenditures, and $50 million for the company's safe harbor repurchases of common shares. The full year earnings guidance for fiscal year 2018 is outlined on Slide 13. Guidance is being provided on both an as reported and an adjusted basis. Total sales increases are expected to be in the range of 14.2%-17.8% as compared to the prior year. Anticipated full year organic growth at the midpoint is 5.5%. Acquisitions in the guidance are expected to positively impact sales by 8.3%, and currency is expected to have a positive 2.3% impact on sales.
We've calculated the impact of currency to spot rates as of the quarter ended September 30, 2017, and 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% and 15.7%, while adjusted segment operating margins are forecasted to be between 16.1% and 16.5%. The full year tax rate is now projected to be 28%, down from our previous guide of 29%, as a result of the favorable stock option tax credits realized in the first quarter. For the full year, the guidance range on an as reported earnings per share basis is now $8.45-$9.05, or $8.75 at the midpoint. On an adjusted earnings per share basis, the guidance range is now $9.10-$9.70 or $9.40 at the midpoint.
In addition to the loss related to the sale of an investment of $14 million or $0.07 per share, this guidance on an adjusted basis excludes business realignment expenses of approximately $58 million for the full year fiscal year 2018. Savings from business realignment initiatives are projected to be $25 million. In addition, guidance on an adjusted basis excludes $52 million of CLARCOR cost to achieve expenses. CLARCOR synergy savings are estimated to be $58 million in fiscal year 2018. We remain on pace to realize the forecasted $140 million run rate synergy savings by fiscal year 2020. Savings from all business realignment and CLARCOR cost to achieve are fully reflected in both the as reported and the adjusted operating margin 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 46% first half, 54% second half. Adjusted EPS first half, second half is divided 45%, 55%. Second quarter fiscal 2018 adjusted earnings per share is projected to be $1.96 per share at the midpoint, and this excludes $0.09 of projected business realignment expenses and $0.09 of projected CLARCOR cost to achieve. When comparing to Q2 FY 2017 results, please remember that last year included a $0.21 gain per share on the sale of a product line which was not adjusted out. On slide number 14, you'll find a reconciliation of the major components of fiscal year 2018 adjusted earnings per share guidance of $9.40 per share at the midpoint compared to the prior guidance of $8.80 per share.
Increases include $0.43 from stronger segment operating income. $0.16 from a reduced tax rate and $0.05 from lower projected corporate G&A. Offsetting these increases is a $0.04 per share decrease from higher interest and other expense than previously forecasted. 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.
Thanks, Cathy. We're very pleased with the start of the year. I think what you have going on here is a combination of a couple factors, sales growth, a lower cost structure that we've been working on in the past, but we'll continue to work on to lower even further, the integration of CLARCOR and the execution of the Win Strategy. All these forces together are combining to provide a very powerful combination that's driving us to project a record year in fiscal 2018. Again, thank you to the global team for all your hard work, all your efforts, and your dedication, and I'm going to hand it off to Chelsea to start the Q&A portion of the call.
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star and then the number 1 key on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we do ask that you please place your line on mute once your question has been stated. Thank you. Our first question comes from the line of Nathan Jones with Stifel.
Hi, good morning. This is Adam Farley on for Nathan.
Hi, Adam.
It looks like one of the big changes in revenue guidance came from international industrial, going up to 16.9% at the midpoint. What regions are driving this growth and what end markets are also driving the growth?
Adam, let me start then. I'm going to hand it over to Lee to give you more details. What's changing in our guide is just looking at order entry over the last three months. What was interesting, order entry was pretty consistent throughout the quarter, both in North America and international. International in particular, we saw Asia continue to be strong. The Europe, Middle East, and Africa region was growing in the low teens, and Latin America was kind of in the low single digits. That combination was pretty strong. Aerospace grew plus four. That's against a pretty tough comp at plus 14. When you put that all in and we looked at what we were projecting for the year and our feedback from customers and distributors, we looked at, I'm looking at industrial only, we raised the whole guidance to whole company 5.5%.
