Good day, ladies and gentlemen, and 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. I would now like to turn the call over to Ms. Kathy Siefer, Chief Financial Officer.
Ma'am, you may begin.
Thank you, Chelsea. Good morning, and welcome to Parker Hannifin's Q1 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 atphstock.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 at phstock.com. Today's agenda appears on Slide number 3. To begin, our Chairman and Chief Executive Officer, Tom Williams, will provide highlights for the Q1 of fiscal year 2018. Following Tom's comments, I'll provide a review of the company's Q1 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.
Thank you, Kathy, and good morning to everybody and thanks for joining the call. We appreciate your interest in Parker. So let me just make a few comments about general business conditions and we'll talk about the quarter. So 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.
So 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. So 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. So there's a nice general business confidence out there from an environmental standpoint. So it's actually been about 2 years since we announced and introduced the new Win Strategy. So I thought I would reflect back on that. It's kind of hard to imagine since it's been 2 years, but a lot has happened in 2 years.
Think back to 2 years ago, we were in a depth of a pretty tough industrial climate, actually our 2nd biggest downturn in sales in the history of the company and we performed better than we've ever had in any previous downturn. But 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 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 implementation. There's lots of upside with the new win strategy and we're excited about that.
So 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 one strategy because when we went around and introduced it, they were a big part of creating the strategies that we're now rolling out. So 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 entries which was great performance.
And you look at the key performance indicators for the quarter really solid performance across all those. So sales was a 1st 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. This segment operating margins continue to make nice improvements and EPS for the quarter that was a 1st quarter record as well. When you look at the change in EPS, EPS increased 36% as reported and 40% on an adjusted basis, so really nice increases there.
And we're on track to deliver strong operating cash flow going forward. So just a quick comment or 2 on capital deployment priorities. So 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 10b5-1 plan that we have in place so for a consistent share buyback program. And we're continuing to focus on bringing down the debt. So I want to talk about the outlook. So outlook was increased from an adjusted EPS standpoint by $0.60 at the midpoint from $8.80 to $9.40 This reflects the Q1 beat that we had and the increased organic growth estimates that we baked into the guidance. So for that, we've increased total Parker organic growth from our previous guide at 3.7% to now the new guide is 5.5 percent organic growth of the total company.
So 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 2 about each one of the 4 goals, starting 1st with engage people. So 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. 2nd is premier customer experience. So 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.
So, obviously, it's great quality and delivery, but it's being easier to do business with That's being digital leaders in our space. So it's Internet of Things, it's e business those type of areas. 3rd goal is profitable growth. So we want to grow organically faster than a market that's the Global Industrial Production Index. And we're doing that through our growth initiatives on the Win Strategy 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. So 17% segment operating margins is still our focus growing EPS 8% year over year or higher. And the focus there for financial performance is those big four initiatives we have under new financial performance. It's simplification, lean enterprise, strategic supply chain and value pricing. So one comment about CLARCOR, I'm sure will come up in the Q and A.
Integration is going very well. Synergies are on track to what we've communicated to you. And really the new Filtration group is really acting as one team. We're very proud of how that whole team has functioned. And really it's 1 Parker team.
It's no longer a separate Clark or a separate Parker team. It's one combined parker team. So in sum, we're looking forward to and anticipating a record year and really driving continuous improvement across the board. And so 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 5. I'll begin by addressing earnings per share for the quarter. Adjusted earnings per share for the Q1 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, Q1 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 6, you'll find the significant components of the walk from adjusted earnings per share of $1.61 for the Q1 of fiscal 2017 to $2.24 for the Q1 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 point 0 $6 Adjusted per share income was reduced by $0.11 due to higher interest expense and $0.06 due to higher corporate G and A, primarily as a result of higher performance compensation expense.
Moving to Slide 7, you'll find total Parker sales and segment operating margin for the Q1. 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 20 18 operating margins include incremental depreciation and amortization from the La Clarkor acquisition.
