派克漢尼汾 (PH) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Parker Hannifin third quarter 2009 earnings conference call. My name is Oneika and I will be your operator for today. At this time, all participants are listen-only mode. We will have a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder this conference is being recorded for replay purposes. At this time I would now like to turn the call over to Pam Huggins,Vice President and Treasurer for Parker Hannifin. Please proceed.

Thanks, Oneika. Good morning everyone. This is Pam Huggins speaking just as Oneika said. I would like to welcome you to Parker Hannifin's third quarter fiscal year 2009 earnings release teleconference. Joining me today is Chairman, President and Chief Executive Officer, Don Washkewicz, and Executive Vice President and Chief Executive Officer, Tim Pistell. Prior to getting into the earnings release just let me address a couple of administrative matters. First for those of you online, you can follow today's presentation with the power point slides that have been presented. And for those of you not online, the slides will be posted on the IR portion of Parker's Web site at PHstock.com. Second is just customary, I would like to call your attention to slide number two which is the safe harbor disclosure on forward-looking statements and ask that you take note of this statement in its entirety. Third moving to slide number three, this slide is required. It indicates that in cases where non-GAAP numbers have been used they have been reconciled to the appropriate GAAP numbers. And moving to the agenda on slide four, the call will be in four parts today. First Don Washkewicz, Chairman, President, and Chief Executive Officer will provide highlights for the quarter. Second, I will provide a review including key performance measures of the quarter concluding with a revised outlook for fiscal year 2009. The third part of the call will consist of the standard Q&A session and as a reminder, please ask one question at that time. Again, my goal is to keep this call to no more than an hour today so please be courteous and get back in the queue if need be and for the fourth part of the call today, Don will close with some final comments. At this time, I will turn it over to Don and ask you refer to slide five, titled Third Quarter and Year-to-Date Highlights.

Thanks, Pam. And welcome to everyone on the call. I wanted to begin by sharing our views of the Company's performance this quarter. I think for everyone on the call, it is obvious to all of you that we have faced the worst recession any of us have seen in decades, certainly and I have been around 40 years here in my career and this is the toughest one I have seen. In that 40 years, I have been through about half a dozen of them myself. So, in our fiscal 2009 third quarter, it became evident that virtually all of our markets and regions worldwide would be affected by the severe downturn. This quarters results demonstrate that Parker is managing extremely well during this period. Parker employees throughout the world have responded with immediate actions to ratchet down our costs and aggressively manage working capital to preserve strong cash flow and a strong balance sheet -- a strong balance sheet. These actions started early in the fiscal year. Our goal -- one of our goals I should say, which is still within reach, has been to achieve a 10% operating margin in fiscal year 2009. And also, a 10% operating margin in fiscal 2010. We're still in the early planning stages for 2010, but that's going to be our target as trying to hit 10% operating margin. Year-to-date this year we've achieved 11.1% operating margin. I'm also very pleased to report that our decline in operating profit, that we refer to as MROS, our decline marginal return on sales, during the quarter, was 33.7%. Our MROS was only 28% excluding acquisitions. In addition, if we exclude expenses associated with reductions in force which were about $20 million, and inventory reductions which were about $30 million, our decremental margins were in the mid-20s, approximately 23%. And I certainly feel this is pretty remarkable and the team has really done an outstanding job in this regard. Keep in mind that earlier we talked about hitting 30% as a MROS. And we said we would hit 30% on the core business excluding acquisitions, reductions in force and inventory reductions and we pretty much did that here.

Also in a very difficult environment, and obviously without many orders coming in, the employees did a remarkable job in reducing inventory by $184 million in the quarter. Year-to-date, free cash flow was approximately 4.5% of sales. However, in the third quarter, free cash flow was approximately 7.7% and operating cash flow was 11.6% of sales. It is certainly clear that our cash flow performance is improving and as we effectively manage or as we effectively manage capital expenditures and working capital. As I mentioned earlier we are managing the business for cash and that is evident in our increasing cash flow metrics. We utilize our cash to pay down debt which declined by $308 million in the quarter representing more than 10% of our outstanding debt. And of course, going forward we are going to continue to strengthen our balance sheet by paying down debt throughout the balance of the fiscal year. Given current trends we have decided to revise our fiscal 2009 earnings guidance downward to the range of $2.95 to $3.15 per diluted share, that gives you a midpoint of about $3.05. As we have stated in the past we plan to continue to give annual guidance with quarterly updates. We understand that there are many companies that have stopped giving guidance. We know this is a tough environment to predict but we're going to give you our best, you know, guidance possible. Lastly, we have placed our acquisition program largely on hold to conserve cash while maintaining our commitment to a consistent dividend pay out. These actions in total give me great confidence that Parker will be poised to accelerate revenues and earnings early in the recovery. So, with that I will turn it back to Pam and we will get into more of this a little bit later.

Thanks, Don. At this time, if you will reference slide number six, I'll begin by addressing the earnings per share for the quarter. Earnings per share for the quarter came in at $0.33. This compares to earnings per share of $1.49 for the same period a year ago. It should be noted however, that the earnings per share $0.33 on the normalized basis is $0.50 adjusting for the following. $0.10 in realignment expense, $0.12 in expense related to inventory reductions and $0.05 for a one time gain related to an insurance settlement. As mentioned in the press release this morning, there were some expenses associated with litigation in connection with Parker ITR but the impact was largely offset by lower effective tax rate.

