Earnings Call: Q1 2017

Oct 21, 2016

Summary

Q1 sales declined 4% YoY, but orders turned positive and adjusted EPS rose 6% to $1.61. FY17 guidance was maintained amid weak but stabilizing markets and continued margin and cash discipline.

Good day, ladies and gentlemen, and welcome to the Parker-Hannifin Corporation First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, you may press star and then zero on your touch-tone telephone. As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Mr. Jon Marten, Chief Financial Officer. Mr. Marten, you may begin. Thank you, Andrea. Good morning, and welcome to Parker-Hannifin's first quarter FY 2017 earnings release teleconference. Joining me today is Chairman and Chief Executive Officer, Tom Williams, and President and Chief Operating Officer, Lee Banks. Today's presentation slides, together with the audio webcast replay, will be accessible on the company's investor information website at phstock.com for one 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 posted on Parker's website at phstock.com. Turning to slide number 3, today's agenda is outlined. To begin, our Chairman and Chief Executive Officer, Tom Williams, will provide highlights for the first quarter of fiscal year 2017. Following Tom's comments, I'll provide a review of the company's first quarter FY 2017 performance, together with the guidance for FY 2017. Tom will provide a few summary comments, and then we'll open the call for a question-and-answer session. At this time, I'll turn it over to Tom and ask that you refer to slide number 4. Thanks, Jon, and welcome to everyone on the call. We appreciate your participation this morning. Today, I'd like to share highlights of our first quarter results, comment on our fiscal year 2017 guidance, and finally, share progress we are making with the new Win Strategy. Before I get into the financial highlights of the quarter, I would first like to talk about safety. Keeping people safe is our first priority, and as such, we start our meetings at Parker with a discussion on safety. So I thought I would start our earnings call with safety as well. During the first quarter of 2017, we were able to reduce our recordable injuries by 35% compared to the prior year. This builds upon a 33% year-over-year improvement we posted comparing 2016 versus 2015. Naturally, we have a long way to go to reach our goal of zero accidents, but I am very pleased with the progress we are making. Safety is important because not only does it protect our people, but also because great safety performance typically leads to great financial performance. Now to the financial highlights of our first quarter results. First quarter sales were $2.74 billion, a 4% decline compared with the same quarter a year ago. This represents the third consecutive quarter we saw an accelerating rate of decline in sales on a year-over-year basis. Nearly all the decline in sales this quarter was organic. Total order rates for the first quarter increased 2% compared with the same quarter last year on easier comparisons. This represented the first quarterly increase in orders since December 2014. By segment, North America is still weak but slowly recovering, and our Aerospace Systems segment and Industrial International order rates were positive. These order rates reinforce our previously communicated view that we are progressing towards stabilization in many of our key markets. However, we will continue to monitor order trends closely to ensure that this outlook is holding up. Net income for the first quarter increased 8% to $210 million on an as-reported basis, or $218 million on an adjusted basis. Earnings per share were $1.55 as reported, or $1.61 on an adjusted basis, a 6% increase in adjusted earnings per share compared with the same quarter last year. Despite soft market conditions, we were able to achieve total segment operating margins of 15.0%, or 15.4% adjusted. This is another quarter of solid performance and represents a 10 basis point improvement year-over-year in adjusted segment operating margins. Our decremental margin return on sales, or MROS, was 3.9% for the first quarter, or 12.7% on an adjusted basis. This really is outstanding performance and marks the seventh consecutive quarter that our adjusted decrementals have been below 30%. It was another strong quarter for cash flow. Cash flow from operations, excluding a discretionary pension contribution, was 12% of sales, reflecting our ability to be a consistent generator of cash through economic cycles. During the quarter, we repurchased $115 million of Parker stock. This completes the previously announced commitment to buy back a minimum of $2 billion in Parker shares by October 2016. Going forward, our plan is to be a great generator of cash and a great deployer of cash in a way that generates increased long-term returns for our shareholders. Regarding FY 2017 guidance, we continue to forecast a year of flat sales compared with 2016. For 2017, we are maintaining guidance for as-reported earnings in the range of $6.15-$6.85 per share, or $6.50 at the midpoint. On an adjusted basis, we expect earnings per share in the range of $6.40-$7.10 for a midpoint of $6.75. Business realignment expenses are still anticipated to be approximately $0.25 per share in fiscal 2017. Just a few comments about our progress with the Win Strategy. We will continue to make meaningful progress across initiatives across four broad goals, engage people, premier customer experience, profitable growth, and financial performance. Our ongoing execution of the Win Strategy through its first full year of implementation gives me even more confidence that we can achieve our key financial objectives by the end of fiscal 2020, which includes targeted sales growth of 150 basis points higher than the rate of global industrial production. We are also targeting 17% segment operating margins, and progress towards these goals is expected to drive a compounding of growth rate and earnings per share of 8% over this five-year period. These performance targets will allow us to deliver sustainable long-term value for Parker team members, our customers, and our shareholders. We'll now hand things back to Jon to review more details on the quarter and fiscal 2017 guidance. Thanks, Tom. At this time, please refer to slide number 5. I'll begin by addressing earnings per share for the quarter. Adjusted earnings per share for the first quarter were $1.61 versus $1.52 for the same quarter a year ago. This equates to an increase of $0.09. This excludes business realignment expenses of $0.06, which compares to $0.11 for the same quarter