Q2 2020 Earnings Call
All participant lines are in listen only mode.
After the speakers presentation, there will be a question and answer session.
To ask a question. During this session you will need to press Star then one on your telephone keypad.
Please be advised of today's conference maybe recorded.
If you acquire any further assistance. Please press star then zero to reach an operator.
I'd now like to have the conference over to your speaker today, Kathy Sseven Chief Financial Officer. Please go ahead.
Thank you Liz.
Good morning, and welcome to Parker Hannifin second quarter fiscal year 2020 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 company's investor information website <unk> P. H stock dotcom for one year following todays call.
On slide number two you'll find the company's safe Harbor disclosure statements 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 materials and are also posted on Parkers web site at ph stocks Dot com.
Today's agenda appears on slide number three.
Well begin with our chairman and Chief Executive Officer, Tom Williams, providing highlights from the second quarter.
Following Tom's comments I'll provide a reviews the company's second quarter performance together with the revised guidance for the full year fiscal 2020.
Tom will then provide a few summary comments and we'll open the call for question and answer session.
Please refer now to slide number four and Tom will get a started.
Thank you Kathy good morning, everybody and welcome to the coal and thanks for your interest in Parker, Let me start with some strategic highlights first of all we're we're very pleased to report that despite challenging macroeconomic conditions, our margins in our cash flow at all time highs relative relative to previous downturns I think the best way to compare this the best way to.
Do an apples to apples as it is look at the base business without lowering SOG compared to prior downturns.
When you look at our second quarter of why 20, adjusted operating margin without acquisitions. It came in at 16.1 person.
This compares to our previous best recession performance, which was enough way 16, and that Q2 adjusted op emerge were 13 and a half person.
Both of these recession said about summer organic sales declines. This represents a 260 basis point improvement compared that to the our best previous previous recession performance really remarkable former should really my thanks, everybody around the world towards a degree job.
In addition to the margin improvement cash from operating activities was an all time year to date Q2 record.
This performance demonstrates that we are building and more resilient business.
Poised for accelerated earnings growth as a market return of utters.
Strong up by 20 margin performance and cash flow generation so far.
Really were a fluctuate improvements driven by the win strategy and the strengthening of our portfolio by buying companies are accretive to gross margins. So we're excited about where we are and we're excited about where we're going to go to future.
Shifting to safety.
We had a 25% reduction recordable incidents in Q2, really making great progress or my thanks again to everybody for their effort on this one or did occasion to safety I recordable incident rate and that what that is a good people aren't familiar with that that is numbers sapiens. Once we have for 100 team members that has now top cortile versus our proxy peers and there is.
A very strong linkage you've heard me talk about this between safety and business performance, if you would applaud or safety metrics in our financial metrics, you'll see that moving in tandem and a positive direction.
So some summary comments on Q2.
Sales were a second quarter record as acquisition revenue offset softer organic sales organic sales decline as we expected with improvement in international getting sales versus are good.
737, Max issues impacted aerospace business as Q2 airframe and engine orders were slowed in advance into production pause.
Strong adjusted EBITDA margins were significantly higher than they were during the last recession. We came in at Q2 adjusted EBITDA margin of 18.5% again really strong performance earnings in a quarter were excellent an adjusted EPS exceeded expectations order rates in a quarter continued to be negative impacting organic growth.
And the portfolio additions, we have made are certainly going to help our organic growth over time, we've acquired businesses that are more resilient higher organic growth rates the legacy Parker.
We're well positioned for action performance in the second half for 2020 and beyond that.
Want to move now to year to date cash flow you've heard me talk about all this is such a strategic priority for us we want to be great generation declares a cash to drive excellent returns for our shareholders. We've achieved the best ever cash flow from operations of any first half in our history given current market missions, that's really commendable free cash flow to sales as a button.
<unk> percent and we're expecting to achieve our 19th consecutive year of cash from operating activities as a percent of sales in excess of 10% for 420.
Year to date free cash flow conversion was excellent at 130%.
Moving now to the outlook, we're increasing dps guidance for 20 on roughly flat sale to the prior year.
This reflects strong Q2 performance, which is being offset by the some through so the Max.
Slightly weaker organic sales in the second half versus our prior good.
Our guidance assumes no additional some through sort of Mac sales for the balance of is quite 20.
We're very excited about the future we feel we're well positioned for growth would exit excellent margins and cash flow as a macro conditions improve some of the factors are driving us feeling a confidence or would be first.
I think it'll show up to 3.0, which is going to drive a further step change in the performance of the company really building on the momentum from the previous updates that we've made to the one strategy second would be the portfolio strengthen that we've done through the strategic acquisitions that have come onboard.
Very happy with our Lord an exact integrations are progressing and we can comment more about that an acute today.
We recently had the leadership teams are both businesses here at headquarters.
Talked about the corporate illustrated 3.0 their integration plans. It was a create great session loaded good team work there and then thirdly the launch of the purpose statement, which is enabling Andrew breakthroughs that lead to a better tomorrow. This statement as a real source of pride for organization and we recognize that takes the being a top quartile.
From a company to live up to the higher purpose.
Parker's transforming as evidenced by the higher level performance and we're doing in a very difficult part of the business cycle.
With lots of opportunities to drive earnings growth beyond roughly 20.
Switching to the next slide you'll see a reminder, cover our winning formula what we've kind of characterize as our competitive differentiators.
