Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Parker Hannifin Corporation first quarter 2020 earnings conference call at this time, but just since I don't listen only mode.
After the speaker presentation, there will be a question and answer session to ask a question Dana session, you'll need to press star one and the telephone.
Please be advised that today's conference is being recorded.
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I would not likely on the conference your speaker today, Kathy Fever, Chief Financial Officer. Please go ahead Madame.
Thank you Joe.
Good morning, everyone welcome to Parker Hannifin first quarter fiscal year 20 earnings release teleconference.
Joining me today, our chairman and Chief Executive Officer, Tom Williams, and President and Chief operating Officer lead banks.
Today's presentation slides together with the audio webcast replay will be accessible on the Companys investor information website that p. It starts dotcom for one year following today's call.
Reconciliations for any reference to non-GAAP financial measures are included in this morning's materials and are also posted on Parkers web site at ph stock dotcom.
Today's agenda appears on slide number three.
Well begin with our chairman and Chief Executive Officer, Tom Williams, providing highlights from the first quarter.
Following Tom's comments I'll provide a review of the company's first quarter performance together with the revised guidance for the full year fiscal 2020.
Tom will then provide a few summary comments I'm open the call for a question answer session.
Please refer now to slide number four and Tom will get US started thank you Kathy and good morning, everybody and welcome to the call. We appreciate your interest in Percher. So let me start with the first quarter highlights and I'm going to start looking woman do on safety, we had a 25% reduction recordable safety incidents year over year, which is a great start to here.
You look at it from a safety incident rate so for those that aren't familiar with this this is the number safety incidents per 100 people. We came in at 0.46, which is a top cortile number top cortile happens to be 0.5 cities. The first time in the history of our company that we came in a top cortile from an answer right. So we're very proud of that.
Safety for us as a core values and zero accidents is not an aspiration a goal a truly an expectation that we're going to operate the business and lead the business such a way that we're going to drive a zero accident culture.
And if you seen there's a very strong linkage between safety in business performance and you can see that if you look at our numbers over the last several years applauded safety and or financial proven you'll see the day, one hand in hand.
Switching to financial results Q1 was a strong quarter our margins on a cash against a challenging macro environment on sales sales declined 4% than that composition was a minus three organic once one and half on currency in a plus 0.5 on acquisitions total segment operating margin remained level at 17.0% reported.
Adjusted segment operating margins increased 10 basis points to 17.3.
On a reported basis EBITDA margin increased to 70 basis points to 18.4, and adjusted EBITDA margin increased 110 basis points reached 19.1%. So really when you're looking at operating margin, where EBITDA margin really excellent performance it as part of the cycle.
Yes, what reported was $2.60 on adjusted basis was $2.76. We had a very strong quarter on cash flow cash flow from operations came in at 13.5% of sales we had a record as far as cash flow from operations in terms of dollars at $449 million.
And free cash flow was 12.0% and when you look at free cash flow conversion that was 118%, so really really strong quarter on cash.
We had a number of exciting announcements in the quarter, we launched one strategy at 3.0. So that's the third revision of the one strategy. This falls a second revision we do that in 2015, and we launched a new purpose statement for the company.
And we closed the lowered an exact acquisition so we've been busy in the quarter.
They were really excited to welcome the learnings our team members of the Burger team. The joint integration teams are working hard and preparation for the closings and they're hitting the ground running is as we speak.
And you heard me talk about the acquisitions, our transformational to parkers portfolio really strengthening engineered materials and aerospace with high growth high margin businesses that will definitely be more resilient over the business cycle.
Our global Parker teams are very energized all these announcements between the win strategy purpose and these acquisition. So we're excited about the future snow switching to the outlook.
Revise guidance for up like 20, we've seen a market shift within the last 90 days is reflected as we can order entry.
Primarily driven from macro conditions and trade uncertainties. So when you look at total sales for Parker enough. What 20 is expected to be flat year over year at the midpoint.
What's guidance now these are all midpoint numbers at minus six organic minus one for currency.
Plus seven on acquisitions sub segment operating margin guidance is now up 15.2 person as reported.
At the midpoint and the adjusted the point is no 16.3% or what is called your attention. There's two important impacts on there. When you look at if were partially or is the amortization of the two deals <unk> through partial years template roughly 20 that impacts us by 70 basis points. When you look at on a full 12 months, there's 100 basis points.
Deal amortization as a headwind on margins.
This realignment expenses are expected to increase of $40 million. This is reflective of the current macro conditions. This was 20 million in the prior guide.
And of course, our guidance still includes Lord inexact metals, forming for the balance of the year.
We'll go through discussing markets and the guidance assumptions in more detail during the Q anew.
So let's switch the cash flow and margin resilience. So hopefully you saw that on a cast members of my comments just a moment ago Castle was very strong record numbers.
And then when you look at the operating and EBITDA margin performance and when compared to 2015 and 16. So the last downturn, we experience and we'll look at this legacy Parker without have without acquisitions that allows us to do a.
Apples to apples comparison, so that's why 16, which would've been the worst year in a downturn on an adjusted operating margin was 14.8%.
Then if wide 20 guidance is 16.6% the midpoint. So when you look at that Delta that's an improvement of 180 basis points on adjusted EBITDA that Fysixteen was 14.7%. Our current guide at the midpoint is 18.2%. So that's a 350 basis point improvement so clear.
