Parker-Hannifin Corp (PH) — Q3 2016 Earnings Call Transcript

Good morning, and welcome to Parker-Hannifin's third quarter FY 2016 earnings release teleconference. Joining me today is Chairman and Chief Executive Officer, Tom Williams; and President and Chief Operating Officer, Lee Banks. Today's presentation slides together with the audio webcast replay will be accessible on the company's Investor Information website at phstock.com for one-year following today's call. On slide number two, 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 posted on Parker's website at phstock.com. Today's call agenda appears on slide number three, to begin, our Chairman and Chief Executive Officer, Tom Williams, will provide highlights for the third quarter of fiscal year 2016. Following Tom's comments, I will provide a review of the company's third quarter FY 2016 performance together with the revised guidance for FY 2016. Tom will provide a few summary comments and then we'll open the call for a Q&A. At this time, I'll turn it over to Tom and ask that you refer to slide number four.

Thanks Jon, good morning and welcome everyone on the call. We appreciate your participation. So today we are going to cover four key topics with you. First, I'll summarize the third quarter results. Second, some commentary on key market trends, give an update on the revised full-year guidance and finally I'll highlight some of the progress we're making on the key initiatives under the New Win Strategy. So beginning with the third quarter results, sales declined 10.6% as the effects of the strong dollar negatively impacted us by 1.5% and organic sales declined approximately by 9.4%. Total order rates for the third quarter declined 6% compared with the same quarter last year. This is a sequential improvement from the second quarter. Earnings per share for the quarter were $1.37 or $1.51 adjusted for business realignment, which was ahead of our expectations. Operating cash flow year-to-date includes a $200 million discretionary contribution to the U.S. pension plan. Excluding the contribution year-to-date, operating cash to sales was 10.5%. During the second quarter, we repurchased $50 million in shares, bringing our year-to-date total to $450 million. We have now repurchased $1.8 billion in shares since October 2014. However, the most impressive accomplishment of the third quarter was our margin performance. I’m very pleased to report total segment operating margins of 13.8% or 14.7% on an adjusted basis. This represents a 30 basis points improvement year-over-year in adjusted margins which is a significant accomplishment given the difficult economic conditions we are facing. During the third quarter, we delivered decremental margin return on sales of 17% or 11.8% adjusted for business realignment expenses. This demonstrates excellent performance by our team. This quarter marks the 5th consecutive quarter with decremental MROS of less than 30%, both on a reported and on adjusted basis. Year-to-date we have also held SG&A flat at 12.1% of the sales despite a $1.2 billion drop in sales, another significant accomplishment by our team. Our performance during such a sustained period of lower sales and order rates is unprecedented. It demonstrates Parker’s ability to create a more adaptable cost structure and deliver resilient financial performance. So now a few brief comments on key end-markets. Reflecting on the order rates over the past year, we are encouraged with a point of moderating the decline. More specifically from Q2 to Q3, we saw a number of end-markets move from what we would classify as accelerating decline to decelerating decline, which is a positive sign. We will continue to monitor additional data points in the coming months to solidify our interpretation of the direction of the macroeconomic trends, and we will provide you an update in our August call. As usual, we will provide more details on our specific end-markets during the Q&A portion of this call. Switching to the outlook. For fiscal year 2016, we’re increasing our guidance for earnings to the range of $6.20 to $6.40 per share on an adjusted basis, resulting in an earnings midpoint of $6.30 per share. Adjusted guidance represents a $0.20 increase from our previous estimate at the midpoint, driven by the third quarter and the incremental savings we’re now seeing from the realignment actions we’ve taken year-to-date. We now anticipate higher business realignment expenses, which for the full year will go from $100 million to $120 million or $0.63 per share. As we move further into the New Win Strategy initiatives, our global teams have identified additional near-term actions that will generate attractive returns on investment. These actions will position us well for future growth and profitability. Now let me give you some highlights from the New Win Strategy, we continue to make meaningful progress with our one strategy initiatives to increase team member engagement, deliver a premier customer experience, and drive overall growth and financial performance. Let me take a moment to update you on progress in a couple of selected areas. Starting with safety, we’ve achieved a 29% reduction in reportable injuries comparing to the third quarter of fiscal 2016 with the same period a year ago on a rolling 12-month basis. This reflects safety engagement across the organization and the progress of our safety-focused high-performance teams. Our goal is to reach zero accidents. The significance for our shareholders is that safe operations are productive operations, which translate to excellent financial results. Our simplification initiative is gaining tremendous momentum throughout the organization. The focus is on four key areas: revenue complexity, organizational structure and processes, division consolidations, and reducing bureaucracy. This is a strategic review of our overhead but also a strategic review of our organization and processes to improve our customers' experience with Parker and drive growth. I’ll give you a few examples. Our division consolidations have yielded cost savings and will generate technology and product introductions for future growth. Our redesigned sales force organization is providing more effective alignment between our customers, distributors, and divisions. Traditionally, at this time of the year, we work through an extensive annual planning process. This year, we greatly simplified that process and dramatically reduced the amount of time that goes into developing our annual plan; what used to take five months now takes eight weeks. In August, we will share the output from this process in the form of our guidance for fiscal year 2017. Innovation activity continues to be strong, positioning us well when the macro conditions stabilize. I’ll give you three examples of innovation front. Several years ago, we commercialized a series of thermally conductive gels to help cool delicate electronic components and mobile devices and automotive applications, such as closed room avoidance. That product series continues to do well for us today in these fast-growing markets. During the third quarter, we were particularly pleased to receive the FDA approval of our groundbreaking exoskeleton technology, Indego. Indego was approved for clinical and personal use by individuals with spinal cord injury, allowing them to walk again. With approvals now in the U.S. and Europe, we’re positioned for a full commercial launch of Indego. Remarkably, we went from an idea to launch in less than three years and have already generated initial sales in FY 2016. Our plan for launch next year is a C&G fuel regulator modular, which optimizes fuel emissions for class five to eight trucks. This module is a one-piece design that integrates multiple products into a central compact system. We’re optimistic about the commercial viability of this important product. These examples showcase just some of the highlights from the past, present, and future innovations that create vitality and growth from new products and technologies. In summary, by executing the New Win Strategy, we are confident we’ll achieve our key financial objectives by the end of fiscal 2020, which includes targeted sales growth of 150 basis points higher than the rate of global industrial production. We’re also targeting segment operating margins of 17%, and progress toward these goals is expected to drive a compound annual growth rate in earnings per share of 8% over this five-year period. I am very pleased at how far we have come in such a short period of time and continue to be excited about the opportunities we have for the future as we strive to make Parker a top quartile performing company compared to our proxy peers. So for now, I’ll hand things back to Jon to review more details on the quarter.