So 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 8, I'll discuss the business segments, starting with Diversified Industrial North America. For the Q1, North American organic sales increased by 9.7% as compared to the same quarter last year.
Acquisitions contributed 26.4 percent to sales, while currency also positively impacted the quarter. Operating margin for the Q1 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 9. Organic sales for the Q1 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 Q1 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 Q1. 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 Q1 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 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 11% for the quarter end.
This year over year improvement is made up of 10% from Diversified Industrial North American orders, 15% from the Diversified Industrial International orders and 4% from Aerospace Systems orders. Slide number 12, we report cash flow from operating activities. Year to date, cash flow from operating activities was $239,000,000 or 7.1 percent of sales compared to 4.2% of sales for the same period last year or 12.2% last year adjusted for the $220,000,000 discretionary pension contribution made in fiscal year 2017. The significant capital allocations year to date have been $88,000,000 for the payment of shareholder dividends, $79,000,000 or 2.4 percent of sales for capital expenditures and $50,000,000 for the company's Safe Harbor repurchases of common shares. The full year earnings guidance for fiscal year 2018 is outlined on Slide number 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 percent to 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 have 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 to be between 16.1% 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 Q1. For the full year, the guidance range on an as reported earnings per share basis is now $8.45 to $9.05 or $8.75 at the midpoint. On an adjusted earnings per share basis, the guidance range is now $9.10 to $9.70 or 9 point of an investment of $14,000,000 or $0.07 per share, this guidance on an adjusted basis excludes business realignment expenses 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 remain on pace to realize the forecasted $140,000,000 run rate synergy savings by fiscal year 'twenty. Savings from all business realignment and CLARCOR costs 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%.
2nd 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 costs to achieve. When comparing to Q2 FY 'seventeen 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 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, dollars 0.16 from a reduced tax rate and $0.05 from lower projected corporate G and 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.
Okay. Thanks, Kathy. So we're very pleased with the start of the year. I think what you have going on here is a combination of a couple of 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 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.
So 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 and A portion of the call.
Thank Thank you. And our first question comes from the line of Nathan Jones with Stifel.
Hi, good morning. This is Adam Farley on for Nathan.
Hi, Adam.
So it looks like the 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?
So Adam, let me start. I'm going to hand it over to Lee to give you more details. But what's changing in our guide is just looking at order entry over the last 3 months. What was interesting order entry was pretty consistent throughout the quarter both in North America and in international. But 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. So that combination was pretty strong. Aerospace grew plus 4%. That's against a pretty tough comp at plus 14%. So 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.
So we raised the whole guidance to the whole company 5.5%. But if you look at the industrial piece by itself taking North America and 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 plus 6% that we had in the second half of FY 2017. So remember we really started clicking from an organic growth standpoint in January of this calendar year. And so we're comparing against that.
So there's still pretty nice growth on top of a plus 6%. So I would say that the I'll let Lee comment about the details here. This is broad based virtually on every end market and every region participating. So I'll let Lee give you further color.
Yes. I'd say just piggybacking off Tom and maybe to give you a little added commentary on the different segments. It continued to move in the direction we expected from the last call and order entry was really broad based and all regions participated. Maybe 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, but we're still forecasting growth for the year. Just breaking that down, I'd say 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. But we do see that to close the gap as the fiscal year goes on. We see it being slightly negative for the year, but not by much.
Commercial MRO was slightly negative for us for the quarter, but we really look at this primarily as timing. All the underpinnings of a strong MRO market are still in place and we expect growth in that market as we move through the fiscal year. And then a last headwind would be military OEM was soft. Again, we see this really as timing. F-thirty five production will continue to accelerate as the year goes on and we're confident in that market.
I'd say the positive was really strong military MRO growth. There was some provisioning for new platforms and then just an increase in spares for some of the fleets being used today. So that's kind of a high level on Aerospace. On Industrial, as we look through our end markets and 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. Really 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, but 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 Just a little bit about oil and gas.
