派克漢尼汾 (PH) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2018 Parker Hannifin Corp. Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I would like to introduce your host for this conference call, Ms. Cathy Suever. You may begin, ma'am.

Thank you, Kevin. Good morning, and welcome to Parker Hannifin's Second 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 second quarter. Following Tom's comments, I'll provide a review of the company's second 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.

So thank you, Cathy, and good morning, everybody. Thank you for joining the call and, of course, your interest in Parker.

So let me just make a few general comments, and I'll get into the quarter specifically. So a top focus of the company continues to be safety and engagement of our people. These are obviously interconnected as we improve safety for all of our team members, and we have higher levels of engagement across the company. We're going to continue to drive higher and higher operating improvements.

When you look at orders for the quarter, very strong momentum across a wide range of markets and geographies. Very excited about that. Organic growth was very strong, much faster than industrial production growth, and this is our fourth quarter in a row that we exceeded industrial production growth. The Win Strategy initiatives, when you look at the improvements in growth, and operating margins continue to evolve, and we really feel we've got a bright future ahead of us. If you look at the progress in the last few years, remarkable progress, but I would just characterize that we're still early days of implementing the Win Strategy. So my thanks to everybody around the world, all the Parker team members for all your hard work and your efforts, and looking forward to a bright future.

So let's get into the quarter. It was a solid quarter and really a great first half of the fiscal year, and I'll go through a couple of key stats. Safety performance, 22% reduction in recordable injuries, which was very nice. Sales was an all-time record for the second quarter, up 26%. Organic growth was approximately 10% increase, significantly outpacing industrial production growth. And order entry rates increased 13%, making the highest order entry rates that we've seen since Q4 of FY '11.

So a couple of comments on margins. Because it's difficult to look at margins year-over-year as prior period did not have CLARCOR in it, this period has CLARCOR in it, so when you look at adjusted segment operating margins, they continue to improve. We came in at 14.9%. But if you would add back the incremental depreciation and amortization from the CLARCOR acquisition, you would add 90 basis points back to that number, so it comes into 15.8% segment operating margins related true underlying operating margins as a company. That represents 110 basis point improvement versus prior year. Another way to look at it is you look at EBITDA margins for the quarter. It came in at 16.3%. Again, 110 basis point improvement if you also adjust out for the divestiture gain that we had in last year's second quarter. When you look at adjusted EPS, it increased 26%, again, excluding the divestiture gain that we had last year. And the new tax legislation was a $225 million net onetime negative adjustment, and Cathy will go through that in more detail in her comments.

So when you look at cash and capital deployment, our goal is to be great generators and deployers of cash. You've heard me talk about that before. It's really an overarching theme of the company. And we remain on track to deliver significant cash flow over the next several years. When you look at the new U.S. tax reform, clearly, in the quarter, it was a negative onetime adjustment. However, many long-term positives for us. First, it creates a more competitive environment, really levels the playing field with our foreign competitors. This creates a nice share gain opportunity for us. It's going to encourage our customers' investment decisions because the way CapEx is treated in the new tax law is clearly going to encourage CapEx and, in turn, will drive through more Parker content as part of that. And then there's greater flexibility, and we'll build a moving cash around the world, which is a big advantage for shareholders.

So when you think about deployment priorities, they really remain the same. However, we have greater flexibility, obviously. So first on the list is continuing our history of increasing annual dividends paid. So maybe I'll clarify why that is so important to us. Obviously, our long-standing record is important. We don't want to break that. But what really speaks to our ability over the cycle, to consistently generate cash, which emphasizes why we are such a great long-term investment for shareholders. Our target on dividends is 30% of net income over a rolling 5-year period of time. So obviously, as our net income grows, which it will, our dividends will grow in a corresponding fashion.

Second priority is CapEx or organic growth, the most efficient way to deploy capital back on behalf of our shareholders. So that'll be at the top of the list. The beauty of our business model and our cash flow generation, when you take those first 2 priorities and you complete them, we have roughly half of our cash still available to deploy. So in the near -- here in the near term, we're going to reduce leverage with the CLARCOR deal. We're also going to continue our 10b5-1 share repurchases. Then as the debt reduces, we're going to reevaluate acquisitions and discretionary share repurchases, with the goal always being that we're going to deploy capital and invest long-term fashion that we can on behalf of our shareholders. I would just remind people that we utilize overseas cash to help fund CLARCOR, so we put most of that overseas cash to work already.

So I want to talk about the outlook, and let me maybe just start with some headlines and the new guidance when I look at it from a full year. Now safety, hard for me to predict the full year there, but injuries down 22%, obviously want to continue that trend. Sales up 17% versus prior year. Adjusted EPS up 21% and versus the prior. And adjusted EBITDA margins forecasted to be 17.6% for the full year versus 16.3% last year. So that's 130 basis points improvement, again excluding the divestiture gain that we had last year.

Now specifically regarding EPS. We're increasing EPS, adjusted EPS, by $0.45 at the midpoint. So our new range is $9.65 to $10.05, reflects the reduction in the U.S. federal tax rate, our year-to-date results. Regarding realignment and CLARCOR costs to achieve, we're going to be at the same levels that we previously anticipated.

