派克漢尼汾 (PH) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2018 Parker Hannifin Corp. Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the call over to Ms. Cathy Suever, Chief Financial Officer. Ma'am, you may begin.

Thank you, Chelsea. Good morning, and welcome to Parker Hannifin's First Quarter Fiscal Year 2018 Earnings Release Teleconference. Joining me today are 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.

Today's agenda appears on Slide #3. To begin, our Chairman and Chief Executive Officer, Tom Williams, will provide highlights for the first quarter of fiscal year 2018. Following Tom's comments, I'll provide a review of the company's first quarter performance, together with the guidance for the full year fiscal 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.

Thank you, Cathy. And good morning to everybody, and thanks for joining the call. We appreciate your interest in Parker.

So let me just make a few comments about the general business conditions, and we'll talk about the quarter. So first, on safety. That continues to be a top priority for the company. Not only is it the right thing to do, obviously, but the focus on safety is driving an increased engagement from our people, which is, in turn, driving safety improvements across the company, which also is impacting our operational improvements across the company as well. So we're very encouraged by all that.

You saw the announcement we had on orders, broad-based increase across markets and regions. The organic growth was greater than industrial production growth for the last 3 quarters in a row, so we're excited about that. The Win Strategy initiatives continue to generate improvements in both growth and operating margins. If I would characterize business confidence in general, feedback from our customers and our distributors are very positive. So there's a nice general business confidence out there from an environmental standpoint.

So it's actually been about 2 years since we announced and introduced the new Win Strategy, so I thought I would reflect back on that. It's kind of hard to imagine it's been 2 years, but a lot has happened in 2 years. I think back to 2 years ago, we were in a depth of a pretty tough industrial climate, actually, our second biggest downturn in sales in the history of the company. And we performed better than we've ever had in any previous downturn. But if you're looking for evidence on whether the new Win Strategy is working, I think if you look at the results over the last 2 years, I think there is clear objective evidence that the strategy is working. You can see it in the numbers.

The good news for all of our people who are listening, the people within Parker and our shareholders, that this is still early days of implementation. There's lots of upside with the new Win Strategy, and we're excited about that. So I wanted to say, first of all, thank you to all the Parker team members around the world for the great progress after 2 years from the launch and for being part of creating the new Win Strategy. Because when we went around and introduced it, they were a big part of creating the strategies that we are now rolling out.

So let's move on to the quarter. Great start. It's always nice to come out of the blocks well. Starting with safety, as we normally do, 24% reduction in recordable injuries, which was great performance. And you look at the key performance indicators for the quarter, really solid performance across all those. So sales, it was a first quarter record for us, up 23% organic growth, slightly above 7%. Order rates increased at double-digits, and this is the highest level of order growth we've had for a quarter since Q4 of fiscal 2011. The segment operating margins continue to make nice improvements. And EPS for the quarter, that was a first quarter record as well. When you look at the change in the EPS, EPS increased 36% as reported and 40% on an adjusted basis, so really nice, nice increases there. And we're on track to deliver strong operating cash flow going forward.

So just a quick comment or 2 on capital deployment priorities. So dividends continues to be our #1 focus, increasing the dividends and maintaining our long-standing track record of dividend increases. We're going to continue to invest in organic growth with our CapEx. It's the most efficient way to grow the company. We're going to maintain the 10b5-1 plan that we have in place for a consistent share buyback program. And we're continuing to focus on bringing down the debt.

So I want to talk about the outlook. So outlook was increased from an adjusted EPS standpoint by $0.60 at the midpoint from $8.80 to $9.40. This reflects the first quarter beat that we had and the increased organic growth estimates that we baked into the guidance. So for that, we've increased total Parker organic growth from our previous guided 3.7% to now the new guide is 5.5% organic growth, total company.

So now going forward, obviously, we're going to continue to driving the new Win Strategy, and I'm going to just make a quick comment or 2 about each one of the 4 goals, starting first with engaged people. So this is really all about creating an ownership culture because if you're an owner and you think like an owner and you act like an owner, it creates a level of intimacy, level of accountability with your area of responsibility that drives much better results.

Second is premier customer experience. So we're going to focus on going from a service mindset to an experience mindset, that holistic experience interaction with our customers and our distributors. So obviously, it's great quality and delivery, but it's being easier to do business with and it's being digital leaders in our space. So it's Internet of Things, it's eBusiness, those type of areas.

Third goal is profitable growth. So we want to grow organically faster than the market. That's the global industrial production index. And we're doing that through our growth initiatives on the Win Strategy as well as the new incentive plan that we rolled out a couple of years ago that really underpins driving right kind of behavior on growth.

And then the last goal is financial performance. So 17% segment operating margins is still our focus, growing EPS 8% year-over-year or higher. And the focus there for financial performance is those big 4 initiatives we have underneath financial performance. It's Simplification, Lean enterprise, strategic supply chain and value pricing.

So one comment about CLARCOR. I'm sure it'll come up in the Q&A. Integration is going very well. Synergies are on track to what we've communicated to you. And really, the new Filtration Group is really acting as one team, and we're very proud how that whole team has functioned. And really, it's one Parker team, it's no longer a separate CLARCOR or separate Parker team. It's one combined Parker team.

So in sum, we're looking forward to in and anticipating a record year and really driving continuous improvement across the board.

And so with that, I'm going to give it back to Cathy to give you more details on the quarter.

