Earnings Call: Q3 2015

Apr 28, 2015

Summary

Q3 sales declined 6%, largely from currency, while adjusted EPS rose 10% to $2.06. Weak orders, end markets and FX prompted lower FY15 adjusted EPS guidance of $7.55–$7.75.

Good day, ladies and gentlemen, and welcome to the Q3 2015 Parker-Hannifin Corporation earnings conference call. My name is Alex, and I will be your operator for today. At this time, all participants are in listen only mode. We will conduct a question and answer session toward the end of this conference. If at any time during the call you require operator assistance, please press star zero and we will be happy to assist you. I would now like to turn the conference over to your host for today, Ms. Robin Davenport, Vice President, Corporate Finance. Please proceed. Thank you, Alex. Good morning and welcome to Parker-Hannifin's third quarter fiscal year 2015 earnings release teleconference. Joining me today is Chief Executive Officer, Tom Williams, President and Chief Operating Officer, Lee Banks, and Executive Vice President and Chief Financial Officer, Jon Marten. Today's presentation slides, together with the audio webcast replay, will be accessible on the company's investor information website at www.phstock.com for one year following today's call. On slide 2, you will 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 www.phstock.com. Today's call agenda appears on slide 3. To begin, our Chief Executive Officer, Tom Williams, will provide highlights for the third quarter. Following Tom's comments, I will provide a review of the company's third quarter performance together with the revised guidance for fiscal year 2015. Tom will provide a few summary comments, and then we will open the call for a question and answer session. At this time, I will turn it over to Tom and ask that you refer to slide number 4. Thank you, Robin, and welcome to everybody on the call. We certainly appreciate your participation today and your interest in Parker. I will take a few minutes to share our perspectives on the quarter, some near-term market trends, and our outlook. Also, I will briefly discuss where we are in the process of refreshing our Win Strategy to take Parker's performance to the next level. First, a few comments on our third quarter. Overall, we performed well considering an increasingly challenging macroeconomic environment, which includes weaknesses in key end markets and the strengthening of the U.S. dollar. Sales declined 6% this quarter, primarily as a result of changes in foreign currency rates. We also saw order rates decline a minus 4% this quarter, the first decline in orders since March of 2013. Despite factors such as currency mix and end market trends working against us, I am pleased we held total segment operating margins at 14.2%. This mostly reflects the benefits of restructuring activities we put in place previously and the ability of our businesses to adapt quickly to changing market conditions. Earnings per share were $2.02 per diluted share, representing a 26% increase from the prior year third quarter. Adjusted for restructuring expenses, earnings were $2.06 per diluted share in the fiscal 2015 third quarter, an increase of 10% compared with adjusted earnings per diluted share of $1.88 in fiscal 2014 third quarter. Year-to-date operating cash flow through the end of the third quarter was $791 million, or 8.3% of sales. We have been active with our share repurchase program following our October announcement of a new authorization for the purchase of $2 billion to $3 billion in shares over two years. We remain committed to completing this share repurchase plan within that time period. To that end, we repurchased $477 million worth of Parker shares in the quarter, which brings our total for the fiscal year to date to $1.3 billion. A few comments on current market trends. The strong dollar and negative trends in construction, agriculture, and oil and gas impacted our third quarter fiscal year 2015 results. We continue to see positive trends in heavy-duty truck and long-term strength in our aerospace business. In total, organic growth was flat for the current quarter, and we will provide you more details as we normally do during our Q&A session. Regarding the guidance, declining order rates, combined with negative indicators in key end markets and ongoing currency headwinds, have influenced our outlook for the full fiscal year. Adjusted guidance has been revised to a range of $7.55 to $7.75 per diluted share and excludes $0.17 per diluted share of previously announced restructuring expenses and $0.13 per diluted share associated with a voluntary retirement program. We believe that our voluntary retirement program is a constructive first step towards our efforts to reduce overhead through the simplification of our business processes. We will further define our enterprise focus and efficiency initiatives in August. We see an opportunity to have a more efficient overhead structure. While managing our business through these more immediate challenges, we continue to focus on the long term. As I referenced on the last call, the Win Strategy will continue as the business system and overarching strategy for the company. However, now is an opportune time to refresh the Win Strategy using input from key stakeholders. Our leadership team continues to spend time with Parker customers and employees globally, as well as our shareholders and investors, to shape our plans. We intend to take the company's performance to the next level, which we define as top quartile performance among our diversified industrial peers. As the details of these plans are beginning to take shape, I am encouraged by what I see and the opportunities we have to improve performance. Later this year, we will unveil greater detail on our future plans, and we have scheduled an investor day in New York on November 3rd to share more with investors. For now, I will hand things back to Robin to give you more details on the quarter. Thank you, Tom. At this time, please refer to slide number 5, and I will begin by addressing earnings per share for the quarter. Adjusted fully diluted earnings per share for the third quarter were $2.06 versus $1.88 for the same quarter a year ago. This equates to an increase of $0.18 or 10%. This excludes the restructuring, which originally planned at $0.08 was actually $0.04 in the quarter and compares to $0.28 for the same quarter last year. Moving to slide 6, you'll find the significant components of the walk from adjusted earnings per share of $1.88 for the third quarter in fiscal year 2014 to $2.06 for the third quarter of this year. Income of $0.32 was realized in other as a result of currency gains. The most significant portion is attributed to the unpegging of the Swiss franc to the euro during the quarter. This resulted in an unexpected one-time intercompany settlement gain, together with currency transaction gains realized from the netting of our international intercompany balances. Additionally, the impact of fewer shares outstanding equated to an increase of $0.14 per share. Offsets to adjusted per share income included lower segment operating income of $0.18 per share, driven by the strengthened U.S. dollar currency translation, increased interest expense of $0.07, and higher comparative corporate G&A that equated to $0.03 per share. Moving to slide 7, with a review of total company sales and segment operating margins. Total company organic sales in the third quarter was flat at 0.2% over the same quarter last year. There was minimal contribution to sales in the quarter from acquisitions. Currency impact was higher than planned, equating to a negative impact in reported sales of $205 million or 6.1% in the quarter. As shown on the bottom of this slide, total company segment operating margins for the third quarter, adjusted for restructuring costs incurred in the quarter, were 14.4% versus 14.7% for the same quarter last year. Restructuring costs incurred in the quarter were $8 million versus $60 million last year. The lower adjusted segment operating income this quarter of $456 million versus $494 million last year reflects the meaningful impact of the strengthened U.S. dollar against foreign currency. Moving to slide 8, I'll discuss the business segments, starting with diversified industrial North America. For the third quarter, North American organic sales were flat as compared to the same quarter last year. There was no impact from acquisitions and a negative impact from currency of 1.1% in the quarter. Adjusted operating income for the third quarter was $237 million as compared to $243 million, driven by the impact of currency translation and unfavorable mix as a result of softening trends in key end markets. I'll continue with the diversified industrial segment on slide 9. Organic sales for the quarter in the industrial international segment decreased by 2%. While acquisitions made minimal contributions, currency negatively impacted sales by 13.6%. Adjusting for restructuring costs, operating margins for the third quarter were 12.7% as compared to 13.7% in the prior year, which reflects the impact of the strengthened U.S. dollar. Restructuring expenses in the quarter were $7 million as compared to $59 million in the prior year. I'll now move to slide 10 to review the Aerospace Systems segment. Organic revenues increased 5.7% for the quarter. With no impact from acquisitions, currency posed a modest negative impact of 0.8%. The sales growth for the period was driven by higher commercial OEM and military aftermarket business. Operating margins for the quarter increased 120 basis points from 11.7% to 12.9%, due primarily to higher margin aftermarket sales volume and lower development costs. Now moving to slide 11 with the detail of orders changes by segment. Just as a reminder, Parker orders represent a trailing average and are reported as a percentage increase of absolute dollars year-over-year, excluding acquisitions, divestitures, and currency. The diversified industrial segments report on a 3-month rolling average, while Aerospace Systems are based on a 12-month rolling average. Total orders shifted to a negative 4% for the quarter end, reflecting the swift downturn in oil and gas, construction, and agriculture, which represents three major industrial end markets for Parker. Diversified Industrial North American orders for the current quarter ended decreased to negative 6%. Diversified Industrial International orders decreased to negative 3% for the quarter. Aerospace Systems orders decreased to negative 3% for the quarter against notably high prior year comparables. On slide 12, we review the cash flow from operations. Year-to-date cash flow from operating activities was $791 million, or 8.3% of sales. The significant uses of cash in the third quarter were returns to our shareholders of $565 million. Share repurchases totaled $477 million and dividend payments were $88 million. Moving to slide 13 for the revised guidance for fiscal year 2015. Guidance is being provided on an adjusted basis. Sales growth for the full year is adjusted for the joint venture with GE Aviation that commenced at the beginning of Q2 fiscal year 2014. Segment operating margins and earnings per share exclude restructuring charges and additional expense estimated for the voluntary retirement program to be incurred in Q4 2015. Beginning with sales, total adjusted sales are expected to be in the range of a negative 4% to negative 3% as compared to the prior year. This is a reduction from previous guidance provided at the end of last quarter due to the negative impact from our strengthened U.S. dollar, mainly the increase in the strength of the dollar versus the EUR realized during the quarter. We've calculated the impact of currency to spot rates as of March 31, 2015, and we have held those rates steady as we estimate the resulting year-over-year impact for the upcoming Q4 of 2015. Adjusted organic growth at midpoint is just under 1%, with minimal impact from acquisition carryover. Currency in the guidance negatively impacts sales by 4%, which is nearly all related to Industrial International. For total Parker, adjusted segment operating margins are forecasted to be between 14.9% and 15.1%. This compares to 14.4% for fiscal year 2014 on an adjusted basis. The guidance for below-the-line items, which includes corporate administrative expenses, interest, and other, is $395 million for the year at the midpoint. This is lower than the previous guidance due to the third quarter favorable currency-driven adjustments. The full-year tax rate is projected at 26.5%, which is a modest reduction from prior guidance. The average number of fully diluted shares outstanding used in the full year guidance is 145.6 million shares. On the topic of share repurchase, as communicated during last quarter's earnings call, we remain committed to the $2 billion-$3 billion share repurchase announced in October. To date, share repurchase spend totals 67% of the low end of the announced repurchase program, and we anticipate that the balance