派克漢尼汾 (PH) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Parker-Hannifin Corp. Q4 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Chief Financial Officer, Cathy Suever. Ma'am, you may begin.

Thank you, James. Good morning, and welcome to Parker-Hannifin's Fourth Quarter and Fiscal 2017 Earnings Release Conference Call. Joining me today is Chairman and Chief Executive Officer, Tom Williams; and President and Chief Operating Officer, Lee Banks.

Today's presentation slides, together with the audio webcast replay, will be accessible on the company's investor information website at phstock.com for 1 year following today's call.

On Slide #2, you'll find the company's safe harbor disclosure statement addressing forward-looking statements as well as non-GAAP financial measures. Reconciliations for any reference to non-GAAP financial measures are included in this morning's press release and are also posted on Parker's website at phstock.com.

The agenda for today's call appears on Slide #3. To begin, Tom will provide highlights for the fourth quarter and full fiscal year 2017. Following Tom's comments, I'll provide a review of the company's fourth quarter and full year 2017 performance together with the guidance for fiscal year 2018. Tom will then provide a few summary comments. And we'll open the call for a question-and-answer session.

Please refer now to Slide #4, as Tom will get us started with the highlights.

Thanks, Cathy, and welcome to everyone on the call. We appreciate your participation this morning.

Today, I'd like to share highlights on our fourth quarter, the full year results and make some brief comments on 2018 guidance and give you an update on our new Win Strategy.

Before getting into the financials, I'd like to start our report on the safety of the company. During 2017, we were able to reduce our recordable injuries by 22% compared to the prior year. This builds on significant year-over-year improvements to the last several years. Our global team continues to focus on achieving our goal of 0 accidents through a multifaceted plan, which includes utilization of high-performance teams. This team process generates higher levels of engagement and ownership across all of our key performance indicators.

Now the financial highlights of the fourth quarter results. This was an outstanding quarter for Parker across many measures. Fourth quarter sales were $3.5 billion, an 18% increase compared to the same quarter a year ago. Notably, organic sales increased 6%, while acquisitions contributed 13% and currency was a slight negative. We are particularly pleased with the strong organic growth of 6% for the second consecutive quarter, driven by improving conditions across many end markets. The CLARCOR acquisition, which closed in late February, was the main factor influencing the 13% increase from acquisitions.

Order rates, which do not include the impact of acquisitions, increased 8% compared to the same quarter last year, mostly driven by a 10% increase in orders for both Industrial North America and Industrial International businesses.

Net income for the fourth quarter increased 21% to $293 million as reported compared with the same period last year. Earnings per share was a record at $2.15 as reported or $2.45 on an adjusted basis, a 29% increase in adjusted earnings per share compared to the same quarter last year. Our overall segment operating margin performance this quarter was very strong at 15.3% as reported or 16.8% on an adjusted basis. This is an excellent performance, representing 120 basis point increase in adjusted segment operating margin compared with the fourth quarter of 2016. Keep in mind that these margins are fully burdened with additional amortization and depreciation related to the CLARCOR acquisition.

So just a few highlights of the full year that I'd like to note. Sales increased 6% to $12.0 billion, mostly driven by acquisitions. Organic growth was 2%, as demand levels were weak in the first half, but improved significantly in the second half of the year. Full year net income increased 22% to $983 million. Earnings per share were $7.25 as reported or $8.11 on an adjusted basis, representing a 26% increase in adjusted earnings per share compared with 2016. As a reminder, during FY '17, we completed the sale of the Autoline product line, resulting in a pretax gain of $45 million or $0.21 per share.

Total segment operating margins were 14.9% as reported. On an adjusted basis, segment operating margins were 15.8%, a 100 basis point improvement versus last year. We anticipate continued margin expansion from the new Win Strategy.

Excluding a discretionary pension contribution, full year cash from operations was 12.7% of sales, and our free cash flow conversion was 134%. As I said before, a key focus for us to be great generators and deployers of cash in a way that produces increased long-term returns for our shareholders. These cash flow measures demonstrate our ability to be consistently a strong generator of cash.

This is also a successful year of cash deployment. We increased our annual dividends per share, ensuring that we continue what is now 61 consecutive years of increasing our annual dividends paid. We also repurchased $265 million worth of Parker shares. Importantly, we invested in growing our business by making 3 acquisitions, one of which, CLARCOR, was transformational for our portfolio.

Regarding the integration of CLARCOR and the Parker Filtration businesses, the team continues to make excellent progress. We see opportunities to accelerate the integration. And we are pulling into FY '18 planned costs to achieve, which were originally expected in FY '19. Our estimated total cost to achieve remain at $90 million. We continue to be confident that we can generate the $140 million in cost synergies originally expected from our combined Filtration businesses. With our strong cash flow, we expect our gross debt-to-EBITDA multiple to reduce to approximately 2x over the next 24 months.

Moving to fiscal 2018 guidance. We are initiating a full year sales growth forecast in the range of 11.4% to 15% to reflect the anticipated higher organic growth and the impact of acquisitions. We are estimating a reported earnings in a range of $7.88 to $8.58 per share or $8.23 at the midpoint. On an adjusted basis, earnings per share are expected to be in the range of $8.45 to $9.15 per share for a midpoint of $8.80 per share. Earnings are adjusted on a pretax basis for expected business realignment expenses of approximately $58 million. And CLARCOR costs to achieve are approximately $52 million. Business realignment expenses will reflect the ongoing footprint optimization and/or simplification actions.