And I've talked about these before so I'm not going to see highlight each one specific I would just tell you. This is this listening in aggregate is what makes a special this is why customers come to listen this is why shareholders will take about investing in Berger if I had a reference one in particular are these competitive differentiators I would point out when should you 3.0, and what were the most.
Sentiment of performance enhancement, so it's going to create overtime and a lot more discussions will happen on that as we move forward. So my thanks to all the global team members for their continued dedicated effort in creating a top cortile company with that I'll hand, it back to Kathy more details on a quarter in the guidance. Okay. Thanks, Tom.
I'd like you to now refer to slide number six.
This slide you sense as reported and adjusted earnings per share for the second quarter.
Adjusted earnings per share for the second quarter $2.54 compared to $2.51, but the same quarter a year ago.
Adjustments from the fiscal year 20, as reported results totaled 97 cents, including before tax amounts of business realignment charges of eight cents.
Acquisition cost to achieve a five cents an acquisition transaction expenses of $1.14.
These were offset by the tax effect of these adjustments of 30 cents.
Prior years second quarter earnings per share had been adjusted by 15 cents. The details of which are included in the reconciliation tables for non-GAAP financial measures.
Slide number seven you'll find the significant components of the walk from adjusted earnings per share $2.51 to the second quarter of fiscal for the second quarter fiscal 2019 to $2.54 for the second quarter. This year.
Starting with the net decrease of 13 cents in segment operating income.
For legacy Parker, a $260 million <expletive> dollar decline in sales contributed to a 34 cents reduction in operating income.
The legacy Parker teams did a good job of controlling costs on this lower volume by sustaining a decremental margin of 23% for the quarter.
The acquisitions contributed 21 cents, partially offsetting this reduction.
Lower corporate DNA contributed 16 cents due to gains this year compared to losses last year on market adjusted investments tied to deferred compensation.
Incremental interest expense on the debt borrowed for the acquisitions resulted in a 27 year over year decline in the current earnings per share.
Lower other expense of seven cents benefited from interest income earned on the bond proceeds.
Year to the closing of the Lord acquisition.
We gained 10 cents from a lower tax rate, primarily due to favorable discrete tax benefits.
And a lower share count benefited the current quarter three cents.
Slide number eight shows total Parker said sales and segment operating margin for the second quarter.
Organic sales decrease year over year by 7.1% and currency had a negative impact of 0.4%.
These declines were more than offset by the positive impact of 8.2% from the acquisitions.
Total adjusted segment operating margins for 15.8% compared to 16.6% last year.
This 80 basis point decline equal the incremental amortization expense from the acquisitions.
With the help of the win strategy tools. The legacy Parker businesses managed to achieve good decremental margins of 23% on their lower sales volume.
On slide nine we're showing the impact Lord and exotic had on the second quarter fiscal year 20.
These results reflect a partial quarter of contribution from Lord since the acquisition closed on October 28, and a full quarter of exotic which closed on September 16.
Sales from the acquisitions during the quarter over $286 million and operating income on an adjusted basis was $36 million during the stub period.
Moving to slide number 10, I'll discuss the business segments, starting with diversified industrial North America.
For the second quarter, North American organic sales were down 8.5% well acquisitions contributed 7.3% to the segment.
Operating margin for the second quarter on an adjusted basis was 15.4% of sales versus 16% in the prior year.
Incremental amortization of 75 basis points in the quarter more than accounted for the change in margins.
North America's legacy businesses generated a good decremental margin of 24%, reflecting the hard work and diligent cost containment and productivity improvement together with the impact of our win strategy initiatives.
Moving to the diversified industrial International segment on slide number 11.
Organic sales for the second quarter in the industrial International segment decreased by 9.4%.
Acquisitions contributed 4.5% to the segment and currency had a negative impact of 1.4%.
Operating margin for the second quarter on an adjusted basis was 14.6% of sales versus 15.7 in the prior year.
Incremental amortization was 30 basis points in the quarter.
The legacy businesses generated a very good decremental margin of 23%, which was partially offset by contributions from acquisitions.
Ill now move to slide number 12 to review the aerospace systems segment.
Aerospace systems sales increased $111 million or 18% from acquisitions and 1.3% from organic sales.
Growth in military OEM and commercial aftermarket sales were largely offset by lower commercial OEM sales and military aftermarket sales.
Operating in operating margin for the second quarter was 18.5% of sales versus 19.7% last year.
Incremental amortization expense of 160 basis points more than accounted for the change in margins.
Good margin performance from exotic and hard work by the teams on productivity improvements helped contribute to this strong performance in the quarter.
On slide number 13, we report cash flow from operating activities.
Year to date cash flow from operating activities was 826 million or 12.1% of sales.
This compares to 7% to 10.7% of sales for the same period last year. After last year's number is adjusted for a 200 million dollar discretionary pension contribution.
That's a year over year increase of 11%.
Free cash flow for the current quarter was 10.4% of sales and the conversion rate to net income was 130%.
Moving to slide number 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 while aerospace systems are based on a 12 month rolling average.
Continued declines in the industrial markets resulted in total orders dropping 3%.
This year over year decline is made up of a 7% decline from diversified industrial North American orders and a 6% decline from diversified industrial international orders.
Offset by a positive 12% increase from aerospace systems orders.
Moving to slide number 15.
The full year earnings guidance for fiscal year 2020 is outlined.
This guidance has been revised to align to current macro conditions and includes the impact of the Lord and exotic acquisitions.
Guidance is being provided on both an as reported and an adjusted basis.
Total sales for the year with the help from acquisition are now expected to be flat compared to prior year.