of the commitment for repurchase will be made discretionarily over the remaining 18 months. For the full year, revised guidance on an adjusted earnings per share basis is reduced to a range of $7.55-$7.75, or $7.65 at the midpoint. This guidance excludes restructuring and voluntary retirement program expenses of approximately $60 million to be incurred in fiscal year 2015. The effect of this restructuring on EPS is approximately $0.30 for the full year, consisting of $0.17 for restructuring and $0.13 for voluntary retirement program expenses. Despite the reduced projected restructuring expense, previously guided savings of $23 million associated with the restructuring spend remains unchanged. Savings associated with the voluntary retirement program have not been forecasted for Q4 fiscal year 2015. On slide 14, you'll find a reconciliation of the major components of our revised Q4 fiscal year 2015 adjusted EPS guidance to $1.86 from the prior guidance of $2.43 at the midpoint. Modest increases include $0.02 from a reduced tax rate and $0.01 from favorable reduce to other expense. Key components of the decrease include a $0.38 reduction in segment operating income from translational currency, resulting from the strengthened U.S. dollar, and $0.22 reduction in segment operating income due to unfavorable mix and volume reductions as a result of the softening of the key end market. Please remember that the forecast excludes any acquisitions and divestitures that may be made during the fourth quarter. For consistency, we ask that you exclude restructuring expenses from your published estimate. This concludes my prepared comments, and Tom, I'll turn the call back to you for your summary comments. Thanks, Robin. As you can see, near-term challenges are shaping our immediate actions to respond and meet our financial commitments for this year. Longer term, we see a promising future and many opportunities to drive even higher levels of performance for Parker. I know there are many employees who call in to listen to this discussion, and I'd like to thank you for your efforts and express my appreciation for all of your hard work. I am very confident we can build on our past successes and continue to produce strong shareholder returns. At this time, we are ready to take questions. Alex, if you'd like to give the instructions, that'd be great. Ladies and gentlemen, if you wish to ask a question, please press star one on your phone. If your question has been answered or you wish to withdraw your question, please press star two. Again, that's star one to ask your question. Your first question comes from the line of Josh Pokrzywinski with Buckingham Research. Please proceed. Hi, good morning, guys. Good morning, Josh. Just I guess to parse out some of the end market performance you guys mentioned, if you could just, I guess, first comment on oil, and then if you had to think about the major drivers, whether it is de-stock in some of your broader distribution, oil weakness or the strong U.S. dollar impacting U.S. manufacturing in general. If you could just talk through some of those items and what you saw in the quarter. Hi, Josh. This is Lee. What I will do, if it is okay with you, I will just walk you through the different regions and give you some color. I think before we do that I do not want to be overly dramatic on any of these end markets. Remember, currency was the big driver of top line here. So organically, we were flat for the most part. So starting with North America, I think the headline story there that you mentioned is oil and gas, and for us, it is really upstream land-based oil and gas. And we have seen a rapid decline in global oil prices, which really led to a quick deceleration in CapEx across that sector. We have noticed a big onshore rig utilization down year-over-year, which has put a lot of pressure on some of the OEM customers servicing that sector. Those OEM customers continue to build, but at a much slower rate than they have in the past. Our MRO and services business continues to be okay. Where it touches some of the OEM first fit, it is down. Where we have MRO opportunities, that continues to be good and poses opportunities for us. We have talked about mining in the past. That continues to be flat to down. We do not see any recovery there soon. I think one bright spot when the Americas really comes to energy markets, we have seen this around traditional and renewable power gen. There has been an accelerated decommissioning in coal-fired power plants, and what we have seen is an increase in gas-fired plants, along with solar and wind capacity. Net-net, there is net new capacity being added, but the switch has created some opportunity for us, not only on first fit, but for our MRO distribution. In concert with that, energy storage continues to gain momentum with battery technology advancing. We started a business unit in that area with some significant orders this quarter, so it is a real promising trend for us as we move forward. I think some other end markets in North America, heavy truck continues to be good. The line of sight we have for FY 2015 is strong with the backlog, and from every indication we have, FY 2016 continues to be very encouraging. Distribution in North America, I would say, as a whole, remains reasonably healthy. Now, that depends what distribution you touch and where. Where it is really focused on oil and gas, they have seen softness. But on the flip side, there has been a positive on the MRO markets, really in plant, automotive, and energy. Year-over-year, I would call it about neutral when it comes to North America distribution, with some pluses and some minuses. Just turning to Europe. Europe, by and large, continues to tread water, I guess is a good way of saying it. We did see some volume and margin mix degradation in the quarter. Really, we saw that in agricultural business, truck, oil and gas, and construction. We did have quite a few oil and gas projects moved out or pushed out, which were bound for the Middle East, so hopefully, those will come through in later quarters. We have heard a lot of optimism from the export markets, significantly industrial machinery. We were just at the Hannover Messe. There is a lot of positive sentiment, but I will be candid with you, we have not seen that translate yet. So time will tell, and we will see what happens there. Turning to Latin America, obviously being impacted by the recessions in Brazil and Argentina. Negative year-over-year growth in industrial production. We are seeing