Moving to slide number seven, laying out the components of the earnings per share decrease in the quarter versus the same quarter a year ago, the puts and takes are as follows; lower sales 26% obviously a result of the global recession translating into lower operating income; realignment expenses of $25 million; reduced inventory of $184 million; higher interest expense of $3 million, due to higher debt outstanding this year versus last; and higher other expense of $18 million mainly due to litigation expenses partially offset by the gain on the insurance settlement that I previously just mentioned. As an offset to these items, corporate general and administrative expenses were lower by $8 million, mainly due to reduced compensation expense, tax expense was reduced by $93 million due to decreased income and a lower affectible tax rate and fewer shares outstanding impacting earnings per share of $0.02.

Moving to slide number eight, sales, if you look at the top line, you can see sales for the quarter decreased 26% to $2.3 billion from $3.2 billion last year. Up at 26% decline in sales, 24% related to organic sales. Acquisitions contributed 5% in the quarter and currency reduced sales by 7% up from last quarter. The currency impact as you know was mostly due to the international industrial segment mainly the Euro and the strengthening of the dollar.

Moving to slide number seven, I am going to skip this slide because I really addressed it in my comments just now. So, we'll move to slide number 10 and focus on segments commencing with industrial North America. North American sales declined 21% in the quarter versus the same quarter a year ago, and of this 21% decline acquisitions added 7% and currency reduced sales by 2% resulting in a core sales decline of 27%. However, decremental marginal return on sales for the quarter was 32%, but if you exclude acquisitions, inventory reductions and realignment, the decremental marginal return on sales is 23%.

Slide number 11, let's continue moving to international within the industrial segment. Sales declined 38% in the quarter versus the same quarter a year ago. Currency was negative in the quarter at minus 13% and this versus 11% in the previous quarter. Acquisitions added 5% to sales in the segment and organic sales declined 30%. Again, margins as a percent of sales were 4.6% for the quarter and decremental marginal return on sales was 35%. However, if you exclude acquisitions, inventory reduction again and realignment, the decrement marginal return on sales was 27%.

Moving to slide number 12 and focusing on the aerospace segment. Aerospace continues to have positive sales growth with 4% organic growth in the quarter. Margins decreased 80 basis points and that's in line with what we mentioned last quarter mainly due to a higher proportion of OEM business and higher R&D costs.

Moving to slide number 13, the climate industrial control segment. As we have spoken about many times, this segment has obviously had very hard by heavy duty truck, residential air conditioning, and automotive. Sales are down 39%, currency at 5% as a deduction to sales for the quarter and organic or base sales are down 34%. Margins as a percent of sales were minus 4.3% for the quarter, and decremental marginal return on sales was 24%. However, again without inventory reduction and realignment because there weren't any acquisitions for that segment, decremental marginal return on sales was 19%.

So, moving to orders on slide 14, which details orders by segment, as you know these numbers represent a trailing three month average and are reported as the percentage increase of absolute dollars year-over-year. Excluding acquisitions and currency except for aerospace and aerospace is reported using a 12 month growing average. So, as you can see from this slide, orders are down 34% for the March-quarter just ended. This compares to minus 20% last quarter and a positive 9% a year ago. North American orders for the quarter are down 35% year-over-year, and last year at this time orders were positive by 2% and this compares to a minus 18% sequentially from the December-quarter. Industrial international orders declined 41% year-over-year. However, this is up against a positive 11% last year. And this negative of 41% compares to minus 28% last quarter. Aerospace orders are down 12% for the quarter which compares to a positive 2% last quarter, and a positive 28% a year ago. So, up against very, very tough comparisons. And in the climate industrial control segment, orders are down 36% for the quarter, down from the negative 28% last quarter at a minus 1% a year ago.

So, let's move to the balance sheet now. Parker's balance sheet remains solid. Cash on the balance sheet at quarter end was $167 million. Commercial paper outstanding is $676 million, and this is down $257 million from last quarter. Days sales and inventory increased three days to 76 days from 73 last quarter. However, if you exclude acquisitions, days sales in inventory were 74. And as you recall, Don mentioned we did reduce inventory $184 million in the quarter. Accounts receivable in terms of days sales outstanding is 52, two days higher than the last quarter.

Now, moving to slide number 16. Operating cash flow for the quarter was $272 million. This represents 11.6% of sales. The healthy cash flow in the quarter allowed capital expenditures of $52 million and capital expenditures are down to 2.2% for the quarter. Dividends to be paid in the amount of $40 million a reduction in debt outstanding of $308 million. No acquisitions closed in the quarter and share repurchases were nominal at $8.8 million. On slide 17, you can see that the debt to total capital was 36.8% and on a net basis, 35.2%.

So, now moving to the guidance, slide 18. Just briefly, slide 18 through 20, I'm not going to walk you through those numbers but on slide 18, the guidance for sales in operating margin by segment has been provided and on slide 19, guidance has been provided for the items below segment operating income. Slide 20 summarizes the guidance on an earnings per share basis, and as you can see from this slide, the guidance for fiscal year 2009 for earnings per share is projected to be $2.95 to $3.15 as Don previously mentioned. Please remember that the forecast, it includes acquisitions that have closed, but it excludes any acquisitions that may be made in the future.

The full-year resized guidance assumes the following. Sales growth decline approximating 15.8% to 16%, segment operating margins as a percent of sales in the range of 9.9% to 10.3%. Corporate administration costs lower from 2008 by 5% to 20%. Interest expense higher than last year by 6% to 20%. And then other expense in a range of plus 5% to a negative 40% versus fiscal year 2008. And of course a tax rate of 27%. So, at this time, Oneika, would you please open the call to begin the question-and-answer session?