last year. On slide number 6, we review the influences on the adjusted earnings per share for Q1 versus Q1 of FY 2016. We had earnings per share of $1.52 for the first quarter FY 2016, and $1.61 for first quarter of this year. Increases to adjusted earnings per share include a reduction of corporate G&A expense, which totaled $0.11 per share, a lower effective tax rate of 28.1% versus 29.2% in Q1 of FY 2016, lower interest expense, and the impact of fewer shares outstanding due to the company's share repurchase activity, which equated to an increase of $0.07 per share. A reduction of $0.08 per share in income was a result of lower adjusted segment operating income driven by weakened end market top-line demand as projected, while higher other expense equated to a reduction of $0.01 per share. Moving to slide number 7 with a review of the total company sales and segment operating margin for the first quarter. Total company organic sales in the first quarter decreased by 4.6% over the same quarter last year. There was nominal contribution to sales in the quarter from acquisitions and minimal currency impact. Total company segment operating margins for the first quarter, adjusted for realignment costs incurred in the quarter, was 15.4% versus 15.3% for the same quarter last year. Business realignment costs incurred in the quarter were $11 million versus $22 million last year. The lower adjusted segment operating income this quarter of $422 million versus $438 million last year reflects the impact of the weakened industrial end markets, partially offset by the savings realized from the company's simplification and restructuring actions. Moving to slide number 8, I'll discuss the business segments, starting with Diversified Industrial North America. For the first quarter, North America organic sales decreased by 9% as compared to the same quarter last year. There was no impact from acquisitions and nominal impact from currency in the quarter. Operating margin for the first quarter, adjusted for realignment costs, was 17.5% of sales versus 17.2% in the prior year. Business realignment expense incurred totaled $4 million as compared to $8 million in the prior year. Adjusted operating income was $205 million as compared to $221 million, driven by the reduced volume as a result of those same key industrial end markets. I'll continue with the Diversified Industrial segment on slide number nine. Organic sales for the first quarter in the Industrial International segment decreased by 3.2%. Acquisitions positively impacted sales by 0.9%, while there was no impact from currency. Operating margin for the first quarter, adjusted for business realignment costs, was 14.2% of sales versus 13.6% in the prior year. Realignment expenses incurred in the quarter totaled $7 million as compared to $12 million in the prior year. Adjusted operating income was $144 million as compared to $141 million, which, despite the weakened top line, reflects the offsetting savings resulting from the realignment actions taken in the current and prior fiscal years. I'll now move to slide number 10 to review the Aerospace Systems segment. Organic revenues increased 3.1% for the quarter. Neither acquisitions nor currency impacted revenues. Growth in military OEM, commercial OEM, and commercial aftermarket sales were the drivers for the quarterly performance as compared to the prior year. Operating margin for the first quarter, adjusted for realignment costs, was 13.1% of sales versus 13.9% in the prior year. No business realignment expenses were incurred in the quarter compared to $2 million in the prior year. Adjusted operating income was $73 million as compared to $76 million, reflecting the timing impact of higher development costs during the quarter. Moving to slide number 11 with the detail of orders changes 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 in 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 improved to positive 2% for the quarter and reflecting easing year ago comparisons and a decelerating rate of decline in key industrial end markets. Diversified Industrial North America orders decreased year-over-year to negative four. Diversified Industrial International orders increased modestly year-over-year to a positive three, and Aerospace Systems orders increased year-over-year to a positive 14%. On slide number 12, we report cash flow from operations. For the first quarter, cash flow from operating activities was $114 million, or 4.2% of sales. This compares to 0.7% of sales for the same period last year. When adjusted for the $220 million discretionary pension contribution we made in the quarter, cash from operating activities was 12.2% of sales. This compares to 7.7% of sales for the same period last year, adjusted for the $200 million discretionary pension contribution made last year. The significant uses of cash during the quarter were the $220 million for the discretionary pension plan contribution, $115 million for the company's repurchase of common shares, and $85 million for the payment of shareholder dividends. $33 million for CapEx, equating to 1.2% of sales for the quarter, is also called out. Turning to slide number 13, the full year earnings guidance for 2017 is outlined. The guidance is being provided on both an as-reported and an adjusted basis. Adjusted segment operating margins and earnings per share exclude expected business realignment charges of $48 million, which are forecasted to be incurred throughout FY 2017. This is the only item for which we are adjusting. Total sales are expected to be in the range of -1.5% to 2.1% as compared to the prior year. Organic growth at the midpoint is nearly flat. Acquisitions in the guidance are expected to positively impact sales by 0.4%. Currency in the guidance is expected to have a modestly positive 0.3% impact on sales. We have calculated the impact on currency to spot rates as of September 30, 2016, and we have held those rates steady as we estimate the resulting year-over-year impact for the upcoming balance of FY 2017. For total Parker, as reported segment operating margins are forecasted to be between 14.8% and 15.2%, while adjusted segment operating margins are forecasted to be between 15.2% and 15.6%. The guided midpoint on each range compares favorably to FY 2016 margins, 13.9% on an as-reported basis and 14.8% on an adjusted basis in FY 2016. The guidance for below-the-line items, which includes corporate G&A interest and other expense, is $478 million for the year at the midpoint. The full year tax rate is projected at 28.5%. The average number of fully diluted shares outstanding used in the full