A few highlights regarding simplification. We have continued to consolidate divisions, going from 114 divisions in FY '15 to 100 divisions in the middle of FY '17. And we plan to be at 90 divisions by the end of FY '18. These numbers are for our legacy business, excluding CLARCOR.

In June, we formed the Motion Systems group by combining the businesses of our hydraulics and automation technologies. We believe this combination leverages the strengths of Parker's motion technologies into a single organization that can better address the needs of our customers.

In the Europe, the Middle East and Africa regions, we are fully streamlining our organization to put greater emphasis on leveraging resources across the regions. With this change, we are reducing the number of regions from 4 to 2 and from 22 sales companies to 7 multi-country sales companies, all supported by a pan-regional customer service organization. Additionally, we continue with our revenue complexity efforts to reduce costs and improve the speed at which we serve our customers.

The execution of the new Win Strategy and the strategic addition of CLARCOR have resulted in a significant increase in our EBITDA margin. On an as-reported basis, EBITDA margin improved 160 basis points from 13.7% in FY '16 to 15.3% in FY '17. On an adjusted basis, EBITDA margins increased 200 basis points from 14.7% in FY '16 to 16.7% in FY '17. In 1 year alone, we have made significant progress toward our targeted 300 basis point improvement in EBITDA as a result of the CLARCOR acquisition and the new Win Strategy. We look for continued EBITDA margin expansion in the future.

So for now, I hand things back to Cathy to give you more details on the quarter and the guidance.

Thanks, Tom. I'd like you to now refer to Slide #5.

I'll begin by addressing earnings per share for the quarter and full year 2017.

Adjusted earnings per share for the fourth quarter were $2.45 versus $1.90 for the same quarter last year. Fourth quarter earnings have been adjusted to exclude CLARCOR acquisition-related expenses of $0.19 per share and business realignment expenses of $0.11 per share, which compares to business realignment expenses of $0.13 per share for the fourth quarter last year.

Adjusted earnings per share for the full year 2017 were $8.11 versus $6.46 for 2016. For 2017, earnings are adjusted for business realignment expenses of $0.30 per share and CLARCOR acquisition-related expenses of $0.56 per share for a combined total of $0.86 per share. The 2016 earnings are adjusted for business realignment expenses of $0.57 per share.

On Slide #6, you'll find the significant components of the walk from adjusted earnings per share of $1.90 for the fourth quarter of 2016 to $2.45 for the fourth quarter of this year. Increases included higher adjusted segment operating income of $0.66 per share, reflecting the improved market demand and benefits from the new Win Strategy initiatives.

Lower income tax expense in 2017 equated to an increase of $0.04 per share, due largely to the stock option expense tax credit. Adjusted per share income was reduced by $0.11 to -- for higher interest expense, while higher corporate G&A and other expense reduced it another $0.04.

On Slide #7, you'll find the significant components of the walk for adjusted earnings per share of $6.46 for the full year 2016 to $8.11 for the full year 2017. Increases in 2017 included higher segment operating income equating to $1.17; a gain of $0.21 realized in Q2 from the divestiture of the Autoline product line; lower other expense and corporate G&A of $0.16; lower income tax expense equating to $0.17, which was, again, driven primarily by stock option expense tax credits; and fewer shares outstanding equating to $0.08. The decrease in adjusted earnings per share for fiscal '17 was higher interest expense of $0.14 associated with the CLARCOR acquisition debt issuance.

Moving to Slide #8. We've reviewed total Parker sales and segment operating margin for the fourth quarter and full year. Total company organic sales in the fourth quarter increased by 6% compared to last year. There was a 12.9% contribution to sales in the quarter from acquisitions, while currency negatively impacted the quarter by 0.7%.

Total segment operating margins for the fourth quarter, adjusted for realignment costs as well as CLARCOR acquisition-related costs, was 16.8% versus 15.6% for the same quarter last year. The increased adjusted segment operating income this quarter reflects the impact of organic growth combined with the benefits yielded from our simplification initiatives.

For the full year, organic sales in fiscal year 2017 increased by 1.7%. Acquisitions contributed 4.9%, while the effect of foreign currency translation resulted in a negative impact of 0.7% of sales.

Total company segment operating margin for fiscal year 2017, adjusted for realignment and CLARCOR acquisition-related expenses, was 15.8% versus 14.8% in fiscal year 2016.

Moving to Slide #9. I'll discuss the business segments, starting with Diversified Industrial North America. For the fourth quarter, North American organic sales increased by 7.4% compared to the same quarter last year. Acquisitions contributed 25.1%, while currency negatively impacted the quarter by 0.3%.

Operating margin for the fourth quarter, adjusted for realignment and CLARCOR acquisition-related costs, was 18.2% of sales versus 18.0% in the prior year. This improvement was driven by strong incremental margins on increased revenues and lower fixed costs.

For the full year, organic sales for fiscal year 2017 decreased by 0.2%. Contribution to sales from acquisitions was 8.8%. The impact of foreign currency translation resulted in a negative impact to reported sales of 0.3%. For the full year 2017, operating margins, adjusted for realignment costs, was 17.7% versus 16.8% in the prior year.

As a reminder, these Industrial North America results have been impacted by the CLARCOR acquisition, with approximately 85% of total CLARCOR sales recognized within North America. I'll provide further detail for the quarter and full year regarding the impact of the CLARCOR acquisition in a subsequent slide.

I'll continue now with the Diversified Industrial International segment on Slide #10. Organic sales for the fourth quarter in the Industrial International segment increased by 7.7%. Acquisitions positively impacted sales by 6%, while currency negatively impacted the quarter by 1.5%. Operating margin for the fourth quarter, adjusted for business realignment costs, was 14% of sales versus 12.6% in the prior year, again reflecting strong incremental margins on increased revenues and lower fixed costs.

