派克漢尼汾 (PH) 2003 Q4 法說會逐字稿

Please stand by for realtime transcript. The captioning will begin momentarily of the Parker-Hannifin call.

Good morning. My name is Stephanie and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Parker-Hannifin fourth quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number one on your telephone key pad. If you would like to withdraw your question, press the pound key. Thank you. At this time, I would like to turn the conference over to Pam Huggins, Vice President and Treasurer of Parker-Hannifin. Miss Huggins, you may begin your conference.

Thanks, Stephanie. As Stephanie mentioned, this is Pam Huggins speaking. I think most of you know that this is my first teleconference.

Previously, Tim Pistell, who has been promoted to our Chief Financial Officer, conducted the teleconferences in the past. I would like to mention that Tim will, however, join us for the open question and answer session at the end of the teleconference to aid in questions that may be asked in particular with respect to the history of the company of the prior three quarters. Prior to commencing with the earnings release, however, I have a few comments. First of all, the slides will be available on the web site after today's presentation for your viewing. It's at phstock.com. The second thing that I'd like to mention, if you haven't already done so, would you please register at our web site. This will give you the ability to receive email alerts on an ongoing basis. Finally, I'm going to follow with Tim's practice and ask you that you not ask more than one question in the q & a session to give everybody a chance to participate. Moving forward, again, once again, we've presented the disclosure statements for you. There have been a couple changes in the disclosure statement, so I ask that if you haven't already done so please take the time to read it. Moving to today's agenda, we're going to cover pretty much in line with what we've done in the past, a summary of the earnings per share for the quarter and for the year. We'll also provide an update on acquisitions and divestitures followed by the financial results for the quarter, for the year and by segment.

I will then cover balance sheet and cash flow statement and I'll finalize with what most of you are probably looking forward to, which is the fiscal year 2004 outlook. Subsequent to the outlook, the session will be open to question and answers. Moving to the next slide, nonGAAP financial measures, I just want to point out that this presentation has been prepared in accordance with GAAP. All of the numbers represented are as reported. The only exception to that is on the sales. We basically reconciled sales on a GAAP basis to that without acquisitions and divestitures and currency to allow you to be able to evaluate the changes in sales on a comparable basis from period to period. Moving to then the financial results for the fourth quarter, specifically, earnings per share, you can see that in the fourth quarter of fiscal year '02, we reported negative $.10 cents in earnings. Again, this is on a reported basis. Moving up to $.42 cents in fourth quarter of fiscal year '03. So on a reported basis, shows fair good improvement.

Below, there's a footnote where we specifically outlined for you the business realignment charges as well as the good will impairments. Most of you are familiar with the good will impairment that was taken in fiscal year 2002. Somewhat unique to this year, you'll also see that there's a gain on the sale of a noncore business. I'll get into that a little bit more when we get into the acquisitions and divestiture slides. Moving to earnings per share on a year-to-date basis, again, fiscal year '02 on a reported basis, $1.12 in earnings per share moving up to $1.68 for fiscal year '03. Again, the items have been outlined below for you with respect to the realignment charges and the good will impairment. Somewhat different on the slide versus the fourth quarter is also an equity investment adjustment for '02 and '03, which relates to a Japanese investment that is basically counted for equity method. We've put that there for your convenience to be able to see the difference in '02 and '03. Moving to acquisitions and divestitures, the only acquisition that we made in the year you're familiar with. It was reported in the third quarter earnings release. But was actually acquired in the fourth quarter.

It was reported in the third quarter because it happened prior to the earnings release. But at any rate, this is MTS Automation, a $25 million company. We see this as an important acquisition and the fact that it will aid us in the building of systems, it will help our systems business and automation group. They're in the custom motor business, a company that makes Servo and linear motors as well as Servo and digital controllers. We also concluded that the divestiture in the fourth quarter, it's called United Aircraft Products Division. It's a $20 million business that was considered nonstrategic noncore to Parker, and they were in the business of making heat exchangers in the Aerospace industry.

I just want to point out here that this particular divestiture counts for the gain that I talked about in the fourth quarter. Now, moving to the financials starting with the fourth quarter and been moving to a total year basis. You can see that looking at the top line on fiscal year 2003 sales are fairly consistent from year to year, however, once acquisitions divestitures and currency facts are excluded, you can see that sales actually went down for Parker-Hannifin by 4.6 percent. I'll get into the reasons for this later when we move to the segment data, however, I just want to point out that the currency effects, you can see, are fairly significant in the fourth quarter alone, due basically to the strength of the Euro. On the income statement, I'm not going to go through this line item by line item for you, but I'll call your attention to the very bottom line net income. You can see in fiscal year 2003, on a reported basis, net income was $49.1 million versus $11.8 million dollar loss in fiscal year 2002. The highlighted items significant to that are, one, the good will impairment in fiscal year 2002 of $39.5 million. As you can see, that doesn't repeat in fiscal year 2003. Basically represents the write-off from a semi conductor business as well as a noncore business that's included in other segments. Also, I want to highlight the interest in other income lines. You can see that that's going up in the current period and that's a result of the gain on the sale of the UAP Division, the United Aircraft Products Division that I mentioned earlier.

However, the most significant item on this particular slide is the cost of goods sold improvement. You can see that cost of sales improved one and a half percent in fiscal year fiscal year 2003 over 2002. We think this is fairly significant in light of the depressed economy that we're operating in. We've incurred about $60 million in increased pension, medical and insurance costs during the year, which is included in the fourth quarter as well. And I think what this points to is that you can clearly see that our Wynn strategy is at work. Moving to sales on a year-to-date basis, we're up 4.3 percent, however, once again, reconciling down after the effects of acquisitions, divestitures and currency were really down one percent. Again, the currency facts are quite substantial due to the strong Euro. And a sales decrease year-to-date of negative one percent, you know, not bad, considering the Aerospace decline that was in the current year as well as the depressed end markets that we operate in. On the income statement on a year-to-date basis, again, I'm not going to go through this income statement line item by line item for you. I'll point out the major or the highlighted items. Net income again going to the bottom line. You can see that net income improved by $66 million going from $130 million up to $196 million. A 51 percent improvement. The most critical items to note on this particular slide again, is the good will impairment loss that I've been speaking of. Again, not reported or reported in 2002, not repeated in fiscal year 2003. Also, the interest in other income line, again. The sale of the UAP Division, United Aircraft Products Division is included in that particular note, but then again, the most significant item is 40 basis point improvement in the cost of sales.

Again, with the decline in the Aerospace margins and pension insurance and medical of $60 million, you can see that we're seeing some results of our Wynn strategy. I will now move to the segment data for you. And right away, you can see that in industrial North America, the sales change for the fourth quarter negative eight percent. Most of you know that orders fell off in February, and unfortunately, things really got worse for us. They never seemed to recover. So this eight percent decline in the fourth quarter is really the result of that. The one thing that I do want to mention, although not probably that significant, is in the fourth quarter, we did see some pickup in the semi conductor business in 2002. That really never did take place, and so on a comparison basis, we, you know, it stayed down and that's what we're seeing. Also, the telecom and egg markets continued to decline. However, not looking good in the fourth quarter in terms of sales, there is a bright spot here. Looking at the margins, you see a decline of going from 5.1 percent in the fourth quarter 2002, down to 4.8 percent.