year guidance is 135.5 million. For the full year, the guidance range on an as-reported earnings per share basis is $6.15 to $6.85, or $6.50 at the midpoint. On an adjusted earnings per share basis, the guidance range is $6.40 to $7.10, or $6.75 at the midpoint. This as-reported EPS guidance excludes business realignment expenses of approximately $48 million to be incurred in FY 2017. The effect of this restructuring on EPS is approximately $0.25. Savings from these business realignment initiatives are projected to be $30 million and are fully reflected in both the as-reported and the adjusted operating margin guidance ranges. We would 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 fiscal year 2017 guidance are sales divided 48% first half, 52% second half. Adjusted segment operating income is divided 45% first half, 55% second half. EPS first half is $2.96 and $3.79 at the midpoint. That's first half versus second half. Q2 adjusted earnings per share is projected to be $1.36 per share at the midpoint, and this excludes $0.10 of business realignment expenses expected to be incurred in our Q2. On slide 14, you'll find a reconciliation of the major components of FY 2017 adjusted EPS guidance of $6.75 per share at the midpoint From prior FY 2017 EPS of $6.75 per share. Increases include $0.05 from lower corporate G&A and $0.05 from the lower tax rate. The key component of the decrease includes a $0.10 per share reduction from higher other and interest expense. Please remember that this forecast excludes any acquisitions and divestitures that might close during FY 2017. This concludes my prepared comments. Tom, I'll turn the call back over to you for your summary comments. Thanks, Jon Marten. I am glad we started 2017 on such a positive note. I would like to thank the Parker team members around the world for their efforts. Not only have we made meaningful progress with initiatives designed to improve margins, we have also taken great strides to strengthen and sustain our business and better serve our customers. We are positioned well for the rest of this year and beyond, under the framework provided by the Win Strategy. I look forward to sharing more with you as always, as the year progresses. At this time, we are ready to take questions. Andrea, if you could help get us started. Absolutely. Ladies and gentlemen, if you have a question at this time, please press the star then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, you may press the pound key. Again, that is star and then one to ask a question. Our first question comes from the line of Nathan Jones with Stifel. Your line is open. Good morning, everyone. Morning. I think I would like to talk a little bit about cash generation and cash usage today. Very strong cash flow quarter in what I do not think is normally an overly strong cash flow quarter. I think for as long as I have followed Parker, your target has been 10% of sales converted into free cash flow. Is the new Win Strategy and execution of that structurally changing that target? Should we think about cash generation being some number higher than 10 going forward? Nathan, it's Tom. 10% has been our historical target, it's still the target. What we've done as far as determining that target is what's top quartile against our peer group. It happened to be when we set that goal years ago, 10% was top quartile, and as we benchmark it today, 10% is still top quartile. Now obviously, as we continue to raise margins, which is our goal, we should continue to be even better at performing, but the goal is to be top quartile. We happen to have been a pretty consistent performer in being top quartile on cash. I think you look for us to continue to do that. Okay, fair enough. The $2 billion share repurchase is complete. The commitment that Don made a couple of years ago there is complete. The balance sheet is still pretty robust. You've still got plenty of capacity there. How should we think about your approach to M&A versus share repurchase going forward from here? Yeah, Nathan, it's Tom again. We obviously look at both of those all the time on the dynamic basis with the goal of making the best long-term value creation decision for our shareholders. I would characterize the pipeline right now as far as acquisitions, being fairly active. As always, acquisitions are lumpy and hard to predict as far as the output. I think what historically the last couple of years has slowed us down as far as converting more acquisitions, has been the price valuation gap. What we're seeing now, and I would hope over the next couple of years, we'll continue to see this even more, is I think sellers' expectations coming closer to reality. I think that price gap that we experienced will become closer, and I think properties will become more actionable. We will continue to look at share repurchase and acquisitions and make the best decision every quarter on behalf of our shareholders. On the share repurchase, just as opposed to pre-announcing, we'll continue to be active, and as I've said before on these calls, what we'll do is we'll communicate after the fact. We think that's the best value creation for our shareholders. We won't be buying into our own wind, and you'll see us be active. Like I mentioned in my opening comments, our goal is to be great generators of cash, and we'll continue to be even better at that, but we want to be great deployers of cash and put it to work. Now, the $2 billion that you mentioned, Nathan, that's sitting there, just reminding, I think most people realize this, is that 99% of that is permanently invested overseas. There's certain constraints or factors that you have to weigh when you think about how to deploy that and try to deploy it in the most tax-efficient manner on the benefit of our shareholders. We'll look at that. We obviously want to put it to work, but there's factors you have to consider on that cash that's sitting overseas. Okay, thanks very much. I'll pass it on. Thank you. Our next question comes from the line of Andrew Obin with Bank of America. Your line is open. Yes, good morning. Morning, Andrew. Just a question. We are seeing improvement in energy prices. I was just wondering if you could give us some more color if you guys are seeing any impact on backlog or discussions with your customers. Andrew, this is Lee Banks here. I would characterize the oil and gas pretty much as we characterized it last call. Year over year, it's still down. There's certainly an increase in rig counts taking place, but I would characterize it as almost basically at the bottom with a lot of choppiness taking place in the market. There's