For the full year, organic sales for fiscal year 2017 increased by 4.3%. Acquisitions positively impacted sales by 2.9%, while currency resulted in a negative impact to reported sales of 1.6%. For the full year 2017 operating margin, adjusted for realignment costs, was 14% of sales versus 12.3% in the prior year.

I'll now move to Slide #11 to review the Aerospace Systems segment. Organic revenues were relatively flat at a 0.1% increase for the fourth quarter. Modest declines in OEM volume, reflecting continued softness in business jets, were offset by positive aftermarket growth during the quarter. Operating margin for the fourth quarter, adjusted for realignment costs, was 18.5% of sales versus 16.4% in the prior year. Adjusted operating income was $112 million as compared to $99 million last year, primarily reflecting the impact of favorable aftermarket mix during the current quarter. For the full year, organic sales for fiscal year 2017 increased by 1.1% of sales. And operating margin, adjusted for realignment costs, was 14.9% of sales versus 15.1% in the prior year.

On Slides 12 and 13, you'll find the fourth quarter and full year 2017 results for total Parker, CLARCOR and the resulting legacy Parker for net sales, operating income and operating margin. We wanted to provide clarity for legacy Parker and legacy CLARCOR results through fiscal year 2017. In fiscal 2018, we will be operating the CLARCOR and Parker businesses more as one company, and we will no longer be able to provide a clean split between the 2.

On Slide 12, you see that the fourth quarter 2017 CLARCOR sales contributed $351 million, and as-reported operating income was a negative $3 million. Adjusted CLARCOR operating income, which includes amortization, was $30 million favorable when adjusted for acquisition-related expenses.

On an as-reported basis, legacy Parker operating margins improved 230 basis points from 14.8% to 17.1%. On an adjusted basis, legacy Parker operating margins improved 210 basis points from 15.6% to 17.7% in the fourth quarter.

On Slide #13, you'll find that the 4 months Parker owned CLARCOR, CLARCOR sales contributed $487 million. And as-reported operating income was a negative $16 million. Adjusted CLARCOR operating income, which includes amortization, was $42 million when adjusted for acquisition-related expenses of $58 million.

On an as-reported basis, legacy Parker operating margins improved 180 basis points from 13.9% to 15.7%. On an adjusted basis, legacy Parker operating margins improved 130 basis points from 14.8% to 16.1%. The amortization related to CLARCOR intangibles is presently estimated to be $129 million per year, and incremental depreciation from CLARCOR is estimated to be $16 million per year.

Moving to Slide #14 with the detail of order rates by segment. As a reminder, Parker orders represent a trailing average and are reported as a percentage increase of absolute dollars year-over-year, excluding acquisitions, divestitures and currency.

The Diversified Industrial segment's report on a 3-month rolling average, while Aerospace segments are based on a 12-month rolling average.

Total orders grew a positive 8% as of June 30. Diversified Industrial North America orders increased to a year-over-year 10% change. Diversified Industrial International orders also increased year-over-year at 10% for the quarter. And Aerospace Systems orders were positive 1% year-over-year.

On Slide #15, we report cash flow from operating activities. Full year cash flow from operating activities was $1.3 billion or 10.8% of sales. This compares to 7.7% (sic) [10.7%] of sales for the same period last year. When adjusted for the $220 million discretionary pension contribution made in the first quarter of fiscal 2017, cash from operating activities was very strong at 12.7% of sales. This compares to 12.4% of sales for the same period last year, which is adjusted for $200 million discretionary pension contribution made in 2016.

In addition to the discretionary pension contribution, the significant uses of cash in 2017 were $4.2 billion for acquisitions, $265 million for the company's repurchase of common shares, $345 million for the repayment of share -- I'm sorry, for the payment of shareholder dividends and $204 million or 1.7% of sales for capital expenditures.

On Slide 16, we show a 10-year history of Parker's free cash flow conversion rate. For the full year 2017, Parker generated free cash flow conversion of 134%. As reflected on this slide, our free cash flow conversion has exceeded 100% for each of the past 12 years.

The full year earnings guidance for 2018 is outlined on Slide #17. Guidance is being provided on both an as-reported and an adjusted basis. Adjusted segment operating margins and earnings per share exclude expected business realignment charges of $58 million and CLARCOR costs to achieve of $52 million for the full year. Total sales are expected to increase in the range of plus 11.4% to plus 15% as compared to the prior year.

Full year organic growth at the midpoint is estimated to be plus 3.7%. Acquisitions in the guidance are expected to positively impact sales by 8.4%. Currency in the guidance is expected to have a positive 1% impact on sales. We have calculated the impact of currency to spot rates as of the quarter ended June 30, and we have held those rates steady as we estimate the resulting year-over-year impact for fiscal year 2018.

For total Parker, as-reported segment operating margins are forecasted to be between 15.1% and 15.5%, while adjusted segment operating margins are forecasted to be between 15.9% and 16.3%.

The full year guidance at the midpoint below the line items, which includes corporate G&A, interest and other expense, is $500 million. The full year tax rate for 2018 is projected to be 29%. We've not included any projected benefit for stock option expense or tax credits.

The average number of fully diluted shares outstanding used in the full year guidance is 135.6 million shares. For the full year, the guidance range on an as-reported earnings per share basis is $7.88 to $8.58 or $8.23 at the midpoint.

