Earnings Call: Q3 2016

Apr 26, 2016

Summary

Q3 sales and adjusted EPS declined amid weak markets, but adjusted margins improved and order declines moderated. FY16 adjusted EPS guidance rose to $6.20–$6.40, supported by restructuring savings and cost discipline.

Good day, ladies and gentlemen, and welcome to the Parker-Hannifin Corp quarter 3 2016 earnings conference call. At this time, all participants are in a listen only mode. Later, we will host a question answer session. Instructions will follow at that time. If, during the conference, you do need to speak to an operator, please press star then zero on your telephone keypad. As a reminder, this conference is being recorded. Now, I will hand the floor over to Jon P. Marten, Chief Financial Officer. Sir, you have the floor. Good morning, and welcome to Parker-Hannifin's third quarter FY 2016 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. Today's call agenda appears on slide number 3. To begin, our Chairman and Chief Executive Officer, Tom Williams, will provide highlights for the third quarter of fiscal year '16. Following Tom's comments, I will provide a review of the company's third quarter FY 2016 performance, together with the revised guidance for FY 2016. Tom will provide a few summary comments, and then we'll open the call for Q&A. At this time, I'll turn it over to Tom and ask that you refer to slide number 4. Thanks, Jon. Good morning, and welcome to everyone on the call. We appreciate your participation. Today, we're going to cover four key topics with you. First, I'll summarize the third quarter results. Second, some commentary on key market trends, give an update on the revised full year guidance, and finally, I'll highlight some of the progress we're making on the key initiatives from the new Win strategy. Beginning with the third quarter results. Sales declined 10.6% as the effects of the strong dollar negatively impacted us by 1.5%, and organic sales declined approximately 9.4%. Total order rates for the third quarter declined 6% compared with the same quarter last year. This is a sequential improvement from the second quarter. Earnings per share for the quarter were $1.37 or $1.51, adjusted for business realignment, which was ahead of our expectations. Operating cash flow year to date includes a $200 million discretionary contribution to the U.S. pension plan. Excluding the contribution year to date, operating cash to sales was 10.5%. During the second quarter, we repurchased $50 million in shares, bringing our year to date total to $450 million. We have now repurchased $1.8 billion in shares since October 2014. However, the most impressive accomplishment of the third quarter was our margin performance. I am very pleased we delivered total segment operating margins of 13.8%, or 14.7% on an adjusted basis. This represents a 30 basis point improvement year-over-year in adjusted margins, which is a significant accomplishment given the difficult economic conditions we are facing. During the third quarter, we delivered incremental margin return on sales of 17%, or 11.8% adjusted for business realignment expenses. This demonstrates excellent performance by our global team. This quarter marks the fifth consecutive quarter with incremental MROS of less than 30%. This is both on a reported and an adjusted basis. Year to date, we have also held SG&A flat at 12.1% of sales, despite a $1.2 billion drop in sales, another significant accomplishment by our team. Our performance during such a sustained period of lower sales and order rates is unprecedented. It demonstrates Parker's ability to create a more adaptable cost structure and deliver less cyclical financial performance. Now a few brief comments on key end markets. Reflecting on order rates over the past year, we are encouraged that they point to a moderating rate of decline. More specifically, from Q2 to Q3, we saw a number of end markets move from what we would classify as accelerating decline to decelerating decline, which is a good sign. We will continue to monitor additional data points in the coming months to help solidify our interpretation of the direction of the macroeconomic trends and provide you an update in our August call. As usual, we will provide more details on our specific end markets during the Q&A portion of this call. Switching to the outlook. For fiscal year 2016, we are increasing our guidance for earnings to the range of $6.20-$6.40 per share on an adjusted basis, which results in an earnings midpoint of $6.30 per share. Adjusted guidance represents a 20 cent increase from our previous estimate at the midpoint. The increase can be attributed to the third quarter beat and incremental savings we are now seeing from the realignment actions we have taken year to date. We also now anticipate higher business realignment expenses, which for the full year will go from $100 million to $120 million, or $0.63 per share. As we move deeper into the new Win Strategy initiatives, our global teams have identified additional near-term actions that will generate attractive return on investment. These actions will position us well for future growth and profitability. Now, I would like to give you some highlights from the new Win Strategy. We continue to make meaningful progress with our Win Strategy initiatives to increase team member engagement, deliver premier customer experience, and drive overall growth and financial performance. Take a moment to update you on progress in a couple select areas. Starting with safety, we have seen a 29% reduction in our reportable injuries comparing the third quarter of fiscal 2016 with the same period a year ago on a rolling 12-month basis. This reflects safety engagement across the organization and the progress of our safety-focused high-performance teams. Our goal is to reach zero accidents. The significance for our shareholders is that safe operations are productive operations, which translate to excellent financial results. Our simplification initiative is gaining tremendous momentum throughout the organization. It focuses on four key areas: revenue complexity, organization structure and processes, division consolidations, and bureaucracy. It is a strategic review of our overhead, but also a strategic review of our organization and processes to improve our customers' experience with Parker and ultimately drive growth. I will give you a few examples of that. Our division consolidations have yielded cost savings and will generate technology and product synergies for future growth. Our sales force organization redesign is providing more effective alignment between our customers, distributors, and divisions. In another example, normally at this time of year, we are working through an extensive annual planning process. This year, we greatly