no real catalyst for significant change at this point in time. Just to follow up on M&A, I've literally had discussions where people are using negative interest rates for cost of funding for deals. How does the equation between the prices and cost of capital is working in this environment? Are people getting more reasonable given where macro is? How does it balance the fact that you can borrow at almost nothing? Andrew, it's Tom. I think the gap I was referring to on valuation has been more of sellers continuing to use what I would call a pre-2008 mentality as far as forecasting sales based on. We buy properties that we know and understand. We buy things within our space, and we have divisions that are in the same space, so we see what the market and our growth rates are, and typically there's been a disconnect on that. I see that disconnect getting closer, which will allow things to be more actionable. Now, your point as far as how we decide to look at the financing side of things, we're disciplined. We do a discounted cash flow. We have a certain discount rate that we look at. We have return criteria that we consider. This is all to the benefit of creating value for our shareholders and how we look at that analysis. I think we're very contemporary. We try to look at it in a current environment, so it'd be reflective of what's going on in the real world. So I think we'll continue to do that robust review. Thank you very much. Thank you. Our next question comes from the line of Jamie Cook with Credit Suisse. Your line is open. Hi. Good morning. Nice quarter. Two questions. One, Tom or Jon, I am just trying to, one, get a better understanding of the margin guidance in Industrial International, given the performance that you put up in the first quarter, given that you actually had a sales decline, and your sales for the year are assuming positive growth. I would assume you would get more leverage there. If you could just give a little color there. My second question is, just on the order front, I guess I was pleasantly surprised that North American declines are lessening, and we saw another positive order number out of Industrial International on a tougher comp. Can you give a sense of your comfort level that the OE channel is clear, or when North American orders should start to inflect positively? Is that in the second half of the year? Whether you expect the strength in Industrial International to continue or when that starts to inflect even better. Thanks. Yes. Jamie, a quick answer from me. This is Jon on the margin guidance here for Industrial International. We did move it up 10 basis points. We are showing, as we made in our commentary, a little bit of a better overview in the Q1 and with the guidance going forward there. We see great progress as a result of our restructuring actions and our simplification ability here in the company-wide internationally also. We thought it was prudent to just move that up 10 basis points, and we are really pleased with how we are performing there. But Jon, your margins in the remaining nine months of the year, implied margins are lower than the first quarter, but we will get sales growth? Well, what we're going to do there is that as we look at the mix as the year goes on, Jamie, we have a very slight change in the mix going forward here. So we're trying to make sure that we get the best guidance out there. Please keep in mind that there are some seasonal impacts here for going forward here that we're going to see in our Q2. That's kind of indicated in our guidance, too, and that will have an impact on the Industrial International margins in our Q2, and as typical, in a beginning of our Q3 also. I'm sorry. What is the mix issue? Is it just more OE, or can you just give color on that? Well, it would be more of an ability as we look at some of the inroads that we're making in some of our businesses in Asia as well as in Europe. Making new wins, getting more business, and we're seeing good increases in our sales there as much better than we had projected. That is really helping us get more business. But that OE versus the aftermarket mix here is having a very slight impact. Okay. Sorry. Just a question on the order inflections for Diversified Industrial North America and Industrial International. Yeah, Jamie, it's Lee. I am going to answer your question and pivot on that, too, and just give some color on the markets around the world. I think it's important, too, for just everybody on the call to just go back a quarter and how we characterized the macro environment as we gave guidance in FY 2017. What we talked about was basically we figured this to be a year where most of our markets declines that we saw would decelerate and eventually make it back or closer to flat. We forecasted growth to be soft in Q1, as you remember, essentially flat in Q2, and then we'd see some small organic growth in a year-over-year basis in the second half of the year. When we gave guidance last quarter, we put the markets in three buckets. Positive, which would be positive year-over-year growth for our FY 2017, neutral, which would be neutral, and then negative. There really hasn't been much change from any of that. When I think about positive, we're still bullish on Aerospace Systems. We talked about refrigeration, air conditioning, semicon, and telecom. We continue to see strong activity in all those areas. On a neutral front, we talked about automotive, we talked about power generation and rail, and I think the one thing that we talked about, which really was a positive in our mind, that we saw distribution moving to neutral, and what we see, we're on track to do that. I will comment on North America, too, for you when I get there. Negative year-over-year, which is consistent, it's decelerating for sure, but the whole natural resource end markets, construction, farm and ag, forestry, marine, mining, oil and gas, all still have headwinds to them. Heavy-duty truck, which we talked about. Having said that, the organic growth for the quarter really largely moved in the direction as we expected from the last call. Just touching on North America in distribution. We saw it's down low single digits. It's really in line with the expectations that we saw. It's definitely regional. Those people impacted by natural resource end markets are still suffering, and there's still some tough comps, if you remember back Q1 last year this time for some of these people. What I was encouraged about is, roughly every four years, we hold a channel meeting in North America with our fluid power channel. I just came back from a meeting with 400 principals