R Just a little bit about oil and gas. Rigs have nearly doubled since last year although some did come out. But really all these rigs are coming out of cold storage and they're all being refurbished which is great for our distribution base. And we also see an appreciable pickup in quotes and order entry activity. So 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 then marine. And then 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 have been very positive across the country. EMEA, we continue to see strong year over year order entry growth and we are forecasting a second year of organic growth for EMEA which is we feel really good about. And then Tom mentioned on Asia, very strong China continues to lead with strong industrial and natural resource end markets and really the strength of China from our opinion has been led by continued infrastructure investment and a strong housing market.
So I would just say we're encouraged by what's happening with our end markets both domestically and internationally. And really 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.
Thanks, Adam.
Thank you. Our next question comes from the line of Joel Tiss with BMO Capital Markets. Your line is open.
Well, it's going to take me
a second here. I wasn't prepared. Can you say that if CLARCOR was accretive or dilutive to the operating margins including the amortization?
Yes. 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. So accretive $0.20 on the year.
I meant on the operating margins. What was the change in the operating margin from the from putting CLARCOR in there?
Yes. They're in line with what you saw historically for CLARCOR and in line with our
in on the year over year? And then I'm down. Thank you. Yes.
Sure. Q1 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.
So a little bit higher investment in working capital than usual, but not out of the normal trend for us for Q1 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 of 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. And then my second question just in terms of chloroquine potential revenue synergies, should we see that in 2018 and how we're tracking to the savings plan that you guys laid out the $140,000,000
Okay, Jamie. This is Tom. In the international strength because CLARCOR's end markets and legacy Parker end markets are the same, that's all one of the same as far as the strength that we saw across international. On the revenue synergies, as I've mentioned before, we've always 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 $140,000,000 of synergies. Regarding the $140,000,000 so 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.
So I would just encourage you on revenue synergies to factor based on the comments we're making on end markets and regions. But on the savings target overall $140,000,000 we still feel very good about that. And remember we formed these 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 and A would be the major categories. And all of them are on track.
So we're very encouraged by what we've seen both the fit, the technologies culturally and the projected savings. So we feel very good about it.
And sorry just to follow-up on the end market commentary. Tom is there any markets that you're looking at that's earned in terms of the markets overheating or where its strength is not sustainable?
Jamie, I lost you there.
Sorry, can you hear me?
Yes, go ahead.
Just are there I know everything was very positive in terms of end market commentary, but are there any markets that you're concerned are overheating? For a lot of people talk about the strength in China not being sustainable. I'm just wondering if you're seeing any warning signs.
Yes. I mean, I think in general China is not going to continue to grow at the pace that it's growing now. And we look at some macro indicators like electrical output usage and rail freight rail usage. And those would and just naturally when you look at the comparables, China is 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. But it's going to bump up against comparables that will make it 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. And our next question is from Mig Dobre with Baird. Your line is open.
Yes. Good morning, everyone. And 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.
So 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.
So, 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, our on the industrial portion of the company, our visibility would be typically like in that 6 to 8 week standpoint. So 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 for the first half industrial 10.5% growth again a little bit easier comps, but that's reflective of what we did internationally 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. So I feel pretty good about that. I mean that on top of a 6% growth feels pretty good, especially when we were living in a world that was negative and all were feeling like if we got 1% or 2% growth that would be the new norm. So that kind of growth rate feels very good. It doesn't feel like we're too far over our skis.
And then 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. Then my follow-up, and maybe 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?
Yes, Mig, I'll take this one. Yes, 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. Now 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% to 7.8% of sales for the year.
They were lighter than that in the Q1. And the mix of aftermarket will shift back, we think, to normal trends in subsequent quarters.
Any sense on the dollar value or margin impact from this cost shift?
The development cost?
Development costs, roughly $10,000,000 to $11,000,000 light this quarter compared to normal.
Our next question comes from the line of Ann Duignan with JPMorgan. Your line is open.
Hi, good morning everybody.
Hi Ann.