simplified that process and dramatically reduced the amount of time that goes into developing our annual plan. What used to take five months now takes eight weeks. In August, we will share the output from this process in the form of our guidance for fiscal year 2017. Innovation activity continues to be strong and will position us well when the macro conditions stabilize. I will give you three examples on the innovation front. Several years ago, we commercialized a series of thermally conductive dispensable gels that help cool delicate electronic components in mobile devices and automotive applications, such as collision avoidance. That product series continues to do well for us today in these fast-growing markets. During the third quarter, we were particularly pleased to receive FDA approval of our groundbreaking exoskeleton technology, Indego. Indego was approved for clinical and personal use by individuals with spinal cord injury, which allows them to walk again. With approvals now in the U.S. and Europe, we are positioned for a full commercial launch of Indego. Remarkably, we went from an idea to launch in less than three years and are already generating initial sales in FY 2016. Planned for launch next year is a CNG fuel regulator module, which optimizes fuel and emissions for class 5 through 8 trucks. This module is a one-piece design that integrates multiple products into a central compact system. We are optimistic about the commercial viability of this important product. These examples showcase just some of the highlights from the past, present, and future innovations that create vitality and growth for new products and technologies. In summary, by executing the New Win strategy, we are confident we will 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 annual growth rate and earnings per share of 8% over this five-year period. I am very pleased at how far we have come in such a short period of time and continue to be excited about the opportunities we have for the future as we strive to make Parker a top-quartile performing company as compared to our proxy peers. For now, I'll hand things back to Jon to review more details on the quarter. 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 quarter were $1.51 versus $2.06 for the same quarter a year ago. This excludes business realignment expenses of $0.14 and compares to $0.04 for the same quarter last year. On to slide number 6, you'll find the significant components of the walk from adjusted earnings per share of $2.06 for the third quarter FY 2015 to $1.51 for the third quarter of this year. Increases to adjusted per share income include the impact of fewer shares outstanding, equating to an increase of $0.05 per share and lower corporate G&A and interest expense equating to $0.04 due to reduction in long-term incentive accruals and our simplification efforts. Reductions to adjusted per share income includes increased other expense that totals $0.33 per share as compared to the prior year, in which last year, sizable one-time favorable currency adjustments were recognized, lower adjusted segment operating income of $0.21 per share due to the impact of the weakened end markets and $0.10 from increased effective tax rate driven by various discrete items booked in the quarter. Moving to slide number 7 with a review of total company sales and segment operating margin for the third quarter. Total company organic sales in the third quarter decreased by 9.4% over the same quarter last year. There was a 3% contribution to sales in the quarter from acquisitions. Currency impact as a percentage of sales was relatively in line with our guidance, equating to a negative impact of reported sales of 1.5% in the quarter. Total company segment operating margin for the third quarter, adjusted for realignment costs incurred in the quarter, was 14.7% versus 14.4% for the same quarter last year. We are especially pleased with this performance given the end market softness. Realignment costs incurred in the quarter were $25 million, versus $8 million last year. As forecasted previously, the lower adjusted segment operating income this quarter of $417 million versus $456 million last year reflects the impact of the reduced volume and the unfavorable mix from the weakening of the industrial end markets. Moving to slide number 8, I'll discuss the business segments, starting with Diversified Industrial North America. For the third quarter, North American organic sales decreased by 12.7% as compared to the same quarter last year. There was a modest impact from acquisitions and a negative impact from currency of 0.8% in the quarter. Operating margin for the third quarter, adjusted for realignment costs, was an impressive 16.9% of sales versus 16.4% in the prior year. Realignment expenses incurred totaled $9 million as compared to $1 million in the prior year. Adjusted operating income was $211 million, as compared to $237 million, driven by reduced volume as a result of the weakening in our key end markets. On slide number 9, I'll continue with the Diversified Industrial segment on this slide. Organic sales for the third quarter in the Industrial International segment decreased by 8.7%. Currency negative impacted sales by 3.1%. Operating margin for the third quarter, adjusted for realignment cost, was 11.9% of sales versus 12.7% in the prior year. Realignment expenses incurred in the quarter totaled $16 million as compared to $7 million in the prior year. Adjusted operating income was $121 million as compared to $146 million, which reflects the impact of weaker end markets. I'll now move to slide number 10 to review the Aerospace Systems segment. Organic revenues decreased 2% for the quarter. Currency impact was negligible. Sales for the period was impacted by some softness in helicopter and business jets. Operating margin for the third quarter, adjusted for realignment cost, was 15.1% of sales versus 12.9% in the prior year. Adjusted operating income was $85 million as compared to $74 million last year, reflecting a combination of higher aftermarket sales volume mix, reduced development cost as a percent of sales, and implementation of the New Win strategy. 