Early raising the floor on margins when you compare the 15 16 downturn to what we're experiencing now.
We fully anticipate to do double digit cash flow from operations for the full fiscal year like we've been doing for the last 18 years.
This performance is driven by a combination of factors the new win strategy, which we introduced in 2015 is propelling our performance all the previous restructuring activities were done which has positioned us to be more agile and lean operating company. So let's move to slide five and talk about the future were very positive about the future.
And I think for we are absolutely poised to generate nice earnings growth. After we clear these near term macro conditions couple of things influencing our confidence on the earnings potential.
When stood at 3.0 in the purpose statement represents an important changes for the company plus we've added two great businesses via these acquisitions and actually in my view the time of these acquisitions couldn't be any better Turner, sorry, so part of the cycle. There's clear advantages here, we are the capacity to digest these much easier to would die.
Just in CLARCOR as we are trying to ramp up the base business as well to Digest CLARCOR.
You look at the timing when you look at the end integration teams hitting their stride. It's about the same time to markets will start to turn rose approximately nine months and both of those factors will drive earnings growth as we look into the future.
We're going to be hosting an investor day March 12.
2020 in New York City.
And turn at Investor Day, we're going to showcase when should at 3.0 and a purpose statement. So give you a lot more color on the key strategic changes for the future we're going to highlight all six operating groups.
During the past we've highlighted one group lasting highlighted three groups.
First time ever going to give you the insights all six groups, you'll see the entire company.
And we'll go through the three last acquisitions, Clark or lowered and exciting.
So just a quick reminder, which is on this page, which you see the winning format for Parker our competitive differentiators.
The win strategy now 3.0, the third revision to that which is our business system. You couple that with our decentralized division structure in my view. This that's a best of both World you get essentially OLED business system, that's deployed locally with a closeness to the BNL the breadth of our portfolio technology is very interconnect connected strong intellectual property.
Pretty long product Lifecycles.
Very balanced between OEM and aftermarket with the best distribution channel.
And the motion control space low capex requirements to actually generate growth and productivity and all this equates ends up culminating in being able to generate a lot of cash and being able to deployed on the best behalf. We can approve shareholders. So weve a lot of confidence on our ability achieved therefore 23 financial targets I just wanted to.
Thank all the global team this listening in for their hard work there continue to dedicated effort.
In the back to Kathy for more details on the quarter in the guidance. Okay. Thanks, Tom.
I'd like you to now refer to slide number six.
This slide presents as reported and adjusted earnings per share where the first quarter.
Adjusted earnings per share for the quarter were $2.76 compared to $2, an 84 cents for the same quarter a year ago.
Adjustments from the fiscal year 20, as reported results totaled 16 cents, including before tax amounts of business realignment charges of four cents.
Acquisition cost to achieve a four cents and acquisition transaction related expenses of 14 cents.
Offset by the tax effect of these adjustments of six cents.
Prior year first quarter earnings per share had been adjusted by five cents. The details of which are included in the reconciliation tables for non-GAAP financial measures.
On slide seven you'll find the significant components of the walk from adjusted earnings per share of $2.84 for the first quarter fiscal 19 to $2.76 for the first quarter. This year.
We benefited two cents per share in operating income from exotic metals, forming company since closing on that acquisition September 16th.
For legacy Parker, a 166 million dollar decline in sales contributed to a 15 cents reduction in operating income.
The teams did a great job controlling costs with lower volume by sustaining a 15% decremental margin for the quarter.
Incremental interest expense on the debt borrowed for the two acquisitions resulted in a 15 cents decline in the current earnings per share.
Interest income income from the pre acquisition investments of that cash benefited the current quarter nine cents.
Lower other expense of 13 cents came from several onetime gains in the current year and by not repeating several onetime losses from last year.
Lower corporate DNA contributed one cents well fewer favorable discrete tax benefits in the current quarter resulted in a higher tax rate, causing 12 cents of incremental tax expense.
Finally, a lower share count benefited the quarter nine cents.
Slide eight shows total Parker sales and segment operating margin for the first quarter.
Organic sales decreased year over year by negative, 3.3% currency had a negative impact of minus 1.5%.
These declines were partially offset by a positive impact of 0.6% in the September acquisition of exotic.
Despite declining sales total adjusted segment operating margin improved to 17.3% versus 17.2 last year.
This 10 basis point improvement reflects the operating cost improvements teams have been working hard on combined with additional positive impacts from our win strategy initiatives.
On slide nine we're showing the small benefit exotic had on the first quarter. If why 20 results post close on September 16.
You can see they contributed 21 million in sales and 3 million in operating income on an adjusted basis. During this brief stub period.
Exotic results are included in the aerospace systems segment.
Moving to slide 10, I'll discuss the business segments, starting with diversified industrial North America.
For the first quarter, North American organic sales were down 3.2% currency had a small impact on sales of negative 0.2%.
Even with lower sales operating margin for the first quarter on an adjusted basis was an impressive 17.3% of sales versus 16.6% in the prior year.
North America continued to deliver improved margins, which reflects the hardware dedicated to productivity improvements as well as synergies from CLARCOR and the impact of our win strategy initiatives.
Moving to diversified industrial International segment on Slide 11.
Organic sales for the first quarter in the industrial International segment decreased by 8.7% currency had a negative impact of minus 3.9%.