On an adjusted earnings per share basis, the guidance range is $8.45 to $9.15 or $8.80 at the midpoint. This adjusted guidance excludes business realignment expenses of $58 million. And savings from these business realignment initiatives are projected to be $25 million in fiscal year 2018.

CLARCOR synergy Costs to Achieve are forecasted to be $52 million for the full year 2018. The effect of these costs on earnings per share is $0.27 per share. As Tom mentioned in his remarks, we have pulled forward some of the planned CLARCOR integration activities. As a result, we expect to have incurred slightly over 80% of the total $90 million estimated cost by the end of fiscal year '18. The remaining 20% is expected to be incurred evenly during fiscal year '19 and fiscal year '20.

CLARCOR synergy savings are estimated to be $58 million by the end of fiscal year '18, equating to approximately 40% of the announced $140 million total expected synergy savings. We estimate an additional savings of another 40% during fiscal year '19 and the balance of 20% in fiscal year '20. We remain well on pace to realize the forecasted $140 million run rate synergy savings during fiscal year '20.

Savings from all business realignment and CLARCOR Costs to Achieve are fully reflected in both the as-reported and the adjusted operating margin guidance ranges we've given.

We would ask that you continue to publish your estimates using adjusted guidance for purposes of representing a more consistent year-over-year comparison.

Some additional key assumptions for full year 2018 guidance at midpoint are: sales are divided 48% first half, 52% second half; adjusted segment operating income is divided 45% first half, 55% second half; adjusted EPS first half, second half is divided 42%, 58%. And first quarter fiscal 2018 adjusted earnings per share is projected to be $1.89 per share at the midpoint, and this excludes $0.11 per share of projected business realignment expenses and $0.10 per share of CLARCOR Costs to Achieve.

On Slide #18, you'll find a reconciliation of the major components of fiscal year 2018 adjusted earnings per share guidance of $8.80 at the midpoint from prior fiscal 2017 earnings per share of $8.11. The increase of $1.54 per share is from stronger segment operating income, and the $0.15 increase is from reduced other expense, primarily driven by lower pension expense in fiscal year 2018. The largest decrease in earnings per share is from $0.38 of additional tax expense in 2018, primarily driven by not recognizing any stock option expense credit for 2018 compared to a $0.26 per share benefit in 2017.

Other decreases to earnings per share include higher interest expense equating to $0.23, the nonrecurrence of a $0.21 per share gain from the Autoline divestiture and higher corporate G&A expense of $0.18 per share. Please remember that the forecast excludes any acquisitions or divestitures that might close during fiscal 2018.

This concludes my prepared comments. Tom, I'll turn the call back to you for your summary comments.

Thanks, Cathy. I am very pleased with the progress we are making towards our key goals.

We're just now approaching 2 years into the implementation of the new Win Strategy. Not only are we delivering immediate results, but we continue to see opportunities that will allow us to drive ongoing EPS growth for the next several years, driven by 4 key factors: first, the new Win Strategy, which continues to drive better overall operating performance; second, lower fixed costs as a result of our restructuring activities; third, higher levels of organic sales growth; and lastly, the CLARCOR acquisition which will yield incremental earnings and synergies.

I would especially like to thank our team members around the world for their dedicated efforts in the outstanding year that we had in FY 2017. Overall, Parker is in a very strong position as we celebrate 100 years and reflect on all the great things we have accomplished and our bright future ahead of us. All signs point to a strong 2018 in which we expect to generate record levels of sales and earnings.

So at this time, James, we're ready to take questions. And you can go ahead and get us started.

(Operator Instructions) Our first question comes from Andy Casey with Wells Fargo Securities.

I was wondering if maybe, Lee or Tom, could you run through what you're seeing by region?

Andy, this is Tom. Maybe what I'd like to do is kind of walk through what we're thinking for the guide, because, obviously, what happened on the regions is influencing the guidance so -- and I know that'll be a question that everybody on the phone is going to have. So let me start with the top line, and I'll include the market view on that as well, Andy. So first, the guidance is $13.6 billion. And round numbers organic of $4 billion, currency at $1 billion, acquisitions of $8 billion. And so we use a lot of different inputs, economic models, discussions with our teams and market activity, of course, talking to our customers and distributors. And the way that 4% organic looks, it's 5% organic growth for the first half total Parker. If you look at just industrial for us, it's around 6% if you add North America and International together. And then the second half of our year, what we use is our traditional first half, second half splits. So we have decades of experience and data that our first half, second half split, barring some macro event in the second half, is almost always 48-52. So you take the first half of 5% organic total for the company, 6% industrial to a 48-52 split, compare it to the next year, the prior year, and you get the $13.6 billion. What that gives you is that yields at 2.5% organic growth for the second half. Now I'll give some insight on margins, and then I'll come back to the markets that influenced that organic look. Of course, then the other part in our top line is putting a full year of CLARCOR in there as well. Now on the margin side, I want to give you some color on legacy margins. So this is the core -- the base Parker business without CLARCOR, and that's grown from 16.1% in FY '17 to 17.2%, so 110 basis point improvement on the legacy business. So significant improvement based on the Win Strategy and all the activities that we're doing driving those type of margins. What that infers is a legacy MROS of around 40%, all in, total company is about 18%. But remember, we've got quite a bit of headwind with the amortization and depreciation from CLARCOR that Cathy went through. So on the end market summary, that makes up that organic look. There's really a tremendous amount, and this is very similar to what we're seeing in the fourth quarter as well. For us, it's a much longer list of positive end markets than there are neutral or negative. I'm just going to run through the positives. I'm just going to list them for the sake of brevity here. Positives are aerospace, agriculture, construction, distribution, forestry, general industrial, heavy-duty truck, lawn and turf, mining, oil and gas, refrigeration and air conditioning, semicon and telecom. So as I said, it's long list, but that's a great thing to have a long list of positives. And the neutral side is automotive, power gen, rail and life sciences. And really the only market that we see as negative year-over-year is marine. Now one comment I want to make is context overall, that end market, that's how we are doing in the markets. I'm not trying to make a comment about the whole end market is going to -- what it's doing. That's just our projection of Parker within that end market. So if I could just kind of wrap up, and I'll let you have a follow-up, Andy. The way I look at this, this is record sales and EPS for next year. We've got legacy margins growing 110 basis points. We've got organic growth at almost 4 versus a global Industrial Production Index of about 2. So remember, we've talked about, with the new Win Strategy, we want to have 150 basis points higher than industrial production growth, and we're exceeding that. And then we're accelerating the CLARCOR Cost to Achieve and the synergy savings, which are going to help us from an EBITDA margin accretion as well. So I view this as a very solid guide with good assumptions.