Thank you. (Operator Instructions). Your first question comes from the line of Eli Lustgarten with Longbow Securities. Please proceed.

Good morning.

Good morning, Eli.

Tough quarter to get through but at least you are managing through. (Inaudible), can we talk a little bit about the guidance. Because, by giving the full year the implication for your fourth quarter is much weaker revenue numbers and margin numbers across the Board. You've got -- what -- what it is down 35% North America, you're talking about a 37.5 plus decline in North America, 44% decline in international. And you've got margins in international sort of cutting in half from the 4.6 that you reported to meet your guidance. At least that's how I work it out mathematically. So, can you give us some idea of whats going on as we go -- in the fourth quarter, how you think about the fourth quarter. It looks like it's materially worse than third quarter?

Eli, this is Tim. I think that not to overly complicate it. Let me try to keep it at maybe sort of the higher level here. Frankly, as you know, going into the second quarter, we still were -- had a -- living a little bit off of backlog and it had the melt down -- hasn't been quite as severe as what we saw after the Holidays. So, coming back from the Holidays of no recovery and actually things got worse. So, I'd say we went in to this quarter a little bit better backlog wise than we're going into the fourth quarter but the long and short of it is we're seeing the fourth quarter being fairly comparable to the third quarter. And not much change. We think we -- we think we have bottomed out here. We can talk more about that later, we can talk about markets, but we think we're bouncing along the bottom now, and we think that it's -- we're going to be at the same run rate. We do carry into the fourth quarter, we are going to have some additional costs on force reductions. We are going to continue to reduce inventories at the same pace, and therefore as I say we see a fourth quarter -- at -- right now adding up to, pretty much the same as the third, but then hopefully a lot of good things to come out of that going into the next fiscal year.

Okay. And even the aerospace you have not only -- you have volume going down -- I think a double digit number in the quarter and margins dropping materially. Is there something going on there that is different or is that more expense, what is causing that.

Well, yes. I say -- there is, again there's -- I think you're reading in the papers that there, you know, the business jet market is down, the regional guys are now shutting down radically, and even Airbus and Boeing, you know, probably push out a bit. So the, that is starting to happen. The airlines are projected I hear to lose $5 billion. We know that the traffic is down. So, some of that's starting to come through, but the R&D continues at pace. We have those huge $12 billion worth of wins that are going to bode real well for the future. And we still got to spend the money to -- on that non-recurring engineering.

Alright. I will get in line. I guess we should have more than one thats (inaudible) what we should do it, so.

Your next question comes from Nigel Coe with Deutsche bank. Please proceed.

Yes, thanks, good morning. Just wanted to dig a bit deeper into the realignment charges, $25 million, could you just break that out a little bit more in terms of head count reductions versus plant consolidations? And it sounds like fourth quarter might be a similar to third quarter. Could you just confirm that?

Well, yes. The second quarter, when we talk about the reduction in force cost. If you start with the second quarter we had about $10 million in cost in Quarter 2. Some of the benefits would accrue obviously in subsequent quarters to what I am talking about here. Quarter 3, the costs we are about $20 million in reduction in force costs, quarter 4 we're expecting just a little less than that probably around $15 million in quarter 4 for a total of about $45 million in costs for the year for the fiscal year. That's the way the reduction in force looks right now.

Okay. And given the question (inaudible), can I just throw one more in. Can you just make some comments on price both for the quarter and also what you're seeing in terms of you know April trends?

Yes, as far as pricing, of course pricing is very difficult, and it always is in a recession. So, we're getting a lot of pressure across the board on pricing. I think we're managing it very well. The other side of the equation of course is the cost side of the equation. So, we're -- I think we're in pretty good balance. I think as, as we go forward, we're managing the costs making sure that our raw material costs and input costs are coming down in line with any, any price adjustments that we may be giving out there. So, we're keeping that in balance. We've done this in the past, we manage well through this in the past. And we're actually in better shape today because we do have pricing experts in all the divisions now, pretty much worldwide.

Okay. Thanks, Don.

Sure.

Thanks, Nigel.

Your next question comes from the line of Jeff Hammond with Keybanc Capital Markets. Please proceed.

Hi. Good morning, guys.

Good morning, Jeff.

Just some clarification, you know, Tim on your comment. You had commented that you think fourth quarter's generally like third quarter but you've got a pretty big step down. Certainly, you know, ex the items on an, you know, on an earnings basis, and I am just trying to under -- you know, bridge the gap between what changes 3Q to 4Q, it looks like restructuring is less. You know, maybe just quantify what inventory reduction is within that.

Sure, Jeff. I, actually, I think they're fairly comparable. I think as Pam indicated to you, that on the quarter here, as reported, $0.30 -- $0.33, and -- but we have about $0.10 in realignment, we think around $0.12 on inventory, you know, those were the hits.

And what are those numbers in 4Q?

Well, okay. Let me just finish up to get to the 50. So, then, we did have this -- insurance finally won on an insurance settlement which was $0.05. So, that gets you down to the $0.50. We think the numbers are going to be fairly comparable in the fourth quarter. We're going to, a little bit of moving around here. There -- Don indicated 15 million in force reductions. Probably a little higher. There's a -- notice the difference there was a 20 million a 25 million quoted for this quarter. There were some asset write offs, in addition to the force reductions. It should be a little bit higher as of write offs in the fourth quarter as well. And again, as we say we're going to hope to take about the same amount of inventory out. So, you know, in the neighborhood of $0.12. So --

And we don't expect that insurance recovery -- of course thats not going to repeat.