Anticipated full year organic change at the midpoint is a decline of 6.4%.
Currency is expected to have a negative 0.5% impact on sales and acquisitions will add 6.9% to the current year.
We have calculated the impact of currency to spot rates as of the quarter ended December 31, 2019, and we have held those rates steady as we estimate the resulting year over year impact for the remaining quarters of fiscal year 2020.
Considering the uncertainty of the regulatory clearance of the 737, Max we have now excluded all 737 Mac sales for the balance of the fiscal year 2020.
For total Parker as reported segment operating margins are forecasted to be between 15.1% and 15.5%. While adjusted segment operating margins are forecasted to be between 16.0% and 16.4%.
We have not adjusted the incremental amortization expense of approximately $100 million.
We will incur in fiscal year 20, as a result of the two acquisitions.
The full year effective tax rate is projected to be 22.5%. The second quarter tax rate was favorably impacted by discrete items, which we don't forecast for the balance of the year, we continue to anticipated tax rate from continuing operations of 23.3% for the real.
Under the year.
For the full year the guidance range for earnings per share on an as reported basis is now $8.78 to $9 in 38 cents or $9, an eight cents at the midpoint on.
On an adjusted earnings per share basis, the guidance ranges now $10.25 to $10, an 85 cents or $10.55 at the midpoint.
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, but the associated savings projected to be 15 million this year.
Synergy savings from CLARCOR are still estimated to achieve a run rate of 160 million by the end of fiscal year, Tony which represents an incremental 35 million of year end savings.
In addition guidance on an adjusted basis excludes 27 million of integration costs to achieve for Lord and we thought it.
And 185 million of onetime acquisition related expenses.
Lord and exotic are expected to achieve synergy savings of 18 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.
We ask that you continue to publisher 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 midpoint, our sales are divided 48% second half.
52, sorry, 48% first half, 52% second half.
Adjusted segment operating income is split 49% first half 51% second half.
Adjusted EPS second half second half is device first half second half is divided 50% 50%.
Third quarter fiscal 2020 adjusted earnings per share is projected to be $2.36 per share at the midpoint and this excludes 18 million of projected business realignment expenses.
7 million of integration cost to achieve and 19 million of onetime acquisition related expenses.
On slide 16, you'll find a reconciliation of the major components of revised fiscal year 2020, adjusted EPS guidance of $10.55 per share at the midpoint compared to the prior guidance of $10 in 50 cents per share.
During the second quarter stronger than guided sales together with meaningfully higher segment operating margins from the industrial segment generated a net 17 cents operating income beat.
Strong gains in market adjusted investments tied to deferred compensation and lower than guided interest expense contributed a benefit of eight cents and favorable discrete tax benefits during the quarter helped to contribute seven cents totaling two a 32 cents EPS beat in the quarter.
Updates to the second half guide result in a four cents increase in operating income.
Offset by 30 cents negative impact to operating income from the elimination of 737 Max shipments in the second half.
Updates to the below the line items, resulting in net one cent decline. This results in a net five cent increase to the fiscal 2020 full year guidance earnings per share at the midpoint.
On slide 17, we show the impact the acquisitions will have on both an as reported and adjusted basis for the full year.
On an adjusted basis, the acquisitions lower operating margin to 16.2% for total Parker from 16.6% for legacy Parker impacted by the 100 million or 70 basis points of full year as slide 20 incremental amortization expense.
But the adjusted EBITDA margins, the acquisitions provide 50 basis points of improvement moving from 18.1% for legacy Parker to 18.6% for total Parker.
If you'll now go to slide 18, I'll turn it back to Tom for summary comments. Thanks, Cathy we're pleased with the continued progress we are performing well through this downturn as demonstrated by our cash flow performance and our ability to raise the floor on margins were well on our way to delivering top cortile furniture performance as a company.
I just want to remind people were trying to drive to his first we're laser focused on or before 23 targets and those are sales growth at 150 basis points greater than global industrial production growth segment operating burdens at 19% EBITDA margins of 20%.
Free cash flow conversion greater than 100% and those would all culminate in driving and bps cagar. Okay.
At a time, a 10% plus so thanks again to the global team everybody around the world for all your hard work and with that I'll hand, it over to lose distort the Q and a portion of the coal.
As a reminder to ask a question you will need to press Star then one on your telephone keypad to withdraw your question press the pound key.
And that Star then one if you'd like to ask a question at this time.
Our first question comes from a line of Mig Dobre with Baird. Your line is now open.
Yes, good morning, everyone.
Joining me.
Maybe just very quickly some clarification on what's embedded segment level for organic growth.
And your industrial business.
Maybe just Tom so what we assumed.
Just going to give you for the second half with the New Guide was North America at minus seven.
International minus 12.
Aerospace at minus have.
Yes for the second half at a minus seven.
And that compares to the prior guide was minus six big difference there being a little bit of weakness in North America, but the big difference was a shifting the mix.
Understood then if I may on international.
I think you said negative well.
Yeah. So.
If I'm comparing that with what you've done.
In the first half.
Some deceleration there and obviously your orders.
Looking a little bit.
In that regard.
Being less bad if you would so can you help help us understand kind of how you were CNN and what's going on there.
So our thinking on again, because some are picking on the orders and sales for international first drew you are right. So orders came in at minus six they did improve in Q2 of but that was driven mainly by Asia and promote what we can tell a lot of that was influenced by some pull ins in advance of Chinese new year. So we feel is on.
Order rates, maybe a little bit.