And then a follow-up on that 17.2% legacy margin. Does that imply -- I think your fiscal 2020 goals were 17% for the total company. Does that -- so you're already there in the guidance in fiscal '18. Does that just mean you have to pull up CLARCOR to get to the 17% threshold? Or do you expect incremental legacy growth beyond that 17%?

Well, we -- definitely, we're not done. So we definitely expect legacy margins to continue to improve. When we originally set that target of 17%, really our goal was to get that on an as-reported basis. And that was barring some large deal like we did with CLARCOR, which we're ecstatic over. So ideally, I want to get it to 17% on an as-reported basis. And I'd like to the whole company at 17% with CLARCOR in it. Now remember, yes, that amortization and depreciation of the CLARCOR business itself has 10 points of headwind, round numbers, with that amortization and depreciation. So we see continued margin expansion. All the actions that we're going to do underneath what Cathy talked about with our realignment activities are on the base business. And of course, the cost to achieve our combined filtration business are going to continue to make us faster and more cost effective. So we see margin expansion in the future beyond the 17%, obviously.

Our next question comes from Joe Ritchie with Goldman Sachs.

So Tom, it seems like, with CLARCOR, you guys are finding a lot of ways to accelerate cost and realize the synergies. I guess, what's the scope for initiating more spend than the $90 million that you had targeted? And then also specifically, if I'm doing the math right, if you're expecting $40 million in benefits next year, that alone should be like, what, roughly, 275 basis points or so to CLARCOR margins next year. Is that right?

Well, I'm not going to calculate '19 as yet for you, but let me just talk about the integration itself. We are clearly finding opportunities to go faster. And I think it speaks to the great fit that CLARCOR and our Filtration businesses are together. Great product, people, channel, cultural fit, et cetera. And as we put the combined team together, we see opportunities to pull in some of those actions from '19 to '18. So kind of the themes that we're looking at, early on, the savings are focused on corporate overhead, which is a little more straightforward to go after, facility rationalization, manufacturing optimization there and logistics. And as we move into year 2, which will be '19 and '20, still facility lift we'll get. And now you start to bring in more of the supply chain savings. And then you bring in more of the productivity savings as you get a chance to put the Win Strategy and all those things into those divisions. So that's why when Cathy went through it, of the $140 million, it's 40-40-20 as far as the splits between '18, '19 and '20. So we are very optimistic and very encouraged by what we see to continue to work that and make terrific progress.

Okay. No, that's helpful. It sounds like -- I guess, maybe just my follow-up there is just on growth. In talking about the first half of 2018 in industrial and the 6% growth, the order trends are presenting faster growth than that. And so I'm just curious, maybe you could tell us a little bit about the buildup to 6% and what you saw as kind of the trends progress throughout the quarter, just to get a sense for the conservatism of that number.

Well, the trends for the quarter were pretty consistent as far as what we saw, as far as orders. When we look at April through what we saw through July, we're pretty consistent. On the international, we showed 10. We had Asia at mid-teens and Latin America and Europe kind of in the mid- to upper single digits. So we saw good progress there. Now part of what you've got to remember is, especially when you go to Q2, you get the tougher comps with international, because that's what's started turning last year for us was Asia, in particular, turning quicker. So it's a higher -- if you look at the first half of 6% as a higher Q1, upper single digits, moving down to mid as you move through the second quarter. And while we are pleased with these order rates, we recognize that it's hard to continue, especially as we start to move against these comps, at double-digit order rates. So they will start to glide down and will move down to some, what I would call more than nominal growth rates, which will still be terrific for us. And then you leverage that on top of what we're doing and have done already on the cost structure and continue to do is going to mean nice earnings accretion for our shareholders.

Our next question comes from Nathan Jones with Stifel.

I'll follow up to Joe there and start maybe looking at the second half. I think you said 2.5% organic growth in the second half. Leading indicators are still positive. Global economy is improving. I would have thought that potentially, the order rates are going to be better in the first half and maybe drive a better organic growth in the second half. Can you talk a little bit about your assumptions that go into that 2.5% organic growth in the second half?

Nathan, it is Tom. The assumptions are pretty straightforward, 48, 52. Decades and decades of data that has showed, that's our traditional split. I recognize I'm probably not smart enough to be able to forecast FY '18 accurately, but I've got decades and decades of experience that tells me, barring some unusual event, it's going to be 48, 52. So when you do that kind of math and you look at comparison to '17, that's what yields that 2.5% growth.