If you look at the industrial piece by itself, taking North America, international together, it's about 10.5% for the first half and then 3.7% for the second half. Now recognize the second half is comparing to a +6% that we had in the second half of FY 2017. Remember, we really started clicking from an organic growth standpoint in January of this calendar year, and we're comparing against that. That's still pretty nice growth on top of a +6%. I would say that the, I'll let Lee Banks comment about the details here. This is broad-based, virtually every end market and every region participating. I'll let Lee Banks give you further color.
Just piggybacking off Tom Williams, to give you a little added commentary on the different segments. It continued to move in the direction we expected from the last call, order entry was really broad-based, all regions participated. Just walking through one of the segments, just because I know the question will come up. I'll start with Aerospace, and then I'll work my way into the industrial markets. Aerospace did fall short of our original expectations for Q1, we're still forecasting growth for the year. Just breaking that down, on the headwind side, clearly commercial OEM was negative for us. It really was impacted by mix of different platforms being manufactured with different varying amounts of content for us. We do see that to close the gap as the fiscal year goes on.
We see it being slightly negative for the year, not by much. Commercial MRO was slightly negative for us for the quarter, we really look at this primarily as timing. All the underpinnings of a strong MRO market are still in place, we expect growth in that market as we move through the fiscal year. The last headwind would be military OEM was soft. We see this really as timing. F-35 production will continue to accelerate as the year goes on, we're confident in that market. In the positive was really strong military MRO growth. There was some provisioning for new platforms, just an increase in spares for some of the fleets being used today. That's kind of a high level on Aerospace.
On Industrial, as we look through our end markets, we have a heat map by region, it's really hard to find any significant market that not show positive year-over-year order entry growth during the quarter. Just to highlight some of those markets, if you talk about natural resource end markets, we continue to see growth during the quarter. This would include agriculture in some areas, mostly construction equipment, mining, very strong. Oil and gas, land-based North America continues to be strong. I'll talk more about that in a second. Microelectronics industry is really broad-based and strong, and Class 8 truck in North America, very strong. A little bit about oil and gas. Rigs have nearly doubled since last year, although some did come out.
Really all these rigs are coming out of cold storage, they're all being refurbished, which is great for our distribution base. We also see an appreciable pickup in quotes and order entry activity. That continues to be very good. We'll also continue to rebound in activity from our distributor partners around the world. They're very optimistic. I think one of the telltale signs for me when I talk to our distributor partners, when they see an increase in project activity from end customers, that's a real sign for us that capital is starting to be let loose in the economy, and they've all seen an increase in project work. It's not just strictly MRO work. I'd say the only notable end markets we saw around the globe was really in power generation.
This really has to do with a mix of turbines being applied today and the marine. Just real quickly on some regional commentary. I talked about North America, but we're very encouraged by the increasing end market activity. I talked about the natural resource end markets, and our distributor base has been very positive across the country. EMEA, we continue to see strong year-over-year order entry growth. We are forecasting a second year of organic growth for EMEA, which we feel really good about. Tom mentioned on Asia, very strong. China continues to lead with strong industrial and natural resource end markets. Really, the strength of China, from our opinion, has been led by continued infrastructure investment and a strong housing market. I would just say we're encouraged by what's happening with our end markets, both domestically and internationally.
There is just a very strong, clear, positive global sentiment to growth right now.
All right. That's great. Thank you so much. I'll pass it along.
Thank you.
Okay. Thanks, Adam.
Thank you. Our next question comes from the line of Joel Tiss with BMO Capital Markets. Your line is open.
That was going to take me a second here. I was not prepared. Can you say that if CLARCOR was accretive or dilutive to the operating margins, including the amortization?
Joel, at the beginning of the year, we gave guidance that we see $0.20 of accretion from CLARCOR for the year. We're on track for that. That includes the impact of depreciation and amortization, as well as the additional interest that we're incurring because of the deal. Accretive $0.20 on the year.
I meant on the operating margins. What was the change in the operating margin from putting CLARCOR in there?
They're in line with what you saw historically for CLARCOR and in line with our Filtration Group , normal margins.
I just wondered why the operating cash flow was down on the year-over-year. I'm done. Thank you.
Sure. First quarter is always our low quarter for cash from operations. We still expect the year to be at 10% or greater as a percent of sales. In the quarter, we're building working capital to match the higher volume that we're incurring. We're also building some inventory to prepare for some of the footprint moves that we're doing to integrate CLARCOR. A little bit higher investment in working capital than usual, but not out of the normal trend for us for first quarter, and we'll recover that the rest of the year.