Thanks, Tom. I'd like you to now refer to Slide #5. I'll begin by addressing earnings per share for the quarter.

Adjusted earnings per share for the first quarter were $2.24 compared to $1.61 for the same quarter a year ago. This equates to an increase of 39%. For year-over-year comparison purposes, first quarter fiscal year 2018 earnings per share have been adjusted by a total of $0.14. Operating income adjustments include business realignment expenses of $0.04 and CLARCOR costs to achieve of $0.03. Below operating income has been adjusted by $0.07 per share for a loss related to an investment. Prior year first quarter earnings had been adjusted for business realignment expenses of $0.06.

On Slide 6, you'll find the significant components of the walk from adjusted earnings per share of $1.61 for the first quarter of fiscal 2017 to $2.24 for the first quarter of this year. The most significant increase came from higher adjusted segment operating income of $0.62 attributable to earnings on meaningful organic growth, income from acquisitions and increased margins as a result of our new Win Strategy initiatives. I'd like to point out that, this $0.62 improvement is net of incremental depreciation and amortization expense taken on with the CLARCOR acquisition. The lower income tax rate, due largely to the stock option expense tax credit, equated to a year-over-year increase of $0.12, while lower other expense, primarily due to lower pension expenses, equated to a favorable $0.06. Adjusted per share income was reduced by $0.11 due to higher interest expense and $0.06 due to higher corporate G&A, primarily as a result of higher performance compensation expense.

Moving to Slide #7, you'll find total Parker sales and segment operating margin for the first quarter. Total company organic sales in the first quarter increased year-over-year by 7.4%. There was a 13.9% contribution to sales in the quarter from the acquisitions, while currency positively impacted the quarter by 1.4%. Total segment operating margin on an adjusted basis improved to 16.0% versus 15.4% for the same quarter last year. I'd like to remind you that the fiscal year 2018 operating margins include incremental depreciation and amortization from the CLARCOR acquisition. So a better comparison would be the EBITDA margins. EBITDA margins for the same periods on an adjusted basis improved to 17.0% in fiscal year 2018 from 15.0% in fiscal year 2017. This 200 basis point EBITDA margin improvement reflects the benefits of higher volume, combined with positive impacts from our new Win Strategy initiatives.

Moving to Slide #8. I'll discuss the business segments, starting with Diversified Industrial North America. For the first quarter, North American organic sales increased by 9.7% as compared to the same quarter last year. Acquisitions contributed 26.4% to sales, while currency also positively impacted the quarter. Operating margin for the first quarter, on an adjusted basis, was 16.7% of sales versus 17.5% in the prior year.

I'll continue with the Diversified Industrial International segment on Slide #9. Organic sales for the first quarter in the Industrial International segment increased by 11.7%. Acquisitions positively impacted sales by 7.3%, while currency positively impacted the quarter by 3%. Operating margin for the first quarter, on an adjusted basis, was 15.7% of sales versus 14.2% in the prior year.

I'll now move to Slide #10 to review the Aerospace Systems segment. Organic revenues decreased 5.5% for the first quarter. Reduced volume in OEM sales and commercial aftermarket sales were partially offset by strengths in the military aftermarket during the quarter. Much of this reduced volume was timing-related. An increased year-over-year volume is anticipated for the rest of the fiscal year. Operating margin for the first quarter, adjusted for realignment costs, was 14.7% of sales versus 13.1% in the prior year, reflecting the impact of greater aftermarket sales mix and timing of development costs during the quarter.

Moving to Slide #11, we show the details 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 segments report on a 3-month rolling average, while Aerospace Systems are based on the 12-month rolling average. Total orders continue to be strong, improving to a positive 11% for the quarter end. This year-over-year improvement is made up of 10% from the Diversified Industrial North American orders, 15% from the Diversified Industrial International orders and 4% from Aerospace Systems orders.

Slide #12, we report cash flow from operating activities. Year-to-date, cash flow from operating activities was $239 million or 7.1% of sales compared to 4.2% of sales for the same period last year or 12.2% last year adjusted for the $220 million discretionary pension contribution made in fiscal year 2017. The significant capital allocations year-to-date have been $88 million for the payment of shareholder dividends, $79 million or 2.4% of sales for capital expenditures and $50 million for the company's safe harbor repurchases of common shares.

The full year earnings guidance for fiscal year 2018 is outlined on Slide #13. Guidance is being provided on both an as-reported and an adjusted basis. Total sales increases are expected to be in the range of 14.2% to 17.8% as compared to the prior year. Anticipated full year organic growth at the midpoint is 5.5%. Acquisitions in the guidance are expected to positively impact sales by 8.3%, and currency is expected to have a positive 2.3% impact on sales. We've calculated the impact of currency to spot rates as of the quarter ended September 30, 2017, and we have held those rates steady as we estimate the resulting year-over-year impact for the remaining quarters of fiscal year 2018.

For total Parker, as-reported segment operating margins are forecasted to be between 15.3% and 15.7%, while adjusted segment operating margins are forecasted to be between 16.1% and 16.5%. The full year tax rate is now projected to be 28%, down from our previous guide of 29% as a result of the favorable stock option tax credits realized in the first quarter. For the full year, the guidance range on an as-reported earnings per share basis is now $8.45 to $9.05 or $8.75 at the midpoint. On an adjusted earnings per share basis, the guidance range is now $9.10 to $9.70 or $9.40 at the midpoint.