Oh, no.

So, that will be a $0.05 --

That's a one off -- one off event. So -- so that's basically the guidance, plus the fact -- you know, adjusting for the realignments and the inventory reductions, it should get you back to pretty much the same kind of quarter we had this quarter.

And do you think decrementals in the fourth quarter are comparable to what you achieved in 3Q?

I think so. I think so, yes.

Okay, thanks.

Thanks, Jeff.

Your next question comes from the line of Andy Casey with Wachovia Securities. Please proceed.

Good morning, Andy.

Thanks. Good morning, Pam, everybody. If I could ask a question kind of on the industrial end markets both North America and International. You know, the order decline and the, you know, the base revenue decline in the quarter, are you seeing any end to, you know, potential destocking either it be in your distributors or the end customer.

I think as the -- this is Don. I think Andy, as the economy kind of bottoms out here, which I think like Tim said, we're bouncing off the bottom. I think that eventually over the next couple of quarters you're -- I think you're going to find a bottom on the inventory as well. And I am just talking in general context here. I think in some specific markets or industries you may already be there. So, I think that we'll -- we're probably going to be at that level within the next quarter or two I would think pretty much across the board, most of the markets that we serve.

Okay. Thanks. And then if I could ask -- I don't know if you are willing to kind of gauge what were the worst markets you saw in the quarter and then, you know, what were the best on a relative basis.

Well, that's a -- this is Don again, Andy. I would say, let's put it this way, they're all bad. Let me just say that the good ones -- maybe we'll just talk a little bit about maybe the ones that are better. Still anything that's energy related is still -- is obviously the bright spot out there. Anything energy related, whether it's power generated or other energy oil and gas and so forth. Energy related markets. Life sciences would be another one. Of course that's not a huge market although it is a growing market for us and we're focused on that. That's a positive. And of course aerospace was the other bright spot. I'd say the rest of them, and I am not going to go down through a list. I've got a color coded sheet in front of me. It's all red with arrows going down with about four exceptions -- I just gave you the four exceptions. S,o everything else, really, is kind of either flat on the bottom or trending down. I think most are going to be bottoming out here like I said probably within this quarter, or within the next three to six months I would say.

Okay. Thank you very much.

Thank you, Andy.

Your next question comes from the line of Joel Tiss with Buckingham Research Group. Please proceed.

Good morning, Joel.

Good morning. How's it going?

Good.

Can you just give us a sense of the inventory reductions? Is that kind of a moving target or do you feel like you're going further than you need to go for a normalized run rate just to catch up?

Okay, Joel. This is Don. We have a target on inventory of about $0.10 per dollar sales inventory investment. We've been trying to get down to that. We're at about, at the 74, 76 days with or without acquisitions, however you want to look at it this quarter. We are at about $0.125 per dollar sales. So, what we'd like to do is to continue to bring that down in line with our current level of activity but really try to approach that $0.10 number. So, that's really what our objective is going forward. And we think that for the fourth quarter, of course we're going to be reducing inventory as we have. That is going to put pressure on our margins as it has in the past but it's going to throw off a tremendous amount of cash. Of course that's our game plan is to run the business for cash, pay down debt, and have a strong balance sheet. So, thats really our objective there.

Okay. So, there's nothing wrapped in there about what you're hearing from your distributors?

No, no, not at all -- not at all, no.

And then the second question, I think Nigel asked this earlier. Can you just give us any sense about April, weaker or flat or better than what you saw in March in the early stages here?

I think the early stages, Joel, are as we've indicated, we're not seeing any further deterioration. We are seeing people ordering again, the good news. People are back and ordering again, albeit at greatly reduced levels. So, the early signs are that, that we stabilize.

Okay. Great. Thank you.

Thanks, Joel.

Your next question comes from line of Mark Koznarek with Cleveland Research. Please proceed.

Hello, Mark.

Hello, Mark Koznarek. A question about the international margin because it really did collapse quite severely and you point out as reported, the leverage was 35%. But because a lot of that reported revenue decline was from currency, it seems like if you work some adjustments and assume that, you know, your lost income on the currency is much more modest than leverage one core volume declines, it seems like the margin is weaker -- considerably weaker than you would have expected. And I am wondering specifically is there anything unusual going on in international. Is that where a predominance of the charges were or is there some goodwill or intangible write downs on the acquisitions over there or could you give some color, please?

Again, Mark, Tim. The -- yes. The -- we -- as you know this year we did -- and two large acquisitions in Europe. And we have been doing some large acquisitions over there. And we have definitely picked up a quite a bit of amortization of intangibles which of course kind of carries on despite the downturn. So, I would say that definitely is an issue for us in international. And of course the work force reductions there are -- permanent ones are very expensive to do. So, we have to approach that differently with shortened work weeks, which we have done and we're stepping up to. So, yes, I would say there -- marginals are a little bit worse, if you will, than North America, but they have done a good job and they have done an excellent job in reducing inventory as well too. They've taken more inventory out of this system. So, when we look at all of that, they're -- you know, they're not -- a little bit off from North America, but frankly not that much.

Okay. And then Tim, if you were to do your -- I don't know when your calendar is for goodwill testing, and also for your pension true up, but if you were to do those today, what would they imply for upcoming changes in those two categories?