representing this channel across North America. I have to tell you, I spent two days just going from top to bottom, networking with everybody there, and I left mildly encouraged, certainly not depressed, about prospects moving forward. As you would expect, areas like the Great Lakes regions are having positive year-on-year growth. People in the oil patch are still suffering, but it's not that accelerating rate of decline. There's more talk about some positive trends possibly happening here in FY 2017, so that was good. If I talk about industrial markets in North America, you have to talk about oil and gas. Major OEMs continue to indicate no significant investment, but you do get a sense that there's a little bit of light at the end of the tunnel, and there's some talks about some projects happening going forward. Energy markets is another one that we like. Overall, the large frame turbines was flat year-over-year, but I've talked about this in the past, that we've had some good specification wins there. Our content is up, so we've seen some strong numbers from that sector for us. In the mobile markets in North America, we continue to see year-over-year declines in off-highway construction equipment, off-highway farm and ag, industrial trucks, material handling, and railroad equipment. I'd say one market that was a little worse than we forecasted was heavy trucks and trailers. That was a little bit of a headwind for us. I would say in the automotive markets, a little worse, and really, I'm talking about light truck there. I think a lot of that has to do with some extended summer shutdowns in some of those sectors that impacted us. But when we look at it going forward, we still feel very positive about it for the year. I'm going to get to international orders, Jamie. I haven't forgotten you here. When I talk about EMEA distribution, I would say, again, it's the same story. If you talk about oil and gas regions, it had a large negative year-over-year impact. We continue to see great growth in some of the emerging regions, but I will tell you, a little bit of headwind from some of the political unrest in Turkey, which cost us in the quarter. We see that coming back. Oil and gas, still tough year-over-year comps, but we are seeing some positive activity on some project business outside of Western Europe. General industrial, Middle East has been strong for us. There's a lot of projects going on result of their economic diversification efforts, so we've had some great project wins there. In the mobile sector, we are seeing some positive news in Europe with off-highway construction equipment and heavy trucks, and just getting some positive year-over-year input from our customers. So Europe, from an international order standpoint, largely moved in the direction that we thought it would for the quarter. For Asia Pacific, we were encouraged by another strong quarter of year-over-year entry. So it accelerated from last quarter, moved in the direction that we thought. Distribution was strong. We've got a big footprint expansion going on as part of our Win Strategy, and we like what's happening there. We've really seen very strong growth in India and Southeast Asia. Industrially, we are up in almost all end markets. So if I highlight machinery, power generation, semicon, telecom, all real positive in Asia Pacific. In mobile, I've highlighted this before in the past, but high-speed rail continues to be a bright spot for us through some specification wins. We're doing very well there. Really increases in most segments in mobile, off-highway construction. Again, very low levels, obviously. Heavy-duty truck, farm and ag. Latin America, another international component. Again, another second quarter of strong order entry year-over-year from an extremely depressed level. But we're encouraged by what's happening there. It's been the first positive move in some time. When we think about countries like Brazil coming back, that is a positive force. So Industrial International order entry accelerated and stayed relatively in line with what we thought in Europe, accelerated in Asia, accelerated Latin America. Okay, thank you. That was very helpful. I will get back in queue. Thanks, Jamie. Thank you. Our next question comes from the line of Ann Duignan with JPMorgan. Your line is open. Hi, good morning. Morning, Ann. Or whatever. Yes. I had to check if it was good morning. Sorry. Can we just take a step back for a moment? I missed what you said about Turkey. Did you say Turkey was improving, or Turkey was a bigger headwind? You were talking about political activity. It was a little bit disruptive there when all the political unrest was taking place, but it appears to us to be getting back in line. It was really some distribution business that went soft on us for a period of time. Okay, that's helpful. LatAm orders accelerating. Can you just talk about where exactly you're seeing the demand? Is it distribution? Is it truck? Just a little bit of color in terms of where specifically in LatAm, by market or by region. Yeah. These are off very low levels, so I don't want to mischaracterize what's happening there. But truck has been positive, construction equipment, and really farm and ag has been the positive. Okay. Thank you. Just to follow up on your guidance. The dollar has strengthened against the euro by 4% since the end of the quarter, and I know you said you've set your outlook based on September 30 exchange rates. If you were to do your exchange rates as of today, would you have changed your revenue guidance? Anne, this is Jon. I think yes. Given that fact, we have a pattern of going through and using September 30. We'll see how that plays itself out for the balance of the year. But with the strengthening of the dollar today, I think that it would've had an impact on the guidance very slightly. Okay. I appreciate it. I will get back in line. Thank you. Thank you. Our next question comes from the line of Joe Ritchie with Goldman Sachs. Your line is open. Hey, good morning, guys. Morning, Joe. I guess my first question, there's been a lot of concern, especially as we've been exiting September, that things in industrial started to get a little bit worse. I am just curious whether you can provide any color on how things trended in the quarter, and specifically that back half of September, which has been a hot topic of conversation with folks. Joe, it's Tom. Through the quarter, what we saw was that North America orders get less negative, which is a good thing, and seem to progress sequentially that way through the quarter. International and Aerospace Systems were relatively consistent