Even though that's a decline of 40 basis points, I think once you look at it before the realignment charges, you'll see that the margin is fairly flat. Moving to year-to-date sales declined 1.7 percent. Not bad, when you look at the end markets that we operate in, the depressed economy, the lower manufacturing indices and, you know, some of the numbers that are reported by the NFPA. But in spite of that small or relatively flat sales, we were able to increase the margins from 5.1 percent in 2002 up to 5.5 percent in 2003. Clearly again, as a result of the Wynn strategy working for us. Moving to industrial rest of world, things are even better. We have been saying for sometime that Europe doesn't look good at least going forward. They've been able to basically hold up during this depressed economy, although sales have only increased by 1.2 percent in the fourth quarter after the adjustments for acquisitions and currencies. You can see that we had a 2.6 percent improvement in our margin. This improvement has been realized basically on flat volumes and in a period, again, of increasing costs. Looking at year-to-date, sales are up 4.2 percent and again, margins aren't up quite as well as the fourth quarter, but 1.4 percent. And I think if you look at this before the realignment charges, you'll see that there's definite improvement in industrial rest of world. Moving to aerospace segment, this is pretty much in line with what we've been saying all along, tough market to work in right now, sales have declined 4.1 percent in the fourth quarter. You know that the decrease is mostly on the commercial side, particularly in the after market where Parker experiences relatively high margins. On a year-to-date basis, sales have decreased 5.9 percent. Obviously, the SARS impact didn't help Parker, and the Iraq War as well. Once that took place, orders decreased. Obviously, we saw a decrease in passenger miles and margins have continued to decline. This is pretty much, though, in line with our expectations.

I think that you've been hearing us say that. If you look at 2002, you can see that's from quarter to quarter. I think on a comparative basis, however, the margins are holding up fairly well, at least in comparison to what we're seeing out there. If you look at margins for fourth quarter, 13 percent in fourth quarter only decreasing 70 basis points to 12.3 percent. And then on a year to date basis, a little bit more substantial decreasing 200 basis points. Here is probably the appropriate time to mention that going forward our other segment that we've been reporting on included climate industrial controls and then a couple noncore businesses for Parker. Going forward, we're going to segregate this out, so you'll be seeing in climate and industrial control separately from those other two. So I'm going to start with climate and industrial controls, and in the fourth quarter, sales were down 4.3 percent after the adjustments for acquisitions and foreign currency. This slowdown is basically a result of the residential air conditioning. We've had a cooler spring, a cooler summer. And secondly, the decline in the automotive market. On a year to date basis, however, sales are up 3.7 percent. We've been able to hold margins up for the fourth quarter inspite of the small decrease in sales going from 9.1 percent up to 10.5 percent, 140 basis improvement. And on a year to date basis, again, 170 basis point improvement.

Again, just to point out, if you adjust for alignment, I think you'll find that improvement is pretty much the same. Moving to the final segment, the other segment, sales are up for the fourth quarter by 1.8 percent, down 9.5 percent for the year. The margin improvements in this particular segment are quite substantial. We've had a 320 basis point improvement and I think that you can see that even though these are noncore businesses for us, we're managing them well, and I think that, you know, management should be commended for the good job that they've done in this particular segment. I would like to summarize for you where we stand in terms of operating margins in industrial North America, we improved the basis -- we had a 40 point basis point improvement. Rest of world, 140 basis point improvement and in climate and industrial controls, 170 basis point improvement. And in other segments, 320 basis points. The only segment that we weren't able to increase margins in is the Aerospace segment. You can see a decrease by 190 basis points. I think in light of the fact of the environment with the Aerospace and flat sales volume and not insignificant at all, the increased medical pension and insurance of $60 million, we've performed fairly well. In total, you can see that it's only a 20 basis point improvement, but looking at the details, I think you can see that our Wynn strategy is working in all segments. Moving to the balance sheet, starting with cash, you can see that cash continues to be very strong for Parker at $246 million. In 2002, we were still in the commercial market. Having some commercial paper outstanding as of the end of June for 2003. We are no longer in that market, and pointing out, however, we did do some -- we paid off some debt. We paid off $165 million in debt inspite of generating this cash. So I guess to summarize, we've had $200 million in cash as well as a paydown of debt, so cash flow's been very strong and I'll follow-up on the cash flow statement with that. Accounts Receivable, relatively flat, however, the DSO has been consistent. Inventories were, obviously making improvement in reducing the inventories. They went down by about $55 million. We have seen improvement in our DSI. On the deferred income tax area, you can see that short-term income taxes went up, but however long-term decreased. The change in the deferred income taxes is basically the result of the entry that we made, the accounting entry in connection with our pension - minimum pension liability of this year. This might be the appropriate time just to go through that entry for you because as we move through this balance sheet, I think you're going to see that the pension information keeps coming up throughout the various categories of the balance sheet on the asset end, the liabilities side.

As a result of the minimum pension liability this year, we needed to take a debit to our equity of $297 million. Also, we had to increase the accrual for pension in post retirement, which you'll see when we get to the liability section of $410 million. To round out that entry for you, we also had an increase in the asset side or of deferred taxes of $128 million, and then because of the prior service costs, a credit to the intangible asset, which shows up in the other asset category of $15 million. You're going to see this come up again and again. Moving down to plant and equipment, we reduced plant and equipment by $40 million this year. Again, pretty much in line with what we've been saying all along. We said our Cap Ex as a percent of sales would probably come in around 2.5 percent. And that's where it did end up at. Good will is showing an increase of $25 million. This is strictly the result of the translation adjustment at the end of the year. And other assets increasing by approximately $79 million is a result of the $108 million pension contribution that we made. As you know, we never have reached our minimum funding requirement in relation to the pension. We have chosen to do a voluntary contribution of $108 million. Moving to the liability section of the balance sheet, again, as I mentioned before, we're out of the commercial paper market, so notes payable is up, however, long-term debt is down. Payment of $163 million. What's happening here, though,we have $375 million dollars of debt due in September, October and December. That debt has been reclassified from long-term into short-term. However, in the long-term section, replacing that $375 million is the $225 million of the medium term notes that we turned out in February. Wanted to take advantage of the rates at that particular time, so we turned out $225 million of ten-year notes at less than 50 percent. So basically, the 375 and 225 offset.

I'm not going to spend much time on accounts payable accrues, liability, fairly consistent, however, I do want to point out the pension and other post retirement benefits that I mentioned earlier. You can see the $412 million increase specifically relates to the pension liability. Shareholders' equity as well is down $63 million. Again, a result of our pension situation. $297 million, as I mentioned earlier, was the equity adjustment as a result of recording the minimum pension liability. Also included in there that I haven't mentioned is the translation adjustment on shareholders equity which was positive in the tune of $99 million. Moving to the statement of cash flows, you can see that net income higher in '03 versus '02. Depreciation and amortization lower as a direct result of the capital expenditures going down from $207 to $158 million. Also significant on this page are the acquisitions. You can see that as a result of the debt rating agencies, we haven't been making acquisitions in the current year. Like to point out that fiscal year 2002 was a record cash flow year for us, and if you add back in 2003 the pension net of tax, you'll see that we're right in line with fiscal year 2002. So we're very proud of our cash position. We're very proud of the cash flow that we've been able to generate. In times like this, that's where our focus has been. And I guess the last thing that I'll point out is under the debt section where it says payment of debt, $146 million, that's a little bit different than the number that I quoted earlier, and that's a result of the ESOP. On the debt to debt equity, financial leverage schedule in fiscal year '02, you can see we were at 36.8 percent. Our goal was to reduce that, and we made good progress on that every quarter throughout fiscal year 2003. Unfortunately, the number for fiscal year 2003 would look a lot better had we not had to adjust equity for the $297 million in relation to booking our minimum pension liability for the year. I'm not sure if I mentioned, but without those adjustments, the number would have been 32 percent. Now I'll move into the outlooks for you, which is probably what most of you are interested in most. Starting with new order rates, North America. As I said earlier, things became very soft for us starting in February.