Well, it is interesting you ask that question because we do the goodwill -- we begin the goodwill impairment testing process the middle of the fiscal year. We -- and having changed auditors here a couple of years ago, they ask for us to actually go back and review every acquisition we've made for the last five or six years. It was over 90 specific acquisitions we reviewed and as you can tell by the results today there were no impairment charges recorded. Now, that isn't to say that we don't have a handful that might be on the bubble and that we have to watch closely. There were a group that you know, kind of as I say, were very close, but at this stage as I say, as reflected in the numbers there have been no impairments but we're watching it very, very -- and our board is very sympath -- you know, not -- sensitized to that, and we're all over that one. Now, in terms of the pension, we have not done that work now. We do that later in the year. It we did it today. I'm sure we wouldn't like the answer, clearly. We have the worst set of dynamics here, the markets of course collapsed our assets went way down. Meanwhile the interest rates were way down and so the liability was way up. You had a huge gap. We're seeing the markets recover some. We -- you know, I -- just -- its difficult to tell. We will do that at the end of the year, and we really, truly haven't done that calculation now. Pam, I think wants to add something.

Yes, I just want to add something to that, Mark. Because, you know, as Treasurer I'm obviously very in tune to that and looking at that. And as soon as the assets took the big decline I did take the opportunity to meet with (inaudible), and the good thing that Parker has going for them is that we do have a credit carry-forward balance. You know, back -- a few years back if you recall we made several contributions to the pension plan that were greater than the requirement. And we did that because we were trying to reduce our volatility over time. So, we have a large carry-forward balance that we'll be able to utilize that's going to heap us through you know, these next -- at least in the near term. And I think what you're going to see a lot of companies that do have these credit carry forward balances are going to use them if these assets don't recover.

Pam, does that mean you'll likely try and hold that P&L expense flat next year by use of that credit?

Well, there's two different dynamics here. The credits will help us on the cash flow. That -- because of those credits we will not, do not have any funding requirements that we see for at least a couple of years. So, that's a great story in terms of cash requirements. P&L wise, again, we just need to do that calculation, that's a different -- that's an accounting thing. Were you know, we have to do that exercise come June. So, I would -- but no I fully expect Mark, that we will be having to amortize some additional expense on a go-forward basis. How much, I can't tell you.

Okay. Great. Thanks for the help.

Yes.

Your next question cops from the line of Jamie Cook with Credit Suisse. Please proceed.

Hi, good morning.

Good morning.

A couple of questions, one I was struck in the quarter on the ability to hold the decremental margins especially if you sort of ex out the inventory reductions and acquisitions and sort of one time things. I think for some of the segments you were in the mid to -- sort of mid-20 range, so. You know Tim, how sustainable do you think that is on a go forward basis? Was there anything unusual in the quarter that led to that? And then can you, you know, I think Don -- you mentioned in the beginning of your prepared remarks that you're hoping to sort of achieve a 10% margin in 2010 although we're early and who knows, but sort of, what assumptions -- what are your assumptions -- what are your market assumptions I guess behind that?

Well -- .

And savings from restructuring that you took this year.

Yes. We think that, the savings from our -- the restructuring probably be about $120 million per year on the full-time people. And then on the reduced work weeks probably $100 million a year. The -- the assumptions -- it's very early right now, Jamie, to give you a lot of this assumptions because we're just gathering up -- we're right in a -- mode right now, the planning mode for this coming fiscal year. However, our expectations I'm talking -- and when I say our, the head quart quarters people here, the leadership team expectations are going to be that we want to try to hit as -- a margin comparable to what we did this year and that should be around that 10% mark. And our thoughts are kind of like this, that we probably would, we probably would see an environment out there for the first half of our new fiscal, which would be the second half of this calander year. Which probably would be comparable maybe a little bit better, we're not sure, to what we have just saw in this -- in the second half of this fiscal year which we're just going to be finishing up here, with hopefully a recovery coming in the second half of our next fiscal year. So that when you look at year-to-year, okay, because we started this year off strong, ending week, probably starting off weak in next fiscal year and ending stronger, that we would have two years that would be comparable and we'd be getting the benefits of the reduction in force and other restructuring that we've done throughout this time frame we'd see the full benefit of that next year. So, thats kind of the way we're looking at it. Tim has another comment he'd like to add to that.

I just want to -- Jamie, I thank you for your kind words on the marginal returns and we, that's something that we're very proud about here. I think we have, we're telling you people before the downturn that we were trying to prepare for the cyclicality. I have to be honest with you our plans looked at minus 15, minus 20, we never in our wildest dreams thought minus 30 or 35, but nonetheless, that's what we had to deal with. But we had those plans in place. We tried to execute very early, and I would like to kind of recount a little bit of that -- because we did a round of cuts in -- right after an all time record first quarter in October pretty good, we did our first round of cuts trying to -- as we could see what was happening, trying to be proactive. And -- but that first round of cuts, as we told you, there was a lot of temporary agency consulting people. So, we were able to do that with a minimal cost. I said it the last quarter and I stand by it. I think that our -- our costs that we're going to give you for these reductions are going to be far less than you're going to see, I think out of most all of the companies and for the savings we're going to generate. And that's the reason why we have planned for that. So, why are the at marginal return on sales so good that we went early? We didn't, you know, we're no t trying to chase it we were trying to be out in front of it. And we had some built-in opportunities there. Now, we did our second round of cuts right after the Holiday and we've just gone through a third round of cuts. Now, all told -- and I don't think we gave you the number, but it looks like that those collectively -- those reductions in force collectively will be over 20% of our head count when we began -- of our employee count. And so fairly dramatic. But we also saw with the order rates we've just given you, that was not enough. It wasn't going be enough. So, what we had to do were these pay reductions. So, all salaried workers pretty much everywhere in world globally have taken a 10% cut, and they're getting some extra days off. In the plants, they're down at least -- many times 10%, 20%, or 30%. And that is, that is what's abled us to do that. So, we have -- also have wage freezes in all around the world, everywhere. And it's a combination of all of those things that have, you know, have allowed us to generate these things. And like I say, we are extremely pleased that the people have executed so well, no one is happy out here needless to say, but after three rounds of reductions, that's why we went to the pay cuts, we're thinking we're down to the core, we're down to the family. If we cut any further we are cutting into bone. So, we really had to do these pay cuts in lou of days off. But, that really is a very, very important metric we think. And we are happy with the results today.