Overstated or maybe not entirely reflective of our underlying market conditions.
Given the uncertainties of the Corona virus and effect to check the Chinese government has extended Chinese new year by one week.
We actually had our Asia team just within the last 48 hours redo the second have forecast, what they thought and their latest thinking which was obviously very fluid given what's going on there is now reflected in this new guide and Iran. Ironically. It came in about the same as what we had before were minus 11 that before or minus 12.
That was our thinking is a combination of the orders are little bit of over enhanced from a pull ins.
And our current intelligence based on what's going on.
Reflected in this good.
I appreciate that not to put too fine a point, but as we're sort of thinking about Q3, specifically.
In China.
How do we think about that in terms of the negative 12 for the back half the year.
So I'm not going to split out the slip by region, but we have international for Q3 of them about minus 16.
So the worst feel worst of hitting in Q3, you got the Chinese new year. The extension of the Theres. Some obvious reasons why Q3 might be affected worse.
Great. Thank you Tom.
Thanks, Nick.
Our next question comes from Nathan Jones with Stifel. Your line is now open.
Morning, everyone.
Turning Nathan.
Maybe I'll just start with a question on pricing I mean, you're kind of getting to the peak of the negative comps in this part of the down cycle are you seeing any pricing pressure coming from cost him as any kind of.
Aggressive or irrational behavior from a competitive.
In the market out there I know you guys are always targeting being price cost neutral or you still able to maintain that at the moment and do you think you can maintain it for the rest of the year.
Yes definitely.
The answer your question is yes, as you know our goal always has to be price cost neutral margin neutral.
And I think why we're so resilient and doing out of the processes that we have you know we follow the input costs through our purchase price index and we have are showing price index.
We track.
It all the different locations, but.
In our forecast and what we're expecting is to be up price cost neutral margin neutral.
Okay.
You guys have also I mean, you've taken the margin expectation in aerospace down, which I think it fairly straightforward right you've got less volume from the Mac, So you're not going to not going to see the leverage on that you did take the margin expectations in both North America any international up can you talk about what's going on there whether it's.
Internal productivity or what else is has led to an expectation of better margins for the full year.
Dan you had previously baked into guidance.
Nathan as Tom I think what we're experiencing.
What we saw and you saw us a lot of than the first half, but take North America. As an example, we had some benefits from Lord synergies pulling into what we had originally expected the win strategy and then we're doing there we've seen a lot of helping kaizen activities.
All of our plants on international.
We had very strong Q2, driven somewhat with higher volumes versus guide, but the same thing for international.
Isn't activities the when should we had the benefit of prior restructuring.
That is playing through for US there and I think it just gave us confidence that when we looked at.
Our second half that we could continue that in the second half the organic growth is slightly different slightly worse.
In the prior guide, but we didn't think it was enough to where we thought we had enough other positives to offset the and to to improve the margins.
Okay. Thanks, very much for taking my questions I'll pass on.
Thanks Nathan.
Our next question comes from Joe Ritchie with Goldman Sachs. Your line is now open.
Thanks, Good morning, everyone on Joe.
Tom I just wanted to clarify that the Max comment that you made.
Thank you said that it impacted QQ and so.
If it did like what kind of impact could it have on Twoq, you and then secondly.
As you said you think about the zero for the second half of the year as it just is it just fair to assume that Airframers have inventory on hand, and Thats why the Max is going to zero in two age.
Yes, So let me just Joseph Tung budget to ask because I wanted to give a little bit color as to why we did what we did vote on the Max first given boeing's public comments about the on grounding occurring sometime in the middle a year, we felt that hey, there's a lot of uncertainty there even Boeing doesn't fully know exactly what's going to happen with that one suppliers will turn.
Back on.
And that we really wanted to de risk.
The guidance for the rest of fiscal year, taking the Max.
I also felt that it wasn't fair to our shareholders to have it in and then be guessing at what is going to be what kind of ramps that could be as photos.
The service to our shareholders in the it would be much.
Better perceive stronger by taking a completely out of China, we could demonstrate.
The guidance that we're going that we have here even without the the Max.
So what we did as some of the production pause officially started January 15. However, when you look at what hit US in Q2, there was some minor.
Slowing of orders both on the airframe and engine side was approximately $5 million.
In Q2.
The total amount for us with a four year.
Including Q2 in the second half as a as a $150 million impact for the mix of $50 million earnings, obviously, lower volume and the lack of absorption associated with the.
But obviously Boeing on those as well as all of our customers are really important knows we're going to be there to support them whenever the production returns that happens to return soon but what we have in this guidance will be there for them.
And then to maintain we're reallocating our team members to other programs as much as possible to help with backlog and potentially accelerating schedules of our customers.
Amid the so this was a strategy and the thinking behind the mix.
That's that's super helpful. Tom and then maybe if if you could just kinda talk about the North America weakness in a little bit more detail.
Just just parsing out like what you're seeing.
From a distributor perspective versus what you're seeing on the heavy industry side and how you expect that to play out.
And your and your fiscal second half.
Okay. So Joe what I'll do is I'll go through North America, but I'll, just maybe run through the whole.
Company on markets, because it's typically a question people want but our thinking on North America.
We are guiding 100, bips lower than where the Pergo. So was minus six now it's minus seven I'm just talking about the second half because obviously thats will slow.
Orders were down from 100 basis points from Q1 to Q2, so that's probably the most direct linkage there we had distribution weaker we have the December ism at 47.2.
All those factors plus obviously every every time, we do this would do a bottoms up we look at.