Things continued to get worse and unfortunately things haven't recovered. Our industrial mobile markets, they appear to be steady but at a reduced level. Oil and gas looks positive, however, not until the second half of fiscal year 2004. We haven't baked that into our plan. We don't plan for a recovery, but from everything that we see, it should be positive in the second half. Ag. doesn't appear to be getting any better. It remains depressed. And vehicle automotive continues to decline. We remain, obviously, very cautious. We feel that our inventories are pretty much balanced with demand. We feel that with any tail wind at all, it should be very favorable to Parker and our capacity utilization rates, we feel that we've taken the appropriate steps to be ready should that turn occur. On rest of world, as we've mentioned before, we felt that Europe doesn't look good. It doesn't seem real promising. Rest of world has held up for us. Mostly due to Asia Pacific and Latin America. Europe, like I said, doesn't look promising moving forward remains fairly mixed. However, in the very near term for rest of world, it does look promising. On the Aerospace side, we continue to feel confident in the regional jet orders. Embraer's forecast for 2004 is 180, up from 133 in 2003. As you know, we have a large bill of material on that particular jet and so the regional jet area we feel confident will be fairly promising, however, on the commercial side, and in the after market where the margins are relatively high, things are relatively flat.

Military is slightly positive and we do feel that we will get a replenishment from that particular side of the business, however, based on our history, typically, that that doesn't come in for many months out. I'll move into the fiscal year 2004 outlook. Here's probably the appropriate time to mention that the press release that went out, unfortunately, the attachment to that press release indicated that it was the outlook of quarter to quarter. I just want to point out that it is the outlook on a year to year basis. So please note that. Sales growth, we've indicated that in the outlook going forward we're going to give you a range of percentages by segment. Here they've been duly noted. North America we're anticipating growth of two to five percent. And industrial rest of world five to eight percent. Aerospace we see a decline of five to eight percent. And climate industrial controls will be flat to a negative three percent, and other, two to five percent growth. I want to point out that our plan has been put together with no recovery. As you know, we've been out there before. We've anticipated recoveries going forward. Those recoveries didn't happen. As a result, we ended up being wrong. Our position now is that we are going to give an outlook without any recovery and that's how our plan has been prepared. Moving to operating income again, we're going to give you ranges, a percentage range of how we feel we're going to do in fiscal year 2004 versus 2003, and in North America, we see that we can increase operating income 20 to 30 percent. That same percentage applies to industrial rest of world. However, on the Aerospace side, we see a decline of 15 to 30 percent. Probably an appropriate time to point out that Aerospace started out last year very high. They came in very high in the first quarter and they continued to decline. Our position is that we feel that Aerospace has basically declined to its floor, but it will probably remain at that floor moving forward. Climate industrial controls are zero to ten percent improvement and in other, a ten to 20 percent improvement. We feel that we can make these improvements in spite of pension, medical insurance, incremental next year of $75 million, and we feel that we can do this obviously, with our Wynn strategy. Going below the operating margins, corporate administration, not significant or given the range of plus or minus five percent interest expense, the same thing.

Other, we feel will be a mindless fiscal year 2003 and we've outlined our tax rate for you of 34.5 percent. Moving to the near-term, looking at the first quarter going forward, we're projecting that our earnings per share will be 20 to 30 percent below the first quarter of 2003. This decline in the first quarter is primarily due to the Aerospace, approximately 75 percent of this decline can be directly related to that particular segment. The other thing is we're really going up against some tough comparables. We came out of the chute in fiscal year 2002 with really good results. So, you know, we don't see that moving forward, but the next thing that I want to point out, is again, the pension insurance and medical. We see that going up till - the incremental is even higher than last year, and like I say, our plan, it doesn't assume any recovery. Orders were flat in February. They're at a decreased basis and we're assuming that they're going to remain there going forward. I would like to point out, however, that going forward, the second and third and fourth quarter is obviously up. So we're down on the first quarter and then you will see improvement in the next three quarters moving forward. So at this time, I would like to open the session to q-and-a.

At this time I would like to remind everyone in order to ask a question, please press star then the number one on your telephone key pad. We ask that you limit your questions to one and one follow-up question. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Jeff Hammond with McDonald Investments.

Hi, good morning.

Hi, Jeff.

A couple of questions, I guess, on the guidance. If you look at fiscal '04, you know, guidance, is that -- does that incorporate any additional restructuring activites? Would you expect any further realignment charges?

Jeff, I think going forward, you know, in our particular business, we're going to always have summary alignment charges. Our view on that is what we've said going forward, I mean, you can see that we've taken a lot of realignment charges in the last two years, although the realignment is significantly done in fourth quarter versus -- or 2003 versus 2002. What we've said is that yeah, we're going to have some realignment charges but we expect to see savings that will offset those. So the savings in the cost will offset in the period that they're incurred in.

Okay. And then on the top line guidance, I guess assuming no recovery, I guess, you know, if I take the midpoint of your guidance for your sales collectively, it suggests that sales are up two percent. So does that suggest that the market is flat and you would outperform the market by two percent? I just wanted to understand, you know, from that angle.

Yeah. Well, I think yeah, you're right in your perspective on that. You know, also, in connection with the Wynn Strategy, we have strategic pricing going on. So we're expecting to see some improvements from that as well.

Okay, thank you.

Thank you.

Your next question comes from Ann Duignan with Bear Stearns.

Good morning.

Hi, Ann.

Hi. My questions are on the Aerospace forecast from next year the negative eight and negative five. That seems extraordinarily conservative given the fact that one would expect to see military after market pick up at least in calendar '04 and the Embraer orders should start flowing through your system about the same time. Can you give us some color on that and tell us why you think it's going to be so negative?

Well, I think that, you know, we've seen a decline in the current year. Every quarter of the margins have declined and I think our view on that, Ann, is that we've kind of reached the floor. We think that we've really reached the bottom on Aerospace and we're looking for things to pretty much remain flat going out. But what I need to point out, if you look at the first quarter on the Aerospace, it's really, really strong. And we're assuming that we're going forward from the fourth quarter of this year. Did I make myself clear on that or am I confusing you?

Yes, you are taking fourth quarter as the base and it's a very conservative outlook.

Yeah. And that in line with the fact that last year we started really, really high.

Okay. And as a follow-up, you know, traditionally, your orders have lagged ISM orders by three to four months. Why wouldn't we expect the same pattern going forward and that being the case, you know, isn't this guidance of zero recovery very, very conservative, also?

Well, I don't think we're denying that, you know, we're being conservative. I mean, as I said before, we went out there, you know, the economists were telling us things were going to turn, and we went out there and as a result, we took arrows. So I'm not going to deny that we're being conservative in our forecast.

Okay, thanks.

But really, Ann, we just don't see anything right now that's any different.

Okay so no improvement July month to date or, you know, the last couple of weeks?

No. We don't see any change.

Okay. Thanks.

Ann?

Your next question comes from David Raso with Smith Barney.

One clarification first, is the guidance for '04 off of the '03 base which includes all the restructuring charges?

It's off of the as reported numbers.

All right. So that's all in as reported?

All in, correct.

My question is this. If we use the midpoint of your range, and let's say North American Industrial, you're saying 3.5 percent top line growth. The pension hit is $75 million incremental, correct?

Right.

Now let's just assume North America gets its fair share, which probably gets even more than that. Let's say it gets 45 percent of it.

Mm-hmm.

Giving us 45 percent of sales, the implied midpoint operating income growth, if you adjust that pension hit it's implying incremental margins of almost 75 percent. And I'm trying to understand given the history we had the last five or six quarters with the margins, I mean, people talk about this being a conservative guidance.

I'm looking at the operating income and I'm trying to understand - the outlook here seems, I won't say optimistic, but given the last four or five quarters, it's conservative. Can you help me understand what's going to change so dramatically the last couple quarters to put up 3.35 percent growth and get incremental margins nearly 75 percent in North America unless my numbers are incorrect? All I'm doing is growing the operating income 25 percent, and then I'm adding on top of it the pension hit just to adjust for pure.

David, you need to take into account that our outlook are off of the as reported numbers.

Okay.

Okay?

And that's $155 million of North American profit, correct? Just looking at the press release. The operating profit for north American industrial for the year was 155.

Okay.

And if I grow that 25 percent, the midpoint of your range, and then add to those profits, taking away the incremental pension hit, it suggests operating profits of $228 million.

Well, there are a couple of things going on there. You know, the Wynn Strategy we've talked about, okay? We said that in '03, we were going to see a one percent improvement. We said that moving forward in '02 we were going to see a two percent improvement.