Operating income for the first quarter on an adjusted basis was 15.9% percent of sales versus 17.0 in the prior year decremental margin of 25%.
The teams continue to work on controlling costs during the more difficult drops in volume by utilizing tools of our win strategy initiatives.
Ill now move to slide 12 to review the Aerospace systems segment.
Organic revenues increased 8.2% for the first quarter as a result of growth in all of the platforms, but the strongest growth in military OEM and the commercial aftermarket.
In addition, the aerospace segment sales increased 21 million or 3.7% remediation of the exotic position.
Operating margin for the first quarter was 20% of sales versus 19.5 in the prior year, reflecting the impact of higher volume and all the platforms lower development costs and good progress on the win strategy initiatives.
Slide 13, we report cash flow from operating activities.
Cash flow from operating activities was a first quarter record at 449 million or 13.5% of sales. This compares to 10.3% of sales for the same period last year. After last year's number as adjusted for a 200 million dollar discretionary pension contribution.
The year over year increase of 25%.
Free cash flow for the current quarter was 12% of sales and the conversion rate to net income was 118%.
Moving to slide 14, we show the details of order rates by segment as a reminder, these orders results exclude acquisitions divestitures and currency.
The diversified industrial segments reported on a three month Rolling average well aerospace systems are based on a 12 month rolling average.
Continued declines in the industrial markets drove total orders to drop 2% for the quarter end.
This year over year decline is made up of a 6% decline from diversified industrial North America.
10% decline from diversified industrial international orders offset by a very positive 22% increase from aerospace systems orders.
The full year earnings guidance for fiscal year 2020 is outlined on slide number 15.
This guidance has been revised to align to current macro conditions and now includes the impact of the Lord and exotic acquisitions.
This is being provided on both an as reported and adjusted basis.
Total sales for the year with the help from acquisitions are now expected to remain flat compared to prior year.
Anticipated full year organic change at the midpoint is a decline of 6%.
Currency is expected to have a negative 1.1% impact on sales and acquisitions will add 7.4% to the current year.
It's calculated the impact of currency to spot rates as of the quarter ended September 30, and we have held those rates steady as we estimate the resulting year over year impact for the remaining quarters of this fiscal year.
For total Parker as reported segment operating margins are forecasted to be between 15.0% and 15.5%. Although adjusted segment operating margins are forecasted to be between 16.0% and 16.5%.
There's not adjusted for the incremental amortization of approximately $100 million, which we will incur for the remainder this year as a result of the two acquisitions.
The full your effective tax rate is projected to be 23%.
First quarter tax rate was favorably impacted by discrete items, which we don't forecast we are anticipating a tax rate from continuing operations of 23.3% for quarters two through four.
For the full year the guidance range for earnings per share on an as reported basis is now $8 in 53 cents to $9 in 33 cents or $8, a 93 cents at the midpoint.
On an adjusted earnings per share basis, the guidance ranges now $10.10 to $10, a 90 cents or $10.50 estimate.
The adjustments to the as reported forecast made in this guidance include business realignment expenses of approximately $40 million for the full year fiscal 2020.
With the associated savings projected to be $15 million.
Synergy savings from CLARCOR are still estimated to achieve a run rate of $160 million by the end of fiscal 20, which represents an incremental 35 million of year end savings.
In addition guidance on an adjusted basis excludes 27 million of integrated cost to achieve for Lord and exotic.
And $200 million of onetime acquisition related expenses.
Lord and exotic are expected to achieve synergy savings of $15 million this fiscal year.
A reconciliation and further details of these adjustments can be found in the appendix to this morning slides.
Savings from all business realignment and acquisition costs to achieve our fully reflected in both the as reported and the adjusted operating margin guidance ranges.
So you continue to publish your estimates using adjusted guidance for purposes of representing a more consistent year over year comparison.
Some additional key assumptions for full year 2020 guidance at the midpoint are a split first half second half of 47%, 53% for all sales.
Adjusted segment operating income and adjusted EPS.
All three we expect to speak split 47%, 53%.
Second quarter fiscal 2020 adjusted earnings per share is projected to be $2.22 per share at the midpoint.
This excludes $15 million of projected business realignment expenses, and 167 million of acquisition related expenses and cost to achieve for both Lord and exotic.
On slide 16, you'll find a reconciliation of the major components of revised fiscal year 20, adjusted EPS guidance.
$10.50 per share at the midpoint compared to the prior guidance of $11, a 90 cents per share.
Starting with just the legacy business, a 10 cents per share beat in the first quarter is quickly going to be offset by the challenging macro conditions facing the rest of the fiscal year.
Drop of nearly $800 million and forecasted sales at the midpoint is driving a decline of $1.44 cents in operating income for the rest of the year.
Interest expense in our previous guide included the interest on $2.3 billion of bonds, we were holding for the acquisition.
Since then we have borrowed additional term loans and commercial paper to complete both acquisitions.
Now that both acquisitions are closed we've allocated 72 cents of interest expense to the acquisitions, which includes the interest on the bonds the term loans and the new commercial paper, causing a relief of 29 cents of interest expense within the legacy business.
Also in our previous guide we had an assumption of earning 35 cents from interest income on the cash from the bonds that cash has now been used for the acquisition. So the other expense line, which includes interest income has been reduced going forward.