Great. Thank you.
Thank you. Our next question comes from the line of Jamie Cook with Credit Suisse. Your line is open.
Hi. Good morning. Nice quarter. I guess, a couple questions. You sort of talked about the strength in the international markets. Was that all just Parker's core business, or are you seeing any traction in terms of CLARCOR starting to gain some traction sort of on the international front? I guess that's my first question. My second question, just in terms of CLARCOR, again, potential revenue synergies, should we see that in 2018, and how we're tracking to the savings plan that you guys laid out, the $140 million?
Okay, Jamie, this is Tom. The international strength, because CLARCOR's end markets and legacy Parker end markets are the same, it's all one and the same as far as the strength that we saw across international. On the revenue synergies, as I've mentioned before, we're working them hard, but we've always viewed them as a contingency to make sure we deliver on our commitment to all of our shareholders on the $140 million of synergies. On the revenue synergies, if some of you are trying to bake them into FY 2018, I would encourage you not to do that, because even if we were going to publicly disclose that, which we're not, we wouldn't see any of that stuff realistically into FY 2019 anyhow. I would just encourage you on revenue synergies to factor it based on the comments we're making on end markets and regions.
On the savings target, overall, the $140 million, we still feel very good about that. Remember, we have an integrated management office. We've got a great cadence around project management here, and we have value creation teams all around a couple of the key synergy buckets. Manufacturing, footprint productivity, material, logistics, and SG&A would be the major categories. All of them are on track. We're very encouraged by what we've seen, both the fit, the technologies culturally, and the projected savings. We feel very good about it.
Sorry, just to follow up on the end market commentary. Tom, is there any markets that you're looking at that you're concerned in terms of the markets overheating or where strength is not sustainable?
Jamie, a lot.
Sorry, can you hear me?
Yeah, go ahead.
Just, I know everything was very positive in terms of end market commentary, but are there any markets that you're concerned are overheating? For example, a lot of people talk about the strength in China not being sustainable. I'm just wondering if you're seeing any warning signs.
Yeah. I think in general, China's not going to continue to grow at the pace that it's growing now. We look at some macro indicators like electrical output usage and freight rail usage. Just naturally, when you look at the comparables, China's going to glide from strong double digits to something that's going to be below double digits, but it's going to continue to be very good for us. It's going to bump up against comparables that will make it's going to have to glide down to some more normalized type of growth plan there.
Okay, thank you. I'll get back in queue.
Thanks, Jamie.
Thank you. Our next question is from Mig Dobre with Baird. Your line is open.
Yes, good morning, everyone. Before I ask my question, just a quick word here. Tom and the team, your performance has really been impressive over the last couple of years, especially the last 12 months, and that's coming from someone who has been on the sidelines on the stock. Tip my hat to you guys. Great job.
Mig, before I let you ask a question, just thank you on behalf of all of us. Go ahead and ask your question.
Here's my question. I remember last quarter, one of the discussions that we had collectively was progression of organic growth and how to think about more difficult comps in the back half of the year. Looking at your order intake, at least what we're seeing from this quarter, is that you are able to buck those more difficult comps quite nicely. I guess from your perspective, how are you thinking about the puts and takes of these more difficult comps? Do you think the business has enough momentum to potentially ride that out?
Mig, this is Tom. On the order entry, remember on the industrial portion of the company, our visibility would be typically like in that six to eight-week standpoint. Obviously, we have a lot more visibility and confidence in the first half of the year and going into January or so. But like I had mentioned before, with the first half industrial, 10.5% growth, again, a little bit easier comps, but that's reflective of what we did industrially this last quarter and the order pattern that we're seeing. Then the second half is in that 3.5% range. Remember, again, that we had 6% organic growth the first two quarters of this calendar year, the last two quarters of our fiscal year. I feel pretty good about that.
That on top of a 6% growth feels pretty good, especially when we were living in a world that was negative, and we all were feeling like if we got 1% or 2% growth, that would be the new norm. That kind of growth rate feels very good. It doesn't feel like we're too far over our skis. Of course, we'll give you an update in January if we think there's more there than that, but we'll certainly give you an update in January.