What are thinking was there.
I went through international but I wanted to make a comment about distribution when I think about.
North America distribution and whole for the whole company was down mid single digits about 400 basis points worse than Q1.
And this decline pretty much sequentially through the quarter and really was broad based remote from an end markets standpoint.
International distribution was worse than North America, but about all the regions went down and equally approximately.
Going Q1, Q2 in North America, but clearly we think the holiday timing.
Kurt.
We had two Wednesdays involved there for Christmas and New year's day.
Really what we saw within customers is that drove extended plant shutdowns and our distributors as a result of his broad market.
Base decline and the extended shutdowns.
Look the opportunity to re size their inventory.
So if you think about down mid single digits on distribution.
Our best Intelligence and again this is an estimate it was about half of that was de stocking half of that was tight end markets.
Maybe if I go back to just total end markets I'm, just going to list all of the positives and negatives and I'll give maybe little more color on on the specific end markets, but on the positive side for the quarter Q2, total Parker aerospace mining semiconductor lawn and turf and marine.
The minus was distribution what it was was just talking about is not a market, but important channel dulles.
Mills, and foundries refrigeration machine tools tire and Rover power generation Telecom life Sciences oil and gas automotive heavy duty truck construction AG.
Forestry and real this is too on the list them a negative side.
So let me give you some color close to kind of lifted up to.
The major segment, so I talked about distribution.
So no if I just characterize industrial end markets for those maybe not familiar in all of our industrial markets are basically things without wheels things that don't move equipment it doesn't move.
That was that improved soon industrial end markets when from minus nine to minus six and a half.
Total company. The positive side are there was low single digit improvements in mining and semiconductor semiconductor starting to come back on the negative side low single digits I'm, just going to kind of give you buckets low single digits was mills.
Oil and gas mid single digits was refrigeration power Gen General industrial things greater than 10% declines for machine tools rubber entire telecom and life science.
On a mobile side again equipment with wheels.
So let's go from minus six to have in Q1 to minus 14. So that was the big shift a lot of that was driven in North America.
And the positives there was a mid single digit improvements in lawn and turf.
On the negatives kind of two buckets here high single digit decline in forestry button almost all of them.
End markets with mobile or kind of in that 10% to 20% decline range.
Automotive construction of new truck rail and material handling.
And then Kathy alluded to in her comments about aerospace.
Rounding to the nearest have.
Plus one of the half we had commercial OE minus three military OE post to commercial and MRO, plus 15, and military narrowed down down five that it out one of the half so thats kind of the spin through the end markets showed a copy of a follow up to the.
No I think I'm all good thanks, Thanks, Tom.
Thank you Joe.
Our next question comes from Nicole Deblase with Deutsche Bank. Your line is now open.
Yes, thanks, good morning, guys.
During the call.
So I guess, maybe focusing on the North America orders, we already talked a little bit about what happened in international but what's your view on whether or not order activity has bottomed and maybe thinking about how January has trended as a way to characterize that.
Nicole is Tom So if I was to kind of do what I did and I won't go didn't assume kind of ditto for.
For North America, but if you look in North America industrial.
One Q1 in Q2 fiscal about the same minus five an a minus six so basically the same.
Quarter over quarter. The mobile is what declined the most one from minus five to minus 16 and all those same at market. So that just described for the total company is what we sold there.
Then on distribution.
When from.
Okay minus two to about.
It was flat in North America to about minus four so.
Q2, so that was 400 Bips in North America loan we went.
So that was kind of how we look at North America.
I think in general we think about organic growth for the year.
We're really in our guidance reflecting.
Early Q3 is kind of our bottom.
In what we see at this point.
Okay got it that's helpful. Thanks, Tom and then just a quick one on the deals I think you guys said that you're expecting 18 million of synergy is all it all back from your prior guidance can you just say what you realize in synergies in the second quarter and whats remaining for the second half.
Yeah, we saw a little bit of the synergies for Lord pull into the second quarter the timing.
Ahead for US, we got them sooner than we anticipated and and so were then factoring that through the rest of the year as well so a small amount in Q2 with 18 million.
The full year effect.
Got it makes I'll pass it on.
Thanks Nicole.
Our next question comes from the line of and dining with Jpmorgan. Your line is open.
Hi, good morning, everybody.
Joining me.
Good morning, and Tom would you just comment.
The notion that one you've taken the downturn in aerospace because of the 737, Max I couldn't that also spill over into your industrial business more broadly just from the supply chain in the supply base as they have to shut them production.
And as Tom we did factor that in.
Because people don't realize.
We have a fair amount of work that goes the aerospace related and engineered materials and filtration that goes into the US with 150 million includes the industrial piece and the and just in round numbers about 10% of that is industrial the other 90% as you might imagine the bulk of it is in the aerospace segment, but we did we did factor in.
And.
[music].
The amount of onboard type of work, we did and then the I think what the other part you referred to as the things that might be in the factors of our suppliers. That's that's factored into the Guy we have.
Most of the business.
Okay I appreciate that and then just circling back on the fed topic can you give us a break them.
The 150 million how much of that legacy Parker and how much is exotic. So you have exotic is 60 million of the 50.
But 156 did 150 60 of the 150, yes, Okay and that includes both direct shipments content on the aircraft as well as shipments to the engine yes.
Okay. I appreciate that I, just wanted to get a color and I think you've given us most of everything else we need so appreciate that.
Good Thanks, Dan.
Our next question comes from Jamie Cook with Credit Suisse. Your line is now open.