And finally within the legacy business, we are anticipating a slightly higher tax rate for the rest of the year, which will drop earnings per share three cents, resulting in revised legacy Parker adjusted guidance of $10.50.
Exotic is estimated to contribute 28 cents and Lord 44 cents to operating income for the year inclusive of the additional combined $100 million amortization expense, we will be incurring.
Offsetting this will be the 72 cents of interest expense related to the debt for these acquisitions.
All in this leaves $10.50 consolidated adjusted earnings per share at the midpoint for our guide for fiscal 2020.
On slide 17, we show the impact the acquisitions will have on both an as reported and adjusted basis.
On an adjusted basis, the acquisitions lower operating margin to 16.3% for total Parker from 16.6% for legacy Parker impacted by $100 million of amortization expense.
For adjusted EBITDA EBITDA margins, the acquisitions provide 50 basis points of improvement moving from 18.2% for legacy Parker to 18.7% for total Parker.
For those of you building forecast models. We've included more details regarding the Lord and exotic impact on the total year guidance in the appendix.
We'll now go to slide number 18, I'll turn it back to Tom for summary comments. Thank you can at least so we're very pleased with our progress well, we're going to perform well what this downturn as demonstrated by our cash flow performance and raising the floor and operating margins and we're well on our way to being that top cortile component that we want.
On to achieve and being best in class and just a reminder, where we're trying to drive drive to we want to transform the company to achieve.
Progress, we've set out enough by 23, a growing organically 150 basis points greater than global industrial production growth segment operating margins of 19% EBITDA margins of 20% free cash flow conversion grids, and 100% and EPS CAGR over that time period of 10% plus so again, thanks to everybody.
All the global team members around the world for your hard work.
And with that I'll hand over to Joe will start to Q and a portion of the call.
Thank you ask reminders ask a question you wanted to press star one on your telephone.
Your question Pester Pankey.
Please standby.
Okay.
Our first question comes from Nathan Jones with Stifel. Your line is open.
Good morning, everyone.
Nathan.
Tom It seems like you guys have taken a maybe a bit more negative outlook going forward over the next three quarters. Here then since some of your peers have you mentioned you were planning on three more quarters of downtown here can you just maybe talk a little bit about what's going on in the end markets in your expect.
Patients.
Why youre thinking this downtime is as long as you guys have seemed to have built into guidance Jay.
Nathan as Tom and I'm sure. This is the question top of mind for everybody. So let me I'll start off with going through kind of what was behind the guide then ill finish with a summary of end markets. So let's start first with our Q1 orders and you've seen the minus two total company, but in particular minus six North America at minus 10 internationally and then you.
Got to look at other external indicators that are typically.
Flow through in our orders you know three to six months out those things like the isms in the Pmires. So the U.S Ism at 47.8 for September that was a 10 year lows everybody knows.
Europes, Peter My 45.7% September and of course, Germany, our third largest country at 41.7, obviously feeling the impact of the trade related to uncertainties Asia Pmires are weak and so when we look part of what influenced our forecast was the trend of orders through the quarter. So August and so.
Timber about the same but they were weaker than July and then as you look at October while October is not done yet we looked at October on a daily basis. We saw further softening from that August and September rate. So put those factors into also our bottoms up latest look from the divisions and our view.
Yielded a more challenging macro environment. So I'll give you peel back the organic piece, a little bit more and I'll give you some of my thoughts as to why we did what we did.
So you've seen organic at the midpoint of minus six so that composition as North America at minus six international minus 11 of the have.
And aerospace applause, Florida.
So the first half second half organic is both minus six mindset for first half minus six per second.
And so given that organic growth was minus three in Q1 that implies that are low power point for the bottoming out of Parker is somewhere between Q2 Q3 in this guidance and we also looked remember I talked about the pressure curves last time, and we had baked in about a 15 month duration. This now it looks like it's an eighth.
The month duration, the whole whole fiscal year, that's a difference versus the prior good.
When we look at the four phases of growth.
Talked about in the past.
We've got.
The markets are definitely moving through those phases, the largest phases now in phase four due solely to growth at 40% the last quarter levels at minus 10, So that's encouraging that you're starting to move through the when you look at phase three which is accelerated decline, but used to be 67% last quarter notes 28%.
So that's that's also an important points. So thats. All these things are signaling some kind of a bottoming for us.
But the midpoint of our avoid 20.
So maybe now just to kind of walk from the prior guide to the new goods to the prior guide was minus one of the half.
At the midpoint again I'm talking about organic.
And the new guys minus six so that's a 450 basis points today.
Our order step down 200 basis was again im focused on industrial piece, where North America and international stepped on 200 basis points.
And then we had to try to project out those isms and Pmires I. Just described that are pretty negative and they're going to flow through an orders and there were over the next couple of months to maybe a maximum of six months.
It also looking at the October orders that weakened from what you see in September so that kind of made up the balance you got 200, it's already decline with orders the balance to 50 make made up of that projecting those pmires aneurysms or future orders and what we saw in October so that kind of gives you the walk down.
So maybe if I give comments on the end markets for Q1.
I'll start with the positives aerospace continues to be very strong.
Lawn and turf forestry and marine.
Pretty much all the others are negative so probably the best way for me to summarize the others as to kind of take them into into major buckets. So distribution I recognize is not a market, but it's an important channel for us.