significant pullbacks in heavy truck, our large OEM customers, with plant shutdowns and workforce reductions. When it comes to offshore oil and gas in Latin America, really not much happening with what has happened with Petrobras. Some pre-salt projects have been postponed due to cash shortages and other issues. So MRO services are good, as I mentioned before, but year-over-year growth there is not there. Lastly, turning to Asia, I guess the first conversation is about China. I continue to characterize that as slow industrial production growth year-over-year. Having said that, we do see positive impact in our distribution business. Some of this is growing municipal projects, but a lot of it has to do with just growing our distribution in general. We get a little bit of benefit there. Some positives are medical equipment manufacturing, heavy truck, and power generation, really around alternate energy. We have talked in the past about the contraction in construction equipment and mining, and if anything, that has taken a step down. It certainly has not gotten any better. I would say, lastly, just talking about Asia, that a bright spot is Southeast Asia continues to grow. It is a relatively small base for us, but growing quickly. A lot of infrastructure investment, agricultural investment, and really energy. All our people and teams are focused with our customers. This is a great opportunity for us to shine with these end markets. When we have softness like this, it gives us a great opportunity to create more value for our end customers. That is very helpful. Thanks, Lee. I guess if I just had one more follow-up on that, did you guys see any destock in the quarter anywhere? Any quantification, that would be helpful. Can you talk about the cadence and anything you are seeing into April? Yeah, Josh, this is Tom. We did see some destocking, primarily, like Lee was referring to, distributors that would service those end markets that were the softest: oil and gas, construction, ag. That would be OEM channel as well as distribution. I think it is going to take a couple of quarters to play through. Obviously, we will stay close to it, stay close to our customers and our distributors and give you better insight in the August call. I do think there is some more destocking that needs to play through. That is part of what you are seeing reflected in our updated guidance. As far as current trends, the April trends, that is what is in our guidance. Got you. All right. Thanks, then. Your next question comes from the line of Jamie Cook with Credit Suisse. Please proceed. Hi. Good morning. I guess, my question relates to, given the weakness that you're seeing in the market and as we're approaching 2016, both Tom and Lee, I know you went through some major restructuring actions last year. Is there anything larger that you are contemplating right now, like another round of restructuring actions, just given the weakness that you're seeing in the markets? I guess just my second question is, given the weakness in the markets, are you seeing valuations come down on any acquisition opportunities and how you're thinking about acquisitions in the light of weaker markets? Would you be more opportunistic because that could potentially help 2016? Thanks. Yeah, Jamie, it's Tom. I'll try to address both of those. First, on the restructuring. You saw that we announced $0.13 for a voluntary retirement program, and that's an initial first step. What we're looking at is really enterprise focus and efficiency. It's really a new initiative or a continuing initiative to focus on improving our overhead costs, the overhead burden to the company. We're working on that. You'll get more insights on the details of that in the August call, but this was an initial first step. We thought it was a constructive first step, offering a voluntary retirement program. We do think there is extra efficiencies we can get through our overhead structure. That would be one aspect of it. Certainly, in the near term, we're doing the normal run the business adjustments that we normally do with short work weeks, reducing temps, all those kind of things. But the retirement program and the overhead efficiencies is an additional step on top of the market adjustments we'd be making. On the acquisition side, haven't seen valuations turn down yet, but we are very active and we've got reviews going monthly, reviews going quarterly with all the groups. We're starting to see activity pick up. Our desire is just like it has been historically, to have 4-5 points of growth via acquisitions. You're right, in today's climate with softness in end markets, this is an opportune time for us to add the acquisitions, and we've got a great track record historically of being the consolidator of choice within our space, and we want to continue that. We're very interested. Acquisitions, it's hard to predict. They're lumpy in nature as far as coming out of the pipeline, but the activity is certainly there. Tom, just one follow-up on portfolio. Are you and Lee both considering any, as you look at Parker's organic growth, I would say investors have been disappointed over the past couple of years. A lot of it is macro, I get that, but are you considering any portfolio changes within Parker, any potential divestitures of sort of lower growth or commoditized businesses, or is that off the table? No. I would say a couple things on the growth side. One, we always look at portfolio continuously through the business cycle, and you've seen us in the past make adjustments. So that's something we always take a look at, and there's nothing major at this point, but we always look at it, and certainly we would update you if we had any changes. But on the growth side, in addition to acquisitions, Lee touched on a little bit at the end of his end markets. This is a great time for us to take share. We're only 11% share of the total motion control space, and we've got all of our teams around the world focused on trying to gain share by account by account, market by market. So that'd be one aspect of it. The other part is we've rolled out a new growth incentive plan starting this year, with the full impact of that being next year. It's a growth multiplier on top of our annual incentive plan, which is the RONA plan, which some of you may be familiar with, our RONA plan, which is done division by division and goes all the way from the general manager down to the operator on the floor. But what we've added is an incentive if you grow faster than the market, and we're