But Tim, you know, outside of inventory or structure and whatever, do you think sort of mid to high 20s, is that a new sustainable level we should be thinking about?

Well, it's going to get tougher because any other -- first of all, any reductions from here are going be more costly. As I said we did the least cost ones. If we have to do more, they would be more costly. And again, we may be facing to get some asset write offs here or there. We could be facing some impairments et cetera. But the 30% is the guideline. That's what we try to live to. I mean we're so darn happy that we are less than 30%, but 30% -- 30% is kind of the target we try to hold people to.

Alright. Thank you. I'll get back in queue.

Thank you, Jamie.

Your next question comes from the line of Alex Blanton with Ingalls & Snyder . Please

Good afternoon.

Good morning, Alex.

Good morning, yes. Clarification quickly. The inventory expense you mentioned, that's under absorption, is that correct.

Right.

Okay. Due to running production below sales levels, okay.

Right.

Related to Jamie Cook's question and the answer to it, which was that you expect the first half of fiscal 2010, comparable to the second half of '09, but seasonally, the first half is usually weaker than the second half. And so if in this case it is comparable does it imply some measure of recovery taking place in the next six months through the end of the calendar year?

Alex, this is Don. I try to keep this on real high level. We're just really looking at the macro economics now, really not trying to get into so much quarter-by-quarter half-by-half. That -- mine was a generalization of just kind of how we're looking at the years and how we're trying to craft what we think might happen out there. Of course it's just our best look at it. There's nothing finite that's been, you know, determined yet because we haven't been through the entire planning process, we'll get more feedback from the groups and the divisions as we go forward here, but that's kind of how we're still seeing it. I wouldn't read too much in to it . It's early -- it's still pretty early. We don't have the roll up yet from the group. So, this is just kind of how we're looking at it at

Okay. So, I guess we should just seasonally adjust that number.

You could, you could.

Yes, and it might not necessarily be literally the same as the second half but reflect a seasonal -- .

Yes. I think they -- the -- when you look at the total year though, our hopes that the total year would be approximate what we've just completed here.

So, that would imply a recovery beginning by year end.

Yes.

In your business. Not necessarily the economy, that might come earlier but in your business.

I think that's true. Yes.

Alright. Thank you.

Yes. And again, we would -- we still feel that, you know our target on the operating margin is still -- the double digit is what we're shooting for there.

Right.

Okay.

Okay, thank you.

Thanks, Alex.

Your next question comes from the line of Ann Duignan with JPMorgan. Please proceed.

Good morning, Ann.

Hi, guys, good morning. How are you?

Good.

I just did want to just comment on the fact that you've spent, I think you said $45 million, and by my calculation, that's for a head count reduction of about 9,000 plus or minus versus one of your customers is spending $500 million for a reduction of 20,000. So, clearly, you guys real have done a good job of taking costs out at a low expense. So, congratulations on that. And can we take a step back and talk a little bit about pricing again. Don, could you give us a little bit more color, if I look at the PPI for fluid power it looks like pricing is still pretty healthy out there for the industry. Can you talk about where you might expect to see cracks in pricing first? Would you expect it on distribution, would you expect if from some of the major OEMs who maybe have inflation clauses in their contracts with you? Could you just give us a little it more color of where you think the pressure will come from?

You're talking about the downward pressure?

Yes, downward.

Yes, yes, the pressure really has always been primarily at the OEM side of the equation. The OEMs are always the toughest, especially in this kind of an environment, where everybody has been, you know, pretty much impacted the same across the board. However even talking to some of the distributors, there's pressure out in the distributer organization as well. I'd say though, if you want to talk about a order of magnitude, it's a lot tougher at the OEM level than the distribution level for sure. And I'd have to say that thats globally too from what we see around the world.

And will you issue your normal, annual catalog pricing to distributors? You know you normally issue that -- ?

Yes.

By year end.

That's correct. That would be July 1. And there will be some adjustments made, there will be some adjustments made and typically those are only adjustments going on the upside, okay. They will probably be moderate where appropriate. And some may not be hit at all but I would say over all, if you look at the aggregate of whatever the price increase in those price sheets would be, it would be a positive.

Okay. And then just one follow up on your end markets, you know if you look at your score card that you have in front of you that you described earlier as pretty red in color. You know, if you took last quarters score card and compared them, where are you seeing the biggest change, Don, either negative -- I'm assuming there's no positive but on the negative side. And you know, have you been surprised by the magnitude of any -- of the changes, either regionally or from an end market standpoint?