In addition to the loss related to the sale of an investment of $14 million or $0.07 per share, this guidance, on an adjusted basis, excludes business realignment expenses of approximately $58 million for the full year fiscal 2018. Savings from business realignment initiatives are projected to be $25 million. In addition, guidance, on an adjusted basis, excludes $52 million of CLARCOR costs to achieve expenses. CLARCOR's synergy savings are estimated to be $58 million in fiscal year '18.

We remain on pace to realize the forecasted $140 million run rate synergy savings by 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 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 the midpoint are: sales are divided 48% first half, 52% second half; adjusted segment operating income is divided 46% first half, 54% second half; adjusted EPS, first half, second half, is divided 45%, 55%. Second quarter fiscal 2018 adjusted earnings per share is projected to be $1.96 per share at the midpoint, and this excludes $0.09 of projected business realignment expenses and $0.09 of projected CLARCOR costs to achieve. When comparing to Q2 FY '17 results, please remember that last year included a $0.21 gain per share on the sale of a product line, which was not adjusted out.

On Slide #14, you'll find a reconciliation of the major components of fiscal year 2018 adjusted earnings per share guidance of $9.40 per share at the midpoint compared to the prior guidance of $8.80 per share. The increases include $0.43 from stronger segment operating income, $0.15 (sic) [$0.16] from a reduced tax rate; and $0.05 from lower projected corporate G&A. Offsetting these increases is a $0.04 per share decrease from higher interest and other expense than previously forecasted. Please remember that the forecast excludes any acquisitions or divestitures that might close during the remainder of fiscal 2018.

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

Okay, thanks, Cathy. So we're very pleased with the start of year. I think what you have going on here is a combination of a couple factors. Sales growth and lower cost structure that we've been working on in the past but we'll continue to work on to lower even further, the integration of CLARCOR and the execution of the Win Strategy. All these forces together are combined to provide a very powerful combination that's driving us to project a record year in fiscal 2018.

So again, thank you to the global team for all your hard work, all your efforts and your dedication. And I'm going to hand it off to Chelsea to start the Q&A portion of the call.

(Operator Instructions) And our first question comes from the line of Nathan Jones with Stifel.

This is Adam Farley on for Nathan. So looks like the -- one of the big changes in revenue guidance came from International Industrial going up to 16.9% at the midpoint. What regions are driving this growth? And what end markets are also driving the growth?

So Adam, let me start, and then I'm going to hand it over to Lee to give you more details. But what's changing in our guide is just looking at order entry over the last 3 months. What was interesting, order entry was pretty consistent throughout the quarter, both in North America and International. But International in particularly we saw Asia continue to be strong. The Europe, Middle East and Africa region was growing in the low-teens and Latin America was kind of in the low-single digits. So that combination was pretty strong. Aerospace grew plus 4% -- that's against a pretty tough comp, but plus 14%. So when you put that all in and we looked at what we're projecting for the year and our feedback from customers and distributors, we looked at -- I'm looking at industrial only. So we raised the whole guidance to whole company 5.5%. But if you look at industrial piece by itself, taking North America and International together, it's about 10.5% for the first half and then 3.7% for the second half. Now recognize the second half is comparing to a plus 6% that we had in the second half of FY '17. So remember, we really started clicking from an organic growth standpoint in January of this calendar year and -- so we're comparing against that. So there is still pretty nice growth and top of a plus 6%. So I would say that -- I'll let Lee comment about the details here. This is broad-based, virtually, every end market and every region participating. So I'll let Lee give you further color.

Yes, just piggybacking off Tom, and maybe to give you a little added commentary on the different segments. It continued to move in the direction we expected from the last call. And order entry was really broad-based and all regions participated. Maybe just walking through one of the segments just because I know the question will come up, I'll start with Aerospace, and then I'll work my way into the Industrial markets. Aerospace did fall short of our original expectations for Q1, but we're still forecasting growth for the year. Just breaking that down, I'd say, on the headwind side, clearly commercial OEM was negative for us. It really was impacted by mix of different platforms being manufactured with different varying amounts of content for us. But we do see that to close the gap as the fiscal year goes on. We see it being slightly negative for the year, but not by much. Commercial MRO was slightly negative for us for the quarter, but we really look at this primarily as timing. All the underpinnings of a strong MRO market are still in place, and we expect growth in that market as we move through the fiscal year. And then the last headwind would be military OEM was soft. Again, we see this really as timing. F-35 production will continue to accelerate as the year goes on, and we're confident in that market. I'd say in the positive was really strong military MRO growth. There was some provisioning for new platforms and then just an increase in spares for some of the fleets being used today. So that's kind of a high level on Aerospace. On Industrial, as we look through our end markets and we have a heat map by region, it's really hard to find any significant market did not show positive year-over-year order entry growth during the quarter. Really just to highlight some of those markets. If you talk about natural resource end markets, we continue to see growth during the quarter. This would include agriculture in some areas, but mostly construction equipment, mining, very strong. Oil and gas, land-based North America continues to be strong. I'll talk more about that in a second. Microelectronics industry is really broad-based and strong. And Class 8 truck in North America, very strong. Just a little bit about oil and gas. Rigs have nearly doubled since last year, although some did come out. But really, all these rigs are coming out of cold storage, and they're all being refurbished, which is great for our distribution base. And we also see an appreciable pickup in quotes and order entry activities. So that continues to be very good. We also continue to rebound the activity from our distributor partners around the world. They're very optimistic. I think one of the telltale signs for me when I talk to our distributor partners, when they see an increase in project activity from end customers, that's a real sign for us that capital is starting to be let loose in the economy, and they've all seen an increase in project work. It's not just strictly MRO work. I'd say, the only notable end markets we saw around the globe was really in power generation. This really has to do with the mix of turbines being applied today and then Marine. And then just real quickly on some regional commentary. I talked about North America, but we're very encouraged by the increasing end market activity. I talked about the natural resource end markets, and our distributor base have been very positive across the country. EMEA, we continue to see strong year-over-year order entry growth, and we are forecasting a second year of organic growth for EMEA, which is we feel really good about. And then Tom mentioned on Asia, very strong. China continues to lead with strong industrial and natural resource end markets. And really, the strength of China, from our opinion, has been led by continued infrastructure investment and a strong housing market. So I would just say, we're encouraged by what's happening with our end markets, both domestically, internationally. And really, there is just a very strong, clear positive global sentiment to growth right now.