through the quarter. In October, we haven't seen anything that's unusual, and October's consistent with what we've put in the guide. Okay. All right. Helpful. Still helpful, Tom. Maybe, just given that the earnings number came in a little bit better than expected, Tom, you kind of kept the guidance range wide for the year. I think historically, you guys have kind of narrowed in the first quarter. Just curious what your thoughts were around that, especially just given the fact that order trends have gotten a little bit better. Yeah. Two things. One, maybe I'll talk about the width of the guidance. Maybe people didn't pick up on it, but we did this year in August different than what we've done historically. If you go back and look at our August guidance, typically had a much wider range. We started off the year with a more narrow than traditional range in August, and we just kept that the same for the third quarter. Part of it is really the starting point. Then as far as keeping it consistent, when you look at what happened through the quarter, we met the guide at the operating income level. The good thing about what happened in the quarter is we had slightly less sales, but we had better operating margins, so we ended up delivering the operating income to our guide, which was a testament really to the team around the world doing a fantastic job on that. We got some help below the line with some discrete one-off things that are not going to repeat. We felt that with that mix, holding it flat made sense, and holding it flat, especially in today's environment with the macro environment being, I would still say, fairly uncertain. While we're encouraged with the fact that our orders turned positive, I'd like to see a little bit more data before we get too far ahead of ourselves. Yeah. Got it. That makes sense. Maybe one last follow-up, and just specifically on the below-the-line items in the guide. I know you guys made a voluntary pension contribution. I assume that was going to be a little bit of a tailwind to your earnings number for this year, but it looks like your corporate number has gone up. What's the natural offset there? Yeah, I think, first of all, it's not a big tailwind, but it is a slight few cent tailwind there for that additional contribution that we made. Going on below the line, what would be going the other way, as Tom Williams has talked about in many of our different venues over the last several quarters, our investments in R&D, our investments in e-commerce, our investments in IoT, and the kinds of things that we need to do in order to improve our customer experience is really driving the additional expenses here that are helping to offset that five cent or so impact that we're getting from the additional pension contribution that we made. I hope that helps you, Joe. That's helpful, Jon. Thanks, guys. Okay. Thank you. Our next question comes from the line of Andy Casey with Wells Fargo Securities. Your line is open. Thanks a lot. Good morning, everybody. Hey, Andy. Hi. On the quarter, could you give a little bit more color on the benefit to operating profit from restructuring and simplification? Yeah, Andy, it's Tom. Maybe I'll start strategically, and I'll let Jon add in with the details within the quarter. But with simplification, the strategy here is, there's four elements of it, and we've focused at the, I would say, initially, if you had envisioned simplification as kind of being an iceberg, the tip of the iceberg was division consolidations. That was kind of the natural thing out of the gate that we did. But the bigger part of simplification, what's underneath that, is going to be product line complexity, revenue complexity, organization design work, process changes that we'll do related to that revenue complexity, and it is good old-fashioned bureaucracy. We are very encouraged because, if you remember, simplification is geared more at the strategic SG&A type of restructuring. We made a lot of progress, but I think this is, we're very early days in this, and that's part of why you've seen, from an operating margin standpoint, why we've performed so efficiently the last several quarters and why our decrementals have held up so well. But specifically within the quarter, I don't know if Jon has something he wants to add on that. Well, the only thing that I would say, on specifically in the quarter here is, we had $0.06 in restructuring that we actually booked. We're going to see about, we're maintaining our guidance for the year, and we're maintaining our savings that we had projected when we put our guidance together, which is about 20% of the savings that we're going to get in the first half of the year. So it kind of came right in along with our expectations. Our actual restructuring that we booked in the quarter was a little bit lighter, a few cents lighter than what we had projected in the guidance. It's actually $0.03 lighter than what we had projected in the guidance. But we're very pleased with our progress, and we are maintaining that projection through the balance of the year. Okay. Thanks, Jon and Tom. If I step back a little bit from the quarter, and look at the 2020 goals, you mentioned confidence in achieving those. If I just isolate the 17% operating margin goal, can you comment on whether you can get there if the market stabilization happens, but the markets kind of stay flat after that? Or do you need some end market growth in addition to the 150 basis point outgrowth that you're targeting? Yeah. Andy, it's Tom again. What we projected, including the 150 basis points greater than the market, is a 1.5% CAGR. Now remember, the CAGR starts in 2015, so it went down from 2015 to 2016, which is why that doesn't sound like a really big number. We go down, because 2015, all the natural resource, the dollar, everything from 2015 to 2016, flattening from 2016 to 2017, then starting to grow. By the time we get to FY 2020, our expectation is to grow 150 basis points faster than the market, based on FY 2020 as an exit rate. When you do the CAGR through that period of time, that's a 1.5% CAGR. As a backdrop, as long as the CAGR from 2015 to 2020 is a 1.5% CAGR, we think we can get to 17% operating margin. Obviously, if it's lower than that's going to put challenges on it. But I think that's a reasonable expectation given the macro environment and our goal to gain share and all the other strategies we've got around the Win Strategy to grow faster than the market. I think that's fairly reasonable, and we feel very comfortable that we can pull that off. Okay. Thank you very much. Thank you. Our next question comes from the line