Hi, good morning, and nice quarter I.
I guess two questions. Tom you know just in terms of you know as as we exit 2020, potentially you know comps get better when we start to see organic growth reignite again.
Based on what you've done with the acquisitions and when is there should we be thinking about incrementals any differently and I'm wondering.
If there's a difference on how to think about things you know industrial versus aerospace I guess and then just yeah. My second question just relates to your portfolio given some of the announcements recently one do you see any change in the competitive landscape or could that be a positive for you would eat and selling their hydraulics business and.
And.
Just you know your view of that.
It is there any change in your view I guess of your of your portfolio in terms of potential divestitures. Thank you.
Okay, Jamie as Tom So I'm going to work backwards on the questions I'll start with.
I think what you're referring to is that Dan pause Eaton.
Announcement.
I would first say we weren't surprised.
Given I think the portfolio that even hasn't I think some of the.
Our inclinations as to what they might do with it we have a lot of respectable Dan inflows and eating.
And our view strong competitors make you a better business. So we welcome we welcome the challenge we like our chances we believe that the breadth of our technologies the growth that we have with the motion full technologies and the one strategy, it's going to allow us to compete effectively within a company in our space.
We are confident going forward, obviously, when you have these kind of transitions.
Having done a lot of these type of acquisitions ourselves, we recognize that theres.
ER stress in the system when that happens and then maybe potential opportunities to to look at share gain.
And so we will obviously be doing everything we can't optimized.
And take advantage is a.
Good competitive tension in the system. So if I move back to maybe your other two comments on income.
Decremental Mros was kind of looking forward I still think plus 30 in general is a good number if you doing it over multiple years.
But clearly coming out of a downturn.
As we've talked about in the past you would expect to see that would be north of a plus 30.
Because you're going to get some help us as the volume comes up and you're going to.
The only adding incremental.
Variable costs and doing a very efficiently as you do that so I think.
The first couple of quarters coming out tends to be stronger than what I would say you'd see overhaul cycle and then the whole goal of these acquisitions and they will but maybe I could just comment in general about them I'm extremely pleased with the progress. We've we've acquired group products and technologies with the best thing that we've done as the talent that's come up.
The organization from these two businesses. It was on full display when we hit the leadership meeting with about 80 people from both businesses and together.
And if I look at lowered.
Lower does is ahead of where we would hope for those low single digit growth and that compares to a minus six and a half for total Parker. So it's doing what we wanted this more resilient.
What we're seeing from the aerospace thermal management of the structural adhesives portal Lord is really doing quite nicely, we were very confident alone or 25 million of cost synergies.
We pulled in the synergies into this year numbers exotic the team is doing a great job some through sort of Max's everybody's hands.
It's something we can't control, but the team there was effectively redeployed everybody that was on the Max.
Weve reported on to.
If 135, and we're going to do some minor capex to help facilitate the but we have them.
35, we also have.
The repair depot, starting up and they have 135.
We've got one of the big synergies, which we didn't really disclose and our revenue side is the fact that we have is well established aftermarket organization customer support operation as part of legacy PARP Aerospace that can help with the commercial efforts of exotic to go capture those legacy engines and to look for spares and repairs.
Theres for the type of products. So those were going to do that we're going up trying to pull them in and everything I. Just described on that is not going to really help so much exotic neverwet 20.
But it's really positioning for for 21.
And the Max will come back and so I think we had the benefit there is potentially a one two punch with exotic Mexico is back and that we've also got additional people training and some of the F. One third if I will depend on our customer, allowing us to accelerate to schedule think the.
Signal that they would but obviously if some other supply becomes a constraint for them the they might slow us down, but thats an opportunity to explore different 30 foot. So those kind of a long winded answer on acquisitions, but if you think about them in aggregate.
There are coming in they are going to grow faster than the legacy Parker and that was the whole reason why we acquired them you see the incremental EBITDA, what it's doing for US is one of the slides the Kathy head. So we're still very positive dumb acts as a short term blip.
On the path to produce strong future for them.
Thank you I appreciate the color.
Thanks, Jamie.
Our next question comes from Jeff Sprague from vertical research. Your line is now open.
Thank you day everyone.
Just a couple of things for me first just back to Lord Tom can you address how it's performing kind of in the automotive markets and.
You had pointed to kind of the ability to outgrow through thick and then we've heard a lot to.
Kind of negative automotive comments out of the three EMS and Dupont's here. This earnings season, I Wonder how things are really progressing for that slice of the business here. So.
Getting in specific numbers.
Just take two or three major buckets aerospace is a pretty strong growth.
For Us and then.
Industrial piece would be slightly negative and automotive would be neutral to slightly positive and what's really happening there's the.
The technologies, we have there that are more electrical electrification type of technologies, which would be thermal management and structural adhesives are offsetting the weakness was that we have in the traditional adhesives and coatings that might be more supplied into the internal combustion engine. So I'm really happy with what they're doing coming in at low single digits.
And that's even factoring in some.
You know weakness in Asia tied to the Corona voters, so those debts, obviously, a new element the nuts.
That's an unknown still has yet to be determined, but I'm really happy with what they're doing out of the gate.
No I was curious back too.
The Mac situation you provided a little detail on the read the deep redirect to the F 135 et cetera, but have you actually.
Shut down Max related production or are you.
No continuing at some low rate to kind of keeps the line warm how do you have you kind of manage that operationally to make sure you are.
Ready to go if you get the signal.