Our next question comes from the line of Joel Tiss with BMO Capital Markets.

Can you say that if CLARCOR was accretive or dilutive to the operating margins, including the amortization?

Yes, Joel, at the beginning of the year, we gave guidance that we see $0.20 of accretion from CLARCOR for the year. We're on track for that. That includes the impact of depreciation and amortization as well as the additional interest that we're incurring because of the deal. So accretive $0.20 on the year.

I meant on the operating margins. What was the change in the operating margin from the -- from putting CLARCOR in there?

Yes. They're in line with what you saw historically for CLARCOR and in line with our Filtration Group, so normal margins.

Okay. And I just wondered why the operating cash flow was down in -- on the year-over-year? And then I'm done.

Yes, sure. First quarter is always our low quarter for cash from operations. We still expect the year to be at 10% or greater as a percent of sales. In the quarter, we're building working capital to match the higher volume that we're incurring. We're also building some inventory to prepare for some of the footprint moves that we're doing to integrate CLARCOR. So a little bit higher investment in working capital than usual, but not out of the normal trend for us for first quarter, and we'll recover that the rest of the year.

Our next question comes from the line of Jamie Cook with Crédit Suisse.

I guess, a couple questions. You sort of talked about the strength in the international markets. Was that at all just Parker's core business? Or are you seeing any traction in terms of CLARCOR starting to gain some traction sort of on the international front? I guess, that's my first question. And then my second question, just in terms of CLARCOR again, potential revenue synergy, should we see that in '18? And how we're tracking to the savings plan that you guys laid out, the $140 million?

Okay, Jamie. This is Tom. The international strength because CLARCOR's end markets and legacy Parker end markets are the same, that's all one and the same as far the strength that we saw across international. On the revenue synergies, as I've mentioned before, we've always -- we're working them hard, but we've always viewed them as a contingency to make sure we deliver on our commitment to all of our shareholders on the $140 million of synergies. Regarding the $140 million -- so on the revenue synergies, some of you are trying to bake them into FY '18. I would encourage you not to do that because even if we were going to publicly disclose it, which we're not, we won't see into the stuff realistically into FY '19 anyhow. So I would just encourage you on revenue synergies to factor based on the comments we're making on end markets and regions. But on the savings target, overall, $140 million, we still feel very good about that. And remember, we formed these -- we have an integrated management office. We've got a great cadence around project management here, and we have value-creation teams all around the couple of key synergy buckets. Manufacturing footprint, productivity, material, logistics and SG&A would be the major categories, and all of them are on track. So we're very encouraged by what we've seen, both the fit, the technologies, culturally and the projected savings, so we feel very good about it.

And sorry, just to follow up on the end market commentary. Tom, is there any markets that you're looking at that you're concerned in terms of the market's overheating or where strength is not sustainable?

Jamie, I lost there.

Can you hear me?

Yes, go ahead.

Just are there -- I know everything was very positive in terms of end market commentary. But are there any markets that you're concerned are overheating? For example, a lot of people talk about the strength in China not being sustainable. I'm just wondering if you're seeing any warning signs?

Yes. I mean, I think, in general, China is not going to continue to grow at the pace that it's growing now. And we look at some macro indicators like electrical output usage and rail -- freight rail usage. And those would -- and just naturally, when you look at the comparables, China is going to glide from strong double-digits to something that's going to be low double-digits, but it's going to continue to be very good for us. But it's going to bump up against comparables that will make it -- it's going to have to glide down to some more normalized growth plan there.

And our next question is from Mig Dobre with Baird.

And before I ask my question, just a quick word here. Tom and the team, your performance has really been impressive over the last couple years, especially the last 12 months, and that's coming from someone who has been on the sidelines on the stock. So tip my hat to you guys. Great job.

Mig, before I let you ask your question, just thank you on behalf of all of us. Go ahead and ask your question.

So here's my question. I remember, last quarter, one of the discussions that we had collectively was progression of organic growth and how to think about more difficult comps in the back half of the year. Looking at your order intake, at least what we're seeing from this quarter is, that you are able to buck those more difficult comps quite nicely. I guess, from your perspective, how are you thinking about the puts and takes of these more difficult comps? Do you think the business has enough momentum to potentially ride that out?