Thanks Tom, and at this time please refer to slide number five. I’ll begin by addressing earnings per share for the quarter. Adjusted earnings per share for the quarter were $1.51 versus $2.06 for the same quarter a year ago. This excludes business realignment expenses of $0.14 compared to $0.04 for the same quarter last year. On slide number six, you will find the significant components of the walk from adjusted earnings per share of $2.60 for the third quarter FY 2015 to $1.51 for the third quarter of this year. Increases to adjusted per share income include the impact of fewer shares outstanding equating to an increase of $0.05 per share and lower corporate G&A and interest equating to $0.04 due to reductions in long-term incentive accruals and our simplification efforts. Reductions to adjusted per share income include other expenses totalling $0.33 per share as compared to the prior year in which last year sizeable one-time favorable currency adjustments were recognized, lower adjusted segment operating income of $0.21 per share due to the impact of weakened end-markets, and $0.10 from an increased effective tax rate driven by various discrete items booked in the quarter. Moving to slide number seven, I'll provide a review of the total company sales and segment operating margin for the third quarter. Total company organic sales in the third quarter decreased by 9.4% over the same quarter last year. There was a 3% contribution to sales in the quarter from acquisitions. The currency impact as a percentage of sales was relatively in line with our guidance, equating to a negative impact of reported sales of 1.5% in the quarter. Total company segment operating margins for the third quarter, adjusted for realignment costs incurred in the quarter, was 14.7% versus 14.4% for the same quarter last year. We are especially pleased with this performance given the end-market softness. Realignment costs incurred in the quarter were $25 million versus $8 million last year. As forecasted previously, the lower adjusted segment operating income this quarter of $417 million versus $456 million last year reflects the impact of reduced volume and the unfavorable mix from the weakening of industrial end-markets. Moving to slide number eight, I’ll discuss the business segments, starting with Diversified Industrial North America. For the third quarter, North American organic sales decreased by 12.7% as compared to the same quarter last year. There was a modest impact from acquisitions and a negative impact from currency of 0.8% in the quarter. Operating margin for the third quarter, adjusted for realignment costs, was an impressive 16.9% of sales versus 16.4% in the prior year. Realignment expenses incurred totalled $9 million as compared to $1 million in the prior year. Adjusted operating income was $211 million as compared to $236 million driven by reduced volume as a result of the weakening in our key end-markets. On slide number nine, I’ll continue with the Diversified Industrial segment. Organic sales for the third quarter in the Industrial International segment decreased by 8.7%, and currency negatively impacted sales by 3.1%. Operating margin for the third quarter, adjusted for realignment costs, was 11.9% of sales versus 12.7% in the prior year. Realignment expenses incurred in the quarter totalled $16 million as compared to $7 million in the prior year. Adjusted operating income was $121 million as compared to $146 million, which reflects the impact of weaker end-markets. I’ll now move to slide number 10 to review the Aerospace Systems segment. Organic revenues decreased 2% for the quarter. Currency impact was negligible. Sales for the period were impacted by some softness in helicopters and business jets. Operating margin for the third quarter, adjusted for realignment costs, was 15.1% of sales versus 12.9% in the prior year. Adjusted operating income was $85 million as compared to $74 million last year reflecting a combination of higher aftermarket sales volume mix, reduced development costs as a percentage of sales, and implementation of the New Win Strategy. Moving to slide number 11 with detail of orders changes by segment. As a reminder, Parker orders represented trailing averages 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 three-month rolling average, while Aerospace Systems are based on a 