Well, obviously, that's a balancing act so we have redeployed to people. So we haven't lost that skill set for the most Parker some we could not retain unfortunately, but we've retained most of them. So we have the skill. So people was obviously, we'll make sure we maintain and aid as equipment that needs to be maintained so we're ready to go do.
With our supply chain, we're making sure that there are ready.
And able to supply to us when we need to so we need to carry a little extra inventory to be ready, we'll do that our suppliers or will be and ready to.
But I thought it was prudent for us and for our shareholders to not be trying to chase and guessing one the Max was going to start pick up so we didnt built into guidance, obviously internally, we're going to make sure. We built to supply chain that can respond pumps at Boeing needs to give us some.
Lead time, and they recognize and they will.
But we won't be there to respond when Boeing.
Gives us a single signal.
Great. Thank you.
Thanks, Jeff.
Our next question comes from Joel Tiss with BMO capital markets. Your line is now open.
Hey, guys hasn't gone.
Turning to oil.
We've done a lot of good information here. So just I'm just a couple of like whatever clarifications I guess.
Are you guys I'm, giving any updates on on your debt to EBITDA like where do you expect to be by win or is that more for the analyst day.
I can talk about that for your Joel as we finished the quarter considering that we don't have a full 12 months of EBITDA from the acquisitions in there. We're currently at a gross debt to EBITDA as is a four times.
And our net debt is 3.6 times, we expect by the end of the year, we'll have the gross debt down to 3.7 and the net debt down to 3.3 again, that's not that only has a stub period of EBITDA for the acquisitions in there so that it actually next year, we'll look quickly look.
It will better once we get 12 months of EBITDA.
And is there a target before you'd look at acquisitions again do you need to be closer to two or is it more two and a half Joel as Tom but I.
I think is 2.0 is what we'd like to get too, but obviously is as we start to GLEI closer to that we're going to obviously, our interest is going to get more keen to key thing on what we've learned and it's not a new lesson.
Over the years is yet to continually work that business development pipeline. We are working it now today as we speak building those relationships understanding the strategic.
Fits to our company and so we'll continue to do that even though we're not ready to action that thing well continue to work that pipeline, but yes, we need to get closer to two.
When we get back in the game.
Okay and just one last quick one you Jamie asked about Pls and you Didnt really.
You Miss that part of the question I just wondered are there any kind of bigger chunks that you guys, you're seeing that that that could accelerate the restructuring or everything's pretty much as you expected and and we'll just.
Keep the incremental improvement.
Joel help me with appeal US open product line simplification, so looking at individual product lines and having them off for finding a better owner for them. Okay. Good. So yes, that's going to be a big we will talk a lot about that.
IR day, but the Cliff notes is that still really big part of our strategy going forward and we've added two was simple by design so still looking at.
Well I'll call organizational structural change number divisions in groups, but that does play through for the most part, but we continue to look at that book to other part of that that will look at as.
Just within the divisions or do we have the right staffing elements, what we call competitive staffing analysis looking at debt versus best in Class example, so thats item. One item three is I think what you are using what we would call 80 20, and that's still early days, we have lots of opportunities and Thats, a big part of how we're trying to simplify things right.
No complexity and the processes that structure that's that service.
The third element is simple by design.
Which gets at approximately 70% of the product cost is tied up in how we design things in first place. So you can have the most fantastic lean system, and kaizen and doing only sort of simplification things I just talked about but a lot of your costs.
And your speed within your factors your speed of service customers is stuck in concrete vision, how you design and product. So we'll go through the in a lot more detail at IR, Dave and we think we're one of the first People's thinking differently, how we want to do that it'll be a combination of process and software things that will elaborate more detail and.
Thats, obviously, that's a little bit longer term because you got to do that as you design new things Theres. Some things we can do going backwards was existing designs, but that will set us up nicely for margin expansion and really I think speed.
In the future.
Okay, great. Thank you very much.
Thanks Doyle.
Our next question comes from Julian Mitchell with Barclays. Your line is now open.
Hi, good morning.
I think Tom you'd said that.
Stocking was about a two and a half point drag on sales in the fiscal second quarter.
So just wondering what your guidance implies for that destock aspects in the second half please.
You know that one is really hard to predict exactly how de stocking goes and doesn't go.
To be honest I would not have expected given what we were trending for the quarter.
This habit step down about 200 Bips we are.
In round numbers were about minus 100 de stocking in Q1 snow around minus 300 in Q2.
It has to eventually find equilibrium and I would.
Based on probably as a Q3 being our bottom our hope is that the destocking when it bottom in Q3, then everything else from our distribution channel would be end market related as we go into Q4.
That's helpful. Thank you and then my second question just on the International Industrial segment.
You gave a lot of good color on the topline pieces moving around that I just wanted to ask on the margins.
'cause it looks as if in terms of the margin rates.
Full year guidance for margins and international implies a step down.
Sequentially in the second half from the first half second half versus Q2.
No. The revenues just in dollar terms should be going up so I just wondered if there's something around.
Mix or something with the Asian production impacts that you were talking about earlier.
Dragged down the margin sequentially, even if even with the higher revenue you hit you hit the nail on the hub so percentage wise organic goes down 11, and a half to minus 12 for for international but I think in particular, what you're seeing there because we've got a loop our assumptions.
As a little weaker decremental.
Go from what the decremental in the low Twentys.
The first.
First half to kind of the low thirtys and the second half for Asia really influenced by how we looked at what.