Mig, this is Tom. On the order entry, remember, our -- on the industrial portion of the company, our visibility would be typically like in that 6- to 8-week standpoint. So obviously, we have a lot more visibility and confidence in the first half of the year and going into January or so. But like I had mentioned before, for the first half, industrial, 10.5% growth, again, a little bit easier comps, but that's reflective of the -- of what we did international -- industrially this last quarter in the order pattern that we're seeing. Then the second half is in that 3.5% range. Remember again that we had 6% organic growth the first 2 quarters of this calendar year, the last 2 quarters of our fiscal year. So I feel pretty good about that. That on top of the 6% growth feels pretty good, especially when we were living in a world that was negative, and we all were feeling like, if we got 1% or 2% growth, that would be the new norm. So that kind of growth rate feels very good. Doesn't feel like we're too far over our skis. And then, of course, we'll give you an update in January, if we think there's more there than that, but we'll certainly give you an update in January.

Understood. Then my follow-up, and maybe a little more color on the margin in Aerospace. You called out some things that helped this quarter. Maybe help us understand exactly what's kind of changing for the rest of the year in order to get to your margin guidance?

Yes, Mig, I'll take this one. Yes, in the quarter, we saw a better mix of aftermarket, just in general terms, of the overall mix. We also were a little bit lighter than usual on our development costs. Now some of that was timing of the development costs and we'll incur the rest of those costs during the rest of the year. We expect the development costs for Aerospace to still be around 7.5% to 7.8% of sales for the year. They were lighter than that in the first quarter. And the mix of aftermarket will shift back, we think, to normal trends in subsequent quarters.

Any sense on a dollar value or margin impact from these -- from this cost shift? The development cost?

Development costs, roughly $10 million to $11 million light this quarter compared to normal.

Our next question comes from the line of Ann Duignan from JPMorgan.

Can we talk just a little bit about CLARCOR and the integration? And I mean, coming into the year, you have cost cuts pulling forward costs to accelerate the integration. How should we think about that? Are we going to achieve the $140 million in synergies sooner? Or are we going to achieve more than $140 million? How should we think about that from our model perspective?

Ann, this is Tom. So we're still staying with the $140 million. The one thing that I do want to at least let people know because this is, obviously, a popular question, and I think some of you should have seen, we posted a whole Save The Date for our Investor Day in spring of next year. We picked that time because that will mark about the 1-year anniversary of the acquisition, and we'd like to go in lot more detail on how we're progressing and what we think at that point. But $140 million still feels like the right number. And with a couple more quarters, when we give you -- have the investor update in the spring of next year, also might be a lot smarter and educated as to where we think that number is going to land.

Okay. I appreciate that, that it takes time. Most of my other questions have been answered. But would you be able willing to share with us how big China is for Parker total?

No. You know me, Ann. I probably won't be able to give you that. But China is our second or third largest country after the U.S. Both Germany and China kind of competing for that second spot. But I would look at our Asia progression as not just a China-only story. We see really good effort across the entire region. So North Asia, Korea and Japan are probably better than I can remember in a lot of years. India is having one of our better years in India. Southeast Asia is doing strong. Australia has come back from where it was, coming off the bottom. So for us the part that I feel good about with Asia is that it's a broad-based Asia story. It's not a singular China story.

And I support that. I mean, it's hard to find anything negative right now, but I wonder how sustainable it all is. Is there any cloud out there that you worry about that -- you know we've never seen such a coordinated recovery across regions and end markets before. What worries you about this?

Well, I think, your point is spot on. I mean, it is encouraging because you're right. If you look at the PMIs across the regions, it's very rare in my memory where you've gotten this much strong PMI activity pretty consistently across the board. But I think this is a different, I think, time period for industrials. There's been a lot of data and analysis that we've done. If you look at the last 15 years for industrials -- and this is going to be maybe a long winded answer your question. The '03 to '08 time period was a really strong industrial time period where industrials kind of outpaced GDP, driven really because of China and the whole globalization of industrials. And we had the Great Recession '08 into '09 and '10 starting to recover, a rebound to '11. Then most industrials somewhat treaded water from '11 to '15. And then we had the industrial recession, which was really natural resource led, '15 and '16, and of course, we've seen the recovery now start at beginning this calendar year. My feeling is, this feels -- and this is one of the comment I was making at the beginning. The general business conditions and sentiment from customers and distributors, feels different than the previous eras I was just describing, more like in '03 to '08. But it's not going to have the same pull that China had back in that era. So I look for industrials to break out of their kind of treading water pattern than it was in the '11 to '15. Where that finally ends up, nobody -- I'm not smart enough to say. But this does feel slightly different. Trees don't grow to the skies, so PMIs aren't going to grow forever. But I think what we're in for is a period of more sustainable industrial growth than what may be expected. I think, remember, when we launched the new Win Strategy, we were talking about a 1.5% world. Doesn't feel like that right now. But where it lands, we're going to learn over the next several quarters and years.

And on that note, are you seeing any labor inflation yet anywhere in the world? And I'll leave it there.

Yes, Ann, I'll just -- I'll continue. This is Tom. No, nothing out of the norm.

And our next question comes from the line of Joe Ritchie with Goldman Sachs.

Maybe still the growth rates are clearly really strong this quarter. And I think you mentioned in your prepared comments that, typically, 1Q is seasonally -- you tend to see an inventory build for you guys in 1Q, which makes a lot of sense. I'm just curious, like, when you think about the sell-in versus sell-through on the distributor side, maybe you can provide a little bit of color on where you think distributor inventories are today.