defining the market as the median of our proxy peers, there's an additional kicker to your RONA and a very nice kicker that really accelerates and encourages growth. But also, if you grow slower than the market, there's a negative consequence, but there's actually a deduct to your annual incentive. So I think that comes into full play next year. I think that will drive the right kind of behavior and incentive. I think you're familiar with the key things we're going after with the Win Strategy and growth. Those continue. I think the other aspect would be services. Our e-business, the parker.com channel, while very young as far as from a commercial standpoint, I'm very pleased with the progress the team's made there. We have a much better, from a customer friendliness standpoint and feedback, that website's improved dramatically. Attracting, finding, helping customers buy product and then service them, I think our website has clearly improved dramatically. That in addition to other service things on asset integrity and part tracking. There's a number of things besides, I'll call, the traditional growth playbook that we're doing to help grow organically. But right now, I'd love to do more acquisitions, and we're certainly going to focus on that as well. All right. Thanks. I'll get back in queue. Your next question comes from the line of John Inch with Deutsche Bank. Please proceed. Thank you. Morning, everyone. Good morning, John. Good morning. Did any of the verticals that we talked about, did any of them actually sequentially improve, or was this a matter of the ag construction, oil and gas got bad and the others also sort of softened, but just softened by less? I guess, if you could parse your answer in both North America and Europe, that would be great. John, this is Lee. I would say, sequentially improved. Heavy trucks and the transportation improved sequentially. Power generation sequentially, and these are really North America-centric, what I'm giving you right now. There's some smaller ones here, semiconductor, sequentially. I would say flat would be areas like process industries have been flat sequentially. Rail has been flat sequentially. I think that has to do probably with what is happening with the oil markets right now. Then areas like forestry. What has been negative sequentially are areas that we talked about, oil and gas, mining, to name a couple. Lee, would that read through, in terms of what you just described, also map to your orders? In other words, you are sort of giving me the trend in the quarter. What about the mapping to the orders? Was there any differences there, or would you find John, I would say that is pretty consistent with the order trend. That, I am assuming, is North America. What about Europe? You are a big company in Europe. Did you find similar trends or is it a little bit different? I would say similar. Distribution was okay. That's really driven by MRO. Sequentially in Europe, machine tools was up. I'm always careful because when we talk sequentially, I'm talking about our Q2 versus Q3. Q2's such a soft quarter, so I don't want to make too much of these sequential numbers, if that makes sense to you, John. Yeah. Well, I was trying to put it into a context of what you normally would've expected to see sequentially, considering, to your point, you've got some seasonality and year-over-year compares. But I think I get it. Sure. Go ahead. Sequentially, we would always want to see Q3 bigger than Q2. I think, which we didn't expect, was the deceleration in upstream oil and gas. We would not have expected that going into Q3. You have said oil and gas is 6% of the company. The one thing, of course, that we knew was going to happen, not pertaining to Parker specifically, was the derivative impact of oil-producing states like Texas, the Dakotas, et cetera. Is that what you also realized? So directly it was 6%, but the indirect perhaps was more broadly felt, and is there any way to kind of put a handle around that? Absolutely. The derivatives of oil and gas had a negative impact. It is really hard to attach a number to it. We work hard to attach the 6% to oil and gas, so to try and get all the periphery industries is difficult. But you could definitely see it throughout the markets in the channel. Maybe just one last one. If these trends don't really change much, which could be a scenario, as we roll into 2016, the one thing that seems striking is that there is going to be some relatively tough compares in the September and December quarters for 2016, and then, of course, we've got the below-the-line stuff this quarter. Is there any reason to think that 2016, the first half, is actually going to improve versus the current trend based on your thinking today? Hey, John. On 2016, it's probably too early for us to comment. We're just now starting to roll up numbers for 2016, and we haven't even had our initial meetings. So, what we've got in our guidance and the comments we've made are Q4. I did mention, obviously, the de-stocking we thought would continue for a couple of quarters, but it's too early for us to give you an input for 2016, and we'll certainly give you a lot of detail when we do the August update. Okay, got it. Thank you very much. Thank you, John. Your next question comes from the line of Eli Lustgarten with Longbow Research. Please proceed. Good morning, everyone. Good morning, Eli. Can we go a little bit into the fourth quarter guidance? Because when I look at it, if I'm interpreting correctly, the North American sales decline is in line with the order decline at the mid-single digit. But it looks like the diversified rest of world, International, has a huge decline. I assume when you start talking 20% plus, you start talking about at least 15 plus is currency, and then it's a bigger decline in the orders, the order weakness we saw. It just looks like there's a very weak fourth quarter coming in International. Can you give us a call of what's going on in the two markets? Eli, you're right. The significant driver, probably two-thirds of that is related to the currency translation. Likewise, we're also seeing that there is unfavorable mix and some volume impact as reflected through the orders as well, as a result of the softness in the key end markets. Those are really the primary things that are going on with the change in revenues and then the follow-on impact on the operating margins. It is a very weak international quarter that's coming, particularly versus the tough comparison last year. Is that fair? Certainly. But