So now going forward, we're going to continue to drive the Win Strategy, and I'm -- I'll just make a couple of comments about each of the goals here briefly.

But engaged people is still our first goal. It's all about creating that ownership culture. And I will remind people that being an owner, people think differently when they think and act like an owner, and it creates a level of intimacy and accountability with your respective area of responsibility that drives results. And I would characterize our engagement process across the company as being the water that's going to lift performance up for the whole company.

The second goal is premier customer experience, and we're moving from a service mindset to an experience mindset, and we're doing that by rolling out a new metric, Likelihood to Recommend. And that's now fully deployed, and we're getting great customer feedback from that, and it gives us tremendous opportunities to improve. And remember, the whole purpose behind a great experience is it leads to share gain, leads to faster growth.

Third goal, profitable growth, and we have a number of initiatives, which I won't go through here, all around driving growth faster than the market.

And then financial performance is what I would call affectionally the big 4 strategic initiatives. It's simplification, lean enterprise, strategic supply chain and value pricing. And we see tremendous upside really in all 4 of those categories.

Now we're really looking forward to seeing everybody for Investor Relations day on March 7. So let me just give you a quick commercial on what the high-level agenda is going to be. We're going to give you a progress report on the new Win Strategy. We're going to give you an update on our 5-year targets. We'll give you a much more detailed review of the CLARCOR synergies. Let me just characterize that the integration is going very well. Very happy with what's happening there, but we'll give you more color on that at -- on IR day. And then we're going to give you presentations from 3 of our 6 operating groups: Aerospace, Engineered Materials and Filtration. First time we've given that level of transparency and detail, so I think you will enjoy that. We look forward to sharing that with you.

So in sum, we're looking forward to a record year and a continuous improvement with the Win Strategy.

So with that, I'm going to hand it back to Cathy for more details on the quarter.

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

Adjusted earnings per share for the second quarter were $2.15 compared to $1.91 for the same quarter a year ago. When comparing to second quarter fiscal 2017 results, please recall that last year included a $45 million or $0.21 per share gain on the sale of a product line, which was not adjusted out. Excluding this product line gain, adjusted earnings per share increased 26% from the same quarter last year. The respective adjustments for both years are as follows. Fiscal year 2018 second quarter operating income adjustments include business realignment expenses of $0.07 and CLARCOR costs to achieve of $0.07. This compares to $0.04 for business realignment expenses in the second quarter of fiscal year '17. Other expense in fiscal year '18 has been adjusted to exclude a net gain of $0.05, which includes a gain from the sale of assets, offset by the write-down of an investment. Prior-year other expense was adjusted for $0.09 of acquisition-related expenses. And last but not least, fiscal year second quarter '18 has been adjusted for the net onetime impact from U.S. tax reform of $225 million or $1.65. I'll discuss this adjustment in more detail on Slide 13.

If you move now to Slide #6, you'll find the significant components of the walk from adjusted earnings per share of $1.91 for the second quarter of fiscal 2017 to $2.15 for the second 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 initiative. I'd like to point out that this $0.62 improvement is net of incremental depreciation and amortization expense of $0.16 taken on with the CLARCOR acquisition.

The lower effective income tax rate equated to a year-over-year increase in earnings per share of $0.07. Adjusted earnings per share was reduced by $0.31 on the other expense line, primarily due to the nonrecurring $0.21 per share gain from the sale of a product line included in the prior year. Higher interest expense was an $0.11 drag, together with slightly higher corporate G&A and share count, equating to a $0.03 per share reduction.

Moving to Slide 7. You'll find total Parker sales and segment operating margin for the second quarter. Total company organic sales in the second quarter increased year-over-year by 9.5%. This was a 13.3% -- sorry, there was a 13.3% contribution to sales in the quarter from acquisitions, while currency positively impacted the quarter by 3.4%.

Total segment operating margin on an adjusted basis improved to 14.9% versus 14.7% for the same quarter last year. I'd like to remind you that the second -- that the fiscal 2018 operating margins include incremental depreciation and amortization from the CLARCOR acquisition. Without this incremental expense, margins would have improved 110 basis points. This margin improvement reflects the benefits of higher volume, combined with the positive impacts from our Win Strategy initiatives.

Moving to Slide #8. I'll discuss the business segments, starting with Diversified Industrial North America. For the second quarter, North American organic sales increased by 12.7% as compared to last year. Acquisitions contributed 26.3% to sales, while currency also positively impacted the quarter. Operating margin for the second quarter on an adjusted basis was 15.1% of sales versus 16.6% in the prior year. Current year includes 160 basis points of CLARCOR-related incremental depreciation and amortization expense. Without this, margins improved 110 basis points.

I'll continue with the Diversified Industrial International segment on Slide #9. Organic sales for the second quarter in the Industrial International segment increased by 10.7%. Acquisitions positively impacted sales by 6%, while currency positively impacted the quarter by 8.1%. Operating margin for the second quarter on an adjusted basis was 14.2% of sales versus 13.1% in the prior year. This includes 40 basis points of CLARCOR-related incremental depreciation and amortization expense.