Joe, this is Lee. I would say, last quarter we talked about a little bit of a rebound in inventory build at the distribution level. I would characterize, at the distribution level and at the OEM level, right now, it feels like end market pull-through for the most part. People have reacted to the rapid increase in order entry. And as a general statement, I would say, it's end market pull through.

Good enough. And then if I kind of followed on some of the questions that were asked earlier around CLARCOR and the synergy targets, one thing I noticed this quarter is that you put through, I think, about $6 million of costs to achieve through versus $52 million for the year. I'm just curious, was there any reason why the spend wasn't more front-end loaded just to support the synergy expectations? And just once again any color on that.

Yes, Joe. This is Cathy. We did shift a little bit the timing of some of the footprint mergers that we have planned in the whole integration. And so as the costs were originally projected for the quarter, those shifted more towards later in the year. However, we have some offsetting other favorable savings that are coming through earlier than we expected. So we're on track for the savings as we had predicted we would get. We're going to see about 40% of the savings in the first half and 60% of the savings in the second half of the year, with about $58 million for the year.

Joe, this is Tom. If I could just add on. In general, if I would characterize, whether it's CLARCOR-related or just traditional restructuring, when we do plant closures, our teams tend to be more ambitious on thinking they're going to accelerate the timing of the closure. And we tend to let them run to a more aggressive target so they can try to get things done. But we are always conservative on forecasting the savings that come that, from recognizing the plant closures and the timing and all the announcements is sometimes tricky to coordinate all that. So we were conservative on the savings projection. That's why you don't see us come off our savings for this year. And the actual costs, while Q1 was light, you'll see that come back up in Q2, 3 and 4 through rest of the year.

Got it. No, no, That's great to hear. And I know maybe a last question. I know Ann just asked about wage inflation. I'm just curious whether you saw -- commodity inflation impacts the North America margins this quarter. I know, clearly, there was a mix issue going on as well. But yes, was there any -- was there much of an impact from price cost this quarter on North America margins?

Joe, it's Lee. I mean, the net is no. We have seen some commodity inflation such as copper. But really, where we have that is an issue, where it's -- we have a lot of exposure. We've got contracts with our customers that it hits a certain level we pass that through. So that's the only really volatile one that I can think of. The others are up year-over-year, but they've kind of flattened out.

And our next question comes from the line of David Raso with Evercore ISI.

I'm just trying to think through sort of the back half of the year, the way you laid out the sequencing of splits. It doesn't appear, in the second half of the year, you're assuming really much by way of any real improvement on the year-over-year incrementals, even though, by then, you'll have anniversaried -- majority at least. Of the second half, you'll have anniversaried the CLARCOR deal. And just given the commentary you have about the order book and the breadth of it and so forth, I'm just trying to understand, am I reading that properly? And if so, where are we on the ability to push price in this market?

Yes, let me address the margins first, David. We're currently seeing, it's -- we're struggling to break out with good enough numbers and share with you what legacy Parker looks like today because we're doing a nice job integrating CLARCOR. But as we look at it internally, in very rough estimates, we're anticipating still 30% incrementals for the balance of the year or for the total year for legacy Parker. So yes, we'll have CLARCOR for the full year by the end. We are being impacted by the additional amortization and depreciation expense. But we're on track to have incrementals in the low-30s.

Well, I guess, I'm just thinking the improvement. I mean, if you put the all-in numbers, you're looking for 18% incrementals in the first half and about 21% in the second half. And given the natural help from anniversarying CLARCOR, I would have thought there'd be a bigger improvement in the second half incrementals versus the first half. And I'm just trying to think through -- are we not getting pricing? Or maybe if you can just give us a little more color on price cost for the second half of the year, just as people try to think of the earnings run rate exiting the fiscal year thinking about calendar '18.

Yes, David, it's Lee. I would say, on price costs, going back to the guidance we gave, we're expecting a positive separation. Our selling price index, we forecast it every year, we expect that to be mightily positive for the year. And we expect a separation between that and our purchase price index. So we're not forecasting any wild acceleration in pricing in the second half of the year.

And on the second half, the slower growth rate in industrial, you mentioned it was largely comps. And is that actually the case in the guidance, there's really no slowdown per se in any of end markets in the guide, it's just a function of comp?

Yes, David, it's Tom. Yes, it's Tom, David. That's how I would characterize it.

And our next question comes from the line of Andy Casey with Wells Fargo Securities.

With the broad-based strength, have you seen any supply chain constraints? And if you did, can you give some color on maybe what sort of components?

Andy, it's Lee. So any time you have a ramp like this, there's obviously noise, but there's nothing that I would consider to be abnormal. It's everything that we're managing through. So there's nothing I would spike out. And there's really no components that I would -- could spike out that are really causing us major problems right now.

And Andy, it's Tom. Just to tag on. One good indicator of whether we're okay on that is, if you look at our total company backlog, it's basically stayed flat even with 3 quarters of pretty strong increases from an order entry standpoint. So if any of our customers are listening, we recognize we want to do better and improve to -- our delivery times and everything with the customers. But we've been able to absorb this pretty strong increase and not have our backlog go up.

Okay. And then if I step back and look at the longer-term Win Strategy, you talked about a whole bunch of multichannel selling techniques to get above industrial production. You're kind of running there already. Is they are any big thing left within the Win Strategy to accomplish? Or is it just certain parts of it are running better than you would have thought?