Distribution actually got a little bit better I'm talking about going from Q4 to Q1 year over year came in Q1 at about.
Minus two.
And in Q4, it was it was minus two and a half the composition.
North America got better Europe stayed about the same in Asia Pacific got worse. The industrial end markets stayed relatively the same both were minus nine months going into Q4 mines.
Q1.
And the mobile market is where we saw the stepped on mobile markets went from a minus three in Q4 two of minus six in particular, what stepped down in mobile was AG.
Instruction heavy duty truck in material handling so thats a quick run through the Thats at the global level. What I was describing is frozen markets and what would cause us to move the guidance like we did.
I appreciate the transparency and.
Adam the color there.
Just moving away from things that are happening in the short term here I'm sure there'll be plenty of questions for that on your maybe you could you just talk a little bit about what's changed in the wind strategy three point from wind strategy to point out.
And I'd be happy to do that because that's going to be very exciting for the company not assume we heavy altogether will go through this lot more due to but if I would just.
Paraphrase the key key points, so underneath engagement, we're going to continue to expand the ownership concept, but the idea that more people, we have thinking and acting like an owner the better the companies can perform but a big change on a gauge People's Kaizen and will take you through all the things we're doing a cousins first.
Our approach to it who were working with and the results were seeing under customer experiences a lot more emphasis on digital leadership and expand what we mean by that and a new metric which is not.
To to some are what we had before but we have a numerical composite likelihood to recommend which is going to be a mixture of on time delivery and feedback from our customers and distributors.
Our new profitable growth, we have this new strategic.
And this should call strategic positioning, which will give you more color on new product blueprinting.
Underneath innovation and two new metrics renovation product, but tell the index and gross margin for the product until they will explain more about the.
Well, we're in person at an earnings simplification, a very new powerful concept called simple by design, where we focus on simplifying the design of our products to reduce the building material complexity.
Inventory and planning and scheduling complexity and the ability to produce.
Recognizing about 70% of our protocols are tied up and how we designed it. So we will talk a lot more about that we have you all there will be somewhat careful on simple, but design because I don't want to teach all my competitors how to do that but we'll give you enough color. So it's you all know that it's real and Theres some big enhancements to the company both on a growth in the margin standpoint.
I appreciate all the color and all the transparency there I'll pass it on thanks very much.
Thanks Nathan.
Thank you. Our next question comes from and dynamic with Jpmorgan. Your line is now open.
Hi, good morning, I'm not sure the burning questions left for all of that the color.
Thank you gave us a global end markets industrial versus mobile would you mind breaking those out by region pleased or any notable differences across.
The major markets that have declined AG construction heavy duty material handling.
During this time so.
So I'll give it give you the high points by region. So.
North America.
Was about 3% organic decline on the positive side was machine tools heavy duty truck forestry and lawn and turf.
Flat was distribution and automotive.
Then on the negative side, we had.
Low single digits was mining telecom telecom and life Sciences mid single digits decline. These are all declines refrigeration mills, and foundries and and tires.
And then switching them all as a mobile markets mid single digit declines was construction and marine and mid teen declines was egg material handling and rail.
So again I had mentioned that distribution.
Fared better North America than any other regions as far as overperform than on in Europe came in about a minus seven for the quarter on the positive. So it was refrigeration power semiconductor life science and oil and gas.
On the negative side, starting with the industrial end markets. We had a couple that were greater than 20% mills and foundries machine tools, obviously, Europe being more export sensitive feeling the impact to trade uncertainties those are.
Very trade centric type of end markets mid teen declines was mining tire rubber distribution came in around minus four and a half of the same as it was versus prior period.
And mobile.
We had low single digit declines in construction AG and about 10% and heavy to truck and auto so actually mobile fared okay in Europe industrial end markets suffered worsen in Europe .
And then on Asia, the positive side pager came in.
A 12% decline for Q1.
On a positive side, where oil and gas mining and marine.
Although the clients distribution was down about five and a half.
And on the industrial space, we above mid teen declines on mills.
Refrigeration machine tools greater than 20 on some of those big secular in markets like charge and some icon and of course telecom being somewhat impacted by the wall way.
Challenges as it on a mobile side is where we saw some of the steepest declines greater than 20 and construction material handling rail. So you can see that.
Mobile.
Feeling the worst in Asia Pacific, So thats quick spend to the regions.
Okay, and then just as a follow up I think you've already answered that but.
Are you seeing any signs of I hate to use the word we use every time, we're coming up any green shoots everywhere.
Well what has been nice is that distribution got a little bit better. So we'd like that the fact of that went into phase four.
And we had a number other things moving in the phase for automotive.
Life Sciences, and oil and gas so.
And actually powergen, and some I couldn't even though they are down mid teens for us affected they won in the phase four I always like when things move in a phase workers on unit.
The next phases accelerated growth. So that's that's encouraging and we still had the ones that were strong and continue to be strong like aerospace lawn and turf.
Seeing some seasonal help there and forestry with all the paper related.
Goods tied to e-commerce as continued to be strong. So those are what I would say as indicators again for us.
As Bob we're so what we're signaling what this guidance is a bottom forming for us I can't call about him for the anybody else would a bottom for us is somewhere in the middle of our fiscal year.
Okay I leave it there and the interest of time and get back in queue. Thank you appreciate it.