Does that then imply that you're assuming a relatively neutral demand environment? You're not assuming any improvement in the global economy as we go forward, say, over the next 6 months, getting towards the second half in order to see that 48, 52 split? If the global economy improved, then maybe it'd be a little heavier to the second half than usual?

I feel pretty good about the global economy right now. It's -- we've already experienced, as you've seen in our orders the last couple of quarters. This is pretty good activity right now, and we look for it to continue. And the splits kind of is what drove the second half. But we feel very good. I mean, this is -- if you look across the regions, this is a great environment for Parker right now.

And then just one on the order rates. Do you have any indication of whether or not there's restocking going on at the OEMs or whether this is -- you're pulling through real demand here?

Nathan, it's Lee. I saw -- on the distribution level, I would say there's some modest restock taking place. There's been a surge in activity, and I have North America mostly in mind when I make that comment. And then on the OE side, I would say modest, but it's pretty much pull-through demand the best we could tell at this point in time.

Our next question comes from Steve Volkmann with Jefferies.

I know you sort of do your business reviews kind of at the end of the year. And I'm curious, as you think about your portfolio and the simplification stuff that you're doing, whether there might be an opportunity to sort of further streamline the portfolio, maybe do some divestitures or something, along with the process of kind of reducing the overall complexity.

Yes, Steve, this is Tom. When we look at the portfolio, we're pretty happy with it now. We'll continue to look at whether we're the best owner. I think that's always a good practice. And if you look at us the last 5 years, we've divested of about $350 million of business that we didn't think was core or we weren't the best owner. But when you look at how the company has been built, we are an integrated motion and control technology company, with 60% of our customers buying from 2/3 of the company. So obviously, our customers are voting with their hard-earned wallet that this package that Parker offers makes sense to solve problems for them. So I don't see any big things for the portfolio on that end, but we'll continue to be good stewards and look at that. But as I mentioned in my opening comments, there's a lot of activity going on with the whole simplification actions. If I just -- I'll just tick through a couple real quickly. So division consolidations, when we started this as part of the Win Strategy, we were at 114 divisions. This is without CLARCOR right now. And we're going to end the fiscal year at 90 in FY '18. So 24 divisions. But to get the 24 divisions going down, you have to combine 48 divisions. So 48 out of the 114, in round numbers, is like 45% of the company has gone through some kind of a consolidation process. Pretty impactful to have that much activity. Then we took -- we used to have separate hydraulics and automation businesses. So those housed all of our motion technologies, so hydraulics -- at hydraulics, obviously, automation, pneumatics and electromechanical. So we looked at those and said to ourselves, it makes more sense that they be underneath one leadership, one operating structure, because our customers are looking for one motion technology solution. And let's do that together. Let's put all of our motion technology together. So we combined those 2 business groups effective in June of this calendar year. And then I mentioned the things that we're doing in Europe and Eastern Africa, a much more pan-European approach on customer service and our sales structure, which is really doing a lot to kind of reduce, I would call, the higher part of the organization structure, so keep all of our key salespeople or at least most of them and have a much more efficient sales leadership structure in Europe. So -- but I would still say that -- so those are some pretty impactful structural things we're doing this fiscal year. But the big knot is still the whole revenue complexity, the 80-20 and looking at all of our part numbers, our quote activity, et cetera, and streamlining that. And that will be day-by-day hand-to-hand combat working through that over the next several years, and that'll have continued margin lift for us as well.

Great, that's helpful. And maybe just a follow-up. And as I look at the difference between North America and International, we're at roughly 400 basis points now in terms of the margin. And I guess, I've been doing this long enough with you to remember when you actually had some parity there a few years back. And I'm curious, as you look at the 2 businesses and the trajectory over the next couple of years, do you expect that to close? And are there any sort of structural reasons that those margins should be that different?

Steve, it's Tom again. I don't know what time period you're talking about. But in my time, they've never been the same. Maybe there were some data point historically, but they've always had a difference. And the difference really kind of stems to 2 things: one, the mix of OEM and distribution is higher distribution in North America, hence, why one of the key growth strategies of the company is to grow the international distribution in Europe and Asia and Latin America to drive that. We want to grow distribution around the world, including North America. We would like to change that mix in the rest of the world. So that'd be one big one. And then the SG&A is higher in Europe than it is in North America. Hence, when you hear these actions that you're talking about, especially this year, are all geared to trying to lower that SG&A and get these more in line. Remember, the mix issue between OE and distribution, that won't be solved in a year. That's going to take -- it took us 60 years to build the network we've got in North America. I'm not going to be happy to wait that long, but obviously, we're going to stay at it very aggressively. But that will take time to change the mix part of things.

Our next question comes from John Inch with Deutsche Bank.

So CLARCOR, what was the organic growth in the quarter? And I guess, you're saying your industrial growth you're expect next year is 6.5 the first half -- sorry, 6 the first half; 2.5 the second half. What about CLARCOR? Is that going to follow the same pattern?

Yes, John. For the fourth quarter, we had relatively low single digits of almost flat growth for CLARCOR itself. Part of that is because they had a really strong March. And so the fourth quarter just was even. We were okay with that. Going into fiscal year '18, we're expecting low single-digit organic growth for CLARCOR for the year. Little heavier first half, as their seasonality is strong in the first half compared to second half, as it is for Parker.

So we'll a little below the corporate average, right, of 4. So does that -- I think that's natural if you're kind of restructuring that business you're going to create a little bit of disruption in terms of people moving around and stuff. Is that what that is, or is there something else about the CLARCOR mix or their end markets or whatnot? And I'm assuming you're not baking any revenue synergies into those assumptions.