12-month rolling average. Total orders were down 6% for the quarter, reflecting less negative order rates in the Industrial segments and Aerospace segment where orders were turning positive. Diversified Industrial North American orders improved to a negative 9%. Diversified Industrial International orders improved to a negative 6% for the quarter. Aerospace Systems orders improved to a positive 1% for the quarter. Now turning to slide number 12 on cash flow. Cash flow from operating activities year-to-date was $681 million. When adjusted for the $200 million discretionary pension contribution made in the first quarter, cash from operating activities was $81 million or 10.5% of sales. This compares to 8.3% of sales for the same period last year. In addition to the pension contribution discussed earlier, significant uses of cash year-to-date were $707 million returned to our shareholders via share repurchases and dividends, $68 million for acquisitions closed during Q1. No acquisitions were announced in Q3, and $111 million for CapEx equating to 1.3% of sales year-to-date. The revised full-year earnings guidance for FY 2016 is outlined on slide number 13. Guidance is being provided on an adjusted basis. Segment operating margins and earnings per share exclude expected business realignment charges of approximately $120 million, the balance of which are forecasted to be incurred in Q4 of FY 2016. Total sales are expected to be in the range of negative 11.9% to negative 9.9%, or negative 10.9% at the midpoint compared to last year. Adjusted organic growth at the midpoint is negative 8.2%. Currency in the guidance negatively impacted sales by three, the majority of which is attributed to the industrial international segment. We have calculated the impact of currency and the stock range as of March 31, 2016, and we have held those rates steady as we estimate the year-over-year impact for the balance of 2016. For total Parker, adjusted segment operating margins are forecasted to be between 14.7% and 14.9%, or 14.8% at the midpoint; this compares to 14.9% for FY 2015 on an adjusted basis. As Tom mentioned, we are very pleased to be guiding to those levels of adjusted segment operating margins, given the magnitude of the end-market declines. The guidance for below-the-line items, which includes corporate admin, interest and other is $478 million for the year at the midpoint. The full-year tax rate is projected at approximately 28%. The average number of fully diluted shares outstanding used in our full-year guidance is $137 million. And for the full-year, guidance on an adjusted earnings per share basis has been increased to $6.20 to $6.40 or $6.30 at the midpoint. The guidance excludes business realignment expenses of approximately $120 million to be incurred in FY 2016. Savings from these business realignment initiatives are projected in the amount of $85 million, which are reflected in the segment operating margins. Slide number 14, you will find the reconciliation of the major components of the revised FY 2016 as reported EPS guidance of $5.67 per share at the midpoint from the prior FY 2016 EPS of $5.60 per share. Increases include $0.18 in segment operating income as a result of simplification efforts, and increased savings from restructuring actions taken to date, and $0.08 from reduced corporate G&A, interest, and share count. The company's decision to increase full-year realignment cost to $120 million results in an additional expense of $0.13 per share. Income taxes and other expense projected comprise additional expenses of $0.06, reflecting discrete items in current projections. On slide number 15, you will find a reconciliation of the major components of the revised FY 2016 adjusted EPS guidance of $6.30 per share at the midpoint from prior FY 2016 EPS of $6.10. As previously detailed, increases included $0.18 in segment operating income and $0.08 from reduced corporate G&A, interest, and share count. This is partially offset by a $0.06 increase in other expenses and taxes. Please remember that the forecast excludes any future acquisitions or divestitures that might be closed during FY 2016. For consistency purposes, we ask that you exclude restructuring expenses from your published estimates. This concludes my prepared comments. Tom, I'll turn the call back to you for your summary comments.