of Joe Giordano with Cowen. Thanks for taking my questions. Sure, Joe. Just, we've kind of touched on this, but with the orders in North America Industrial getting slightly better on a comp basis, but the revenue was touched a little bit lower, like 40 bps. Did the order patterns, even though it improved, come in a little bit lighter than you might have thought? Joe, this is Tom. The sales gap that we had, which was very slight compared to our guide, around $40 million, was pretty much equally dispersed between the three reporting segments, Aerospace, North America, and International. For Aerospace, it was a little bit of biz jets softness, helicopters. For North America, a little softer in heavy-duty truck, automotive, and a little bit into general industrial. Then International is mainly a little bit lighter in Europe than we had thought. But when you put it all together and based on the order trends that we see, and the fact that order trends are moving in the path we had thought they were going to go, we're encouraged, which is why we left the sales guidance flat for the full year. No, I guess I was just referring to, just on the sales guidance for North America was touched down a little bit from prior, and orders seem to be getting a little bit better. I didn't know if that specifically had, if the cadence there was a little bit different than you might have thought. Yeah, no. These are only slight differences. Yeah Joe, we're only down a total of, for the time period, of $19 million. For the year going forward, we're not down all that much. This is us going through each one of our end markets, each one of our businesses, pulling them all together and coming up with some guidance that makes sense. I would not read anything into that. Our orders are trending just the way that we thought that they would, and therefore, we are making just very slight changes in the sales as we're projecting here in the guidance. All right, fair enough. If I could just switch quickly to Aerospace Systems for a bit. You mentioned the margins suffered a little bit from development costs. Can you maybe go into a little detail there? Then just two quarters in a row there, 14% order growth. How much would you attribute that to just comps getting progressively easier, or are you seeing some real strength there? Well, first on the development cost, I mean, from time to time, it's very hard to project these quarter by quarter here. These are more timing issues than they are anything else. Now, on the 14% for two quarters in a row, I want to again, as you know, and everybody on the call knows, we're reporting these numbers because it's a long cycle business at a rolling 12-month average. Now, the long-term growth rate that we can expect is what we have seen almost in Q1 from Aerospace Systems, their sales up 3.1%, and our long-term growth rate with them is going forward, is going to be in the 4% range. That is something that over a next three or four or five year timeframe, we feel very confident in saying. I want to just caution you that to not expect a 14% increase going forward. This has to do with the lumpiness of the orders and how they come in from our military and commercial customers. The long-term prospects are fantastic, but they're not translating to sales at a 14% per year annum rate. Good. Thanks, guys. Okay. Thank you. Our next question comes from the line of Stephen Volkmann with Jefferies. Your line is open. Hi. Good morning. Just a couple quick follow-ups. I think, Lee, when you sort of went around the horn on all the end markets, I didn't hear you mention anything regarding distributor inventory levels and maybe destocking is kind of waning or something, but I don't want to put words in your mouth. Anything to comment on there? Steve, I don't think it's a big issue. I mean, I'm sure there's some pockets out there that aren't apparent to me, but by and large, it's not something, when I talk to the channel people are real worried about. I think a lot of that has worked its way out. Okay, great. Then maybe for Jon, it feels like we're sort of tweaking down the guidance, I guess, for fiscal second quarter a little bit. Correct me if you disagree, but is there anything to call out for modeling purposes? Any kind of below the line item stuff that maybe bounces back? Or how do we think about that? No, you're right. I mean, I think that there is some one-time events that Tom was talking about that happened in Q1 that were kind of good news for us, that are not going to repeat in Q2. You're right, your observation is correct. It's been tweaked down just slightly. And there are no other new and different types of activities that are occurring here that I would want to call out in a call like this. I think it's a normal cost structure. Our cost structure is getting better. Our volume is following along. Our orders are coming in the way that we had projected. So we're just a slight adjustments here for the slight bits of good news here that we got in Q1, especially below the line. Great. That is all I got. Thank you so much. Okay. Thank you. Our next question comes from the line of Jeffrey Hammond with KeyBanc. Your line is open. Hey, good morning, guys. Hey, Jeff. Just back on simplification and the division consolidation. I mean, you guys have done a great job early on. But Tom, you mentioned, a lot of runway ahead. Can you maybe just speak to what are the really big opportunities as you go forward? And maybe along those lines, Lee, you touched on international distribution. Maybe just expound on what you're doing there. Thanks. Okay, so Jeff, it's Tom. I'll start with the simplification, then Lee can talk about international distribution. For us, I think the biggest pole in the tent on simplification is the whole revenue complexity. And when you look at our divisions and you do a histogram of their sales, and you look at that last couple percent of revenue, it has a significant, and I would underline significant, amount of part numbers, quote activity, and SG&A that's tied up in a relatively small percent of revenue. Now, we don't want to walk away from that revenue, but we want to do it significantly more efficiently. So that's a big element. And because of the size of the company and just the sheer magnitude of part numbers, that is something that will take time, but it's going to be probably the biggest contributor to savings in the future on simplification. And we've just now started scratching the surface on that. Related to that is organization design and process. As we go through that product line complexity and simplify it's the old 80/20 type of concept, we're