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, and currency. The Diversified Industrial segment report on a three-month rolling average, while Aerospace Systems are based on a 12-month rolling average. Total orders were a negative 6% for the quarter end, reflecting less negative order rates in industrial segments and Aerospace segment, where orders turning positive. Diversified Industrial North American orders improved to negative 9%. Diversified Industrial International orders improved to negative 6% for the quarter. Aerospace System orders improved to a positive 1% for the quarter. Now, turning to slide number 12 on cash flow. Cash flow from operating activities year to date was $681 million when adjusted for the $200 million discretionary pension contribution made in the first quarter. Cash from operating activities was $881 million or 10.5% of sales. This compares to 8.3% of sales for the same period last year. In addition to the pension contribution discussed earlier, the significant uses of cash year to date were $707 million returned to our shareholders via share repurchases and dividends, $68 million for acquisitions closed during Q1. No acquisitions were announced in Q3. $111 million for CapEx, equating to 1.3% of sales year to date. The revised full-year earnings guidance for FY 2016 is outlined on slide number 13. Guidance is being provided on an adjusted basis. Segment operating margins and earnings per share exclude expected business realignment charges of approximately $120 million, the balance of which are forecasted to be incurred in Q4 of FY 2016. Total sales are expected to be in the range of negative 11.9% to negative 9.9%, or negative 10.9% at the midpoint as compared to last year. Adjusted organic growth at the midpoint is negative 8.2%. Currency in the guidance negatively impacts sales by 3%, the majority of which is attributed to the Industrial International segment. We have calculated the impact of currency to spot rates as of March 31, 2016, and we have held those rates steady as we estimate the resulting year-over-year impact for the balance of 2016. For total Parker, adjusted segment operating margins are forecasted to be between 14.7% and 14.9%, or 14.8% at the midpoint. This compares to 14.9% for FY 2015 on an adjusted basis. As Tom mentioned, we are very pleased to be guiding to this level of adjusted segment operating margins, given the magnitude of the end market declines. The guidance for below-the-line items, which includes corporate admin interest and other, is $478 million for the year at the midpoint. The full-year tax rate is projected at approximately 28%. The average number of fully diluted shares outstanding used in our full-year guidance is 137 million. The full-year guidance on an adjusted earnings per share basis has been increased to $6.20 to $6.40, or $6.30 at the midpoint. The guidance excludes business realignment expenses of approximately $120 million to be incurred in FY 2016. Savings for these business realignment initiatives are projected in the amount of $85 million, which are reflected in the segment operating margins. On slide number 14, you will find a reconciliation of the major components of the revised FY 2016 as reported EPS guidance of $5.67 per share at the midpoint from the prior FY 2016 EPS of $5.60 per share. Increases include $0.18 in segment operating income as a result of simplification efforts and increased savings from restructuring actions taken to date, and $0.08 from reduced corporate G&A interest and share count. The company's decision to increase full-year realignment cost to $120 million resulted in an additional expense of $0.13 per share. Income taxes and other expense projected comprise additional expense of $0.06, reflecting discrete items in current projections. On slide number 15, you will find a reconciliation of the major components of the revised FY 2016 adjusted EPS guidance of $6.30 per share at the midpoint from prior FY 2016 EPS of $6.10. As previously detailed, increases include $0.18 in segment operating income and $0.08 from reduced corporate G&A interest and share count. This is partially offset by $0.06 increase in other expense and taxes. Please remember that the forecast excludes any future acquisitions or divestitures that might be closed during FY 2016. For consistency's purposes, we ask that you exclude restructuring expenses from your published estimates. This concludes my prepared comments. Tom, I will turn the call back to you for your summary comments. Thanks, Jon P. Marten. I am very encouraged by the response of our Parker team members around the world. We are weathering the challenges of our end markets and delivering impressive performance. Our team is embracing changes designed to improve Parker and positions for the future under the framework of the New Win strategy. Together, we are building a stronger and better Parker. I look forward to sharing more with you on our progress. At this time, we are going to take questions. Brian, if you could please get us started. My pleasure. Ladies and gentlemen, at this time, if you would like to ask a question over the phone, please press star then 1 on your telephone keypad. We ask in the interest of time that you please limit yourself to 1 preliminary question and 1 follow-up. Again, that is star then 1 to ask a question. If you do wish to remove yourself from the queue, please press the pound key. Our first question comes line of Jamie Cook with Credit Suisse. Your line is now open. Please go ahead. Hi, good morning. I guess a couple questions. 1, Tom, I guess everyone's interested in sort of the order or sales trends that you saw throughout the first quarter, and potentially what you are seeing in the month of April. Are there any markets that you sort of see bottoming or perhaps even seeing some green shoots without being too optimistic? Then I guess just my second question to you is, with 1 quarter left in the year, you upped your restructuring again. As we are thinking about 2017, do we think we have done enough restructuring, given your view on the markets, that we just have to execute on what is already out there, or could there be potential for more as we think about 2017? Thanks. Okay, Jamie, this is Tom. I will start first with order trends. Orders during the quarter sequentially got better as we saw January going through March. Obviously what we saw in April is consistent with the guidance that we gave you. As far as the markets go, I will finish all my comments, and I will let Lee Banks give you some deeper color. But I made the comment about we saw a number of markets move from accelerating decline to decelerating decline. I think the theme of what we are seeing is this moderation of decline. The movers from accelerating to decelerating that really led the charge were distribution, general industrial, ag, mining, and semicon. You asked for some of the positive markets. The positive markets are refrigeration and air conditioning, rail, turf, Aerospace Systems, commercial MRO, and power gen. I'll let Lee go into more details here in a minute on all the market color. On the restructuring, we moved it from $100 million to $120 million. Just to clear the air with people listening on the phone, this isn't because we saw some market change or worsening of orders or anything that we felt we needed to do this. It really was, we saw more opportunities as we