The risk associated with the uncertainties around in particular Asia, the krona virus and just the unknowns, they're recognizing that as you extend Chinese new year shutdown nothing's happening there, let me start back up it's going to be much more inefficient.
Our belief on the startup than in previous times coming off of Chinese new year. So that's really the difference Julie.
That's great. Thank you thanks Julien.
Our next question comes from Andy Casey with Wells Fargo Securities. Your line is now open.
Hi, Thanks, a lot.
It.
First question on Europe , It Doesnt seem like that's trending any different than you expected, but are you seeing we're seeing some.
Now improving macro stuff are you seeing anything on the ground that would follow that.
And is Tom we saw some slight improvement in Europe , if I look at.
EMEA as as a total region.
Industrial one from minus 13.
To minus 11 in Q2 so.
Still soft, but I've got a little bit better.
There was no particular end market that could have lifted up sand that was what drove it just was kind of really the whole breadth of it.
Getting a little bit better mobile was basically the same minus 13 slight improvement last 12 and have them Im rounding to the nurse have.
So I would say fairly consistent with some minor minor improvement.
Okay. Thanks, Tom and then.
I think last quarter.
You called out.
Phase three phase, one or sorry phase three phase for being.
28% in 48% respectively.
It sounds like North American distribution had had a little bit of a leg down could you.
End of help us with how phase three and phase four trended in Q2, and how that May change. If you exclude the North America, North American distribution piece.
The into so that the distribution as distribution goes it really influences. These four phases I think what we've seen known and looking at these phases things can move kind of jockey back and forth between phase three and phase for depending on what's going on and that's what we saw in this last quarter distribution one from thieves for.
In the prior quarter to phase three and distribution being like 37 points of art.
Excluding aerospace.
It influences quite a bit so if I just contrast, freia phase one that's accelerating growth.
It was plus three I'm talking about the current quarter decent growth phase two is plus 70 foot was 17% of our sales.
So in decline phase three was 72% and that main reason why that moved higher was because distribution moved moved into there.
Automotive moved into their automotive was in phase for the balance being a percent of our sales was in phase.
For discern decline so the big shift.
Predominant was distribution.
And automotive moving from four to three.
Okay. Thank you and then one last one an assessment attempt 'cause irrespective of what you say will be at the Investor day.
But should we expect any significant changes in the longer term goals that you previously outlined.
Outside of potentially EBITDA margins, which are.
What kind of track to may be exceed it.
Given.
Big slug of amortization that you're carrying now.
EBIT margin [laughter].
Seems like it it might be more of a challenge.
But anyway should.
Your line up looks great it looks like you're gonna be.
Providing a lot of detail, but at the end of it.
Should we expect significant changes in the longer term trajectory.
And as Tom your very perceptive, obviously, the the amortization headwinds castigated numbers by segment. If you look at that on a steady state round numbers.
But 100 Bips headwind that we now have with amortization.
Before that we didn't have before we set those goals.
But I would the short answer to your question is no you should not see any big changes that obviously EBITDA needs to be looked at given given what's happened and we will look at that and I were looking forward to sooner, but it because I think you're going to see and excited team with an exciting lineup.
With that I think more information than we've ever shared with you and we're going to get a chance to talk about the three windstream to 3.0 in a lot of things that I think are going to be very compelling.
People want to have to be excited about our current shareholders and then hopefully future shareholders too.
I want to own Parker hannifin.
Great. Thank you very much.
Andy Liz I think we have time for one more question.
Our last question comes from the line of Stephen Volkmann with Jefferies. Your line is now open.
Well, just just slated and thank you good morning.
Can I just ask.
I wanted to go back to something you were talking about earlier when I think Joel was asking you about product line simplification and you talked about 80 20.
From a lot of other companies who have instituted this you know a big part of the process was.
Hi, being off fairly chunky size of revenues that might be underperforming or might just not have the potential to perform over time that you might have thought you'd made lots and lots of acquisitions. So I guess I was just trying to get a little more clarity. There can you picture Parker drilling through a process of.
Divesting a significant chunk of revenue to kind of you know prepare the ship for higher returns and higher growth going forward or is that the portfolio kind of where you wanted and there might be some tweaking, but nothing major.
Yes, Steve is Tom So that's a good question on and actually that's probably what you'll was getting out and I didn't completely answer.
I think the short answer is no you're not going see any major chunks come off you might see some minor tweaks the big difference between say, how we're deploying 80 20, we're deploying it the same way that people that you've seen do before like they tw et cetera. The differences our portfolio. Our portfolio is built with a lot of complementary intra interruption.
Connectivity there.
And with 60% of our revenue coming from customers that buy from for more of our technologies.
Our revenue in the tail is very much linked other revenue throughout the company. So it requires a little more thoughtful approach, we Kansas Lop off those tails, then hey, that's the end of that because the tail for one division might be an item for a different divisions. So we're doing that for a very thoughtful standpoint, we will still get the same kind of.
Speed and margin improvements, we're just you're not going to see really any kind of revenue.
Changes on that we don't see it as a headwind to revenue it will be neutral neutral on a revenue side you might see some minor things that we do on the most who is going to be just helping customers through different ways to deliver.
Different pricing things was different things, we can do on alternative part numbers to satisfy their demand we want that still take care of customers and create a great experience for them, there's going to find more efficient ways to do it.
Great. Good good color I appreciate it thanks.
Thanks Steven.
This concludes our question answer session and the earnings call. Thank you everyone for joining us today.
Covenant, Jeff will be available throughout the day to take your call should you have further questions. Thank you enjoy the rest of your day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[music].