going to change organization design and processes associated. And there will be speed, efficiencies, cost, et cetera, and in general, an improvement in the ability to serve customers and ease of doing business with us. That's the other big part of the simplification, is to make it easier to do business with Parker. We'll look at traditional things in organization design like span of controls, number of layers, all those type of things. And we'll look at good old-fashioned bureaucracy, which Lee and I have talked about in the past. But if you were to do our, what used to be called internally in the company the black book process, which is our annual planning process, was a process that would take 5 months, 28 financial schedules, and literally thousands and thousands of people, hours tied up in that process, and we drove that down to 8 weeks, 8 schedules, and significantly freed up time for people. So those are just some examples and color on that. We're early days in this, but I would say it's got great momentum in the company. So I'll let Lee take over on what we're doing on distribution internationally. Hey, Jeff. We have talked many times that our distribution network is our greatest off-balance sheet asset that the company has. We have talked about North America being the gold standard in terms of how we compete and how we get to market. When we were putting the new Win Strategy together, although we had done a lot, we were cognizant that we still had not built this network out at the rate that we wanted to throughout the rest of the world. As we rolled out the new Win Strategy, we put a team of senior executives that know how to get this done, focusing on emerging regions in Europe and focusing on Asia-Pacific. We are really encouraged by the progress we are making 12, 15 months into it right now. It is very positive. Okay. Thanks, guys. Thank you. Thank you. Our next question comes from the line of Jeffrey Sprague with Vertical Research Partners. Your line is open. Thank you. Good morning, everyone. Morning. Hey, just a couple questions of clarification. First, I just want to make sure I had straight what Jon said about the restructuring. You made a comment about 20%. I do not know if, Jon, if you were saying 20% of your restructuring benefits are in the first half, if you could clarify that, and then just a couple of follow-ups. No, you got that right. 20% of the savings that we get from the restructuring that we are incurring for this year, we will get in the first half. Yes, that is correct. Then on Aerospace, obviously, with these wins and orders, you do have this development cost bubble. I wonder if you could just give us some sense of how elevated your R&D or E&D is today, versus where you expect to see it, say, in that 2020 horizon. Yeah. We're, in round numbers, at about the 8% level today. We've, as you know, moved it down from 11% a few years ago. The 7%-8% range is a range that historically is a number that we are the most comfortable with. But overall, our level of development costs are aligned with what our expectations are of our customers. If there is new and different types of requirements where we are the technical experts, then we will be, in many cases, the designer of choice, and so that will fluctuate. But for right now, given today's environment, 7%-8% seems to be the right level for us, and we're at about eight right now. If I could just have one more question, and we'll wrap it up for today. I hope that answers your question, Jeff. Thank you. All right. Our last question comes from the line of Alex Blanton with ClearHarbor Asset Management. Your line is open. Thank you. Hello? Hi, Alex. How are you? Just a question on the CapEx. The first quarter, you had $32.5 million, which is about 1.2% of sales. That's about half of what you normally do, which in turn is half as a percent of sales of what it was 10 years ago. What do you expect the CapEx to be for the year? What percentage of sales? It will be in the range of 1.6%-2.0% for the year. 1.- 1.6%-2.0% CapEx as a percent of sales. Okay. That is going to be a pretty low figure compared with what you were 10 years ago. We are nowhere near as require the capital that we did 10 years ago, Alex, and that 1.6%-2.0% includes a lot of reinvestment into the company. You are right. We are nowhere near where we were five years ago, let alone 10. That is mainly due to the lean efforts, correct? Yes. It's hard to articulate on a phone call like this how much lean has transformed our company. When you add on to that all the efforts that we're going through from a business simplification standpoint and how that's impacting our CapEx plans, we're just seeing a lot of great momentum from that. Yes, that's correct. It's not just a matter of raising the margins, but increasing the profits, the higher profits specifically, when it comes to allocating at the CapEx and share repurchases and acquisitions. Yeah. From a CapEx standpoint, we feel very good about our positioning there. Of course, we're disciplined. We're using an IRR approach on that, just as we do on the DCF from an acquisition standpoint. We remain disciplined on all of our raw capital allocation plans, and that's our goal. As Tom said, we want to be great deployers of cash going forward. I hope that helps you out, Alex. I just have one suggestion on the slide that you missed your cash flow. I guess it's slide number. What slide is it? Yeah. Cash flow from operating activities. Slide 12. I would give a simplified cash flow statement, actually, there. You're not presenting the individual components, the major components of cash flow. Now, I realize that's in the cash flow statement in the operating statements, but it would be very helpful to have it right here on the slide so people could see it and wouldn't have to refer back to the cash flow statement. Just a simplified one, showing the CapEx, showing changes in inventory and working capital and so on. Okay. Yeah, I appreciate that. Yeah, no, good suggestion, Alex. We'll definitely take that one on and take a real hard look at that for you and all of our investors. I think with that- You gave the number when you were talking, but they're not on the slide. Okay. All right. We'll try to be a little bit clearer next time. Thanks, Alex. And with that, I think this concludes our Q&A earnings call. I want to thank everybody for joining us today. I want to just reassure everybody that Robin and Ryan will be available throughout the day to take your calls should you have any further questions. And thank you, and have a great day. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.