Thanks, Dan.
Thank you. Our next question comes from Joel Tiss BMO capital markets. Your line is now open.
Hi, I forgot.
So.
I just wonder.
The last discussion and Super Duper color there can you just.
Give us any sense of how you take it feels like things are a little worse now or maybe in the next couple of months future because of inventory reductions how do you take the amplification of that in the near term out of your forward guidance Im just curious how to think about that.
Yes, Joe as Tom again so.
The de stocking, it's always a tough question, but the one area, where we do have good dead on is North America distribution.
And you've heard boldly and I talk about this in the past that it's been the Destocking has been improving but about 100 bips and thats.
Actually what happen again, so to refresh People's memories in Q3 of 19. It was down 300 Bips with these tuck in Q4 200, Bips and Q1 was 100. Those so are we had guided to the we felt distribution was going to at least North America was going to get into.
Some somewhat of equilibrium at the end of the calendar years into Q2, but we clearly are seeing destocking at the Oems, especially the mobile mobile Oems Destocking.
And.
How long it takes to play through is very typical because we don't have the kind of visibility into that that we have.
The U.S. distribution, what we're guiding to its very hard to split end market demand versus destocking.
What we gave you is kind of our view all in a does this impact.
And then just like a strategic question and not so much thinking about a forecast just thinking about how do we how do we think about parkers earnings earnings resiliency going forward like beyond the obvious you know okay. Aerospace is a bigger part of the company, but unlike some other ways that you guys think about if that could.
Help us thank you.
Joel to another good question and I'm actually glad to ask because we've been working very hard to does as you might imagine and is there was a number of factors first it would start with.
Some of the portfolio moves that we've made over the last couple of years CLARCOR lowered and exotic so let me give you some for instances. So when we look at our order entry without getting into things that I want to don't want to disclose publicly our filtration platform is holding up much better than the rest industrial platform and that was by design.
CLARCOR with its density in after our aftermarket so that as living up to its billing what we had hoped for lowered is coming in that up with about a 4% organic growth and that compares to what we just told you are guiding to a minus six for Parker and exotics growth is coming in around 11%.
So that's that's better than than Parker better than Parker Aerospace. So you got some portfolio things that are in future that we're doing it drives Brazil ends and enhanced organic growth and then you've heard us talk about what we've been doing on distribution growing international distribution particular, and we've changed that mix from one.
We started with when should you 2.0, we were 35% international mix and distribution announced 40%. So that doesn't seem like a lot of moving that number 150 year is meaningful that enhances margins and it provides more resilience again, because our channel there is servicing primarily.
After market.
We are doing a lot of things on innovation, which will give you a lot more color with 3.0, we seal in March, but the new product blueprint thing.
But tell the index our gross margins were tracking on these these products are all designed because when you look our innovation growth. It is growing faster than the base business. So it's going to hold up better and the downturn, but things are trying to do to drive customer experience are really important because you can't really grow with a customer if you don't give them a good experience.
And then all the things we've been doing operating wise simplification lean supply chain.
Et cetera, because I know kaizen to make the company more agile and just a better operating company. So those would be the things that I would say in the topline.
Just from an operating standpoint, how we're going to get to those of 23 targets.
Great. Thank you very much.
Thanks Joel.
Our next question comes from Jamie Cook with Credit Suisse.
Open.
Hi, good morning.
I guess just a couple of questions I guess the first one just understanding.
The guide the international Mardi implied international adjusted margins, I guess fall off a little more than I would've expected in the remaining nine months for the year understanding there's a lot of moving parts that is there anyway, you could sort of healthy.
You know help us with what the puts and takes our there Besides increase Sam Moore and then.
Obviously, the cash flow in the in the quarter was very strong and as we are in sort of a slowdown here you know leverage becomes more topicals. So just you know Tom how we should think about cash flow for 2020, whether there's any structural improvements we should be looking for thank you.
So Jamie let me start all have kept the add on as far as a.
Dead, and maybe comment on cash flow, but one thing I want to try to make sure everybody understands this new guide has got still really good decremental margins and we've always few benchmark companies, which I know you all do this.
Minus 30 decremental is still best in class decremental, So im just going to read Tia total decrementals for the company.
Q2 through the rest of the year. So Q2 and these are products fund. These are at the midpoint is going to be a range around these numbers.
27%, decremental Q3, or 20% decremental Q4, 23% detrimental. So we end up with a full year at about 25% decremental. So those are really I think very excellent performance given the if you look at industrial.
It's going to be down minus six north American minus 11 to have an international that's why international's little bit worse honest decrementals North America's coming in around 24, and International's at 29, and it's because it's about a two X difference on volume and so that's that's pretty much more challenging than.
In addition to the volume side.
International has currency, which we've always struggled to identify currency impact on financials, and we've we've basically decided not to try to trigger to try to communicate Texas you can't get a consistent number was it but we do all know that when currency becomes a headwind to us because of pressure point our margins. So that's another factor going.
Cash flow and I'll hand, it over to the Cathy I would just.
I would have shareholders, Russia assured that that 18 years of 10% plus the of away is going to turn into 19 years, because we've got a proven track record of being able to work working capital and these operating burdens like you heard me talk about opening comments are 180 basis points better.
In our last downturns with better operating margins.
On the working capital like we normally do.