I'll now move to Slide #10 to review the Aerospace Systems segment. Organic revenues increased 0.8% for the second quarter. Strength in both commercial and military aftermarket more than offset weakness in OEM activity during the quarter. Operating margin for the second quarter, adjusted for realignment costs, was 16% of sales versus 13.5% in the prior year, reflecting the impact of a favorable aftermarket sales mix and lower 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 a 12-month rolling average.

Total orders continue to be strong, improving to a positive 13% for the quarter-end. This year-over-year improvement is made up of 15% from Diversified Industrial North American orders, 13% from Diversified Industrial International orders and 8% from Aerospace Systems orders.

On Slide 12, we report cash flow from operating activities. Year-to-date cash flow from operating activities was $460 million or 6.8% of sales compared to 7.5% of sales for the same period last year or 11.5% last year, adjusted for a $220 million discretionary pension contribution. The significant capital allocations year-to-date have been $176 million for the payment of shareholder dividends, $145 million or 2.2% of sales for capital expenditures and $100 million for the company's 10b5-1 repurchases of common shares.

On Slide 13, I'll now take a moment to discuss the impact of U.S. tax reform. In the second quarter, we incurred a net $225 million charge that includes a $287 million onetime charge for the deemed repatriation of non-U. S. earnings, offset by a favorable $62 million adjustment to our net deferred tax liabilities to the new 21% federal rate. Any dimension of these onetime adjustments are our best estimates of this time. However, the amounts may change as we continue to analyze the impact of tax reform.

Due to our June 30 fiscal year, our statutory U.S. tax rate for fiscal year '18 is blended at a 35% rate for the first half of the year and a 21% rate for the second half of the year, which results in a 28% full year U.S. statutory rate. This reduced rate will have a favorable impact on cash fiscal year 2018. As for the long-term implications, the U.S. tax reform will result not only in increased net income, but we can benefit from improved mobility of our non-U. S. cash. The payments of the deemed repatriation charge will commence in fiscal year '19. It will be a use of cash over 8 years with significant balloon payments in the last 3 years. Based on our initial analysis, we expect our long-term effective tax rate to be approximately 23% beginning in fiscal year '19. Fiscal year '18 is still a blended rate.

The full year earnings guidance for fiscal year 2018 is outlined on Slide #14. Guidance is being provided on both an as-reported and adjusted basis. Total sales increased [and are] expected to be in the range of 15.3% to 18.9% as compared to the prior year. Anticipated full year organic growth at the midpoint is 6.5%, which is 100 basis points higher than our previous guidance. Acquisitions in the guidance are expected to positively impact sales by 8.1%, and currency is expected to have a positive 2.5% impact on sales. We've calculated the impact of currency to spot rates as of the quarter ended December 31, 2017. We've 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%. Full year tax rate is now projected to be 25%, down from our previous guidance of 28%. For the full year, the guidance range on an as-reported earnings per share basis is now $7.38 to $7.78 or $7.58 at the midpoint. On an adjusted earnings per share basis, the guidance range is now $9.65 to $10.05 or $9.85 at the midpoint.

In addition to the full year net loss of $5 million resulting from the combined gain on sale and write-down of assets and the net provisional tax charge of $225 million, 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 synergy savings are estimated to be $58 million in fiscal year '18. We continue to remain on pace to realize the forecasted $140 million run rate synergy savings for CLARCOR by fiscal year '20.

Savings from all business realignment and CLARCOR costs to achieve as well as anticipated full year favorable effects from U.S. tax reform, are fully reflected in both the as-reported and the adjusted 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 45% first half, 55% second half; adjusted earnings per share, first half, second half, is divided 45%, 55%; third quarter fiscal 2018 adjusted earnings per share is projected to be $2.59 at the midpoint, and this excludes $0.08 of projected business realignment expenses and $0.09 of projected CLARCOR costs to achieve.

Slide 15, you'll find a reconciliation of the major components of fiscal year 2018 adjusted earnings per share guidance of $9.85 share at the midpoint compared to the prior guidance of $9.40 per share. Increases include $0.14 from higher segment operating income, $0.41 from a lower effective tax rate and $0.01 from lower projected corporate G&A. Offsetting these increases is an $0.08 per share decrease from higher forecasted interest and other expense and $0.03 per share from increased fully diluted share count. 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.

Thank you, Cathy. So we're pleased with the strong first half of the year that we've had. The combination of our sales growth, the lower cost structure that we've built, integration of CLARCOR and execution on the Win Strategy, that combination is projecting for us to have the best fiscal year that we've ever had in the history of the company with an all-time sales record. So my thanks to everybody around the world, the Parker team, for all your hard work and efforts into creating that.

So at this point, let me hand it back to Kevin, who'll start the Q&A part of the call.

(Operator Instructions) Our first question comes from Joe Ritchie with Goldman Sachs.