Andy, it's Tom. I think there's still lots of opportunity. If I look at services, innovation, systems, still lots of opportunities there. Our distribution mix is still lighter than we'd like to see it internationally, so there is still opportunity to do that. Collectively, I'm just going to use round numbers. We're still only about 10% market share in this whole motion control space. So there's big opportunities to take share. But I would -- for us, and what we want to demonstrate is that we can grow 150 basis points greater than global industrial production over the cycle. It's easier to do that at the beginning of the cycle when people are reflexing -- rebounding and reflexing up. What we want to demonstrate is over a multi-year period of time, can we average 150 bps. Because really, top-quartile companies, and that's our intention to be, demonstrate that over a cycle. So that's -- while we're really happy with 3 quarters in a row. Believe me, we're very happy with that. We want to -- the real trick will be doing it over longer period of time.

Okay. And then last question kind of capital allocation. Can you comment on the pipeline? I know you're still integrating and on track with the CLARCOR acquisition integration, but I'm wondering if there are any opportunities that you're looking at?

So Andy, it's Tom again. So I've mentioned earlier, so dividends will still be first on the capital deployment side of things, CapEx for organic growth because organic growth is still the most efficient way to grow the company. But we're going to do the share repurchase plan, and we're going to pay down debt. But you're right, at some point, as we glide down the dead path, we're going to have the ability to start looking at acquisitions as part of our growth strategy as well. And I would just -- obviously, I can't give line of sight or any kind of indicator there. I would just let everybody know that we continue to work that pipeline, build those relationships. Those are -- we view this as a long-standing effort, because it's not something we turn the spigot off, turn it back on. We're going to work those relationships and those strategies. These are obviously targets that fit with our strategic vision of our respective groups and the corporation. So we have -- we know what those are and we're continuing to work them. So as some of you have heard me say before, we want to be great generators of cash and great deployers of cash. And on that great deployers of cash side, that includes acquisitions. And we will continue to whatever characterize having assertive balance sheet at the appropriate time. And we'll work those, and we'll certainly let you know when we're ready.

And our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets.

Just on CLARCOR, I know you don't want to talk or quantify revenue synergies yet. But just as to get the groups together, what are some of the early opportunities that you've identified, where there's showing up as clear revenue synergy opportunity?

Look, Jeff, I would just -- it's Tom. I would just characterize at a high level, it boils down to channel opportunities. Number one, our channels are complementary, so you can have product going -- being carried on the line card for the various channel partners. There's regional opportunities because North America is really CLARCOR's strong suite, and we were more balanced globally. So there is regional (inaudible) CLARCOR, which is why we loved it much. It was a 80% aftermarket business, and we were stronger on the OEM. So we're going to leverage those OEM relationships, which may be we have a broader breadth of technologies going in (inaudible) there's filtration that we can leverage. So those will be the 3 broad areas channel, region and really that OEM portfolio that we could go to the OEM with. And we're working those hard. Again, I would just encourage the analysts to not bake numbers into '18, because as we work those, if and when they hit, they're going to be more in the '19 area. And again, I think we'll give you a lot more clarity. You can certainly plan on CLARCOR update and a more extensive discussion being a big part of Investor Day in the spring.

Okay. And then if you look at those 3 opportunities, which one -- where would you expect it to move the fastest?

I'm not going to comment on that, Jeff. Just -- we're working on all of them equally.

And our next question comes from the line of Nigel Coe with Morgan Stanley.

This is Dillon Cumming on for Nigel. Just wanted to back on CLARCOR here. I think you guys talked last quarter a bit about some possible margin pressure in integration, and whether that be through factory consolidation or some short-term manufacturing inefficiencies. Obviously, margins look pretty well here in 1Q. So are you guys still expecting some incremental pressure here to crop up for the couple with quarters? Or do you kind of have clear line of sight that you've kind of work through those headwinds?

Yes. Some of the inefficiencies will come when we're merging the footprint, and we did push that out. So we did less footprint merging in the first quarter than we had originally planned. And you'll see more of that come into play in the third and fourth quarter. Other than that, though, we're on track for the synergy savings, and we're seeing savings in other areas other than footprint consolidation.

I got it. That's helpful. And then maybe just a longer-tail question here. I think you've spoken about your desire to kind of grow out the distribution footprint in the International segment. I just wanted to see if we could speak to that. Or how that strategy is progressing and to what extent that might be driving some of the upside in your international sales growth provision?

Yes, this is -- has been a key -- this is Lee talking. This has been a key initiative for us as a part of a refresh of our new Win Strategy. And we've got some really senior dedicated people working on this around the globe. We've had great progress throughout Asia, Southeast Asia and continued progress in EMEA and really developing parts of EMEA, in Middle East and Africa and developing parts of Europe. So the bottom line is we're making great progress. I think you see that reflective in our sales and in our margins.

And our next question comes from the line of Neil Frohnapple with Buckingham Research.

Pertaining to the sales guidance, I'm curious on what you're factoring in pertaining to CLARCOR organic revenue growth for this year? I think, last quarter, you indicated that you're expecting low single-digit organic growth. So wondering if you can provide an update on that.

Yes, I would say now we're looking at mid-single digits.

Okay. So similar to the base business?

Correct.