Well, I guess I'm just trying to understand, again, trying to put the guidance in perspective. Given we haven't seen that the last couple of years the margin improvements. I guess I'm trying to understand as -- I understand aspirational goals. I just trying to understand looking at the guidance --

But, David, you do see improvement in '03. I mean, if you look at the '03 margins and you compare them to '02 and you take into account what is really happened in terms of the pension medical insurance, I think you'll see that we really did improve them.

Okay.

We went from 5.1 percent up to 5.5 percent and that was basically on flat volume.

But on a 3.5 percent volume for '04, you'd have to grow the core margin 220 basis points from 5.5 to 7.7.

And we're saying that based on the Wynn Strategy, we're gonna see two percent improvement in fiscal year 2004.

To follow up the mix, you mentioned Semi, which is instrumentation, as we know, big incremental margin, so that's potential positive mix. So is there something we're missing to suggest that, again, this has got to be leaning on optimistic, the guidance. I'm just trying to understand what I'm missing here, because it seems a huge step function improvement. You said 40 basis points last year up flat and now we're assuming midpoint is 220 off of 3.5 percent growth.

Right. Well, you're surprising me a little bit because I guess I look at this as being somewhat conservative in line with everything we've done over the last two years. You can see the realignment costs that have come through. And we talked about this last year that we would see savings in fiscal year 2003 and 2004 as a result of the actions that we were taking. We're reducing inventory, and obviously, most important, is our Wynn Strategy moving forward.

And all along we've been saying that, you know, we're in a position finally to take advantage of that. We can see improvement this year as a result of the Wynn Strategy. The margins are up in every single segment other than Aerospace. And we continue to believe that we're going to see improvement next year as a result of those actions that we've taken this year and last year in connection with the realignment.

One last thing related to this, maybe the pricing increase July 1. I know all of your operating groups don't put a July increase, but some do. What is included in this on price improvement for North America?

Well, there's a couple components of that. One is that, you know, half of our business goes through distribution and price increases are always implemented. They vary maybe from January to July but price increases always go through. And we're not changing that.

The price increases that go to our distribution will continue to go through. The second component of that is the strategic pricing program that we have in place. And I think most of you are somewhat familiar with that program, but we expect to see pricing increases on, you know, not all business. Obviously, our OEM business is hard to get price increases but we think we have some real low hanging fruit out there with respect to our noncore business and our smaller customers.

I appreciate the help. Thank you.

Your next question comes from Andrew Casey with Prudential Equity Group.

Good morning, Pam, and good morning, Tim.

Good morning.

On the outlook, I don't know if you wanted to respond to Ann Duignan's question about July. It sounded like you did.

I don't remember now exactly what I was going to say to her. I think what I was going to say is that the ISM index - she was indicating that we were going to be fairly conservative, and I think my point was, you know, how do we know that that's going to stay there?

Okay.

How do we know that that's really going to stay up? I mean, it really isn't much different than believing the economists that the second half's going to turn around. We're not taking that viewpoint. We've said that before, and it's kind of interesting. Some of you think we're conservative and some of you think we're aggressive.

Okay. That's fair. If we could go over to rest of world. I think in the -- in your discussion, Pam, you said Europe doesn't look good going forward. Can you help me understand the fiscal '04 revenue guidance up 5.8 percent and are we looking at rest of world the same way we're looking at North America where you have a no recovery or--

Right.

Or flat market assumption? Is the five to eight percent with extrapolated currency translation benefits?

Some things are happening that makes rest of world totally different than North America. Maybe I can explain a little bit here. That's a good question. Europe, as you know, a big portion of our business early in the big three, the UK, France and Germany. And there's some things going on which you know in Germany that's causing some concerns. I think, Parker, we've been trying to address the situation. And as you know, we're moving a lot of our business to low-cost countries.

We're moving business out of Germany into the Czech republic. We're also operating in Poland. And also China. We have a couple businesses in China. We plan to expand in China. So some of these things are contributing to it, but also Asia Pacific and Latin America have been very strong for us this year. And we're saying that that's going to continue. We believe Asia Pacific and Latin America will continue to be even stronger. That's kind of where I was coming from. Europe, I mean, we don't see that as improving. Hopefully not getting worse, but Asia Pacific and Latin America we see as being strong performers.

Thank you.

Thank you.

Your next question comes from Steve Volkmann with Morgan Stanley.

Hi, Steve.

Hi, Pam. Just a clarification and then a bigger picture question. Can you just give us some guidance or ranges for the cash flow numbers for '04 as well?

Well, I think cash flow's going to depend a lot on our situation with respect to acquisitions, quite frankly. If you look at the cash flow statement, I think you'll see that a big portion of the improvement related to acquisitions, we've been basically out of the market on that, and so Steve, I think going forward, it's going to be very dependent on what we do in that particular area. As you know, our goal, though, is pretty much to come in line with ten percent of sales. We don't really see a change in that.

Okay. Would you expect a change in the acquisition willingness, shall we say next year? Is that what you are trying to say?

We're always looking.

Okay. All right. I want to comment this guidance conservative/aggression -- aggressive slightly different way. I'm wondering if it might make sense to talk about the amount of restructuring that's been done over the last couple of years kind of with an eye toward, you know, moving plants into Czechoslovakia and so forth.

You end up with inefficiencies and learning curves and so forth. Some of that gets written into restructuring charges and some of it probably doesn't. And I think it'd probably make sense to think about whether the '03 margins that we've just seen, for example, might be, possibly be viewed as kind of unduly depressed and some of the snapback that we're seeing in '04 simply just getting back toward more normalized levels for this level of business. Am I moving in the right direction here or would you take issue with that?

No, I think you're right on, Steve. I really do. You know, we're going to continue to have restructuring. We're going to pay as we go on that. So --

Is there any way to even try to guesstimate in the industrial businesses, for example, the amount of margin hit that you might have taken in the last year that wasn't in the restructuring charge that was due to moving suppliers into new areas and retraining new people and that kind of stuff that doesn't show up in the restructuring charges?

Steve, I wish I could answer that for you.

Your silent partner there doesn't want to take a shot at that one?

He's not volunteering. No, I wish I could give you an answer on that. That's a very good question. But unfortunately, I really can't answer that for you.

Okay, fair enough. Thanks.

Your next question comes from Gary McManus with J. P. Morgan.

Good morning Pam and Tim. Hey, the $75 million in increased pension and medical, is that spread evenly throughout the four quarters?

Pretty much, yes.

I know David was hinting at that. How would you split that out by the different operating segments?

Boy, I would say obviously, the biggest, the ones affected the most are obviously North America and then on the insurance side, Aerospace.

Okay.

I don't have the exact breakout for you, but I mean, obviously, the biggest portion of the pension costs does relate to the United States. And then the biggest portion of the insurance relates to obviously the aviation insurance with 9/11. And all of those good things that happened to us --

So if I look at percent of sales that would give me a pretty rough read of it, you would think?

Yeah, I would think so.

And just last thing. I think your guidance for the North American Industrial segment suggests that's somewhere close to a seve percent margin in fiscal '04. I was wondering do you expect that in the first quarter or do you expect margin improvement as we go through fiscal '04?

Yeah. I think if you look historically, you'll see that yeah, it picks up as you move forward in the quarters.

So there is -- you're not assuming that in the first quarter?

Correct.

Okay, thank you.

Your next question comes from Joel Tiss with Lehman Brothers.

Hi, how are you doing?

Hi, Joel.

Can you tell us why you guys are piling up the cash? Any plans to put it into the pension? I know you are hinting at acquisitions.

We plan to make another contribution in the current year. Fairly equivalent to what we made last year. As I said, we plan to make a contribution in the current year equivalent to the last year. There isn't any real reason. We have $375 million in debt which you well know is coming up in September, October and December. I addressed that. So the whole cash position will be addressed at the time that that debt becomes due.