Can we talk just a little bit about Sarkor and the integration? And I mean 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 $140,000,000 in synergies sooner? Or are we going to achieve more than $140,000,000 How should we think about that from our model perspective?
Ann, this is Tom. So we're still staying with the 140,000,000 dollars 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 will mark the 1 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, but $140,000,000 still feels like the right number. And 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 is 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, and I probably won't be able to give you that. But it's our 2nd or 3rd largest country after the U. S. With Germany and China kind of competing for that second spot.
But I would look at our Asia progression as not just a China only story. We see really good effort across the entire region. So North Asia, Korea and Japan are probably better than I can remember in a lot of years. India is 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. So 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.
And I mean it's hard to find anything negative right now, but I wonder how sustainable at 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?
Well, I think your point is spot on. I mean, 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. But I think this is a different I think time period for Industrials. There's been a lot of data and analysis that we've done.
If you look at the last 15 years for Industrials and this is going to be maybe a long winded answer to your question. The 2,003 to 2,008 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. Then we had the Great Recession, 'eight into 'nine and 'ten starting to recover, a rebound to 'eleven. Then most industrials somewhat charted water from 11 to 15. And then we had the industrial recession which was really natural resource led 2015 2016.
And of course, we've seen the recovery now start beginning of this calendar year. My feeling is this feels and comments I was making at the beginning the general business conditions and settlement from customers and distributors feels different than the previous errors I'm just describing more like an 3 to 8, but it's not going to have the same pull that China had back in that era. So I look for industrials to break out of their kind of treading water pattern that was in the 11 to 2015. Where that finally ends up nobody I'm not smart enough to say, but this does feel slightly different. Trees don't grow to the sky, so PMIs aren't going to go forever.
But 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. It doesn't feel like that right now. Where it lands we're all going to learn over the next several quarters years.
And on that note, are you seeing any labor inflation yet anywhere in the world? And I'll leave it there. Thanks.
Yes. Ann, again, I'll just I'll continue. It's Tom. No, nothing out of the norm.
Okay. Appreciate that. I'll get back in the queue. Thanks.
Thanks, Ann. And our next question comes from the line of Joe Ritchie with Goldman
Thanks and good morning everybody.
Good morning, Joe.
Maybe, still the growth rates were clearly really strong this quarter. And 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 like 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?
Joel, 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. And 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 $6,000,000 of cost to achieve through versus $52,000,000 for the year. Just curious, was there any reason why the spend wasn't more front end loaded, just to support the synergy expectations? And just was there any color on that?
Yes, 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. And 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. So 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 $58,000,000 for the year.
Joe, this is Tom. If I could just add on. In general, if I were to characterize whether it's Clark Court 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 that they can try to get things done. But 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.
So we were conservative on the savings projections. That's why you don't see us coming off our savings for this year And the actual costs, what Q1 was like, you'll see that come back up in Q2, Q3 and Q4 through the rest of the year.
Got it. No, no, that's great to hear. And I know maybe a last question. I know Han 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. But yes, was there any was there much of an impact from price cost this quarter on North American margins?
Hey, Joel, it's Lee. I mean the net is no. We have seen some commodity inflation such as copper. But really where we have that is an issue where it's we have a lot of exposure. We've got contracts with our customers that it hits a certain level we pass that through.
So 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. And 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. And 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? And if so, where are we on the ability to push price in this market?
Yes. Let me address the margins first, David. We're currently seeing it's 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 job integrating CLARCOR. But 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. So yes, 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.
Well, I guess I'm just thinking the improvement. I mean, if you put the all in numbers, you're looking for 18% incrementals in the first half and about 21% in the second half. And given the natural help from anniversarying CLARCOR, I would have thought to be a bigger improvement in the second half incrementals versus the first half. And 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?
Yes. 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. So we're not forecasting any wild acceleration in pricing in the second half of the year.
And on the second half, the slower growth rate in industrial, you mentioned it was largely comps. And 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?
Yes, David,
it's Tom. Yes, it's Tom. David, that's how I would characterize it.