So maybe let's just touch on the North American margins for a second. Clearly, it's going to be the pretty big focal point today. And you guys have talked a little bit about the impact from the CLARCOR, the dilutive impact that's having to your margins. But did that number change at all on a quarter-by-quarter basis? Because the margins were down a little bit more this quarter than they were in the prior quarter. And then my follow-on there is, can we maybe just talk a little bit more about like the other potential puts and takes to margins and what impacted them this quarter?

Okay. So Joe, this is Tom. Maybe to help everybody, I'm going to run through the margins and give you back the incremental D&A, depreciation and amortization, that we had from the CLARCOR deal. Cathy did. I'm going to summarize it again just so you have it. So North America, if you add that back, 160 basis points of incremental depreciation and amortization. North America's operating margin for the quarter would've been 16.7%. International, you add back 40 basis points, international's margins would've been 14.6%. Aerospace, obviously not impacted, 16.0%. Total Parker, you add back 90 basis points for 15.8%. So when you look at it all in, North America still was higher by 10 basis points versus the prior year. There are some challenges that we faced in the quarter and faced a little bit when you just look at the mix of order entry and sales that we have. When you look at our -- we're tickled pink with the sales growth, but the mobile part of that sales growth is growing at a faster clip than industrial and distribution. So we got mobile growth at approximately 20% for the quarter; industrial, high single digits; and distribution in the low teens. So that mix is clearly putting a little bit of margin headwind for us. And we had a number of plant closures. And when you look at our restructuring, restructuring dollars are not always equal level of complexity. If you close down a headquarters, like when we closed down Franklin, it's a little more straightforward as far -- that's a closure for CLARCOR to those of you who aren't familiar with that. It's a little more straightforward as far as how you incur those costs. We are, right now, in the heat of the restructuring for CLARCOR, in particular, around the manufacturing footprint consolidations. So to give you some color on this, so plant closures last year, 23 plant closures for the total company. This year, 39. So that level of plant closures -- and there's inefficiencies that you have -- that you're impacted by really kind of both ends of that equation. So Plant A that's getting closed down obviously has some impact when you announce it. Things don't work quite as well after you've announced the plant closure. And then Plant B, as it's coming up to speed, inefficiencies, the yields, line rates, et cetera, just take a little bit of time to come up. So we've incurred all that, and the margin still grew 10 basis points, again, making an apples-to-apples with depreciation and amortization. But that gives you some color as to some of the dynamics that we're feeling from a margin standpoint.

That's helpful, Tom. I guess maybe the follow-on there is, is this quarter then the trough from -- that we should expect from like a -- from an inefficiency perspective, from the plant closure perspective? Or is this something that could potentially be a headwind to North America margins for the next couple of quarters?

Well, it's in our guide. North America margins for the full year at 17.2% for the full year, which is pretty nice performance with all of this. But yes, we would -- because we're, right now, in the throes of this, we experience that this quarter, we're probably going to see it for the next 2 quarters. Remember this is a 3-year synergy plan that we're laying out. The bulk of the heavy lifting from a footprint standpoint is this last quarter we just experienced over the next 6 months. But even with all that, we've got margins at very nice levels. EBITDA, which is a nice way to look at it because it takes out the depreciation and amortization, growing to 17.6% versus 16.3% last year. I guess I would just remind everybody, when we announced the deal December 1, 2016, not that I remember that date. That's an important date for the history of the company, we announced that we would tackle a 300 basis point EBITDA margin improvement. And at that time when we made the announcement, we were sitting at 14.7% EBITDA margin. So we have almost accomplished that 290 basis points. Remember we told you 300 bps was a 5-year look of the combined company. So we've done it basically in 2 years almost. So I'm very proud of what we've done from a margin standpoint. We have a few of those challenges that I just mentioned, but we're putting up some pretty nice numbers and really the heat of the CLARCOR synergy plan.

That's helpful. If I can maybe sneak in one more just on -- again, just the kind of end of the calendar year. We've been hearing from some of our companies that because organic growth surprised to the upside, and clearly, like the growth in North America was extremely strong, that there were higher rebates as well to distributors that flushed out in the fourth quarter, at least the calendar fourth quarter. Did you guys experience any of that just given 50% of your business sells through distribution?

This is Lee. We did have great sales during the quarter, and order entry continues to accelerate, but there's nothing meaningful regarding rebates or anything that's factored into what you've seen.

Our next question comes from Ann Duignan with JPMorgan.

Clearly, my question has been answered. It would have been on the North American margin. So the color was helpful, at least. Maybe switching gears a little bit to Aerospace. Can you talk about your mix of business today and where you see that going? If I recall, you were pretty strong in the 747, pretty strong in the A380, I mean programs that might be ending. And also very strong with Embraer and whether your relationship with Embraer would change if Boeing were to acquire Embraer. So just a little bit of background on the Aerospace business, please.