Well I have to say that certainly construction, you know, industrial lift truck, semicon, those have all been pretty devastating. I mean semicon in particular, we have one operation that's really focused a lot on that, it's just amazing how that whole industry just melted down. Forestry was another drop off that was stronger in prior quarters, that's dropped off in more recent quarters. And of course I don't have to talk about the truck -- or the automotive industry, everybody knows about that. So, I would say those would be some of the -- the areas where we've seen more degradation of late than in the past. But again there's a lot of red on the chart. So, nothing really all that exciting here in just about all of the market segments we serve with the few that I mentioned earlier.

And those comments, Don, were those primarily North America or are those global in that context, did any region fall off more than you might expected?

No, I'd say just getting through the numbers it's pretty comparable around the world. What I was just giving you is kind of an overall look for the total all the markets we serve not being specific about a region but as I am just kind of scanning down through the sheets here, yes, I would say it's pretty comparable around the world. There are some, some markets like in Asia are a little stronger than in North America and in Europe but by in large, there's a lot of red here.

Ann, just to add on to that a little bit you know, look at the Scandinavian countries and they seem to be doing better than most and I think it has to do, obviously with the oil and gas exploration type of activity that takes place there. So, when they're doing well, China saw a little bit of up tick in -- at the end of the quarter. You know but you have to be careful with that. But I do think that from the stimulus package because they had much bigger allocation as a result of the stimulus to infrastructure, I think that we're seeing -- and I don't want to give -- you know, it's not going to move the needle for Parker but just to help you a little bit, I think we are seeing a little bit of up tick there. And then you look around, Europe, I mean, most of the countries are you know, pretty flat.

Okay. I appreciate the color. That's very helpful. Thank you. I'll get back in line or talk to you off line.

Thank, Ann.

Thanks.

Your next question comes from the line of Daniel Dowd with Bernstein. Please proceed.

Good morning. Can you tell me if the -- say in the last four weeks the rate of change of your inventory, is it accelerating, decelerating or staying about the same?

This is Tim. It's been fairly linear actually interestingly. So, we're watching it at the divisional level and it has been fairly linear and in talking to all of the operating groups, they all feel that they can keep going, as Don indicated earlier. There is more than they the can take out. So, I don't think that will continue much beyond this fourth quarter -- our fourth fiscal quarter but they do feel there's more that they can take out in the months ahead.

So, from your perspective your inventory destocking process basically continues to, you know -- at about the same pace recently for the next several months but then it is probably starts to decelerate, is that how you're -- is that how you're thinking about this?

Yes. Exactly, how we're thinking about it, that by the time we finish this fiscal year I think we'll be down to the levels and we won't have that -- we won't have that current going against us going into the next fiscal year.

And based on your conversations with your customers and your suppliers, is it your impression that that's about how they're thinking about it as well, or is there differences between, you know, regions or your customers are different than your suppliers? Any color there?

In general, I'd say -- this is Don. In general, what we are hearing is the customers are kind of reflecting an aggregate what we are seeing, and that is that they are approaching the bottom as well. They feel that they are approaching the bottom or on the bottom. And that you know as we go into -- throughout these summer months they're encouraged they will be coming back out of this. So, the timing -- the question is when, okay, exactly when, but I think that they're pretty much saying -- or seeing the same thing that we're saying here.

Okay, and just one last -- .

Daniel, its Pam speaking for a minute. One of the things you have to keep in mind is because of the lien efforts that have gone on throughout Parker and with the distribution, that this destocking that we talk about, will probably be a shorter time period than ever before. S, while it's -- it's happening, it's not to the same degree in some respects that it has been in the past but of course the downturn is a little bit different too.

That's fair. I mean, honestly I think what's going on in your inventory is very impressive. I guess the other thing I would ask is if, let's imagine that Q2 is the peak of the inventory destocking process, it's also probably true for you that your total inventory levels continue down for several more quarters, it's not like it's going to suddenly snap back to be positive inventory growth in five months from now, right? It's probably still negative, just at a slower pace, right.

It will track our order entry trends for sure, yes.

Okay. Thank you.

Your next question comes from the line of Henry Kirn with UBS. Please proceed.

Hello, good morning, guys.

Good morning.

Could you talk a little bit about the competitive landscape? Are you seeing any signs of potential share gains from some of the distressed competitors?

Henry, Tim. I -- not really. I think at this stage, I think we are all -- you know, we're all beating off the alligators here. So, I think they're, I don't think there has been any, I think there will be, Henry though. I think that's a good -- you know, that's a good astute question on -- of where we're maybe a few quarters from now. They're definitely are some people and we want to be one of them, who are going to come out of this actually with a much healthier and stronger balance sheet and able to take advantage of opportunities. There's other people who are -- we know struggling much more through it.

Okay, that's fair. And I guess if I was early on a question. I'll be late on the question here. Could you talk a little bit about raw materials? Are you seeing any kind of tail wind finally at this point from them?

Well, this is Don. As far as raw materials, many -- it depends on which ones you are talking about. There's been a tremendous drop off in raw materials I'd say over the last 12 months, I think pretty much all of the categories that we've been talking about all of the various metals and so forth and polymers that we use. I don't see them dropping drastically more at this point. I think that, that is starting to stabilize as well pretty much across the board. Maybe a couple of exceptions in there but I think by in large, because the demand globally is down so much, that there's so much pressure on raw materials now, and so little demand that I think that's going to continue for the foreseeable future until some -- some recovery is seen. That's kind of the way I see it right now.

Okay. Thanks a lot.

Sure.

Okay. At this time, we will take two more questions. Your next question comes from the line of David Raso with IFI. Please proceed.