Joel, this is Tim. And again, I've got a lot more history on this than Pam as well. And I think we have told all of you people that last fall it was very important for us to maintain our debt ratings. We met with the debt rating people and, you know, we came to certain agreements. One of which was to back down on acquisition activity.

And you know, you've seen the results of all that. It's continued strong cash flow from operations. And it's -- but yeah, we are, the $250 million cash we owe the balance sheet is $200 million more than what we need to run the business day-to-day. We have paid off all of the short-term debts in commercial paper. Paid down all what we can. We need to term some more out, but we're clearly in an interesting situation. Our leverage really is below our target level. We are scheduled to go back with the debt rating people and, you know, have these conversations to show them how we did and see what kind of capacity we have.

The emphasis around here now is to switch to growth. We think that we've worked extremely hard over the last 2 1/2, 3 years to get through this thing, and we think we've done all of the right things and we've got the house in good order. And so now, you know, now we need to get on with growing the business again. You're going to see -- I will tell you, you're going to see again, three legs to that. You are going to see renewed emphasis on internal growth product innovation allocating some funds there. You're going to see it in expanded globalization efforts and you will see acquisitions as well. So there is no intent to just stockpile the cash. We do want to put it to use.

Okay. And last one. Can you give us a reason why you can't tighten up your ranges on the corporate and interest expense? You know, minus five to plus five? It's a big range.

Yeah. I think that quite honestly going forward, I think that we'll do better than that. I mean, I think that's a good observation and hopefully we'll be pretty much in line with the current year.

Okay, thank you.

Your next question comes from David Bleustein with USB Warberg.

Good morning.

Hi, David.

I know your guidance contains no recovery, but can you back out acquisitions and currency out of the revenue assumptions and give us what you expect core revenue growth to be in 2004?

No, I think moving forward we want to stick to the reported numbers. You know, yeah, sales we back out for you here and there, but I think, you know, that is so speculative as to what's going to happen that I think we want to stick to the numbers we've given you.

Let me take a step back. Somebody asked about the industrial rest of world five to eight percent revenue growth. I'm sure there is a currency assumption embedded in there.

No.

No?

No.

David, this is Tim. The only currency assumption would be is that they would stay at basically the rates that they are. We don't try to speculate where rates will go to, so we peg those rates. We call them the Parker rates and we peg them in the spring and put the plan together. So there really wouldn't be.

Now, having said that, there would be a little positive currency in the first quarter at least because the Euro gained strength over time last year. So there probably would be a little positive, you know, the dollar - Euro stays where they are. There would be a little positive in the first quarter. That would go away quickly and there wouldn't be much else on currency. And we never assume any acquisitions. We only did this MTS $25 million we get a carry over, you know, $18 million of that. So there's very little on currency or acquisition.

Tim, should we assume inventory's flat over the course of the fiscal year or should we assume continued focus on inventory reduction?

I think you can assume that we're going to continue to take inventory out of the business as we have. We're going to continue to work on that to drive it down. So I think you can assume some reduction to that. But you have to remember in line with that, you know, there's always a corresponding cost.

Understood. What I'm struggling with, if you're not going to be producing closer to retail and if currency isn't that big a help and if there is no economic recovery built into your forecast, how are you driving five to eight percent revenue growth in industrial rest of world and two to five percent in North America?

Latin America and Asia Pacific have been really good performers for us. And we're assuming going forward that that will continue.

Okay. So you're assuming continued growth but just in those two markets?

Right.

Okay, fair enough. And last question. Are the prices with respect to acquisitions, are you seeing the prices of targets getting more attractive?

Tim again, David, because I'm once again, I'm heading up the transaction effort here. It's interesting. Frankly, I have to tell you with the cost of money so low, there are some properties that are going at very high multiples.

So on the one hand, you're seeing that phenomenon. On the other hand, you are seeing people who have just lived through three years of really tough sledding and are a little tired and are looking and maybe they're more reasonable on, you know, so in some private situations, I think you may have more realistic multiples, whereas in some of these more public things, you're seeing some pretty high multiples pay. So it's really a mixed bag.

All right. Terrific. Thanks.

Your next question comes from Mark Koznarek with Midwest Research.

Hi, good morning.

Hi, Mark.

Can you give us an update where we are in the Wynn Strategy, Pam, and get into detail and there's purchasing improvement, pricing strategy and then sort of the internal restructuring initiatives? You've gotten some traction already, I guess, on the purchasing cost side. What phase are we moving into now? Can you just, you know, kind of give us sort of an update overall on that program?

Right. I think that our stated goals with respect to the Wynn Strategy Program was that we would, you know, have a one percent margin improvement in fiscal year '03. Two percent in the following year followed by another two percent and then adding with a one percent improvement. We're on path to do that. Our strategic procurement program has been very successful. We've probably progressed the most with that particular program.

It's certainly well through North America moving to Europe, however, the other side, the strategic pricing, you know, strategic pricing is just a lot harder to do in many respects, especially in this environment. It takes a lot more analysis but we're moving well with that as well, ie, particularly in North America. Lean, we're moving with lean throughout the world. Obviously, harder program to quantify but we are making improvements. I think, you know, and I welcome you, Mark or any of you to visit some of our sites. I think you can see if you talk to the people on the floor, you'll see that this isn't something that's just talked about at the corporate level. This is something that, you know, infiltrates Parker-Hannifin.

There isn't any location that you can go to that I don't think you would hear people talking about that. So we're making good progress, like I said, on the strategic procurement side. Very good progress. We're seeing results. Strategic pricing a little harder to do, but we are making improvements in that area. It just takes a lot more analysis, a lot more time to do. And lean again, I think, you know, we're moving forwardly along in that area.

Just to clarify maybe a little bit or just to, you know, offer some insight. Would you say for the pricing and the lean we're sort of only in the second or third inning and there's a lot more to go or do you have a lot more traction than that?

I would say we're exactly right. We have a lot more to do. Procurement being the furthest along. We have a lot more to do in those two areas.

Right.

And just a final clarification on this lean. That includes sort of this initiative to sort of relocate to low-wage cost countries. Is that kind of momentum about going to be even in '04 than it was in '03? You know what I'm asking is if we shut down two plants in '03 in Germany for instance and moved them to Eastern Europe would we see the same amount in other two plants?

Yeah. I think you're going to see at least what you've seen in 2003 going forward. And more. And more. With China coming on board, obviously, in the Czech republic, we're doubling the size of the building that's there. Poland as well. So I think you'll see it increasing, Mark.

Okay, great, thank you.

Your next question comes from Joanna Shatney with Goldman Sachs.

Hi, Joanna.

Hi. I want to just go back to the order stuff. I can appreciate you had a tough copy a year ago and the month of July, so I know you are trying to be cautious around that. I was curious if you can give us commentary on the broader air markets. You talked about ag. and air conditioning and augo being the weaker areas but can you just flush that out? I know you are probably seeing uptick in truck. Also, can you speak to what sentiment you are getting from your customer base?

Okay. Really right now, and really what I think we've been saying all along, is that you are not going to see us saying much unless we really see it. When we look at our order log right now, I think what we're seeing is that there isn't an uptick at all. Obviously, there are some parts of the business in the truck market that are on the upswing, but over all, our end markets in general are relatively flat. We're just not seeing anything differently.

Okay. And can you just give us what the pension plan assumptions are in terms of asset returns and discount rates?

Sure. Sure. Last year, we were at 7.25 percent on discount factor dropping to 6.25 percent this year. On the long-term rate of return, we were at 8.5 percent dropping to 8.25. And I know those numbers have changed a little bit throughout the last few months as I've talked to various people but that's -- those are the final numbers.

Thanks.

Your next question comes from Barry Bannister with Legg Mason.

Yes, hi. How are you?

Hi, Barry.

Quick question for you. Excuse me. Quick question for you about the margins in Aero.