All right, terrific. Thank you.
Thank you, David.
And our next question comes from the line of Andy Casey with Wells Fargo Securities. Mr. Casey, your line is now open.
Sorry about that. Good morning and thanks. With the broad based strength, have you seen any supply chain constraints? And if you did, can you give some color on maybe what sort of components?
Andy, it's Lee. So 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. So there's nothing I would spike out and there's really no components that I would could spike out that are really causing us major problems right now.
And 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 3 quarters of pretty strong increases from an order entry standpoint. So 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. But we've been able to absorb this pretty strong increase and not have our backlog go up.
Okay. Thank you. And then if I step back and look at the longer term win strategy, you talked about a whole bunch of multichannel 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?
Or is it just certain parts of it are running better than you would have 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. So 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. So there's big opportunities to take share. But 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 multiyear period of time can we average 150 bps because really top quartile companies and that's what our intention to be demonstrate that over our cycle. So that's while we're really happy with 3 quarters in a row, believe me we're very happy with that. We want the real trick will be doing it over a longer period of time.
Okay, thanks. And then last question, Mark, kind of capital allocation. Can you comment on the pipeline? I know you're still integrating and on track with the CLARCOR acquisition integration, but I'm wondering if there are any opportunities that you're looking at?
So Andy, it's Tom again. So I had mentioned earlier, so 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. But you're right at some point as we glide down the debt path, we're going to have the ability to start looking at acquisitions as part of our growth strategy as well. And I would just 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. Those are we view this as a long standing effort because it's not something we're going to turn the spigot 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 and the corporation. So we have we know what those are and we'll continue to work them.
So as some of you heard me say before, we want to be great generators of cash and great deployers of cash. And on the great deployers of cash side that includes acquisitions. And we will continue to whatever characterize have an assertive balance sheet at the appropriate time. And we'll work those and we'll sort of let you know when we're ready.
Okay. Thank you very much.
Thanks, Andy.
And our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets.
Hey, good morning. Hi, Jeff. Just on CLARCOR, 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, I would just this is Tom. I would just characterize at a high level, it boils down to channel opportunities. Number 1, our channels are complementary. So you can have product going being carried on the line card for the various channel partners. There's regional opportunities because North America is really CLARCOR strong suit and we were more balanced globally.
So there's regional opportunities. And then there's OEM opportunities, CLARCOR, which is why we loved it so much. It's an 80% aftermarket business and we were stronger on the OEM. So we're going to leverage those OEM relationships which maybe we have a broader breadth of technologies going into Eversysus Filtration that we could leverage. So those would be the 3 broad areas channel region and really that OEM portfolio that we could go to the OEM with.
And we're working those hard. Again, 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. And again 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. And then if you look at those three opportunities, which one where would you expect it to move the fastest?
Not going to comment on that, Jeff. It's just we're working all of them equally.
Okay. Thanks.
Thanks, Jeff. And our next question comes from the line of Nigel Coe with Morgan Stanley.
Good morning, guys. This is Dylan Cumming 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 consolidation or some short term manufacturing efficiencies. Obviously, margins held pretty well here in 1Q.
So are you guys still expecting some incremental pressure here to crop up the next couple of quarters? Or do you kind of have a clear line of sight that you kind of work through those headwinds?
Yes. Some of the inefficiencies will come when we're merging the footprint and we did push that out. So we did less footprint merging in the Q1 than we had originally planned and you'll see more of that come into play in the 3rd Q4. 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. And then 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 how or how that strategy is progressing and to what extent that might be driving some of the upside in your international sales growth provision?
Yes.
This has been a key this is Lee talking. This has been a key initiative for us as a part of a refresh of our new win strategy. And we've got some really senior dedicated people working on this around the globe. We've had great progress throughout Asia, Southeast Asia and continued progress in EMEA and really developing parts of EMEA in Middle East and Africa and developing parts of Europe. So the bottom line is we're making great progress.
I think you see that reflective in our sales and in our margins.