Ann, I'll start out. In the quarter, we had an unusually strong mix of aftermarket, both commercial and military, and that came with our higher margins since our aftermarket typically has higher margins, but it was also a very favorable mix of aftermarket. It was a little unusual in the quarter. However, in the third quarter, we see our strongest aftermarket activity. So third quarter should be a similar mix, but it's not necessarily a full year mix that we would normally see. Yes, we have platforms that are slowing down. Wide-body, we see a lot of slowness in the market. But keep in mind that we're very diverse in our portfolio, and there are also new programs coming on. So as some of them are shutting down or slowing down, we're also seeing growth in like the A350 and in platforms like the Global 5000. And so I think our portfolio mix helps balance the impact that you're describing and won't be a -- you won't see a significant impact.

Okay. So you're suggesting that fiscal Q3 should be strong margins and then taper off. Is that what I should read in the near term?

Q3 tends to be our strongest quarter for aftermarket. It's when the OEs, the large airlines, are typically having the planes brought in for repair. So 3 will be good, yes.

Our next question comes from Joel Tiss with BMO.

I'll just glue both of my questions together. I just wonder if, maybe Tom or whoever, if you could talk a little bit about -- it seems like the order strength is a lot higher than what you were hinting at earlier in the year for your second half. I think your implied order growth was pretty close to flat, and I just wondered why more of that. Is there anything happening that would undercut your confidence on the sustainability of that? And then second, if Lee could just kind of run around the world and give us some of the highlights of the different businesses.

Okay, Joel, I'll start off. This is Tom, and I'll hand it to Lee in a second here. On the order entry, I think, in our sales forecast, so we revised our guidance basically up 100 basis points on organic from 5.5% to 6.5%. Kept acquisitions, kept currency, same assumptions. So the new guide, up 100 bps. In the second half of the tickler, we've raised it from the previous guide. It was 3.7% to 5.0%, so that's what we're forecasting for the second half of the year. And I would just remind everybody, we don't feel anything weakening from a macro standpoint. Lee will cover that momentarily. We feel good about the macro markets and all that. Our sales number is really based on the comps that we have versus the prior year last year. Second half of FY '17, it was plus 6% organic growth. So our plus 5% forecast is building on top of the plus 6%. So that's just the comparable math, the mix of the numbers. We feel good about the macro condition. So I'll let Lee kind of take you through the world.

Joel, it's Lee. So I'm not going to comment on Aerospace. I think Cathy did a great job on that. I would just say, industrially, as you look through all our end markets, it's really hard to find any significant markets to not continue to show positive year-over-year order entry growth during the quarter. And some of these markets go a long ways, especially when it comes to natural resource end markets, and they continued to show growth during the quarter. We saw a strong growth in construction equipment, mining, oil and gas, which is mostly land-based, almost all land-based, frankly. And then other markets like semiconductor, microelectronics, heavy-duty truck and distribution was strong. On land-based oil and gas, if I think about the Americas, the amount of active rigs continues to expand. And I think what's really positive is we continue -- we are starting to see quote activity with some customers that we haven't seen much in the past. So they're doing more than just refurbishing what's in the field. We saw -- also saw a great continued rebound from our distributor partners around the world. Almost every region, double-digit order entry, which is really nice. And they continue to be very optimistic. The only notable market that we saw -- seeing contraction in, and it's been significant, has been large-frame power gen. I mean that's gotten a lot of press, and it's real, so that's had a negative impact. And just commenting on the regions. I won't take you through all the markets. But North America continue -- I continue to be very encouraged by all the increasing end market activity. It just seems that it's somewhat firing on all cylinders. I think there is some worry about maybe implant automotive activity, but we haven't seen much dampening on that yet, but we'll keep an eye on that. Throughout EMEA, continued strong order entry growth. This would be the second year we're forecasting organic growth, which there was a long trough here. We didn't see that. And then in Asia, Japan, Korea, China, continue all to be very strong. Southeast Asia is really good. So I'm encouraged by what's happening there. And then just lastly, on Latin America, it seems that there's some good positive momentum in Brazil despite all the politics, so we're hopeful that continues to turn around. So I would just say we're really happy with what's happening in the end markets, both domestically and internationally. And I think, in some cases, we're pretty early stages because of how far some of those industries have fallen.

Our next question comes from John Inch with Deutsche Bank.

Cathy, what -- the tax rate was a little lower in the second quarter. I don't think anyone -- I don't think you talked about it. What was that about?

Sure. So we're -- let me just reiterate. For the year, we expect it to be 25%. We're at a 28% blended rate for U.S. federal. In December, we adjusted everything to that new blended rate. So as part of that, you do a catch-up of what you had booked provisionally in the first quarter, and you catch up the year for the 6 months to your assumed effective rate for the full year. So you get a little bit of a double benefit in December from the lower tax rate for the year.

So even though tax -- okay, so I'm just trying to understand. Tax reform, though, is a calendarized impact. This is -- you're saying this is actually a function of tax reform. Is that what you're saying?

Yes, correct. So it was effective January 1, but for us, it becomes half effective. So what they require us to do is take the number of days that we would be at a 35% rate and the number of days we'd be at a 21% rate, and that comes to a 28% effective rate for our full fiscal year.