Thanks Jon. I’m very encouraged by the response of our Parker team members around the world. We are dealing with the challenges of our end-markets and delivering impressive performance. Our team is embracing changes designed to improve Parker and position us for the future under the framework of the New Win Strategy. Together we are building a stronger and better Parker. I look forward to sharing more with you on our progress. And at this time, we are going to take questions. So Brian, if you could just get us started.

Good morning. I guess a couple of questions. One, Tom, I guess everyone is interested in sort of the order sales trends that you saw throughout the first quarter and potentially what you are seeing in the month of April. Are there any markets that you see bottoming or perhaps even seeing some green shoots without being too optimistic? And then I guess just my second question to you is, with one quarter left in the year, you upped your restructuring again. As we are thinking about 2017, do we think we've done enough restructuring given your view on the markets that we just have to execute on what's already out there, or could there be potential for more as we think about 2017? Thanks.

Okay Jamie, this is Tom. So I’ll start first with order trends. Orders during the quarter sequentially got better as we saw January going through March, and obviously what we saw in April is consistent with the guidance that we gave you. As far as the markets go, I finished all my comments and will let Lee give you some deeper color, but I made the comment about that we saw a number of markets move from accelerating decline to decelerating decline. So in general, the theme of what we are seeing is a moderation of decline, and the movers from accelerating to decelerating have really led to the charge or distribution in general, industrial ag, mining, and similar accounts; you asked for some of the positive markets. The positive markets are refrigeration and air conditioning, rail, turf, aerospace, commercial MRO, and power generation. Now I'll let Lee go into more detail in a minute on all the market color. On the restructuring, we moved from $100 million to $120 million. Just to clear for people listening on the phone, this isn’t because we saw some market change or worsening of orders that we felt we needed to do this. It really was we saw more opportunities as we started to unpeel the New Win Strategy and being implemented within the company, there were just more opportunities that our team members around the world identified in traditional restructuring, simplification, etc., that we thought would be very good to take now and that will put us in a good position in FY 2017. But you asked about 2017. My opening comments talked about how we moved this to an eight-week process. We are only three weeks into it, so I won't comment about 2017, as you might imagine commenting about 2017 in April is harder than commenting about it in August. However, I will give you some color on the restructuring. I would call this year's restructuring as a high watermark, $120 million, and if you looked at us traditionally before kind of the restructuring we've done over the last several years, we are more in that $20 million to $25 million range. Now while the restructuring is not finalized, I think we are looking at something that’s in between the traditional $20 million to $25 million and $120 million that we did this year. So that’s my take on your comments Jamie; if it’s okay, I'll let Lee take over with giving you a lot more color on the markets, which I’m sure other people on the phone have questions about as well.

Okay, hi Jamie. So as Tom talked about sequentially total Parker organic growth moved in a better direction during the quarter. If you look at it, it was widely a result of North America followed by EMEA. I’m going to walk you through the different regions and try and give you as much color as I can. So starting with North America industrial distribution, total North American distribution is still annualizing at a high single-digit year-over-year decline for FY 2016. This is mostly, as we've talked about in the past, impacted by oil and gas, so we continue to see tightening of CapEx and OpEx budgets which has really been a drag for distribution, most aligned with those end-markets. If you get away from that we continue to see real positive growth out of distribution in the Great Lakes and Midwest areas, and cover automotive plants, Tier-1 machines, all of these, etc. So it’s certainly a couple of different tails depending on where you are in the country. Regarding air conditioning and refrigeration, that’s really a bright spot for us; we continue to experience strong residential air conditioning growth, much of that growth can be attributed to some product introductions we've done that’s given us strong market participation. Our commercial air conditioning refrigeration businesses are up low single digits, and our aftermarket business organically with new product introductions continues to be real strong. The story around oil and gas, major OEMs continue to indicate