started to unpeel the New Win strategy being implemented within the company. There were just more opportunities that our team members around the world identified in traditional restructuring and simplification, et cetera, that we thought would be very good to take now and that will put us in good position in FY 2017. You asked about 2017. In my opening comments, I talked about we're moved this to an eight-week process, but we're only three weeks into it, so I won't comment about 2017. As you might imagine, commenting about 2017 in April is even harder than commenting about it in August. However, I will give you some color on the restructuring. So restructuring this year is, I would call, a high water mark at $120 million. If you looked at us traditionally before the restructuring we've done the last several years, we were more in a $20 million to $25 million range. While the restructuring is not finalized for what we think next year, and we're only about halfway through our reviews, I think we're looking at something that's in between the traditional $20 million to $25 million and the $120 million that we did this year. So that's my take on your comments, Jamie Cook. If it's okay, I'll let Lee Banks take over with giving a lot more color on the markets, which I'm sure other people on the phone have questions on as well. Okay, great. Okay. Hi, Jamie Cook. Hi. Tom talked about sequentially, total Parker organic growth moved to a better direction during the quarter. If you look at it was widely a result of North America followed by EMEA. I am going to walk you through the different regions and try and give you as much color as I can. Starting with North America industrial distribution. Total North American distribution still is annualizing at a high single digit year-over-year decline for FY 2016. This is mostly, as we have talked about in the past, impacted by oil and gas. We continue to see tightening of CapEx and OpEx budgets, which has really been a drag for distribution that is most aligned with those end markets. If you get away from that, we continue to see real positive growth out of distribution in the Great Lakes, Midwest areas that cover auto plants, tier 1 machine builders, et cetera. It is a couple different tales to the story, depending on where you are in the country. Tom mentioned air conditioning and refrigeration, and that is really a bright spot for us. We continue to experience really strong residential air conditioning growth. Much of that growth can be attributed to some product introductions we have done that has really given us a strong market participation. Our commercial air conditioning refrigeration business is up low single digits. Our aftermarket business, organically with the market and with some new product introductions, continues to be real strong. The story around oil and gas, I guess major OEMs really continue to indicate no significant improvement until the end of calendar 2016, early 2017. Really massive, and I am sure you have covered this, restructuring plans taking place. It looks like everybody is trying to restructure to be profitable around $40 per barrel. When we look at some of those different segments, the consensus appears that really the offshore rig market for new builds could take years to recover. I think the land base will come back sooner. On the positive side, and you have heard us talk about this, we continue to increase demand for some of our aftermarket service capabilities, such as our Parker Tracking System that enables asset integrity management in the field, and we have had good traction with that. On agriculture, we expect sales of farm equipment down industry-wide, and our demand continues to be consistent with that. Focusing on energy, we continue to increase our market position with large frame turbine OEMs, and this has been a plus because there continues to be a strong conversion of power plants from coal to natural gas in the U.S., so it's allowed us to participate in that. We did see benefits from our wind and solar business, did get a boost with the production tax credits and investment tax grants that were extended, so that was a positive for us in the quarter. Turning to heavy truck in North America. Current forecasts, ACT forecast, is now 275,000 units, which is really up from the November forecast. Our North America transportation business is down high single digits, better than industry build rate declines. I would attribute this to some new product introductions and really our aftermarket exposure there kind of softens some of that downturn. On the mobile markets, I think a real positive, Tom mentioned turf. It's a North American central market, but continues to be a real strong highlight for us. With all the major construction equipment, that continues to experience top-line declines. But there does seem to be a lot of industry commentary about finding a bottom here, which I'll comment more later on. In in-plant automotive, really this is a key North American distribution that covers that. We're up Q3 versus prior and continue to do well there. Just touching on Europe. Distribution trends are consistent with really last quarter. Distribution tied to industrial MRO, automotive markets continue to be flat to slightly positive. Anything tied to oil and gas, as I mentioned before, continues to be weak. I think one of the bright spots for us and really contained in our New Win strategy initiatives is distribution is up in emerging markets, Eastern Europe, Africa. These are high single digits, a combination of organic growth within the region, plus the fact of increased market participation by us. Oil and gas. Demand across all those related markets continue to contract. We've talked about North Sea investment, and that really still is at a standstill. But then, again, this is another area where we've had some really decent experience with our aftermarket integrity management initiatives offsetting some of the contraction that we see at a first fill level. On ag, we have seen sequential growth quarter to quarter, still flat year-over-year, but the production we're seeing now I would call increased normal seasonality. On heavy truck, stronger demand continues in the quarter, and this is really following a strong fiscal Q2. We saw demand sequentially from Q2 to Q3. In mobile, demand has stabilized at current activity level. We did have a large exhibit at the recent Bauma show, and I think all of us were encouraged by, one, the attendance, but also the favorable sentiment taking place at the show. So maybe it gives some credence to some positive going forward. I'll turn to Asia now. Really, distribution then is flat to moderately down year-over-year. China is the biggest issue. It's the most sluggish. It's down high single digits year-over-year. If