Okay. That makes more sense. That's -- I got it. What about the mix of orders? Tom, you talked about stronger OE, right? And that's -- you talked about the ramp down, I guess, in terms of the plants. But the stronger OE is sort of biasing margins a little bit to the downside. Is that embedded in the mix of orders that you're seeing so we would expect that kind of OE mix to still prevail over the coming quarters?

Yes, John, it's Tom. Yes, it would, and that's what's factored into our guidance, part of why we left margins the same as our prior guide because of that. But over time, that's going to start to stabilize. And those things, the high spike in mobile activity, is going to start to stabilize at a lower number. And I think this imbalance, I guess I would call it, of order entry being shifted a little bit more to mobile and become more in check as we go throughout the next several quarters.

Right. So mobile is clearly accelerating, and I think you did make that claim globally. What's happening with respect to distribution now? At the high single-digit, I think you'd called out that run rate. Is that actually accelerating at a lesser cadence? Or is it sort of steady?

I would characterize, and again, I'll let Lee chime in if he has anything to add. Distributions in the low teens is where it's at. But I would characterize it as stable, high levels of growth stable. And it'll glide down into something in the mid-single digits in the second half, mainly just because of comps to prior year.

CLARCOR, also, I think we took your guide from, what, $0.20 to $0.33. Was that all tax? Or is the business actually getting better?

I'm sorry, I didn't quite understand what you're asking for.

The EPS accretion from CLARCOR. I calculated -- it was a -- it looks like it was about $0.33 for fiscal '18. And I thought you had said it was going to be about $0.20. Maybe that's not true. I'm just wondering. Are you expecting CLARCOR accretion benefits to improve from what you had last said, I think last year, right? So...

Yes, John, we're still at about a $0.20 accretion for CLARCOR for fiscal '18.

For fiscal '18? Okay.

Yes.

Last, I guess, I wanted to ask Tom just a strategic question. Is there an opportunity to maybe migrate if you look at the -- your sort of the distribution of your customers, maybe some of your smaller ones at the tail, is there an opportunity to migrate those in your OE bucket more to the distribution side to, perhaps, free up some of your own overhead and other operating costs, you know what I mean, to try and drive further Parker Hannifin productivity over time?

Clearly, John, you hit the nail on the head. What you're referring to is really part of our simplification program, and the element in particular that you talked about was the revenue complexity side of things, that the 80-20 look at all of our revenue and our products. And clearly, when we look at that tail, that's one of the areas we're looking at is can we move some of that product to distribution that service -- we'd do a better job of servicing the customers in that regard. Can we look at self-service there? Can we look at alternative part numbers that might be higher running part numbers that run to the plant? So there's a variety of tools that we're looking at. But yes, you nailed one of the things we're looking at.

And does that -- I'm assuming, like, where are you at in terms of beginning to implement that? Is this still very preliminary? Or have you actually already started? I'm just trying to -- obviously, you've done a great job with respect to the margin expansion that you called out. So we're all trying to think about the next level, and we can obviously compare Parker versus ITW or other companies with higher margins. So the thought process is really around these various levers you may be able to pull over time to help drive your overall profitability higher from here.

We see more opportunity obviously, and that's something we'll go into more detail at IR Day. But when I think about simplification, lean, strategic supply chain, value pricing, all those things that are any of the financial performance initiatives. I would characterize them as all having lots of upside. The revenue complexity piece that we just were talking about, the first inning, clearly, the first inning. So lots of upside there.

Our next question comes from Andrew Obin with Bank of America Merrill Lynch.

Just a question on -- it's been a long day. Just a question, international margins. Just seems in your outlook, you're actually modeling them now a little bit lower than before, and I was wondering if that's the impact of mobile mix. And what else is going on there if the dynamic there is similar to what you guys are seeing in North America?

Yes, Andrew. It's Tom. It will be the mobile mix because most of our heavy plant closures are in North America, a little bit in Europe, but North America is feeling more of the plant closures. So Europe, the international piece, we changed the guide by 10 bps, and it's mainly the mobile mix.

And just a question in terms of dealing with higher volumes, and maybe this is just sort of a three-pronged question. Just focused on distributors, do they need to change their behavior? Do you have enough capacity? And finally, working capital impact, just because volumes are going up a lot faster than you guys thought.

Andrew, it's Lee. I -- I think if I understood your question is, do we have to do anything different to handle the...

That's exactly right, yes, and working capital requirements, exactly.

No, I'd say from a working capital requirements standpoint, obviously, when you have a huge influx in business, it taps receivables for a period of time. But I would say the biggest working capital requirements we've had throughout the quarter, really the first half of the year, had been with all of these plant closures. So there's been a conscious build of inventory in some areas so we don't impact the customers. I would say with revenue with our OEM customers, there's nothing that we do differently. Some of these customers, we'd categorize our products high runners running through the shop, and distribution would follow many times, too, in the same category. So there'd be nothing different. It's just the level of activity would heighten up with the value streams running at -- not at capacity, but running a lot higher demand than they've run in the past.

Our next question comes from Jamie Cook with Credit Suisse.