Understood. My follow-up, a little more color on the margin in Aerospace. You called out some things that helped this quarter. Maybe help us understand exactly what's kind of changing for the rest of the year in order to get to your margin guidance.
Mig, I'll take this one. In the quarter, we saw a better mix of aftermarket, just in general terms of the overall mix. We also were a little bit lighter than usual on our development costs. Some of that was timing of the development costs, and we'll incur the rest of those costs during the rest of the year. We expect the development costs for Aerospace to still be around 7.5%-7.8% of sales for the year. They were lighter than that in the first quarter. The mix of aftermarket will shift back, we think, to normal trends in subsequent quarters.
Any sense on a dollar value or margin impact from this cost shift? The development cost.
Development costs, roughly $10 million-$11 million light this quarter compared to normal.
Okay, appreciate it. Thank you.
Thank you. Our next question comes from the line of Ann Duignan with J.P. Morgan. Your line is open.
Hi, good morning, everybody.
Hi, Ann.
Can we talk just a little bit about CLARCOR and the integration? Coming into the year, you had talked about pulling forward costs to accelerate the integration. How should we think about that? Are we going to achieve the $140 million in synergies sooner, or are we going to achieve more than $140 million? How should we think about that from our model perspective?
Ann, this is Tom. We're still staying with the $140 million. The one thing that I do want to at least let people know, because this is obviously a popular question, and I think some of you should have seen, we posted a whole save the date for Investor Day in the spring of next year. We picked that time because that'll mark about the one-year anniversary of the acquisition, and we'd like to go in a lot more detail on how we're progressing and what we think at that point. $140 million still feels like the right number. With a couple more quarters, when we give you the investor update in the spring of next year, we'll certainly be a lot smarter and educated as to where we think that number's going to land.
Okay, I appreciate that. That just takes time. Most of my other questions have been answered, but would you be willing to share with us how big China is for Parker total?
No. You know me, Ann, I probably wouldn't be able to give you that. It is our second or third largest country after the U.S., with Germany and China kind of competing for that second spot. I would look at our Asia progression as not just a China-only story. We see really good effort across the entire region, North Asia, Korea, and Japan are probably better than I can remember in a lot of years. India's having one of our better years in India. Southeast Asia is doing strong. Australia has come back from where it was, coming off the bottom. For us, the part I feel good about with Asia is that it's a broad-based Asia story. It's not a singular China story.
I support that. It's hard to find anything negative right now, I wonder how sustainable it all is. Is there any cloud out there that you worry about that, we've never seen such a coordinated recovery across regions and end markets before. What worries you about this?
I think your point is spot on. It is encouraging because you're right. If you look at the PMIs across the regions, it's very rare, in my memory, where you've gotten this much strong PMI activity pretty consistently across the board. I think this is a different time period for industrials. There's been a lot of data and analysis that we've done. You look at the last 15 years for industrials, and this is going to be maybe a long-winded answer to your question. The 2003 to 2008 time period was a really strong industrial time period where industrials kind of outpaced GDP, driven really because of China and the whole globalization of industrials. We had the Great Recession, 2008 into 2009 and 2010, starting to recover, a rebound to 2011. Most industrials somewhat treaded water from 2011 to 2015.
We had the industrial recession, which was really natural resource-led, 2015 and 2016. Of course, we've seen the recovery now start at the beginning of this calendar year. My feeling is this feels, and those are the comments I was making at the beginning, the general business conditions and sentiment from customers and distributors feels different than the previous eras I've just described, more like an 2003 to 2008, but it's not going to have the same pull that China had back in that era. I look for industrials to break out of their kind of treading water pattern that was in 2011 to 2015. Where that finally ends up, I'm not smart enough to say, but this does feel slightly different. Trees don't grow to the sky, PMIs aren't going to go forever.
I think what we're in for is a period of more sustainable industrial growth than what we maybe expected. I think, remember when we launched the new Win Strategy, we were talking about a 1.5% world. Doesn't feel like that right now. Where it lands, we're all going to learn over the next several quarters and years.
On that note, are you seeing any labor inflation yet anywhere in the world? I'll leave it there. Thanks.
Yeah. Ann, again, I'll continue as Tom. No, nothing out of the norm.
Okay. Appreciate that. I'll get back in the queue. Thanks.
Thanks, Ann.