You're correct that we don't have revenue synergies built in. Keep in mind, the aftermarket business doesn't tend to have the volatility or the market-driven change like OE has. Aftermarket tends to be a little bit more steady and low single-digit growth continuously rather than the peaks and the valleys. And they're ahead of the aftermarket.

Okay. So you're saying there's actually no restructuring disruption?

Well, not to the sales, but to the margins, we'll certainly be building inventory for the facility consolidations and things like that. So there'll be some disruption in the margin level, but not at the sales level.

You've given us some CLARCOR numbers. But of the $8.80 midpoint adjusted, what's the EPS attributable to CLARCOR?

We're projecting a $0.20 accretion from CLARCOR in fiscal '18.

Okay. And then just lastly, on Aero, I think Aidan had kind of punk Aero numbers too. Is military just dragging that in some manner right now? Or is there something else going on that -- I realize Aero doesn't get a lot of attention per se. But just -- I'm just curious what -- kind of what's going on, because aftermarket looks pretty good, OE not as great? I mean, what -- is it military or is there something else?

John, this is Tom. Let me just walk you through the 4 major pockets for Aerospace. This is looking at our '18 guide. So for commercial OEM, we've got it as flat. And it's a mixture of single-aisle continuing to grow. Our A350 content is very high, so that's an incremental growth for us, being offset with other weakness in wide-body, like 777, and then weakness in bizjet and helicopters, which is trying to find a bottom, but still not helping us. So those kind of net out to a neutral. Military OE is flat. The good thing is Aero is at 35. We have a great content at 35, missiles and the KC-46 tanker program, offset with legacy fighters starting to wean off, F-15s and F-16s. Commercial MRO at plus 3, driven by available seat miles and air traffic around the world. And the military MRO at plus 5. And that's F-35 provisioning and just the aging fleet that need to do some repair and replacement. So that nets out to 1.6% -- 1.5% growth in FY '18.

Just last, how did China do? China's been really strong for lots of multi-companies. How did it do kind of not just on an absolute basis, but just the cadence of business in China? Did it pick up? I know you've got your own Parker expansion initiatives. Just what was going on in China in the quarter?

Again, John, China continues to do very strong, mid-teen growth in the quarter, and virtually every end market, as you get down the list, being positive. And the Asia team in general across, in addition to China, we've got every country in positive territory, every country growing. And Asia was the first region for us that turned, and had a terrific year versus last year, and looks like it'll be another strong year as well.

Our next question comes from Jamie Cook with Crédit Suisse.

I guess, just a follow-up, 2 questions. One, Tom, I know revenue synergies aren't assumed in your numbers for fiscal year '18. But is it -- is there potential upside in terms of CLARCOR revenue synergies in '18? Or is that -- should we think about that as more of a '19 opportunity, even though it's not in your numbers? And then second, just your assumption on margins, OE versus aftermarket, and just price material costs in '18. Some of your customers are starting to talk about passing through price. I'm wondering if you're able to do that as well.

Okay. So let's start with revenue synergies. Yes, thank you. I would say, we'll start to see maybe some in '18. But you're right, I think this is more of a '19 exposure for us. We continue to want to use that as a contingency and more of an upside for us. We always like to exceed expectations. So I think that's an opportunity for us. But again, I would see that more in '19 than '18. Aftermarket versus OE, the traditional difference for us has been about 10 points in margin. And that's still about the same. And I'll let Lee comment on the pricing environment.

Yes, Jamie, I would just say our assumptions for pricing and costs are pretty flat going into FY '18. There are some dynamics changing, but I'd say from a planning standpoint, we're just assuming pretty flat.

Our next question comes from Mig Dobre with Baird.

Tom, going back to industrial. I'm wondering if there's a way that you can bucket for us maybe what percentage of your business you would guess is currently operating under what you would consider a mid-cycle or a normalized volume environment. And related to this one, we're looking at your industrial guidance for the back half of the year, the organic growth. What exactly does that imply for this bucket? Does it mean that we're getting close to normalized volumes? Or is there something else we need to think about?

So Mig, it's Tom. It's always hard for me to do this early mid-late cycle. Basically, I can't figure out how to do that. So I would just suggest to you that what we're seeing -- if I take distribution as a good example, so distribution is high single-digit growth right now, and it's going to glide into something that's more like mid-single as we go probably into Q2 and then somewhere in that 3% to 4% as we go into the second half. So it's going to start to -- through the course of the next 9 months, you're going to glide into some more normalized growth from what we saw. So we had 2 quarters in a row of 6%. We're forecasting another 6% in the first half. Again, I'm talking about industrial. So that would be 12 months of 6% growth, which is pretty -- pretty good. And the second half it starts to become some more normal -- normalized level.

Okay. Well, then one for you maybe, Cathy. Looking at the below-the-line item guidance. So as far as I can tell here, adjusted for Autoline for '17, you're roughly guiding for a $35 million worth of higher expenses in fiscal '18. Yet your interest is $80 million higher. I understand that pension helps you a little bit. I'm trying to figure out how incremental CLARCOR costs, maybe some additional comp, wouldn't push this number higher than $500 million.

Well, I'm glad that that's the way you're thinking. We've done our best to keep costs down. We've had a lot of initiatives to simplify our SG&A costs, our fixed costs, including at corporate, and these are activities. But you did hit on the Autoline gain won't be there, correct. We are continuing to make investments in things like -- that will go through the corporate G&A for things like Internet of Things growth. We're growing our additive manufacturing, and we're looking into investments into robotics. So we are making -- continuing to make investments that will go through the corporate G&A line. You hit on incentive compensation. We have some incentive comp plans that are market-based, and they will see a little bit higher expense in 2018. Interest expense, you had a high number there. I have $42 million incremental interest expense year-over-year. And you're right, pensions will be dropping. We saw some nice gains in our pension assets in fiscal '17 that will benefit our expense line in '18. And yes, just some other puts and takes in smaller amounts.