again, the big part of that is on the currency translation. Can you talk a bit about what's happening in pricing across the marketplace, both here and particularly outside North America on the products? There's not much inflation, but in these kind of demand scenarios, it seems that pricing is going to get a bit complicated. Of course, you guys do better in pricing than anybody else in the industry, but can you give us some idea of what you're facing at this point? Yeah, Eli, it's Lee. I would say pricing, it's a challenging environment to say the least, with currency movements, et cetera. Having said that, net net, we still are positive year over year from a pricing standpoint, but it is something that we work regionally, and through all our channels, every single week and every single day. I guess the assumption is that this fourth quarter is going to be tough. You don't expect much business conditions other than seasonally and maybe the end of summer restocking as we enter the second half of calendar 2015. Is that a fair way of characterizing what's going on? I think that is a fair way of characterizing it. Okay. All right. Thank you very much. Thank you, Eli. Your next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Please proceed. Hey, good morning, guys. Good morning, Jeff. Hey, just wanted to come back to, Robin, your mix comment. What is really driving that? Is it certain end markets or weaker distribution? Did you see that in the quarter and in the order outlook? Yes, Jeff. It basically links back to the key end markets that we talked about where we saw that softening. Ag, construction, and oil and gas. Those are the big impactors there. So those just have better mix ultimately, and so that's driving the negative mix and the margins. Certainly on the oil and gas side in particular. Yeah. Okay. Is there a way to quantify the magnitude of these order declines in those three markets you called out? Are we seeing like down 15%-20% or? Jeff, this is Jon. In terms of the magnitude of the order decline, again, I think you got a couple things that are going on here. First one, we've talked about oil and gas, and we've talked about ag. These are relatively small parts of the total company. The decline that we've seen there is in line with what we've seen with the macro conditions around the world. We're not really in a position to be able to give you an exact number, but they were material enough that we thought that we should just make sure that we mention it to give you additional color. So, they've impacted things, and as Lee and Tom have talked about, there have been other markets that have been strengthening, including aerospace and heavy-duty truck. Again, when we are talking about what we are seeing internationally, of course, keep in mind that when we are giving guidance, we are using the currency rates at the end of March. That is the lion's share of what is happening with those end markets is not the contraction of them. It is the impact that we are seeing from currency due to the sharp decline in terms of the increased strength of the dollar here for the quarter. Okay. Then just, oh, go ahead. No, that is- Finally on M&A pipeline, it still sounds pretty lean. Maybe just speak to kind of the bias on buyback given kind of the lean M&A. Does that kind of bias you towards that high end of the $2 billion-$3 billion? Yeah, Jeff, it's Tom. We're committed to the $2 billion to $3 billion. I would say that our preference is we'd really would like to do more acquisitions. The output right now, we haven't had any output, but the activity is increasing significantly within the company. The cadence around it and the number of properties that we're looking at are all increasing. I'm encouraged by that. Like I mentioned earlier, it's lumpy, and it's hard to predict the output, but our goal is to still have acquisitions 4% to 5%. That being said, the ideal mix would be we do approximately $2 billion of the share repurchase and $1 billion of acquisitions over that time period that we announced. If the acquisitions do not materialize, then we'll make up the difference with the share repurchase. Your next question comes from the line of Joe Ritchie with Goldman Sachs. Please proceed. Thank you. Good morning, everyone. Morning, Joe. Tom, your comment on overhead simplification I thought was interesting. I went back and did some analysis and looked at the past 20 years and noticed just as a percentage of sales, that you really hadn't seen much of a change in your corporate expense, again, as a percentage of sales. Just given the amount of growth that you've had in the business, I would've assumed that there was a little bit more operating leverage. I'm curious, how are you thinking about the aspirational target on what you can do on the simplification side to get your cost structure down? Yeah. We do have a keen interest in this area, and we're looking at overheads across entire companies. So it would be at corporate, at the group level, and at the divisions, and looking at it in aggregate. It's really all about trying to simplify the company, to have it more focused, to have it be more efficient, to have less of an overhead burden for every dollar of revenue that we take into the company. This is going to take multiple reviews internally. We have a number of them happening in May and June, so it's early days. The early retirement, we felt, was a really constructive first step that would be attractive to potential employees as we try to move towards becoming more efficient from an overhead structure, even more efficient. I would say we've done historically a pretty good job there, but I think as a team, collectively, we're looking for opportunities to do better there. So I'm not ready to give you what we think is going to come out of that, but we will in August. We'll give you the details of what we think we're going to yield from this and of course, what the potential cost might be there. No, that's helpful. I guess maybe one follow-up question on the margin ramp, especially in Aero in the fourth quarter. I'm just curious whether there's any one-time items that are really going to benefit the margins in the quarter. I know that last year you had about a 350 basis point benefit from a claim settlement. So it looks like the margin guidance implies a pretty significant ramp. I'm just curious what's driving that ramp in Q4. Yeah. Joe, John here. I think the ramp in Q4 is something that we've seen historically. You're right. This time last year, there was a significant