Our next question comes from the line of Joe Ritchie with Goldman Sachs.
Thanks, good morning, everybody.
Morning, Joe.
Maybe still at the growth rates were clearly really strong this quarter. I think you mentioned in your prepared comments that typically 1Q is seasonally, you tend to see an inventory build for you guys in 1Q, which makes a lot of sense. I'm just curious, when you think about the sell-in versus sell-through on the distributor side, maybe you can provide a little bit of color on where you think distributor inventories are today.
Joe, this is Lee. I would say last quarter, we talked about a little bit of a rebound in inventory build at the distribution level. I would characterize at the distribution level and at the OEM level right now, it feels like end market pull-through for the most part. People have reacted to the rapid increase in order entry and, as a general statement, I would say it's end market pull-through.
Good enough. Then if I kind of followed on some of the questions were asked earlier around CLARCOR and the synergy targets. One thing I noticed this quarter is that you put through, I think, about $6 million of cost to achieve through versus $52 million for the year. I'm just curious, was there any reason why the spend wasn't more front-end loaded, just to support the synergy expectations? I was just looking any color on that?
Joe, this is Kathy. We did shift a little bit the timing of some of the footprint mergers that we have planned in the whole integration. So as the costs were originally projected for the quarter, those shifted more towards later in the year. However, we have some offsetting other favorable savings that are coming through earlier than we expected. We're on track for the savings as we had predicted we would get. We're going to see about 40% of the savings in the first half and 60% of the savings in the second half of the year, with about $58 million for the year.
Joe. This is Tom. If I could just add on. In general, if I were to characterize whether it's CLARCOR related or just our traditional restructuring, when we do plant closures, our teams tend to be more ambitious on thinking they're going to accelerate the timing of the closure, and we tend to let them run to a more aggressive target so they can try to get things done. We are always conservative on forecasting the savings that come from that, recognizing that plant closures and the timing and all the announcements is sometimes tricky to coordinate all that. We were conservative on the savings projections. That's why you don't see us coming off our savings for this year.
You know what Q1 was like. You'll see that come back up in Q2, three and four through the rest of the year.
Got it. That's great to hear. I know maybe the last question, I know Ann just asked about wage inflation. I'm just curious whether you saw commodity inflation impact the North America margins this quarter. I know clearly there was a mix issue going on as well. Yeah, was there much of an impact from price cost this quarter on North America margins?
It's Lee. I mean, the net is null. We have seen some commodity inflation, such as copper. Really where we have that is an issue where we have a lot of exposure. We've got contracts with our customers that if hits a certain level, we pass that through. That's the only really volatile one that I can think of. The others are up year-over-year, but they've kind of flattened out.
Okay, great. Thanks, guys.
Thanks, Joe.
Thank you. Our next question comes from the line of David Raso with Evercore ISI.
Hi. Thank you. I'm just trying to think through sort of the back half of the year, the way you laid out the sequencing, the splits. It doesn't appear in the second half of the year, you're assuming really much by way of any real improvement on the year-over-year incrementals, even though by then, you'll have anniversaried majority at least of the second half, you'll have anniversaried the CLARCOR deal. Just given the commentary you have about the order book and the breadth of it and so forth, I'm just trying to understand, am I reading that properly? If so, where are we on the ability to push price in this market?
Yeah, let me address the margins first, David. We're currently seeing we're struggling to break out with good enough numbers to share with you what legacy Parker looks like today, because we're doing a nice job integrating CLARCOR. As we look at it internally in very rough estimates, we're anticipating still 30% incrementals for the balance of the year or for the total year for legacy Parker. Yeah, we'll have CLARCOR for the full year by the end. We are being impacted by the additional amortization and depreciation expense, but we're on track to have incrementals in the low 30s.
I guess I'm just thinking the improvement. If you put the all-in numbers, you're looking for 18% incrementals in the first half and about 21% in the second half. Given the natural help from anniversarying CLARCOR, I would've thought there'd be a bigger improvement in the second half incrementals versus the first half. I'm just trying to think through, are we not getting pricing? Or maybe if you can just give us a little more color on price cost for the second half of the year, just as people try to think of the earnings run rate exiting the fiscal year, thinking about calendar 2018.