Good morning. First a clarification, the 10% margin comment for fiscal 2010, is that on a business segment basis before corporate?

Yes.

Just to be clear.

Yes.

Okay. My question focuses on the international margins. First, maybe I missed it, but the realignment expenses of $25 million, how much was in international? I don't believe you gave that number.

David, this is Tim. They're --

I have it right here.

We're trying to find it. Here we go.

$9 million.

Okay. Because what I'm trying to figure is if you back out -- well, I'll ask it this way. The currency impact on EBIT, if you can give it international, industrial ideally or even give it at a corporate level, what was the EBIT impact from currency?

Yes, that certainly -- what we've always said that's a much more difficult. We know exactly what the revenue is, very difficult to get down to the EBIT level. And -- but, I would say David, if you want to call Pam and Robin and discuss with them off line, maybe they can help you.

Okay. Because what I'm trying to figure is the international margins obviously were a critical part of the earnings growth, the margin improvement cycle-to-cycle last time.

Right.

And, it looks like if you back out a reasonable margin assumption on the currency, the acquired businesses from lower margins there. It looks like the core margins for international were say 6%, 6.5% for the quarter.

Uh-huh.

But then the next quarter you're implying, if I am doing my math, international margins are down to -- I mean again, correct me if I am wrong, but 2.5%. So, I'm just trying to think about looking out to 2010, and and a 10% company margin pre-corporate, how are we -- how are we contemplating the international margins for 2010 in that 10% number.

Well, David, Tim. I think you're right. We have given you a lower margin in the fourth quarter than third for international. And it really goes back to the same two reasons. And again things move a little more slowly over there, but the realignment, the costs, the efforts and the costs are going to come more skewed there and so will the inventory reductions. You know, inventory -- it's hard to reduce inventory unless you get the people out. So, that is why we are showing you another decrement on the margins in the fourth quarter and international.

Well then I guess -- so when I look forward then. The inventory drag is basically taking out a decremental margin -- you know the inventory (inaudible) about 38%, 39%. So, if it's focused on international, maybe that's the inventory improvement looking out three or four quarters and that can rally the international margins.

Yes.

But that said is it fair to say then inventory reduction you have done this quarter and this coming quarter a lot of it is in Europe or international broadly?

Well, we -- it starts, I guess it's fair -- what is fair to say is that the reductions, the realignment and the inventory reductions occurred more strongly in North America, they are now occurring in Europe. We're sort of -- dropping off here in North America, though things will continue in Europe for awhile. So, that's all just a timing issue. As I say, it takes a little longer, you've got, you know you have to meet with (inaudible) counsels and et cetera, over there in order to take certain actions.

Okay, so clearly you're saying the international margins big inventory reduction this coming quarter and hopefully with all the headcount reduction and so forth, thats the low water mark for international margin.

Correct.

Okay, thank you very much.

Your next question comes from the line of Daniel Holland with Morning Star. Please proceed.

Hello there, good morning.

Good morning, Daniel.

You know, given that we've got a fair amount of government sponsored infrastructure spending, things like that, coming on line in the next few quarters to years or so. Just wondering if you guys have seen anything within your distributer network or anything like that, that would imply that, you know, more home work is being done, more orders, more quoting, something that would suggest that this is actually having some kind of effect at least in the near term on your books?

Daniel, this is again Tim Pistell. Absolutely. We are very much focused and targeted to go after that. We have identified where the moneys are where those opportunities would be for us. And we actually even have some early wins in that regard. So, now in terms of at the distributer level, I can't comment for that but I can tell you within Parker, we are mobilizing to participant.

And would you -- I mean would you say, kind of, which areas you think Parker is kind of best positioned to take advantage of? I mean you spent a bit of time in the investor day talking about energy and you know wind energy -- stuff like that. Is that kind of where you think things are going to be or where are you seeing the most activity or your best bet.

Well, there's two that have been very good for us. Alternative energy, opportunity such as wind turbines and but also on this energy recovery system which we've talked about, which is using the hydraulics to do -- recover energy, power assist if you will for vehicles that start and stop a lot. And that's just gaining more and more momentum everyday and there is more and more money available and people chasing it. So, those would be the two bright stars.

Excellent. Thank you very much.

Thank you, Daniel. Okay. At this time I'd like to turn the call over to Don who has just a few closing comments.

Again I would like to reiterate that we are focused on the appropriate priorities that will see us through this downturn. We will continue to focus on maintaining a strong balance sheet as I had mentioned earlier. Managing for cash, which has been our focus in reducing our cost, to a level consistent with the reduced demand that we're seeing. This, I expect will continue on for the coming months. While many uncertainties prevail, we are focused on controlling what we can control and managing our business effectively. I am extremely proud of how Parker employees have responded to challenges placed upon them, I have every confidence that we can manage through this downturn and emerge even stronger when a recovery emerges. I think the employees have done an outstanding job in all respects, whether its in the reduction of force, whether its in the inventory reduction, just all I aspects of the business, managing the acquisitions that we've brought on and so forth. And I would say that globally. That's not just a North America phenomenon. That's really our global phenomenon that employees have really done an outstanding job. I want to just take this opportunity to thank those that are on the call for your participation. We certainly appreciate your interest in Parker. I think we had a good dialogue here today. I think you pretty much have been up to speed now on just what we're seeing with respect to the business going forward. If you have any additional comments throughout the day, Pam will be around the balance of the day to entertain those and so at this point I'd just say have a great day. Thank you very much.

Thank you very much.

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Thank you, and have a good day.