The other than to add on.
Jamie we finished the quarter end and leveraged gross debt to EBITDA of 3.6.
We did bring in a small amount of additional debt in the form of term loan when we.
To be ready to or to close lowered this past week and so it's going to go up slightly but if you look historically, we do have a great track record of managing the working capital very well during a down cycle. So we're pretty confident in addition to that both Lord and.
And exotic have a.
History, a very strong cash flow stronger than Parker and they will be great contribute to it and we're confident we'll be at a level that we have that we were with CLARCOR. When we close that deal only brought that down very quickly and we feel that we can do the same even though.
We are seeing things slow down also keep in mind, we do carry about $1 billion of international cash. So our net debt to EBITDA was actually 2.1 at the end of the quarter.
Okay. Thank you I appreciate the color.
Thank you.
Our next question comes from David Raso with Evercore ISI. Your line is now open.
Thank you I'm just looking at the organic growth first half second half obviously, the second half of the change from used to be up one to the negatives Thats now can you take us through your thoughts on how you see orders playing out underneath that decline I.
I mean, it seems like the second quarter, you're expecting the biggest organic decline.
But the second half is still pretty healthy downside.
Healthy many large declines so I'm just trying to get a sense of how you're viewing the order patterns underneath that negative six and fiscal second half.
David as Tom and that's that's where the forecast gets more and more challenging because the for the to go out, but we really were trying to project. Some of those macro indicators that I mentioned in my comments, you us Ism Germany's number Asia's pmires, the rest of Europe , Pmires et cetera recognize it as we plotted those historically that.
The lag and impact our orders through to six months out. So we know we saw a weakening in October which set what thats going to influence Q2, and then these other macro indicators three to six month once out starts to impact the second half.
So that was the thought process behind us, but it does become more challenging as we try to figure that out because our backlog doesn't care is outside of aerospace was occurs out that far. So we had taken a look at historical trends and lagging periods between these macro indicators and what we do.
I'm just trying to think how you thought about managing your own inventory through the end of the year.
You know that that interplay between okay. The second half a lot weaker than we thought.
But.
You see some bottoming process and that's how we're managing and Vietnam, and just inventory, but how you're thinking about pricing.
Usually gets announced Jan one and so forth.
As a fair to say at this stage.
You are not thinking of the orders and improving much and the and the back half fiscally. It's just the comps get a lot easier or something for a lot of people, saying that the cut to the organic is.
Obviously, a pleasant but.
But if you felt the orders are improving in the back half to some degree.
You can call a temporary so what you're speaking to the businesses kind of a temporary macro environment I know, it's hard to call I was just curious.
Since where your head isn't how you're managing the company fiscal second half it doesn't sound like you're planning for orders to be.
So often in the latter part of the or is that fair assessment, you're trying to manage.
Yes, David I think Thats Thats fair, we would projected orders we continue to be week, because our orders you know organic growth and orders are typically within a month or two of each other when you when you applauded historically so for us on inventory.
Inventory is never good it's always a is a waste when you when you're running in lean operation. So we're continuously whether we have volume going up or volume going down we're looking to optimize inventory period, all the time.
And the kaizen efforts that were doing and the in unity with our Parker lean process will continue to work at managing inventories down.
Obviously when orders go down you need to update all your.
Planning tools your plan for every part which is part of our lean system.
So we're doing that.
And then a pricing I'll, let lee comment on pricing.
What we're doing with.
Well I would just maybe I'll put pricing and cost together.
I would say caution puts its it's a mixed bag, there's some going down some going.
Pop.
But from a price cost standpoint, as always we just try to Steve Barger neutral and that's what we're planning going forward.
Okay, and just just to make sure just to wrap up here. The first quarter organic was in line with your expectations.
20, Bips even better.
I actually thought the orders wanted but not bad in the first quarter relative to some of the fear is out there. But then obviously you took a big chunk out of the rest of the year on on organic sales and even your thoughts on orders sort of surprised I guess must have really been this last month.
We thought the sealy some beginning a bottoming process. So is that fair, it's really been the last month that really drove the change in the God.
David as Tom and so there's two things you're right October but then also the sequencing we sold within the quarter. The fact that August since September got worse from July . So we were starting to see a weakening through the quarter that another step down in October .
Why we change the good.
All right that's helpful. I appreciate it thank you.
Thanks, David.
Thank you. Our next question comes from Andrew Obin with Bank of America. Your line is now open.
Yes, hi, good morning.
Turning Andrew.
Just a question on on cash flow and if not more question, but a lot of companies that do deals.
Have shifted to reporting.
Sort of cash earnings given a massive discrepancy between your cash flow generation on reported earnings have you guys considered moving to reporting cash numbers.
And what we've got to what has the feedback banned from your investors.
Andrew as Tom and so good question that we have thought about it and we have reached out to shareholders and thats been pretty pretty uniform from shareholder feedback, saying don't make that change to continue to obviously, we will just for onetime costs and the things we normally been doing but other that continue to report on a GAAP basis and if you.
Think about it just it creates a more a bigger hurdle that the business needs.
To absorb the generate returns on behalf of the shareholders and I think that was the feedback or from shareholders. We want you to corporate debt bigger challenge into how you run the place and but it's a good comment I know there's been good companies that have made that change to at this point, we've elected to stay with so what we've been doing.