I take that out, we're up across the region. I give this a lot of credit to what our guys are doing on expansion that we've talked to you about, such as ASEAN and some of these developing markets. We continue to expand there. Energy across the region, we still see increased activity in renewable, which wind, solar, and hydro, and traditional thermal energy, coal, gas, and nuclear still are taking a major share, and we're participating in those. Rail, we've talked about. Tom mentioned that is in accelerating growth. It continues to be a great story. We've commented for some time on the strengths of this end market in China, and China has really become a preferred builder. They've recently signed high-speed rail contracts with Laos, Thailand, and Indonesia, and we continue to have strong exposure to those build rates. On mobile construction, we've seen some modest growth in China. I've heard some industry comments regarding that. I will tell you that for the most part, the OEM inventory is still extremely high, so I think it'll take some time for us to see that. Our business has stabilized at current levels. Lastly, just touching on Latin America, I think it's really dominated by the Brazil story. Construction equipment, ag markets, et cetera, are still very soft. There is decent activity if you get outside Brazil, but the whole story in Latin America is really dwarfed by Brazil. Taken all together, total Parker organic growth sequentially moved in a better direction, largely as a result, as I mentioned, North America and EMEA. I think, moderately declining are the words that keep coming to our minds to describe what we are seeing on a year-over-year basis. Okay, thank you. I'll get back in queue. Thank you. Our next question comes to the line of Joe Ritchie with Goldman Sachs. Your line is now open. Please go ahead. Thanks. Good morning, everyone. Morning. I guess my first question is around the restructuring actions. I know it's hard to comment much at this point on 2017, but it seems like the payback that you got on these actions, the additional realignment actions, is really good. I guess my question is, when you're thinking about the magnitude of restructuring for next year, how are you thinking about the potential payback, and is it going to be mostly headcount related? Joe, this is Tom. On the restructuring, I would just say in general, we're really pleased with our team around the world. The execution has been timely. We've been thoughtful in how we've done it, and I'm just very proud of how the team has performed on the restructuring, and the timeliness of that has been a big part of what's helped our margins perform this year. As far as next year, we're still going through it. I still think my characterization of it being somewhere between the $120 million and the $20 million-$25 million is probably a good indicator. I still think that for the most part, this restructuring is a pretty good payback from a time period standpoint, usually a 12-month indicator. Obviously, some of the more traditional or international-orientated type of restructuring will take longer, probably 18-24 months. But in general, it would still be aimed at the more strategic restructuring that we've been talking about, which is at the overhead of the company. But we'll continue to look at, as we traditionally have, the footprint optimization as it makes sense. Okay. Then maybe as a follow-up, Tom, your comments earlier about going from an accelerating to a decelerating decline. I am just curious within that context, what is going on with the pricing environment? Are you seeing any pressure across the portfolio today? Have you started to see stabilization there as well? I am just curious. Any color there would be helpful. Joe, this is Lee. I will just give you some comments on that. So I would characterize price realization as very tough, candidly. We did raise prices to distribution this past January. It was mostly around non-core and late life cycle type products, but we did realize price there. But one thing we do track, and you have heard us talk about this in the past, we have an SPI index, which tracks year-over-year pricing by part number, and we have a PPI, which tracks our input costs. And we do have a positive spread there, and we look at that continuously. So I would say if you had to characterize it overall, it is pretty much flat. And Lee, is that spread mostly being driven by the denominator? So is it just because the cost environment has remained favorable? Could that potentially reverse itself as we progress through the year? I would say the top line, the SPI number is flat, as I talked about, but the PPI has given us a spread, yes. Okay, great. Thanks, guys. Thank you. Our next question comes the line of Jeffrey Hammond with KeyBanc. Your line is now open. Please go ahead. Hey, good morning, guys. Morning, Jeff. Just on the buyback, it looks like it's slowed here a little bit and M&A's kind of been weak. I just thought as we come on the deadline for this $2 billion-$3 billion, we'd be tracking more towards the high end. Maybe just update us on how you're thinking about buyback. Yeah, Jeff, this is Tom. On the buyback, we continue to look at that on a dynamic basis, looking at what makes the most sense for our shareholders. Obviously, we'll update you every quarter on that. But some things to just keep in mind from consideration. When you look at our cash that's on the balance sheet, 99% of that is permanently invested overseas. Also, it's important to us to maintain our A rating, so that's a factor that we consider. When we rolled out the $2 billion-$3 billion initiative, that was in October 2014. We were a $13 billion company then, and now we're $11.3 billion. So a number of things have changed. Our cash flow as a percent of sales continues to do very well at 10.5%. But we're going to continue to deploy cash as efficiently as we can. We look at the best ways to deploy it and what gives the best long-term value creation to our shareholders. On the acquisition side, the pipeline is active. But it's always hard to predict the output there. It tends to be lumpy. But I would say valuations are still challenging at this point, with pricing probably starting to moderate a little bit. But we're disciplined buyers, and we buy things that are in spaces that we understand, and we understand the growth rate, so we'll continue to be that way. But I think you'll look to see us be as efficient and aggressive with our deployment of cash as we possibly can, weighing all the variables to try to do the best thing we can on the long-term behalf of the shareholders. Okay. That's helpful. Then, it looks like the guide is mostly North America feeling a little bit better, and I think you mentioned some of the restructuring. But