And then maybe as a follow-up to David's question. I mean, could you talk more about the increased margin outlook for Diversified Industrial -- International? I think the implied incremental margin for the segment at the midpoint is similar to the implied incremental margin in the original guidance. So is there something precluding you guys from experiencing a higher flow-through with the step-up in organic growth expectations? Or is it more of a wait-and-see approach, given how early we are still in the year?

Yes, I would say it's early in the year still. We are seeing the margin improvement as a result of the lot of the Win Strategy initiatives we've been working. We've eliminated fixed costs in Europe, and that's helping. But as the growth comes through, we're hoping to see the incremental margins, but it's a little early yet.

And our next question comes from the line of Timothy Thein with Citi Research.

Just circling back on the discussion earlier on the strength in Asia, which, obviously, has been going on for a while. And that's the region when -- going back a few years, you had facilities that obviously were operating at extremely low rates. And I'm just wondering, given the revenue pickup that you've benefited from, just where those facilities are operating today? And I guess, really the spirit of the question is whether there's additional costs that start creeping back in? Or is there is still ample room within the facilities to be able to meet these higher volumes?

Tim, it's Tom. So on Asia, you're right. You have a good memory. Over the last 10 years, we've made some investments to -- and really in advance of Asia growing into those things, and they really have grown into them. But from additional CapEx, it would be very selective. It'd be more a piece of equipment here or 2. We don't really need any brick-and-mortar pretty well at what we need and with the combination of Lean and some very targeted equipment purchases, we'll be in good shape.

Okay. And is that region -- just thinking about international margin as a whole, I'm guessing, Asia is still, well or at least above the -- that average relative to -- at least relative to Europe.

Yes, it is -- Tim, it's Tom, again. Yes, it is. And that's why, as Asia grows, that's why it gets a nice corresponding lift to international margins.

Okay. And then just, Tom, on the group consolidation. Where are you there? Just thinking about potential, obviously, when those savings come rather quickly. I'm just curious what you're thinking in terms of the division count and where you're looking to end FY '18?

Yes, just as a refresh for -- it's Tom again, refresh for people on the phone. So we started 114, and we're going to be approximately 90 for this year. And that's something that we constantly look at. It's not something we're predicting a number. It's really what makes sense logically as far as the cost synergies and/or growth synergies, people are working in common end markets or common technologies. The pace of consolidations is going to slow. We're not going to continue to go from 114 to 90. Remember, if you go from 114 to 90, that's 24 divisions, but that required 48 divisions to be combined. So that's roughly 45% of the company going through some kind of change process. So it will not continue at that pace, and will be whatever makes sense for our customers and from a cost standpoint. So it's going to glide down by go out years a little bit more. But the simplification actions, that will become less of the big driver and more of the whole revenue complexity, the 80-20 look on being able to be simpler to do business with. Our business strategy is around that whole 80-20 concept to revenue complexity. That was really what will carry simplification on next level going out the next several years.

And our last question comes from the line of Steve Volkmann with Jefferies.

I wanted to circle back to kind of the discussion, I guess, everybody's obviously trying to get a sense of sort of sustainability of these current positive trends. And I'm wondering, Lee, you might have of you because I think you mentioned that there was a lot of rebuild activity in oil and gas, and we're seeing that in some of the mining as well. But it sort begs the question of sort of once you're done rebuilding what's out there, things could sort of flatten out or even slow down a little bit. And I wonder if that's something that you guys worry about or not?

Well, so obviously, there's a lot of that activity going on -- Tim, this is Lee -- or Steve, this is Lee. But it's not the only thing going on. So I mean, there is just -- I think the point I try to make when I survey our partners, the really one plus for me is there's a lot of pickup in project work happening out there in the field. Which I flow that through to just CapEx being let low -- let go with some of these major companies out there, and they're working on that. So for me, that's a big plus happening. So I can tell you that the activity right now is still good with a lot of the -- with the work going on in mining, oil and gas, but it's not the only thing that's happening.

Okay. Fair enough. And then maybe a quick one. Just a follow-up for Tom. You mentioned your new incentive compensation plan was kind of working, now that you're 2 years into that. I thought that was a interesting comment. Can you just provide a little more color around that?

Yes, just -- Steve, it's Tom. Reminder for what that is. We have a return on net assets incentive plan, which really touches almost 95% of our team members around the world. And for the senior leadership team, the divisional leadership team, we've added a growth element to that. So if you grow faster than the market, whatever your incentive payout would be, there'd be a positive multiplier on top of that. If you grow less than the market, there'll be a negative haircut to your payout. So we rolled that out a couple of years ago, and unfortunately, the timing wasn't appropriate because there was a negative haircut for people and it's really first in the history of the company we did that. But as you might imagine, that drove a lot of attention and drove the right kind of behaviors. So what it does is, it encourages people to do what we said on the Win Strategy. We want you to grow fast the market. And if you do that, you're going to be rewarded handsomely for that. And so that's, I think, the incentive plan -- any good incentive plan you want to drive behavior and the indicators it's driving the right kind of behavior.

And it's starting to payout as a multiplier rather than a haircut now?

Yes.

This concludes today's question-and-answer session. I would like to turn the conference back over to Ms. Cathy Suever for closing remarks.

Thanks, Chelsea. Yes, thanks for everybody for joining us today. Robert and Ryan will be available throughout the day to take your calls if you have any more questions. Thank you, everybody. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.