Yeah, David, it's Lee. I would say on price costs, going back to the guidance we gave, we're expecting a positive separation. Our selling price index, we forecast it every year. We expect that to be mildly positive for the year, and we expect a separation between that and our purchase price index. We're not forecasting any wild acceleration in pricing in the second half of the year.
On the second half, the slower growth rate in industrial, you mentioned it was largely comps. Is that actually the case in the guidance? There's really no slowdown per se in any of the end markets in the guide. It's just a function of comp?
Yeah, David, it's Tom. Yeah, it's Tom, David. That's how I would characterize it.
All right, terrific. Thank you.
Thank you, David.
Our next question comes from the line of Andrew Casey with Wells Fargo Securities.
Andy.
Mr. Casey, your line is now open.
Sorry about that. Good morning, thanks. With the broad-based strength, have you seen any supply chain constraints? If you did, can you give some color on maybe what sort of components?
Andy, it's Lee. Anytime you have a ramp like this, there's obviously noise, but there's nothing that I would consider to be abnormal. It's everything that we're managing through, there's nothing I would spike out, and there's really no components that I could spike out that are really causing us major problems right now.
Andy, it's Tom. Just to tag on, one good indicator of whether we're okay on that is if you look at our total company backlog, it's basically stayed flat, even with three quarters of pretty strong increases from an order entry standpoint. If any of our customers are listening, we recognize we want to do better and improve to our delivery times and everything with our customers. We've been able to absorb this pretty strong increase and not have our backlog go up.
Okay, thank you. If I step back and look at the longer-term Win Strategy, you talked about a whole bunch of multi-channel selling techniques to get above industrial production. You're kind of running there already. Is there any big thing left within the Win Strategy to accomplish? Is it just certain parts of it are running better than you would've thought?
Andy, it's Tom. I think there's still lots of opportunities. If I look at services, innovation, systems, still lots of opportunities there. Our distribution mix is still lighter than we'd like to see it internationally, there's still opportunity to do that. Collectively, I'm just going to use round numbers. We're still only about 10% market share in this whole motion control space. There's big opportunities to take share. I would, for us, and what we want to demonstrate is that we can grow 150 basis points greater than Global Industrial Production over the cycle. It's easier to do that at the beginning of the cycle when people are rebounding and reflexing up. What we want to demonstrate is over a multi-year period of time, can we average 100, 150 bips? Because really top quartile companies, and that's what our intention to be, demonstrate that over a cycle.
That's why we're really happy with three quarters in a row. Believe me, we're very happy with that. The real trick will be doing it over a longer period of time.
Okay, thanks. Then last question, more kind of capital allocation. Can you comment on the pipeline? I know you're still integrating and on track with the CLARCOR Inc. acquisition integration, but I'm wondering if there are any opportunities that you're looking at.
Andy, it's Tom again. I had mentioned earlier, dividends will still be first on the capital deployment side of things, CapEx for organic growth, because organic growth is still the most efficient way to grow the company. We're going to do the share repurchase plan, and we're going to pay down debt. You're right. At some point, as we collide down the debt path, we're going to have the ability to start looking at acquisitions as part of our growth strategy as well. Obviously I can't give line of sight or any kind of indicator there. I would just let everybody know that we continue to work that pipeline, build those relationships. We view this as a long-standing effort because it's not something we turn to turn it off, turn it back on. We're going to work those relationships and those strategies.
These are obviously targets that fit with our strategic vision of our respective groups in the corporation. We know what those are, and we'll continue to work them. As some of you have heard me say before, we want to be great generators of cash and great deployers of cash. On that great deployers of cash side, that includes acquisitions, and we will continue to have an assertive balance sheet at the appropriate time. We'll work those, and we'll sort of let you know when we're ready.
Okay. Thank you very much.
Thanks, Andy.
Our next question comes from the line of Jeffrey Hammond with KeyBanc Capital Markets.
Hey, good morning.
Hi, Jeff.
Just on CLARCOR Corp, I know you don't want to talk or quantify revenue synergies yet, but just as you get the groups together, what are some of the early opportunities that you've identified where there's showing up as clear revenue synergy opportunity? Thanks.