just go into a little more detail on what's surprising you to the upside in the North America business. Well, Jeff, I think Jeff Lee probably did a pretty good job of taking you all through that. But in North America, when you look at it sequentially, almost everything was positive in North America. Some of that we get just from the calendar helping us. But in particular, the part that I like is that when you look at, now in case people don't understand what I'm talking about, these market phases. So you've got accelerating growth and decelerating growth, and you've got accelerating decline and decelerating decline. If I was to show you this dot map of our end markets in these four phases, and you were to look at it in Q2, you'd see a lot of dots in the accelerating decline. What's moved, and I would say in particular North America, it's been distribution, ag, semicon, mining, general industrial. But I think the thing that we're still cautious about is that I think we're getting help from comps for the most part, and that at this point it's still too early, I think, to say that there's a general market shift. So we're going to continue to look at that data. We need a few more months and another quarter or two to help confirm that. But in the healing process of order entry, step 1 is to have a decelerating or a moderation of decline. So that's a good thing. We're very happy about that. To put up the kind of numbers we're putting up in this kind of climate, I think if you look at us historically, is remarkable. I've told a lot of people, when we get to flat, you're going to love the numbers because flat will be the new high, and then we'll continue to grow from there. Yeah. But on the margin front, is that just greater traction on some of the restructuring, or what really drove the guidance revision on North America margin? I'm sorry, Jeff. I thought you were talking about sales. But yeah, on margins, it was clearly the return on the restructuring, the simplification actions. We've seen faster return, and just more effective cost savings. Okay. Thanks a lot, Tom. Thank you. Our next question comes from Ann Duignan with J.P. Morgan. Your line is now open. Please go ahead. Yeah, good morning. Morning, Anne. Can I touch back on the share repurchases? Traditionally, you've always talked about having your own internal model, which you use to determine how much shares you think you should buy back or not. With the $50 million buyback, was your model telling you that Parker shares were fairly valued in the quarter? Anne, it's Tom. It's always a good time to buy Parker shares. We just looked at, again, it's back to looking at all the opportunities, and unfortunately, we can't share all the opportunities with you. But when we look at all the opportunities, we felt the amount that we did was the right amount. We'll continue to look at every quarter. We weigh, obviously, dividends first, investment for organic growth, and then we look at the balance between acquisitions and share repurchase. For the reasons I talked about earlier, will be an indicator why we're going to be at the low end of that range, because the dynamics of the world have changed since once we announced that proposal. We're absolutely committed to the low end of that range. I don't want anybody to misunderstand me, but things have changed as far as being able to get to the top end of the range. The balance above that is all depending on what's the best use of cash for our shareholders. Great. That's very helpful clarification. My follow-up is back to some of the comments you made about restructuring the sales force. We get nervous when we hear of companies talking about restructuring the sales force, because it doesn't always work out very well. Could you just give us a little bit more detail on what you're doing there and how comfortable you feel about the progress you're making? Yeah, Ann, it's Tom again. We're very happy with what we're doing there. I can understand your reservations, but this was done with a lot of thought. Here's the big change. Our groups are organized, with the exception of Aerospace Systems, around technology and products. It's easier alignment for our divisions if they can find people that own those same kind of products and technologies. In Europe, as an example, we went from a sales force that was maybe heavily dominated on alignment to markets to being more product centric. We're still not giving up the markets, but having that be less a concentration. More concentration on technologies and markets so that we can have a real good technology discussion with our customers. The other part we did to help simplify our interface with the global OEMs or the regional OEMs in Europe is we now have a Pan-Europe OEM team, which is very similar to what we had in North America, which had so much success. So we have that too, because it didn't make sense to be calling on OEMs country by country that span the entire Europe. That's been in place for probably 6, 9 months, and we're very encouraged with the kind of market share actions that we're seeing coming out of that from that team. Then just in Japan, that was the other example that came to mind when I made that comment. In Japan, if you look at it historically, we had a very fragmented sales force. We now have a sales force that is all aligned. It was kind of because of the combination of acquisitions that we had and joint ventures years ago. Now we have a one Japan sales force with a much better alignment on the operating side, and we're seeing the results of that. Japan's doing very well for us. The organization changes, to give you comfort, are showing in the numbers and in the market concentration. So when we go account by account in the various regions. Okay. Thank you so much. I will leave it there and get back in line. Appreciate it. Thank you. Our next question comes from David Raso with Evercore ISI. Your line is now open. Please go ahead. Yeah. Apologies in advance. I have been hopping between a few calls, but quite simply, looking at the rate of businesses that you have right now and their various growth rates and not thinking of any change, but incorporating seasonality, when would you expect your sales, organic sales that is, to be back to flat? Okay. David, it is Tom again. That is, of course, the question everybody would like to know, and at this point, it is difficult for me to predict, and I will not try to predict it. At this point, our guidance for the fourth quarter is a -7% organically. That shows improvement from the -9.4% we had in Q3. That is the first good sign. And like I said, in these market phases and when we look at all the markets, we went from a concentration in accelerating decline to now more of them move to decelerating decline. You would hope