If I look at what you turned in a 14.4 versus a 16.6 for the full year before items, order trends or plus 14 percent, and yet you are talking about the full year '04 being around 9.9 to 12.1 percent margins just basing on your percentages and your base. You know, I feel that too much pessimism is as bad as too much optimism and I'm trying to gauge whether, you know, given that Parker been predicting the depth of Aero's margins for over two years, where do you see the extraordinary weakness? And further, for detail, would you break out commercial and Aero? Would you tell us which one by orders of magnitude are worse than the other?

Barry, this is Tim. I'll stand the heat on this one because I was the one that was telling you for, you know, a couple years that they were going to be worse than they were and God bless them, they held up better than we had anticipated. You know, at the beginning of the year, they had more in backlog than we knew of. And we said by the fourth quarter we think they will be down around to where they are going to be and sure enough they did commit in that -- come in on that in the low 12. Are we being too draconian next year? You know, who knows? I mean, I think that there are certainly some -- there's some big concern on the insurance side. The insurance markets are very, very hard in Aerospace. We got a big renewal coming in the fall. And we are anticipating that's going to be a fairly significant increase.

And, you know, then it really depends on how the markets return. As you know and speaking as we said before, you know, sort of four segments to Aerospace. The best margins are made, you know, at the commercial after market. And that's still depressed. I mean, that's still not good business. That's our best margin. The next best margins come in the military after market and the good news is that we will eventually see some business there with what happened in the Iraqi War, but honestly, we haven't seen that. So if we could only know when that's going to come in, we don't have a lot of it built into our plan.

The last time it took 12 to 18 months, you know, so there's a chance that could come into this year but we don't have a lot of it built into this year. You know, and then the original equipment both military and commercial are, you know, we don't make much money on that, and you know, we like what's happening on regional jets but initially it will be mostly OE stops. So anyway, hopefully that answers your question there.

Just somewhat. You mentioned pricing when you were talking about military and it kind of made me think that, you know, just CAT and DEER and CNH AG are getting two percent and yet you are spending $75 million on pension, OPEG and insurance. Last year 61, the year before $79 million. When are you going to get some pricing power or are you at a cost disadvantage versus other fluid power companies that you will not get pricing power and the OEMs will continue to eat your lunch?

I think we have a lot of pricing power. I don't think we've -- I think we've held up extremely well battling through this thing. Are the large OEs, some that you mentioned, are they not calling us in and telling us that they'd like to see those reductions? Absolutely, and we fight that battle every day. And we try to present them with alternatives to just a win/lose situation.

And we think we have a lot to offer to give them a cost reduction but not take it out of our hide. So we're faced with that constantly and it hasn't gotten any easier. We have a lot of pricing leverage now on the distribution. Don't forget a big difference of Parker is how much we do through distribution. We control the pricing list. We're pretty diligent about having those. So, I mean, I think we're doing all we can on the pricing front, but we're doing a lot to try to address these cost things, too.

I think the good news on the pension, a lot of these increasing numbers are because all of these companies have had to decrease their assumptions so radically on both the asset returns and the discount rates. Then, of course, that's not going to continue. That will reverse. That's not a permanent situation. So anyway, we're doing all we can. That's about all I can tell you.

When you told David earlier your 20 to 30 percent down in fiscal first quarter 04, would you tell me what that base was again?

You mean on the first quarter?

Yeah, a year ago. What was the base again?

We're talking the first quarter. Are you talking the first quarter of this fiscal year just ended?

Yeah, you said down --

That was $.52 cents. The reported number in the first quarter of fiscal '03 was $.52 cents.

Thanks.

Your next question comes from Robert McCarthy with Robert W. Baird.

Good morning, Pam and Tim.

Good morning.

I'd also like to just get a little clarification on a couple of your answers earlier in the call. When you talk about assuming no improvement going forward, are we talking about beliefs that we can see three percent or better GDP growth in the U.S. in the second half of the year and despite that still have no aggregate growth in your end markets, or do you mean we're not -- we don't care what anybody says for the future, we're assuming zero growth?

The latter.

Okay.

Go ahead.

I'm sorry, Pam, do you have something to add?

No, I'm just saying the latter. I know it's a short response.

That's okay. I just want to make sure I and everyone understood. It's similarly, I understand that you don't want to put out a specific dollar realignment expense estimate for the coming year, but wouldn't it be fair to assume that in your plan, the level of those expenses declines because you're so much farther along in restructuring the company?

Well, I hate to repeat myself, but I think I'm going back to the same thing I said earlier. On the realignment, what we've said is if there's any realignment being done, that savings as a result of that realignment need to be realized in the same period. So you know, it really becomes irrelevant under that scenario.

Okay. And in terms of the international business, I think it would be helpful if you could give us a rough estimate of how much of that business is accounted for by Europe versus Asia Pacific and Latin America?

The thing is you have such different outlooks for the two.

Yeah. Previously, Europe was about 70 percent of it with Asia Pacific and Latin America being 30 percent. And of that 30 percent, it was a little more heavily weighted to Asia Pacific.

You say previously. You mean this past year?

Yeah. I'm just saying historically.

Historically. Okay. Okay, thank you.

Your next question comes from Alex Blanton with Ingalls and Snyder.

Good morning, Pam. On this question of the margin increase that you are looking for in industrial. Historically, wasn't the margin in industrial North America in double digits?

I mean, haven't we seen --

Absolutely.

Years where it was 12, 13, 14 percent?

Yeah. I think in the mid '90s, North America margins were in the range that you are speaking of, Alex.

Yes. So getting back up towards those levels wouldn't be that surprising?

No. And one of the things that we've said, you know, when we talk about where we ultimately want to end up. The 15 percent, I think,the number that you've heard us say.

Yes.

I mean, when we talk about that number, we're looking at it over the cycle, and if you look back, you can see that North American margins have been above 15 percent. We've been able to obtain those levels, looking at Aerospace, you can see they were as high as 18 percent.

Where we've had our problems is obviously in Europe. You know, that's in addition to the Wynn Strategy that's been an initiative of ours is to improve the margins in Europe. And some of the actions I described earlier was with respect to moving to low-cost countries is obviously, trying to address that.

And with your current plan structure, what's your capacity utilization in North America?

I don't know what it is. I'm going to throw out a number here. Don't hold me to this number. I will say 70 percent.

Okay. And finally, just a suggestion. But it would be helpful in those slides to have you do the math for us and give us the adjusted figures.

Alex, this is Tim. We always used to do that and tried to be helpful as we could, you know, and with this Regulation G, our legal counsel told us that we can't do the math, we can give you the numbers but we can't do the math.

Other companies are doing it Tim, and they are not getting into trouble and are filing 8 k's just as you are.

And this will evolve. This is something new the last couple of quarters. We're all for trying to be as --

Really there's nothing wrong with it.

Maybe we're a little, you know, maybe we are a little more conservative and after maybe by the next quarter we can do the math again, but right now, we're following legal counsel.

Just one more thing. What is the state of inventory with your customers? There was a significant pick up in demand at Caterpillar, for example in June and -Rand also had quite a surprising quarter in terms of demand. It seems as if capital spending is picking up unexpectedly here as a result of higher replacement demand but it might not be affecting you yet as you say in your orders because people are running down inventories.

What's your sense of it? Well, I think Alex, I think that we pretty much feel that inventory is level with demand that I mentioned earlier. I hope you're right that capital spending is starting to pick up because we'll be probably one of the first companies to see that. So I do hope that you're right on that, but basically, you know, I'd go back to what I said earlier. We said that it's in line with demand, and so that is a little mysterious, I guess.

Alex, this is Tim. I had, again, maybe a little more history on this over the years. I think as we said on our own that our capacity utilization 70 percent, I think that's a pretty close number. We have a lot of extra capacity to take on new business. Now, through this kind of a period prolonged and rough downturn that it's been, is all of that equipment in tip-top shape to run? I would say no. I mean, this was so bad that people probably were curtailing from basic maintenance work.