Got it. Appreciate the time, guys.
Thanks, Dylan.
Thank you. And our next question comes from the line of Neil Frohnapple 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 the share. 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?
Yes. I would say now we're looking at more mid single digit.
Okay. So similar to the base business?
Correct.
And then maybe as a follow-up to David's question, I mean, could you talk more about the increased margin outlook for Diversified International? I think the implied incremental margin for the segment at the midpoint similar to the implied incremental margin in the original guidance. So is there something precludes new guys from experiencing a higher flow through with the step up in organic growth expectations? Or is it more of a wait and see approach given how early we are still in the year?
Yes, 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 and that's helping. But as the growth comes through, we're hoping to see the incremental margins, but it's a little early yet.
Okay, great. Thanks. I'll pass it on.
Thank you. And our next question comes from the line of Timothy Thean with Citi Research.
Great. Thank you. Yes, just circling back in the discussion earlier on the strength in Asia, which obviously has been going on for a while. And that's a region where in that going back a few years, you had facilities that obviously were operating at extremely low rates. And I'm just wondering, given the revenue pickup that you've benefited from, just where those facilities are operating today?
And 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. So on Asia, you're right. You have a good memory over the last 10 years. We made some investments to and really in advance of Asia growing into those things. And they really have grown into them.
But from additional CapEx, it would be very selective. It would be more a piece of equipment here too. We don't really need any brick and mortar pretty well at what we need. And with the combination of lean and some very targeted equipment purchases, we'll be in good shape.
Okay. And that region, just thinking about international margins as a whole, I'm guessing Asia is still well or at least above that average relative to Europe?
Yes. Tim, it's Tom again. Yes, it is. And that's why as Asia grows, that's why it gets a nice corresponding lift to international margins.
Okay. And 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 where you're thinking in terms of the division count and where you're looking to end FY 2018?
Yes. Just as a refresh, it's Tom again, refresh for people on the phone. So we started at 114 and we're going to be at approximately 90 for this year. And 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 gross synergies. People are working in 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 it requires 48 divisions to be combined.
So that's roughly 45% of the company going through some kind of change process. So we it will not continue at that pace and will be whatever makes sense for our customers and from a cost standpoint. So it's going to glide down if I go out years a little bit more. But the simplification actions that will become less of the big driver and more of the whole revenue complexity of the eightytwenty look on being able to be simpler to do business with our business strategies around that whole eightytwenty concept of revenue complexity. That was really what will carry simplification to 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. And our last question comes from the line of Steve Volkmann with Jefferies.
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. And 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.
But 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.
Well, so obviously there's a lot of that activity going on Tim. This is Lee or Steve this is Lee. But it's not the only thing going on. So I mean there's just 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 low let go with some of these major companies out there and they're working on that. So for me that's a big plus happening.
So I can tell you that the activity right now is still good with a lot of the with the work going on in mining oil and gas, but it's not the only thing that's happening.
Okay, fair enough. And then maybe a quick one, just a follow-up for Tom. You mentioned that your new incentive compensation plan was kind of working now that you're 2 years into that. I thought that was interesting comment. Can you just provide a little more color on that?
Yes. Steve, it's Tom. A reminder for what that is. We have a return on net assets incentive plan, which really touches almost 95% of our team members around the world. And for the senior leadership team, the divisional leadership team, we've added a growth element to that.
So 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. So 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. But as you might imagine that drove a lot of attention and drove the right kind of behaviors. So what it does is it encourages people to do what we said on The Win Strategy.
We want you to grow fast in the market. And if you do that you're going to be rewarded handsomely for that. And so that's I think the incentive plan. Any good incentive plan you want to drive behavior and the indicators of driving the right kind of behavior.
And that's starting to pay out as a multiplier rather than a haircut now?
Yes.
This concludes today's question and answer session. I would now like to turn the call back to Ms. Kathy Seaver for closing remarks.
Okay. Thanks, Chelsea. Yes, thanks for 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.