settlement on a few contracts. We typically are negotiating all year long, and quite often, we're able to settle some outstanding either assertions that we have or issues that come up between ourselves and our suppliers or our customers. We've seen that pattern in the last few years. There's not one particular thing, though, that is driving this result that we're seeing in Q4 as part of our guidance. It's more of a general bottoms-up review of each one of the operations, and this is where we came out here, which will continue to bode well for us going forward. Okay, and maybe one last question on the restructuring benefits. What are you guys expecting for the benefits in Q4? How do we think about 2016 at this point, given all the restructuring actions you've taken thus far year to date? Yeah. We have an estimate in for Q4 for the restructuring as it relates to the voluntary retirement program. Before we commit to a savings number, we want to roll up all of FY 2016, and we want to make sure that we understand who and how the take-up rate on the program is executed during the quarter. We won't know that until we come out with our update in August. We won't be able to give you a really good idea of something that is factual until August. At that time, we'll be very detailed in terms of what we expect in terms of the savings from the voluntary retirement program. Okay. Thanks, guys. Thank you, Joe. Your next question comes from the line of Mig Dobre with Robert Baird. Please proceed. Good morning, everyone. Good morning, Mig. Sticking with international, one of the things that really surprised me is your updated guidance. You reduced your margin guidance by 150 basis points for FY 2016 after only one quarter, if you would, worth of changes in terms of end markets and the environment. This is well below your 15% target after roughly two years of restructuring. I, for one, am a little bit confused as to how I should be thinking about sustainable margins for this business going forward. Any help here would be great. Well, two-thirds of the reduction in the guidance internationally relates to what we are seeing from a currency standpoint. We have seen such sharp currency trends that there is a matter of timing that is involved here, Mig. We are very optimistic long term. We will be back up at the 15% plus rate that we expect from those operations. There is a timing issue where we have got to make sure that we are keeping up with the trends in the marketplace. That is about two-thirds of what is happening with the international margins. The other one-third of it is really being impacted by what we are seeing on the ground in some of the end markets that Lee and Tom talked about. Those end markets that they called out are unfortunately for us having an impact on the mix. Because of that mix issue, we are seeing a very slight degradation for us in those margins. Historically, over the years, our margins for international, as reflected in our guidance, is 13.4, and we are really seeing a slow ramp up to the 15 that we were talking about this time last year. All the savings that we are getting from the very successful restructuring program that we executed on last year are just being masked by what we are seeing in the currency and in these new trends in some of these end markets. We are not backing off our determination to make those businesses 15% plus going forward here. It is just a confluence of events, and that it is really impacting us. Like I say, almost two-thirds of it clearly related just to the currency and the impact there as the strong dollar impacts the translation of our earnings outside the U.S. into our income statement. All right. I appreciate that. Then it is fair to say, basically, as we are looking out, that we should be thinking about currency impact really as well as mix and maybe try to think about scaling up margins as these effects become diminished as fiscal 2016 would progress. Is that a fair way to think about it? I think so, yes. I think that is very true. All right. My last question is on Aero. An order decline here and your orders are on an LTM basis. I think this is the first decline since the Great Recession. Can this business grow in the next 12 months? Yeah, Mig, absolutely. Please do not read too much into that. We had a bad comps here for this quarter. We have got built-in growth rates due to all of our wins of in excess of 5% per year, and that has not changed. We were up mid-double digits this time last year. A lot of those orders related to FY 2016, again, because of the long-term nature of the business. So, I can go through that with you in more detail, but we are not concerned about the impact of those order rates on the long term. We still feel very confident in our long-term growth assumptions that we have come out with. Great. Thank you, guys. Okay. Thank you, Mig. Your next question comes from the line of Nathan Jones with Stifel. Please proceed. Good morning, everyone. Good morning, Nathan. Just following up on the last call, you talked about a timing issue on international margins related to FX. Can you talk about how long that takes to get through before we will start to see improvement there? It will take a quarter or two, is what our rough estimates are. This is something that we are all working very hard around the world to make sure that we are reacting to. But, as you know very well, Nathan, to take the EUR down to 106 for us at the end of March, that as well as the strength of the dollar versus almost all other currencies, that has had an impact on us. And in some cases, not in all, but in some cases, we need to make very quick turns and pivots in terms of our pricing, and we are working on that. Okay. Obviously some different drivers this time, but some of the data is starting to look a little bit like your 2012, 2013 numbers. We saw four quarters of mid-single-digit order declines there, margins compressed about 200 basis points. Is there some reason why we should not be thinking about that as a base case scenario going forward over the next 12 months? Well, I think, the answer to that is, we should not expect that as a base case. I think what is different, the successful massive restructuring that we did last year that is bleeding over into expected future margins that we are going to see. A program that Tom outlined in terms of our overhead efficiency, that it is going to make us even more efficient going forward. Our ability to grow in markets that we are not talking about too much on this call, that is