And some of you people have written upon this. When the turns does come, and it will come, there will be a surge of spending on the after market MRO, if you will, to get the plants and equipment back in order to run. But I don't think we'll see a surge in a lot of new equipment for a while, but I think we'll get that after market and then we'll see that and then only later will we see the original equipment stuff really being purchased. Okay, thanks a lot.

Your next question comes from John McGinty with Credit Suisse First Boston.

Good morning or almost afternoon.

Hi, John.

Just a couple of quick questions. On the cash flow specifically, what would we -- if the sales are at the level that you expect them to be in the guidance, what would we look for the net change in receivables inventories and payables which has been a positive $170 to $140 million the last two years. I wasn't clear on that. Do you hold working capital? How much more could we get if sales hit the guidance you have put forth?

You know, honestly, I think payables when you look at it, the components, payables, I don't really see changing much. And based on the DSO and the receivables line, again, I don't really see much of a change there. Where we will see change is in the inventory. We're going to continue to work at taking inventory down in connection with our lean objectives. And, up know, we've been successful moving that down in some cases ten days at a pop. So we're going to continue to work on picking inventory down.

So the penalty that you have talked about in '03 of underproducing will be equal in '04? Penalty to margins?

Yeah, based on a plan, John, that is a correct assumption.

And that is still baked into your forecast for the substantial margin improvement? So there's no benefit from a lower level of, you know, underabsorbed overhead through underproducing?

Right. If I understand you correctly.

In other words, you had a hit in '03 but you have a comparable hit in '04?

Correct.

Then Tim made one of those statements thats either throw away statement or sends chills down your spine, it says we're going to all of a sudden see new emphasis on internal growth and reemphasis on globalization and I don't remember what the third was. I guess that was acquisition. But the thing all I heard was more money being spent. I wonder if you can clarify exactly are we all of a sudden going to start spending money on stuff and where is that going to show up if we do?

I can try and answer but Tim may want to. I think in terms of innovation, what Tim was referring to was in the press release, you'll see that we're changing some of our incentives internally with respect to innovation. The internal changes that are occurring really doesn't affect from you an external basis. It's just a change that we're making internally to basically help operations out and to do some matching of revenue and expenses.

So it's not an issue of increasing R&D or anything like that?

Right. Right.

And the globalization?

Well, the globalization will continue just as it has. I mean, we've been continuing to do that in fiscal year 2003 and will continue in 2004. And Tim can clarify me if I'm not giving his intentions or the answer that he was thinking of, but I think what he's talking about is what I talked about earlier with respect to the Czech and to Poland and to China.

Great.

We've done that in 2003 and we'll continue to do that in 2004. So I don't really see a big change as a result of that. That's just a continuation of, you know, running our business. With respect to acquisitions, you know, we're always looking.

Great.

If the right thing come as long, you know.

I just wasn't sure if there was an increase in spending. That's fine, thank you.

Thanks, John.

Your next question comes from Matt McGee with Oz Capital.

I just have a quick question for the assumption from next year. How much comes from a win/win strategy incremental margin, you look like you are expecting to get into the four. If we miss in the top line because strategic pricing doesn't come through, I image than's all 100 percent incremental margin, how should we kind of think about that?

Well, I think that, you know, we're continuing with our pricing. I know I get lots of questions on that. People are particularly concerned because the OEM side is so tough. But we feel that we have a really good program in place. We're really going in. We're doing a lot of analysis. We're really identifying areas for improvement. We're not just giving general price increases across the board.

This is a program that requires very detailed and thorough analysis, and we've been quite successful in increasing prices in those particular areas. We're going after the noncore business, the small customers -- small customers and I know this sounds, you know, pretty true but the fact of the matter is lots of times they don't even know those increases are coming forward. It's small in relation to their total business and they don't even recognize that it's there, but there's a lot of business, you know? We have a lot of customers. Very few customers are really large for Parker-Hannifin. We have a lot of small customers and we've been quite successful in doing this. So we are counting on pricing increases and that are reflected in those sales numbers.

How much of the '04 sales increase is coming from the win/win strategy and the strategic pricing in particular? I'm trying to get a sense because we're supposed to use a flat economic outlook and have decent top line growth next year. I understand you think you will get that from strategic pricing. Is that almost all the growth or is there something else going on?

That's a portion of it, but we also, you know, a half a percent may be from the Wynn strategy as a result of pricing. It's probably a good number.

I'm sorry, half you said?

Yeah. The other thing that's going on is systems. You know, some of our competitors don't really compete with us on the systems basis, and when you go out there and put together a system, you can actually get increased pricing for that. So that goes a -- go as long with the pricing program.

And the other question I had was on the rest of the world top line growth.

If we're assuming that you're up slight and all of the growth is from Asia Pacific, it's 20 to 25 percent, is that the right number to think about?

Yeah. I think that's a good number.

The last question, I think it's been answered for us.

I want to make sure I didn't miss it. The charges you've taken through the P&L in '03, can you give us clarity of what it looked like by segment so we can see what the real drag has been on the operating margin?

You can see those on the slides. If you go back to the segment slide that I showed, the first column is the as reported number, which are the GAAP numbers basically. To the right of that, you'll see the realignment numbers.

So there's no rationization - -

I'm sorry, I'm thinking of the income statement but it's also on the segment numbers below. There's no rationization numbers that you haven't broke out for us?

Correct. Thank you.

Your next question comes from Larry Robins with Glennview Capital.

Good morning. I think this is probably a follow-up to David Raso's question earlier. That if we look at just North American industrial, the GAAP operating income number was 155. I think he went through with you before an estimate of maybe $45 million of pension and health care insurance increased on a year-over-year basis which would make the starting point excluding those increased costs, you are including those costs of $110 million.

The midpoint of the guidance implies about $194 or $195 million in operating income, which implies excluding the head winds from pension, health care and insurance, you know, 75 to 80 percent increase in core operating income growth. How much of that increase comes from the lack of corporate transformation charges in '03 that won't recur in '04? And the fact that everybody keeps coming back to this question and eight different ways, is there any other kind of bottoms up view that you can help us with so that we can gain some more confidence in our ability to achieve those numbers?

This is. Let me try again. I don't know how to, I know it looks look a heck of a lot to take on especially as we have the head wind on what we call the pension insurance medical. All we can tell you is that we faced that same head wind this year. We had, you know, obviously not improved by anything. It was down a little bit. We improved the margins. It is a combination of all three of the Wynn strategies coming through to varying degrees. And it is a combination of something we start out with doing a lot of restructuring realignments that tapered way down. If you look through the numbers we presented in the charts, you'll see that the realignments were down quite a bit in '03 from '02.

We would expect summer realignment in '04, but as Pam said, they would be less than that and would be pay as you go type programs. The real change and real improvements is coming from the Wynn initiatives which are paying off, and we said would pay off more this year than they did that first year and the ongoing, you know, savings from the realignment. But to sit here and be able to quantify and break them out as to how much and which one it's all over the place and depends on the business unit and segment. It's too hard to do that.

Okay. And then with respect to the rest of world, I know that the company as you said doesn't speculate on future movements and currency, but if we take the Parker rates which is taking today's rate and assuming that's where things will stay in the next 12 months, what does that imply as a head wind or tail wind on currency? Is it a two percent tail wind on international?

Well it's a real mix situation for us, of course, because I mean, we will end up with in the first quarter in particular, we'll end up with another little plus to sales because, you know, the Euro wasn't quite as strong to the dollar at the beginning of the year. Having said that, the real issue is the strategic issue where in Europe, we're big in Europe. Most of what we sell in Europe, we make in Europe is not so bad.

Again, some of their goods are not as competitive and we export out of Europe. So in real terms that's going to hurt. So it's kind a mixed bag. On paper, we'll have a currency gain. We have a strategic implication that I'm not sure what the impact will be. Right now, we're hoping just to hold our own.

In your slides, you show targets that are well within the range?

It seems to be potential increased acquisition activity.

Are you willing to go, you know, materially higher than your target range for a short period of time? Or are you looking to stay within those guidelines?