Well, Jeff, it's Tom. I would just characterize at a high level, it boils down to channel opportunities, number one. Our channels are complementary, so you can have product going, being carried on a line card for the various channel partners. There's regional opportunities because North America is really CLARCOR's strong suit, and we were more balanced globally, so there's regional opportunities. There's OEM opportunities, CLARCOR, which is why we loved it so much, is an 80% aftermarket business, and we were stronger on the OEM. We're going to leverage those OEM relationships, which maybe we have a broader breadth of technologies going in, besides just filtration, that we could leverage. Those would be the three broad areas, channel, region, and really that OEM portfolio that we could go to the OEM with. We're working those hard.
I would just encourage the analysts to not bake numbers into 2018, because as we work those, if and when they hit, they're going to be more in the 2019 area. I think we'll give you a lot more clarity. You can certainly plan on CLARCOR update and a more extensive discussion being a big part of Investor Day in the spring.
Okay. If you look at those three opportunities, where would you expect it to move the fastest?
Not going to comment on that, Jeff. Just so you know that we're working all of them equally.
Okay, thanks.
Thanks, Jeff.
Our next question comes from the line of Nigel Coe with Morgan Stanley.
Yeah, good morning, guys. This is Dillon coming on for Nigel. I just wanted to come back on CLARCOR here. I think you guys talked last quarter a bit about some possible margin pressure from the integration, whether that be through factory consolidation or some short-term manufacturing efficiencies. Obviously, margins held up pretty well here in 1Q. Are you guys still expecting some incremental pressure here to crop up through the next couple of quarters, or do you kind of have a clear line of sight that you've kind of worked through those headwinds?
Yeah. Some of the inefficiencies will come when we're merging the footprint, and we did push that out. We did less footprint merging in the first quarter than we had originally planned, and you'll see more of that come into play in the third and fourth quarter. Other than that, though, we're on track for the synergy savings, and we're seeing savings in other areas other than footprint consolidation.
I got it. That's helpful. Maybe just a longer tail question here. I think you've spoken about your desire to kind of grow out the distribution footprint in the international segment. I just wanted to see if you could speak to that, or how that strategy is progressing and to what extent that might be driving some of the upside in your international sales growth revision.
Yeah. This is Lee talking. This has been a key initiative for us as a part of refresh of our new Win Strategy. We've got some really senior dedicated people working on this around the globe. We've had great progress throughout Asia, Southeast Asia, continued progress in EMEA and really developing parts of EMEA, in Middle East and Africa and developing parts of Europe. The bottom line is we're making great progress. I think you'll see that reflective in our sales and in our margins.
Got it. Appreciate the time, guys.
Okay. Thanks, Dillon.
Thank you. Our next question comes from the line of Neil Chatterji with Buckingham Research.
Hi, congrats on a great quarter.
Thank you.
Pertaining to the sales guidance, I'm curious on what you're factoring in pertaining to CLARCOR organic revenue growth for this year. I think last quarter you indicated that you're expecting low single-digit organic growth, so wondering if you can provide an update on that.
I would say now we're looking at more mid-single digit.
Similar to the base business.
Correct.
Maybe as a follow-up to David's question, could you talk more about the increased margin outlook for Diversified Industrial International? I think the implied incremental margin for the segment at the midpoint similar to the implied incremental margin in the original guidance. Is there something precluding you guys from experiencing a higher flow-through with the step up in organic growth expectations? Is it more of a wait-and-see approach given how early we are still in the year?
I would say it's early in the year still. We are seeing the margin improvement as a result of a lot of the Win Strategy initiatives we've been working. We've eliminated fixed costs in Europe. That's helping. As the growth comes through, we're hoping to see the incremental margins, it's a little early yet.
Okay, great. Thanks. I'll pass it on.
Thank you. Our next question comes from the line of Timothy Thein with Citi Research.
Great. Thank you. Just circling back on the discussion earlier on the strength in Asia, which obviously has been going on for a while, that's a region wherein that going back a few years, you had facilities that obviously were operating at extremely low rates. I'm just wondering, given the revenue pickup that you've benefited from, just where those facilities are operating today. I guess really the spirit of the question is whether there's additional costs that start creeping back in, or is there still ample room within the facilities to be able to meet these higher volumes?