I guess 2 questions. One, in the quarter, and I guess, as you look at your -- the remainder of the year, are there any different assumptions around price costs or your ability to get price in the market? Can you just talk about how that's going? And then my second question, sorry, back to North America industrial. Tom, I appreciate the comments you've made about CLARCOR in closing more plants and stuff like that, and that'll impact margins or incrementals over the next 2 quarters. But as we shift to fiscal year 2019 with most of that done, can we start to think about North America achieving above -- more normalized incremental margins? Or given where we'd be in a cycle, could you get above-average incremental margins versus your longer-term target?

Jamie, it's Tom. I'll start with your last question and let Lee talk about price costs. So yes, once we get through a lot of this heavy lifting, we would expect things to normalize. The other part that is going to help is once we anniversary CLARCOR and we can look at total company apples-to-apples, it's going to be a lot easier. And our Q4 is the first time when we get apples-to-apples. And even with all the plant closures and that, which will still be happening in Q4, we see that getting to the 30% and more or less type of level. So yes, the short answer is you'll see us get back to normal type of marginals. So I'll let Lee talk about -- go ahead, Jamie.

Sorry, no, just to clarify, so 30% or given where you are in the cycle and with some of the restructuring, could we theoretically do better than that? Because 30%, I would assume, is like more your normalized. But given the restructuring and you're still early in the cycle, I would think -- because it would still be the back half of calendar year 2018, you know what I mean, that we could get -- do better than that.

Well, the number I gave you, 30% in Q4, is with all that noise in the mobile plant closures with the mobile mix not necessarily helping us, so I think that speaks to the underlying margins at a pretty high level.

And then, Jamie, on price costs, I would tell you that there clearly is inflation on the horizon. I mean, you can see materials indexes. We've seen it in copper. We've seen it, et cetera. We've been through these cycles before. I would say, at this point in time, from a price cost standpoint, at a corporate level, we're good, but we're definitely taking actions to stay ahead of this as we go forward.

Our next question comes from Nathan Jones of Stifel.

I'm going to bake the North American marginals one more time. Tom, you talked about the facility closures up from 20 to -- or 23 to 39 this year. Is it possible for you to quantify the impact of the disruption that, that's had, the need to build the inventory, that kind of stuff? And are you going to be back down to, I don't know, 23 in 2019? Or will you be done through this? What's the kind of step-down in the facility closures that you're looking at for '19?

For '19, obviously, we haven't worked all that, but clearly, the bulk of the CLARCOR activity will be through. There might be some residual things that we're doing, plant closures on CLARCOR '19. But we haven't obviously looked at the rest of the business at that point. But clearly, this is a spike in plant closures with them. Now we have a real strict policy in how we count for making adjustments, and so we only count adjustments that you can put clear plant closure costs on severance and those kind of things. So we don't try to add up manufacturing inefficiencies and production rates and yield and all that kind of things. And to be honest with you, it would be just giving you a number that would be off the seat of my pants and wouldn't be a good, actual number. But I think that anybody that's closed a plant knows exactly what I'm talking about. And you feel it on the sending plant, and you feel it on the receiving plant. So it's real. And typically, any plant closure, even a well-laid out plant closure, feels that for 3 to 6 months. And so that's -- we're in the middle of that now. That's -- we fully expect that this is the biggest acquisition we've ever done with the largest synergies we've ever done, and we feel very good about it. But you're kind of right now in the heat of the battle. The supply chain savings, SG&A, logistics, those are more straightforward. If I was to characterize, it's like the slope of the treadmill [low 0] at a lower slope. And you close a lot of factories, it's a higher slope of the treadmill. And I would just commend the teams I know that's listening to this. Closing these number of factories and what we've done from a margin standpoint and taking care of customers is really terrific work that the team's doing.

Okay. Then my follow-up is on one of your prepared comments where you said you thought that the change in the tax bill would open up share gain opportunities for you and drive customer CapEx. Can you maybe talk a little bit about -- a little bit more about where you see those share gain opportunities? And I know it's very early on the customer CapEx side. But maybe what your expectations are on that front?

Yes, Nathan, it's Tom again. The CapEx is just a general comment. If you encourage people with the kind of tax laws with an immediate expensing for tax purposes of CapEx for the next 5 years, that has to be somewhat additive to the current macro environment. So I take a current, very favorable macro environment, add that encouragement there, and I think it bodes well for CapEx in general. How it all plays through and exactly what areas, that's yet to be determined, but we feel good about that. As far as the gaining share, the point there is we have a number of foreign competitors, which I won't highlight, which have had a distinct advantage forever. And now that we have a level playing field, I like our chances. I like our chances going toe-to-toe with them with a level playing field, and I'll take -- I'll bet on us any day of the week. So that's all I was referring to share gains, that we don't have one arm behind our back anymore, and let the better person win the order.

Our next question comes from Jeff Sprague with Vertical Research.

A lot of talk, obviously, about the integration and plant closures CLARCOR-related. I wonder now if you just step back and look at the Parker footprint. You've also done a lot of restructuring here over the last several years, and now we're getting a pretty big business inflection. How do you feel about the footprint right now, actual adequacy of the footprint? And what's the trajectory of your own CapEx, anything like the next year or 2?