We are not looking to go way above them for a period of time. The point is and again, before we recorded this minimum funding liability and the pension, if you look at the numbers before that we reduced our leverage from 38 percent down to 32 percent on an apples to apples basis.

And we did that at the same time we put over $100 million of discretionary funding into the pension plans. So, you know, we are capable of generating some pretty strong cash and, okay, so we had to make that entry on pensions and we look back in the range. If we do nothing, we will generate a boat load of cash over this fiscal year that we really should be putting to use somewhere. So we think we've got certainly have a little bit of capacity right now, and over the course of the year, we'll generate more capacity. And we won't ever have to -- Parker-Hannifin, you know, I can't in 15 years I can't remember where we've been above 40 percent leverage. So we're disciplined about staying down where we are.

Perfect. Thanks, Tim.

Uh-huh.

Your next question comes from Jeff Hammond with McDonald Investments.

Hi. Just a quick clarification. I think with the Wynn strategy targets, lean and pricing, I think you said have been difficult to quantify, but I think in the past you've given procurement I guess on an annualized savings basis. Can you give us that number, I guess, at the end of fiscal '03 relative to the end of fiscal '02?

Jeff, this is Tim again. We're going to not do that, and the reason being is that a lot of confusion. We were giving numbers on signed contracts. The problem is that the contracts were signed but that doesn't mean that you were realizing the savings yet. You had to work off the old inventory and started buying the new. So those numbers were not matching at all, you know, with the, if you will, the GAAP numbers. So we're kind of steering clear of that.

I think what we indicated, again, and I just go back to this. We said that those three initiatives should generate one percent improvement and operating margin in '03, which would primarily come from procurement a little bit from lean, very little from pricing. If you go back and look at our margin improvements and take Aerospace out because it's a completely different situation, take them out and look at all of the other segments and add those together, you are going to see we did just that. We improve the margins one percent. Next year, we're saying we want to do two percent. Aerospace is part of that as well.

We are working hard, too and we expect to squeeze two percent. A lot of that will be procurement part of procurement carrying on quite a bit of the lean and see the beginning of pricing. Then pricing, we think, will come more into play the following year.

Okay, thank you.

Yep yep.

Your next question comes from Andrew Casey with Prudential Equity Group.

Hello again. Can you give a little more color on what you are seeing just within North America? In the past, some of your markets have been up some months and down the next. Has this pattern kind of become less volatile?

No, I don't really think so. I think that, you know, unfortunately, the way that we collect our data sometimes you're going to see those ups and downs. And I think it relates to the fact that we're so diverse. I mean, we're in so many markets and so many different groups and so many different products.

But what you find is you can have one group where they're showing that in fact the market is up and another where, you know it's down. We do the best that we can in trying to accumulate that data, and, you know, help you in trying to determine where these end markets are. But it's very difficult, and we do see fluctuations and there is some volatility. The bottom line is at the end of the day, most of our markets are just relatively flat.

Okay. Thanks.

And then on relocation of the plant capacity, I think Mark Koznarek asked this question earlier. If I can ask it a different way. Some of your industrial-based customers have been moving out of the U.S. into other regions primarily Asia.

Is that causing you to accelerate your movement more than would you have expected at the beginning of last year or are you pretty much on track, you know, in a multiyear plan?

I think we tried to be in front of that situation. We're close enough to our customers quite frankly, we follow our customer. They move, we want to be there with them. So we've, you know, we work with them. We try to part with them so that we know what's happening and we move right along with them.

And then the flip side of that, Pam as some of the customers are moving overseas, some are remaining behind. Are you seeing attempts at better pricing from those customers who remain in the U.S.?

No. I haven't seen that, no. I'm not aware of that.

Okay, thank you.

Your next question comes from Mark Koznarek with Midwest Research.

My follow-up's been answered. Thank you.

Hi, Mark.

Your next question comes from Joanna Shatney with Goldman Sachs.

I have one quick question, you may have answered this but what was net price increases for '03? I don't need it by business. I don't need it after market. I just wasn't overall price increase and decrease in '03.

Joanna, probably on the average, two percent.

So you already have gotten two percent so it's conceivable to say that you can get something into '04?

Right.

Okay, thank you.

Thank you, Joanna.

Joanna, I don't know if you are still on the line. This is Tim. To you or anyone else who's listening, you have to remember that part of the Parker-Hannifin model is distribution. And we love distribution, you know, they're independently owned and, you know, challenging to work with sometime, but we love working with them.

And so much goes through distribution and we control the price list and we very religiously pump go as long. Fully 50 percent of what we sell in North America industrial goes through distribution. About a third of what we sell in rest of world goes through distribution. We always have that ability. You can't be obviously, you've got to remain competitive, but that's a real plus for us and also reaching out to all of those little customers, you know, that makes a difference as well, too. Well, I don't know if you can still hear me, gut but can you just talk historically in good times how large a price increase you've gotten? I don't think people really appreciate it. It's two percent in a tough market. Hasn't it been as much as 3 if not more than that in a good market?

Oh, yeah. Absolutely. It's all in line with what's going on out there inflation and so forth. I know maybe before you were born was inflation with north of 15 percent, you know, and so, you know, we very diligently try to keep one that, not get out in front of competition, but push along, you know what we have. We have real cost increases. Unfortunately, a lot of the big elite customers don't want to hear about that, and they still want, you know, you to price down. But we do, and you can't forget that. I mean that is a big chunk of what we do.

We do have that ability. We don't have a lot of ability with the large OEs but we have it in other places. Okay, thanks.

Your next question comes from David Bleustein with UBS Warburg.

Asked and answered. Just two quick comments. First, the slides are real tough to get. If you can show those out in pdf form in front of the call. Next of all, I think a 16-minute conference call is standard and a 75 minute for one where there's a little had bit more. Hopefully next time we can keep it in that band.

We're all for it. I'm sorry, David. I thought they were supposed to go out in pdf. So I apologize. I thought we had that worked out. But -- they're available. They -- you can go into the web site and download it.

They just took forever to print but thank you very much. Okay. We'll clarify that, thanks.

Your next question comes from Robert McCarthy with Robert W. Baird.

I'm sorry, but have I to follow up Joanna's question. I'm not sure I understood your answer. But you talked about two percent pricing, she said, you know, tell me overall. My understanding is that you were saying that you realized two percent better pricing across the entire company on average, which I'm wondering if that's not really what you meant.

Yeah, we really realized, and I don't know if it was 2, it's impossible to know. But yeah, I'd say we did realize across the company realized 1.5 to 2 percent.

Okay, implying as you indicate in your distribution markets you should have been able to do a little better than that?

At least equal to that.

Okay, thanks.

Your next question comes from Alex Blanton with Ingalls and Snyder.

Hi, time [ pause in captioning ]

I think that's the reason. There's a nice little picture and so on and it's probably in color. And that really slows it down. I mean, if you could simplify these slides, I'm sure you could get it to print in a few seconds each.

Okay. I appreciate that. Again, we -- whatever we can do to help. You know, if someone has a very fast enterprise type printer, have I to have my secretary do that and go to another printer in order to get this thing do. I just added up the numbers on the operating income change for the full year for all of the different segments from the reported numbers. And due to the aerospace decline, it looks as if the mid range increase is only about sever percent, is that right?

Well, I don't know. I mean -- I just took your operating income for each segment, applied the low, mid and high ends of the range of each of the segments and the mid range is up about sever percent and the low end is up maybe 1% and the top of the range in each case looks like it's up about 13%. Does that sound right?

Yeah, I think what we need to do, we probably need to do this offline to go through because I'm not sure if we're all looking at the same numbers or whatever.

Okay. Thank you.

At this time, there are no further questions. Miss Huggins are, there any closing remarks?

No, I don't think so. I think this has gone longer than I expected. Thank you.

Thank you. This concludes today's Parker-Hannifin fourth quarter earnings release conference call. You may now disconnect.