Thank you and then just a question.
As your numbers have decelerated.
What has the feedback been from Lord and exotic.
What have they experience relative to expectations when you announced the deals.
So Andrew as Tom again so.
Actually have held up really nicely Lord.
In our the outlook that we've given just giving is coming in about a 4% organic growth.
And we had in our model above 500%, that's what I was verbally I've always said during the announcement that was kind of our five year CAGR. So if you think of everything thats going on that's changed from when we made that announcement to today.
That's pretty good and.
Again that 4% positive compares to minus six for Parker, that's why we like Lords as much as what Weve why we bought them, it's accretive a growth standpoint, and then when you look at exotic.
Exalytics coming in a little over 11 that have.
We and our and our model that we built.
For the Tcf, we had about a 75% CAGR. So that's held up nicely.
I would say two things a little better of 35 sales.
And we modeled a more conservative 737, Max we modeled exotic going down to 42, but Boeing has not done that yet with exotic and probably won't because exotic with its long lead items.
Long lead time for materials.
When you look at what Boeing is done when they're managing supply chain. The rest apart aerospace is for most part at 42, but as they've managed long lead time type of suppliers exotic being one of those that kept them at 52 because of the obvious reasons you can't ramp back up with that kind of long lead time, so thats part of why the.
Dave Overproduced on the revenue so in a nutshell.
Both acquisitions holding up on revenue both acquisitions coming in.
At the EBITDA level that we expected actually lowered slightly better on EBITDA margins, because we pulled in $15 million 50 million to Kathy referred to in her comments.
As the synergies for lower than we were able to pulled a little bit earlier than we thought.
And if I may squeeze just one in auto exposure was more you did comment that auto is bottoming was that referring to.
Sort of the old Parker exposure was that referring to large exposure as well and that will be it for me. Thank you.
That was total Parker, we haven't that was based on Q1, So we didn't have Lord and Q1.
But there their auto has held up better.
Than our auto as so.
Pretty pretty comparable.
Thank you.
Thanks, Andrew Thank you.
Next question comes from Andy Casey with Wells Fargo Securities. Your line is now open.
Thanks, a lot.
Just wanted to go back to the Decrementals that you talked about Tom where those.
All in including the acquisition.
For those Parker legacy Parker legacy without acquisitions neutron ended turn to do it with the acquisitions is apples and oranges acquisitions are not in the prior period, we've got the 100 million of intangible amortization. So.
The Emerald Wess, when you look at it all in versus prior.
Basically nonsensical you can you can't really read anything into it which is why gave you the ones without it.
Okay. Okay appreciate that.
And then.
And basically over the long term you had talked about 30%.
Incrementals.
The Decrementals are gave where were lower than that which is good.
When you embed the.
Two new acquisitions, it seemed to be a little bit.
Similar to CLARCOR, a little bit more resilient.
With that.
The downside over the long term relative to the mid to high 20% decremental that gave.
Kind of even shrink further.
Well I think theres definitely the potential because they were to your point they will be more resilient.
There are higher margins as well so this should help us with that.
Bill and we're going to work to make them even better than they are today. Our goal is to take the best of what we do in a post and of course, we as no laws and the best of luck to acquisitions had and make it even better. So I still think again for purposes of bottling I want to get too far over my skis I would just encourage it continue to use.
The plus or minus 30, it's still best in class and of course, our goals are trying to do better than that.
Okay. Thank you very much.
Hey, Thanks, Sandy Joe I think we have time for one more question.
Thank you.
Final question comes from Jeff.
Search partners. Your line is now open.
Thank you good morning.
Just just two from me.
Mind, just first back on the acquisitions.
At the time, they were announced I thought.
Lords run rate sales were about a billion won and exotic was about 450 and.
When I look at what you laid out here it looks like they're both actually trying to on an annualized basis tracking flattish.
Not.
Is there something and timing or do I have those bases wrong.
Jeff as Tom I think the main thing you would have we gave it was based on calendar year over calendar year now east numbers earn our at play and Parkers fiscal year. So it's the prior periods are not comparable.
Those growth rates, you gave us, though Tom we're for the year and your program and your plan or just in the quarter those organic.
Yeah, the growth rates I gave Jeff or for RF why 20, so it be comparing a period of time there in Puerto Park replied, RF why 20 than using the same Parker fiscal year unemployed 19 presents critical back and kind of reconstitute the with the two acquisitions.
And then just one other question on Incrementals, if you don't mind.
And perhaps it goes to the FX point, you were making Tom but the the decline in 6% organic sales decline.
Right is about 650 million in sales I think Cathy said 800 million up I think about it on a core basis.
And $1.44 of EPS had one would gross up to like 230 million. So that's that's like a 35% decremental.
On the core business I think about it relative to both the walk that you gave US where you showed kind of legacy Parker versus deals.
I'm missing something there or is that FX.
Yes, yes, Jeff it's the FX differential so the number I quoted was topline Toby drop that we had in our guidance.
For the second third and fourth quarters.
And when you're quoting organic you're probably correct that's closer to 600.
Uh huh.
Okay, great. Thank you for that color.
Okay. Thank you.
All right. This concludes our Q in a in our earnings call. Thank everyone. Thank you to everyone for joining us today.
Robin and Jeff will be available throughout the day to take your costs should you have any further questions everyone have a great day. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.