to keep moving counterclockwise around these phases and start to move into some kind of growth. But I think it is too early for us to be able to give you an indicator of that and be able to tell you when. A few more data points, a couple more months, and a couple more quarters, obviously, we're going to be in a much better position to tell you. But I would say this was the first step in the healing. Okay. That's fine. Just wanted to get your perspective on that. Thank you. Thank you. Our next question comes from the line of Eli Lustgarten with Longbow. Your line is now open. Please go ahead. Good morning, everyone. Morning, Eli. Can we talk a little bit about where inventory levels are, both in the distribution sense and the OEM, the basic indeco? Are we really past all the inventory liquidation, or there is still some going on? With the pricing, you raise prices at distribution, but we keep hearing distribution people are having trouble passing anything on. Are they taking the price increase and absorbing it, or are they able to pass it through? Eli, it is Lee. I was expecting this inventory destocking, so I researched this 10 times before this call. Here is the consensus when I checked this, not only from our guys and then I just go out and call our contacts. If you are involved in oil and gas and you had a lot of OEM exposure, you are still sitting on a lot of inventory. If you get away from that, inventory is pretty much normalized at this point in time. I think some of the guys may have gotten hit a little bit by some side effects from oil and gas, but that is fairly normalized. I would say on OEM inventory, where I still see it is kind of in construction equipment, mining markets, especially Asia comes to mind. If you tour some of the equipment yards, there are just excavators and wheel loaders that go on for miles. But in North American distribution, I am most comfortable that outside of oil and gas, it is not a big issue. Then your second question on pricing, I cannot really comment on that. What we did there was really non-core, so I cannot really comment too much on that. I have not had any feedback that it has been a big issue. If anything, it has been a positive, what our posture has been there. All right. Thank you very much. Thank you. Thank you. Our next question comes line of Josh Pokrzywinski with Buckingham. Your line is now open. Please go ahead. Hi, good morning, guys. Morning, Josh. Just maybe to ask David Raso's question a little differently. On the orders front. You guys can obviously see the comp getting easier there. Orders clearly down a little bit more than maybe the comp was, got easier this quarter. Is there a potential for orders to get back to flat in June, understanding that it may be a while longer before sales quite get there? You want to talk to that? Josh, Jon here. Just to be responsive to your question, of course, we're not calling for that in our guidance going forward. When you take a look at the orders overall for Parker, we are just looking at, we were, this time last year, down 4, then we were down 9, down 11, down 12, now we're down 6. The question is, what is the rate of the incline in the reduction of the orders for the company? We don't have that forecasted. We're going to be looking at that very closely. It is going to be fully aligned with the end market progress that Lee and Tom have been making. We are gaining market share. We are watching the end markets and, as Tom said, I think our best characterization is that the decline is obviously moderating. But we'll be coming out with that answer when we do our guidance in August. But right now, in April, it's a little too early to give you a very detailed answer to that. Okay. Then just to revisit the buyback discussion. It sounded like maybe there were some mitigating factors in the quarter that stayed your hand. But is there a period of time that passes when some of those other opportunities go away or aren't actionable, or are actionable and you guys are left with buyback, or is this something that is a little bit more structural in nature? Just trying to get the overall strategy there, maybe versus like a one-quarter event. Yeah. Well, the overall strategy hasn't changed. We want to be great generators of cash and great deployers of cash. I think the generators of cash, the New Win strategy is going to continue to work that aggressively with the changes that we've made. We're 10.5% now. We like being that, and we would like to work it even higher, and we're going to do that through continuing to grow our operating earnings and continuing to work the working capital down. On the deployment, it's the same priorities that I've mentioned. It's trying to make the best decision. I wouldn't read one thing too aggressively in the one quarter on this. Because the buyback announcement is going to expire, and my preference is to tell you every quarter what we're doing as opposed to making some big announcement as to what we're going to do from here going forward. There are some natural considerations given the amount of cash that's permanently invested overseas, our desire to keep an A rating, and the fact that this program was rolled out two years ago, or approximately two years ago. But we like all those avenues, and we want to be as great at deploying cash as we're great at generating the cash. I would look for us to do that. I can't show you everything that we see, but we'll continue to do the best we can on behalf of the shareholders for what we think is best long term. All right. Thanks for the answer. Thank you. Our next question comes from the line of Andy Casey with Wells Fargo. Your line is now open. Please go ahead. Thanks. Good morning, everybody. You mentioned mining as showing decelerating declines. Can you kind of help us on whether that was related to shipments into OEMs or an MRO comment? I think on the mining, what we saw in general is that probably a little bit more help on the Well, I would say it would be both. OEM in general, comparing Q2 to Q3, got a little bit better. Distribution got a little better as well. But for the most part, it's probably more the comps that are helping us at this point. We're not ready to declare victory in any of these areas. Get a couple more quarters and we see this move, then I think we're ready to say it's more the market, but at this point it's probably the comps helping us more than anything. Okay. Thank you, Tom. If you covered this, I missed it, and I apologize. On the incremental $85 million benefit you expect during this year from restructuring and simplification, how much have you realized year to date? If you can give it in the quarter. Yeah, Andy, of the $85 million, we are expecting $40 million of that in our Q4. So $65 million for the second half, $85 