Tim, it's Tom. On Asia, you're right. You have a good memory. Over the last 10 years, we made some investments really in advance of Asia growing into those things, and they really have grown into them. From additional CapEx, it would be very selective. It would be more a piece of equipment here or two. We don't really need any brick and mortar. Pretty well at what we need. With the combination of lean and some very targeted equipment purchases, we'll be in good shape.
Okay. That region, just thinking about international margins as a whole, I'm guessing Asia is still well or at least above that average at least relative to Europe.
Yes, it is. Tim, it's Tom again. Yes, it is. That's why as Asia grows, that's why it gets a nice corresponding lift in international margins.
Okay. Then just, Tom, on the group consolidation, where are you there? Just thinking about potential, obviously when those savings come rather quickly. I'm just curious what you're thinking in terms of the division count and where you're looking to end FY 2018.
Yeah. Just as a refresher, it's Tom again, refresher for people on the phone. We started at 114, and we're going to be at approximately 90 for this year. That's something that we constantly look at. It's not something we're edicting a number. It's really what makes sense logically as far as cost synergies and/or growth synergies, people that are working in common end markets or common technologies. The pace of consolidations is going to slow. We're not going to continue to go from 114 to 90. Remember, if you go from 114 to 90, that's 24 divisions, but that required 48 divisions to be combined. That's roughly 45% of the company going through some kind of change process. It will not continue at that pace, and it'll be whatever makes sense for our customers and from a cost standpoint.
It's going to glide down, if I go out years, a little bit more. The simplification actions, that will become less of the big driver and more the whole revenue complexity, the 80/20 look on being able to be simpler to do business with. Our business strategy is around that whole 80/20 concept of revenue complexity. That was really what will carry simplification on the next level going out the next several years.
Okay, great. Thanks, Tom.
Thank you, Tim. Okay, we have time for one more question.
Thank you. Our last question comes from the line of Stephen Volkmann with Jefferies.
Wow, great. Okay, thanks. I wanted to circle back to kind of the discussion. I guess everybody's obviously trying to get a sense of sort of sustainability of these current positive trends. I'm wondering, Lee, you might have a view because I think you mentioned that there was a lot of rebuild activity in oil and gas, and we're seeing that in some of the mining as well. It sort of begs the question of sort of once you're done rebuilding what's out there, things could sort of flatten out or even slow down a little bit, and I wonder if that's something that you guys worry about or not.
Obviously there's a lot of that activity going on. Tim, this is Lee. Steve, this is Lee. It's not the only thing going on. I mean, I think the point I tried to make when I survey our partners, the really one plus for me is there's just a lot of pickup in project work happening out there in the field, which I flow that through to just CapEx being let go with some of these major companies out there, and they're working on that. For me, that's a big plus happening. I can tell you that the activity right now is still good with the work going on in mining oil and gas, but it's not the only thing that's happening.
Okay, fair enough. Maybe a quick one just to follow up for Tom. You mentioned that your new incentive compensation plan was kind of working now that you're two years into that. I thought that was an interesting comment. Can you just provide a little more color on that?
Yeah. Steve, this is Tom. A reminder for what that is. We have a return on that assets incentive plan, which really touches almost 95% of our team members around the world. For the senior leadership team, the divisional leadership team, we've added a growth element to that. If you grow faster than a market, whatever your incentive payout would be, there'd be a positive multiplier on top of that. If you grow less than a market, there'll be a negative haircut to your payout. We rolled it out a couple of years ago, and unfortunately, the timing wasn't perfect because it was a negative haircut for people, and it's really the first time in the history of the company we did that. As you might imagine, that drove a lot of attention and drove the right kind of behaviors.
What it does is it encourages people to do what we said on the Win Strategy. We want you to grow faster than a market, and if you do that, you're going to be rewarded handsomely for that. That's, I think, the incentive plan. Any good incentive plan you want to drive behavior, and the indicators, it's driving the right kind of behavior.
That's starting to pay out as a multiplier rather than a haircut now.
Yes.
Great. Thank you.
Okay. Thanks, Steve.
Thanks, Steve.
Okay.
Thank you. This concludes today's question and answer session. I would now like to turn the call back to Ms. Cathy Suever for closing remarks.
Okay, thanks, Chelsea. Yeah. Thanks, everybody, for joining us today. Robin and Ryan will be available throughout the day to take your calls if you have any more questions. Thank you, everybody. Have a great day.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.