really going to help us in the out period. So I am very optimistic about us going forward. We are certainly going to see an increase in our Aero margins as time goes on also. Because of the actions that we took in Europe, because of the markets that will continue to grow in North America, and because of the Aero segment actions and wins that we took a few years ago, I do not feel like we are going to see a repeat of that time period. So, kind of a long-winded answer, Nathan, but, wanted to be responsive. Okay. One more. You did talk about industrial machinery exports potentially improving in Europe with them becoming more competitive with a lower currency. Have you started to see any impact in Europe from the lower currency over there making European economies more competitive? Any green shoots of that or any expectation? Nathan, it is Lee. I am not ready to say that at this point in time. There is certainly a lot of hope and a lot of conversation. But to see strong evidence of that, I cannot see that yet. All right. Thanks very much. Thank you, Nathan. Your next question comes from the line of Joel Tiss with BMO Capital Markets. Please proceed. Squeaking in. How's it going, guys? Good morning, Joel. A lot's been asked, and you guys have been great about answering everything. I just wondered if you guys share the historic view that the Aero is a little bit too small of a percent of the whole company. Yeah, Joel, it's Tom. Ideally, we'd like to get Aero to be 20% of the portfolio. Today, it runs around 15% or 16%. So we would like it to be a bigger piece that acts as a counter-cycle to the shorter cycle industrial part. It shares all common technologies across the company. There's parts of it that we'd really like to build out, which I won't necessarily say publicly, because I don't want to tip my hand as far as where we might want to be investing in. But there's a lot of it that we very much would like to build out, and the Aero team is working that as we speak, both organically and through acquisitions. Is it safe to assume that there is nothing really big in the acquisition pipeline? Or else, you guys would balance the share repurchase and the acquisitions a little more? Joel, it is Tom again. The pipeline is getting more active. I will probably never be happy with the volumes that are, but it is getting more active, so I am pleased with that. Our sweet spot will continue to be in that $30 million to $300 million revenue range. That being said, we are a big company, we could do a bigger acquisition, but I think you will see us, the majority of our activity is going to be in our traditional wheelhouse as far as revenue size. Last one. I just wondered why not top decile instead of top quartile? Is there anything from what you see today and what you have seen historically, that makes it more realistic to reach for the top quartile instead of the top decile of industrial profitability? Yeah, I want to make sure I under. This is Tom again. Are you talking about top 10% versus top 25%? That is your Yeah. Yeah, I mean. You guys have been in the top 25%, probably for most of the last decade. Yeah. When we look at it's against our proxy peers, is what we're comparing to, and it's a pretty competitive group. There's some metrics that we're not in the top quartile that we'd like to get into the top quartile. When we give you the WIN strategy refresh on November 3rd for the investor day, we're going to give you a vision of where we'd like to take the company. That'll include some metric expectations and give you an idea of how and how long it'll take us to get there. Okay. But we think, I mean, the bottom line is we think we can take the company. The company's done extremely well. The WIN strategy has been really unifying document for the company, unifying strategy. But we think there's an opportunity to take it to the next level, which in turn will take the total company to the next level. I can just tell you, for everybody on the phone as well, both Lee and I have gotten tremendous interest and participation as we've been going around talking to our employees about the new WIN strategy. There's lots of good ideas, and we're encouraged by what we're hearing. Great. Thank you very much. Thank you, Joel. Alex, I think we'll take one more call. Okay. Your last question comes from the line of Steve Volkmann with Jefferies. Please proceed. Hi, good morning. Just slipped it in. Just one quick detail, maybe, Robin. The gain in Switzerland, how much was that exactly? That was $0.19 attributed to the gain. Nineteen. You're welcome. $0.19. Great. That's helpful. Then, Tom, I think it was you in the initial comments, talked about refreshing the WIN Strategy, and I guess you're going to try to sketch that out in more detail, but I'm going to just see if I can get a little bit of a preview. Traditionally, we've had kind of pricing and lean and sourcing as sort of the key levers in WIN Strategy. Are we adding additional levers? Do we think there's a lot more room in the existing levers? Just give us a sense of how you think about that. Yeah. It's early for me to try to give you that, but I think the essence, why we're calling the refresh, you're not going to see a sharp turn to the right as far as on the WIN Strategy. It's going to be building on top of it. So I think it will be a combination of enhancements to existing strategies and a few new ones that we'll put on there. I think it's the combination. Really, the vision, there's a couple visions here. One, to be a top quartile diversified industrial company, and that's kind of the overarching one. The second is to be an even stronger number one in our space. So we're only 11% share. If you've looked in the back of the WIN Strategy, we've always had a vision historically to be 20% market share. That would put us at a $20 billion company, and that is the other part of it. Initiatives on how to get to be in top quartile and how to be significantly bigger, being a significantly bigger number one is going to frame the WIN strategy refresh. Is it safe to say WIN 2.0 is more focused on growth than on margin? I would say it is always going to be balanced. You have to do both. Great. I appreciate it. Okay. Thanks so much, Steve. This concludes our Q&A and earnings call. I would like to thank you for joining us today. Todd and I will be available throughout the remainder of the day to take your calls should you have any further questions. And once again, thank you and have a great day. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.