no significant improvement until the end of calendar 2016 or early 2017, and this is really massive – and I'm sure you have covered this – restructuring plans taking place. It looks like everybody is trying to restructure and look to be profitable around $40 per barrel. Looking at some of those different segments, the consensus appears that really the offshore rig markets for new builds could take years to recover. I think the land base will come back sooner, but the positive side you’ve heard us talk about is that we continue to see increased demand for some of our aftermarket service capabilities, such as our Parker Tracking System that enables asset integrity management of the field, and we've had good traction with that. On agriculture, we expect sales of farm equipment to decline industry-wide, and our demand continues to be consistent with that. Focusing on energy, we continue to increase our market position with large frame turbine OEMs, and this has been a plus because there continues to be a strong conversion of power plants from coal to natural gas in the U.S. so it has allowed us to participate in that. We did see benefits from our wind and solar business, which got a boost with the production tax credits and investment tax grants that were extended, so that was a positive for us in the quarter. Turning to the heavy truck in North America, the current forecast, ACT forecast is now 275,000 units, which is really up from the November forecast, and our North America transportation business is down high single digits but better than industry build rate declines, and I would attribute this to some new product introduction. Our aftermarket exposures there kind of softened some of that downturn. On the mobile market, I think a real positive is that the North American central market continues to be a real strong highlight for us, and major construction equipment is still experiencing top-line declines, but there does seem to be a lot of industry commentary about finding a bottom here, which I'll comment more on later. The in-plant automotive business is a key North American distribution and we're up Q3 versus the prior and continue to do well there. Touching on the European distribution trends are consistent with last quarter – the industrial MRO automotive markets continue to be flat to slightly positive while anything tied to oil and gas continues to be weak. I think one of the bright spots for us really contained in our Win Strategy initiatives is distribution is up in emerging markets in Eastern Europe and Africa. These are high single digits, a combination of organic growth within the region, but cost-effective increased market participation by us. Oil and gas demand across all those related markets continue to contract. We've talked about North Sea investment, and that really still is a bit of a standstill, but this is another area where we've had decent experience with our aftermarket integrity management initiatives offsetting some of the contraction that we see at a first fit level. Then on agriculture, we've seen sequential growth quarter-to-quarter, still flat year-over-year, but the production we're seeing now I would call an increase in normal seasonality. In heavy truck, stronger demand continues in the quarter, following a strong fiscal Q2. We saw demand sequentially from Q2 to Q3, and mobile demand has stabilized at current activity level. We did have a large exhibit at the recent show, and I think all of us were encouraged by the attendance and the favorable sentiment taking place at the show. So it gives us some hope to be somewhat positive going forward. Moving to Asia, distribution is flat to moderately down year-over-year; China's the biggest issue, it’s the most sluggish, down high single digits year-over-year. If I take that out, we’re up across the region. I give this a lot of credit to what our teams are doing on expansion. We've talked about expanding in these developing markets. Energy across the region is still seeing increased activity in renewable sources like wind, solar, and hydro, as well as traditional thermal energy sources like coal, gas, and nuclear taking the major share, and we are participating in those. Tom mentioned this as an accelerating growth; it continues to be a great story, and we've commented for some time on the strength in this market in China. China has really become a preferred builder; we recently signed high-speed rail contracts with Laos, Thailand, and Indonesia, and we continue to have strong exposure to rail building. Lastly, just touching on Latin America, I think it’s really dominated by the Brazil story; our construction equipment, agricultural markets, etc., is still very soft. However, there is decent activity if you get outside Brazil, but the whole story in Latin America is really dwarfed by Brazil. So taking all together, total Parker organic growth sequentially moved in a better direction, largely as a result of what I mentioned in North America and EMEA. I think moderately declining is the word that keeps coming to our minds to describe what we’re seeing on a year-over-year basis.