million for the year. Of the second half, $42 million in Q4. Okay. Thank you, Jon. Should that step up kind of continue into the next fiscal year? Or would you expect with the additional restructuring that you kind of alluded to, you'd have even more of a step-up kind of back-half loaded next year? Yeah. There's no doubt that the savings that we're getting from this year will carry through for a period of time into next year. It's too early for me to give you too much color on the numbers that Tom was referring to earlier in his comments about the restructuring and the savings that we get for next year. I don't want to be misleading. I just wanted to tell you that clearly we are not going to be taking a step back. The savings that we're getting on is permanent. That is going to be a very helpful tailwind for us for next year. Okay. Thank you very much. Okay, Andy. Thank you. Our next question comes to the line of Nathan Jones with Stifel. Your line is now open. Please go ahead. Good morning, everyone. Morning, Nathan. Can we just clarify on that last point, $40 million restructuring savings in 4Q. Is $160 million annually the new run rate that you're looking at from the $120 million, or should it be a little bit higher than that? I do not think it's going to be higher than that. It's not going to be $40 million per quarter going forward here, Nathan. I want to research that one further here, but that's just the way that we calculate the savings here based on the restructurings that we've done year to date. Year to date. Okay. Most of the restructuring, of course, that we're doing in Q4, the actual restructuring is going to give us savings next year. Mm-hmm. Okay. If I could get into North American margins from a different angle here. On a year-over-year basis for the quarter you just reported, organically, you lost about $200 million of revenue. All else equal, I would think the decremental on that should be somewhere in the vicinity of 25%. So you started about $50 million in the hole on operating income, and you're up about 25. From other avenues, you gained about $75 million of operating income. Could you kind of bucket the main places that that came from, where the savings came from, what's improved execution, what's productivity, those kinds of things? Well, certainly I can't detail it down to you for the dollar, but as Tom and Lee have talked about, the productivity that we're seeing from the New Win strategy is a significant portion of that number, Nathan. As we apply the techniques that we've known for years and the ones that we are really focusing on here with the New Win strategy, we are seeing margins in a declining environment that we have never seen before. So we're gratified by that. A significant portion is just additional incremental productivity that's not necessarily to take the place of the savings that I've been talking about when we do the simplification efforts or the restructuring efforts that we've done in the company. I can't detail it down to you dollar by dollar, but what is happening with the margins, and the reason why our decrementals are so impressive is because of the dedication of our employees to redouble our efforts on productivity in the company and our ability to get savings from the restructurings that we've done in the past year. Yeah, they were really very impressive. Just one for Lee. Lee, you talked about mobile OEM China inventory. This is an issue we've been dealing with for probably going on 5 years from the overstimulation coming out of the last recession in China. Any attempt at guessing when that inventory may clear? No. To be candid with you, there does seem to be some positive sentiment with some of the stimulus that the Chinese government's trying to use, but it's way too early to tell on that. Okay, that's fair. Thanks very much. Brian, I see that we're at the top of the hour, so we could just take one more question, please. My pleasure. Our last question comes to the line of Joe Giordano with Cowen. Your line is now open. Please go ahead. Hey, guys, thanks for sneaking me in here. Quick on the decrementals, kind of like what Nathan Jones hinted at. When I'm comparing North America to international, and granted, the decrementals have been great on both pieces of those businesses. But we're seeing more pronounced organic declines on a year-on-year basis in North America, but margins actually going up. Can you kind of walk us through what may be the different types of initiatives going on on the restructuring side between the two segments as to what might be driving- Sure even more pronounced decrementals reductions in North America? Yeah. Joe, sure. Just real quick here, top level, although we're down higher organically, and you're absolutely right, in North America than we are in Industrial International. Our decremental MROS on an adjusted basis is 13% for North America versus about 19%. Now, in any environment, that 19% in our history, in our company, is a very impressive number, but it is distinguished from North America. I believe it has something to do with the level and depth of some of the restructuring that we're doing, a little bit of a quicker payback in restructuring in North America versus internationally. But in both cases, we're making great progress and we are seeing a little bit of a difference, but this is historically in North America and in our industrial businesses, the best we've ever done in a downturn like this, especially considering the magnitude of this downturn that we're talking about of a negative 9.5% for the quarter and our guidance of negative 7% here coming up. The short answer is very quick actions, quick recovery, dedication on the part of our management teams, both internationally and in North America, and our ability to be resilient and adaptable as a company today versus maybe in some of the prior downturns in past periods. All right, great. Then just last for me, just in terms of scale, maybe you could put this in appropriate context for us on the simplification efforts and removing of divisions, things like that. How many SKUs have you guys gotten rid of on a percentage basis or something, just to give us a sense of how much this has really changed? Yeah. This is Tom. That would be very difficult to answer. I couldn't even hazard a guess, but just recognize that we are working that last couple percent of revenue. It does carry a disproportionate amount of cost and part numbers and quote activity, and that's the focus. But I couldn't give you a guess on that amount. All right. Good enough. Thanks, guys. Okay. Ladies and gentlemen, thank you very much. This is all the time we have for questions and answers today. Thank you for your participation on today's call. You may now disconnect. Everybody have a wonderful day.