Our next question comes from Joel Tiss with BMO.

A simple one and then a little -- not really that detailed. Anyway, the margins in the Aerospace division, is that -- is this kind of a new run rate? Is all the R&D still abating and we can stay at these kind of levels and build on that? Or is it just more of the mix in this quarter that kind of jumped it up so high?

It's more of the mix, Joel. They saw some very heavy aftermarket mix in the fourth quarter. Fourth quarter volume for the aftermarket does tend to be our highest quarter. So the mix was good. We did -- just because of timing of some of the development costs -- I don't know if you remember, in Q3, our development costs were up a bit. Those came out of Q4 kind of run rate. So Q4, just for the quarter, had lower levels of development costs. But we expect development costs to continue to be about 7.5% of sales going forward. And margins in the fourth quarter were kind of a onetime anomaly, and they'll return back to where we were seeing them during most of the year.

Okay. And I wonder if, Lee, maybe you're the best guy for this, if you could give us a couple of examples of the revenue complexity. What are the things you're working on and a couple of maybe the targets for 2018? Just give us maybe some guideposts that we can watch out for to stay updated on.

Well, that's a big topic, Joel. I don't know if I could do it justice.

Just a summary of a couple of topical things.

Yes. We've got a process inside our company we call Parker Operating Protocol, and it really gives a segmentation across our product line base. And it gives us -- as you know, we've been building some of these products for a long time. There's a long tail. And it gives us an opportunity to reduce the complexity of that long tail by either moving into standard products or finding alternative methods to take advantage of that. So I think what you can expect to see, you say, "Well, how can you measure this?" You can expect to see margin expansion as we go forward on this, and quite frankly, higher growth opportunities as we focus on core opportunities and not be distracted by peripheral opportunities, if that makes sense.

Our next question comes from Ann Duignan with JPMorgan.

I guess, my question would be, if you're pulling forward the synergy costs for CLARCOR into 2018 from '19, why aren't you pulling forward the savings?

Ann, this is Tom. When you pull forward the costs, a lot of those costs might be hitting in the final quarter of '18. So we won't be able to see the savings. I mean, that's the quick answer.

Okay. So it's just on the margin pulling it in from one to the other?

Right.

Actually, I think that was sort of it. I think most of my other questions got answered along the way. So I'll leave it there and follow-up offline.

Our next and final question will be from Dave Raso with Evercore ISI.

First question, cadence of the orders throughout the quarter. And obviously, any color on July now that July is completely done, would be greatly appreciated.

David, this is Tom. Orders were pretty consistent, didn't see a lot of variation, which was good, consistently at a pretty high level throughout the quarter. And July was indicative of what we've reflected in the guide. So nothing unusual in July.

And then also thinking about the buckets of orders. I mean, you have a lot of your old school investors, more of a machinery, big mobile growth, others thinking maybe factory floor, CapEx, stationary type stuff comes in next. And then you have, obviously, the consumer life sciences type bucket that's a little more multi-industrial besides, of course, your internal improvement story. I know you have a lot of end markets. But can you give me a little color on -- if you don't even want to talk about even the actual quarter, not even going forward. I assume mobile is the biggest growth. What are you seeing in the factory stationary and then some of the even nonindustrial, so to speak, the consumer and life sciences just for folks who get nervous about the strength of mobile, second derivative slowdowns, obviously inevitable over the next few quarters. Some of those other end markets, what are you seeing from them?

So David, it's Tom. I would just, in round numbers, characterize it. So distribution was high single digits; mobile, high single digits as well; industrial, kind of in that 3% to 4% range. And then that's -- when you blend the whole thing, that's how you get the 6% organic growth that we had in the quarter. And I think that's going to be the expected. And distribution right now in high single digits, I think, has been influenced by some of the recovery in oil and gas and some of the general industrial supply chain that supports all of that. We fully expect that to kind of glide over the next couple of quarters down to a more nominal growth level.

That's interesting, mobile is not double digit. I guess, for diversity of your end markets, that's encouraging to hear that it's not just mobile. But can you help me a little bit around factory floor and stationary then? What are you actually seeing? And is it accelerating? Is it big one-off type projects? Just for a little better understanding and trying to look beyond the mobile markets.

Well, that's in the industrial, which would be the stationary stuff. Again, that's at the approximate 4% level.

But I don't understand, what are you seeing there? What is driving that? Is it any particular geography? Is it big projects? Just trying to understand how much we can assume. Is that something still on to come, so to speak, it can stay at this level or even accelerate? Or as mobile slows, expect stationary factory to stay kind of where it is on growth?

I think stationary is going to be pretty consistent from what I've seen so far. You've got -- remember, our stationary includes buckets that are high -- there's a bit of a mix. You've got telecom and semicons are very high. You've got power gen that's soft right now. Life science, soft, but we view that going to more neutral for FY '18. So it's a mixture of things that make up -- at least the way we classify industrial.

Okay, thanks, David. Okay. This concludes our Q&A and our earnings call for today. Thank you, everybody, for joining us. Robin and Ryan will be available throughout the day to take your calls should you have further questions. Thanks, everybody. Have a good day.

Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you very much for your participation. You may now disconnect. Have a wonderful day.