Okay, great.

Just to build on that, we continue to see good strength, especially in some of those markets that I've highlighted, and I’m also hopeful to continue to see that in the second half. So between that and the restructuring, we feel we’re in a good position. More than anything, we just need a little bit of consistency with that going forward, and you will see that reflected in our ongoing performance.

Thanks. Good morning, everyone. I guess my first question is around the restructuring actions. I know it's hard to comment much at this point on 2017, but it seems like the payback that you got on these actions, the additional realignment actions, is really good. I guess my question is how are you thinking about the magnitude of restructuring for next year? How are you thinking about the potential payback, and is it going to be mostly headcount-related?

Jo, this is Tom. So on the restructuring, I would just say in general, we’re really pleased with our team – teams around the world. The execution has been timely, and we've been thoughtful on how we've done it. I'm proud of how the team has performed on the restructuring and that’s been a big part of the timeliness and helping our margins perform this year. As for next year, I still think my characterization would be somewhere between the $120 million to $125 million is probably a good indicator. I still think for the most part, as restructuring, is a pretty good payback from a time period standpoint, usually the 12-month indicator; obviously, it’s a more traditional or international-oriented type of restructuring that will take longer, probably 18 to 24 months. But in general, it would still be aimed at the more strategic restructuring that we've been talking about, which is at the forefront of the company. But we’ll continue to look at what we typically have for footprint optimization as it makes sense.

Okay. And then maybe as a follow-up, Tom, your comments earlier about going from an accelerating to a decelerating decline, I'm just curious within that context what's going on with the pricing environment? Are you seeing any pressure across the portfolio today? Have you started to see stabilization there as well? Any color there would be helpful.