Jeff, it's Tom. I think our CapEx will continue to be about 2% of sales. We've been running in a 1.7% to 2% range, and I would see it at that level, and I'll expand a little bit more upon that at IR day kind of more of a strategic thought on that. As far as the restructuring going forward, let me just make one comment to kind of calibrate people as to what we've done with the restructuring of the company, and I'll start with [prefacing] this that there's a lot more that we can do. But anyhow, we're going to circle for the first time in the history of the company, hopefully with this guidance, crossing $14 billion. So it makes you go back and look, "Okay, what was the last all-time high of the company? And how many people did we have?" So the last all-time high was $13.2 billion in FY '12, and we had 59,000 team members. So with this guidance, we're [basking] our round number is going to be $1 billion higher than that, and we're going to have 2,500 fewer people than we had at that peak. So an extra $1 billion of revenue, 2,500 for your people. So clearly speaks to what we've been doing as far as the efficiencies and the structure of the company. I would just reiterate, like I said at the beginning, that we still see opportunities to continue to improve that. And it's those big 4 that I referenced: simplification, lean, supply chain and value pricing as margin enhancements. Whether we're -- I doubt that we would continue to be at a $110 million clip on restructuring. I think it's going to stabilize at some level. But I don't think it'll be bad. If you looked at as historically before the new Win Strategy, we have may have been in that $20 million to $30 million type of range in restructuring. And I would see us being a little bit higher than that because I think there's still opportunities for us to continue to simplify the structure of the company, make it faster on behalf of our customers. And we're going to continue to work that.

And then just briefly on M&A. Obviously, you're deleveraging and digesting amount here still primarily, but do you see [bombing] into your view and anywhere in the portfolio and maybe infiltration in particular?

Yes. No, M&A is obviously something that we stay engaged -- again, Jeff, it's Tom. We stay engaged with this all the time because the relationship-building is important to do, whether you're in a position to deploy capital towards that or not. So we have that. We have the strategic candidates that we'd like to add to the portfolio and where it fits and complements our strategy. And we're working that every day, every week. So as we start to glide down, like I mentioned earlier, our debt position, we'll clearly look at that. And if I were to characterize our portfolio strategy, first, we want to be consolidator of choice. So if it's in our space, we'd like to be at that. Doesn't mean we'll swing, but we'd like to be at that to take a look. But all things being equal, we'd like to invest more infiltration, engineered materials, aerospace and instrumentation part of the portfolio for a lot of strategic reasons: margins, resilience through a cycle, growth, capabilities and those type of things. So that would be a little bit of color behind the M&A strategy.

Our next question comes from Jeff Hammond with KeyBanc.

Can you just -- you talked about some of the disruption. But can you speak to kind of how you're thinking about CLARCOR cost synergy savings second half versus first half?

Yes. We're going to have $58 million of savings that we enjoy this year in fiscal '18. About 35% of that went in the first half, and we expect 65% of that in the second half.

Okay. Great. And then just, Tom, you mentioned kind of the debt pay-down. What's kind of the updated timing where you start to transition away from debt reduction?

Well, there's no formal time line. A lot of it is contingent upon opportunities that present themselves as we're looking at that. But we'd like to get closer to a 2x EBITDA multiple, and we started off at 3.5 when we first did the deal and currently at 2.9. So we're making good progress, and we want to continue to demonstrate that. And then when we think we're in a better position from a debt standpoint, then we'll start to look again.

Jeff, I'll add on to that. We do have some term debt of $450 million due in the fourth quarter of '18 and $100 million due in the first quarter of '19. So you can count on that term debt being liquidated.

Our next question comes from Josh Pokrzywinski with Wolfe Research.

Just maybe come full circle on all the North America margin questions. I know that there's usually some corporate true-ups that happen in the second quarter. I think seasonally, always the case. Did those look any different than normal? I know we've beaten this to death at this point, but I guess we're down a little bit.

Yes, Josh. Let me point out that the majority of the impact from those -- the true-ups from incentive comps is down below the line. When you're looking at segments, it's down in corporate G&A. We did have adjustments, but not anything unusual compared to other years in this quarter. So I don't think that, that was a driver of what you're looking at, and it's not a margin impact.

Got you. And then just on the tax rate. I guess all that implies, the second half, that it's still above the 25% just given how you had a lower first half. How should we think about kind of the go-forward, more of an annualized or fiscal '19, however you want to think about it, rate? Is it still kind of just 26%, 26.5%? Or are you really at 25% once we get through all the initial phase-in?

Yes, let me step through. So for fiscal '18, we're at a statutory U.S. rate of 28%. Blend that with our international rates, that gets us to about -- with all the other discretes that have come through so far, we're estimating a 25% rate for this year. On -- starting in fiscal '19, we'll be at a true 21% statutory rate for U.S. So that will lower our rate. We anticipate our ongoing rate starting in '19 and forward to being closer to 23%.

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

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.