Joe, this is Lee. I’ll just give you some comments on that. So I would characterize price realization as very tough, candidly. We did raise prices to distribution in this past January; it's mostly around non-core and late lifecycle types of products, but we did realize price there. One thing we do track, and you’ve heard us talk about this in the past, we have an SPI Index which tracks year-over-year pricing by partner. We have a PPI which tracks our input costs. And we do have a positive spread here and we look at it continuously. Overall it’s pretty much flat.

And Lee, is that spread mostly being driven by the denominator? Is it just because the cost environment has remained favorable and could that potentially reverse itself as we progress through the year?

I would say top-line, the SPI number is flat, as I talked about, but the PPI is giving us the spread, yes.

Hi. Good morning, guys.

Good morning, Jeff.

Just on the buyback, it looks like it slowed here a little bit, and M&A has kind of been weak. I just thought as we come on the deadline for this $2 billion to $3 billion, we would be tracking more towards the high end. Maybe just update us on how you are thinking about buyback.

Jeff, this is Tom. In the buyback, we continue to look at that on a dynamic basis, assessing what makes the most sense for our shareholders. We’ll continue to update you every quarter. But some things to just keep in mind from consideration: when you look at our cash, 99% of that is permanently invested overseas. It’s important to us to maintain an A rating, so that’s a factor that we consider. When we rolled out the $2 billion to $3 billion initiatives that was in October 2014, we were a $13 billion company then and now we are $11.3 billion. So a number of things have changed. Our cash flow as a percent of sales continues to perform very well at 10.5%. We’re going to continue to deploy cash as efficiently as we can, looking at the best ways to deploy it and what delivers long-term value creation to our shareholders. On the acquisition side, the pipeline is active, but it’s always hard to predict the output; it tends to be lumpy. I would say valuations are still challenging at this point, with pricing probably starting to moderate slightly, but we’re disciplined buyers and we buy things that are in spaces we understand and that we understand the growth rates. We’ll continue to be that way. You’ll look to see us be as efficient and aggressive with our deployment of cash as we can, weighing all the variables to try to do the best for our shareholders in the long term.

Okay. That's helpful. And then it looks like the guidance is mostly coming from North America feeling a little bit better, and I think you mentioned some of the restructuring. But just go into a little more detail on what is surprising you to the upside in the North America business.

Well, Jeff, I think Lee probably did a pretty good job of taking you through that, but in North America, when you look at it sequentially, almost everything was positive in North America. Some of that we get just from the calendar helping us, but in particular the part that I like is that when you look at - in case people don’t understand what I’m talking about, these market phases, you’ve got accelerating growth and decelerating growth, and you have got accelerating decline and decelerating decline. If I was to show you this dot map of our end-markets in those four phases, in Q2, you could see a lot of dots in the accelerating decline. And what’s moved, and I would say particularly in North America, it’s been distribution, Ag, semiconductor, mining, and general industrial. The thing we are cautious about is that we are getting help from comps for the most part. Still, it’s too early to say there is a general market shift. We’ll continue to look at that data; we need a few more months and another quarter or two to help confirm. But in the healing process of order entry, step one is to have a deceleration or moderation of decline, so that’s the good thing, and we’re very happy about that. To put up the kind of numbers we are putting up in this kind of climate I think, if you look at us historically, is remarkable.

Yes, but on the margin front, is that just greater traction on some of the restructuring, or what really drove the guidance or vision on North America margins?

I’m sorry, Jeff. I thought you were talking about sales, but yes, on margins, it was clearly the return on the restructuring and the simplification actions. We’ve seen a faster return and just more effective cost savings.

Good morning. Can I touch back on the share repurchases? Traditionally you have always discussed having your own internal model, which you use to determine how much shares you think you should buy back or not. With the $50 million buyback, was your model telling you that Parker shares were fairly valued in the quarter?

Ann, it's Tom. It's always a good time to buy Parker shares. We just looked at - again it's fair to look at all the opportunities we can't share. When we look at all those opportunities, we thought the amount we did was the right amount. We will continue to weigh every quarter, of course, dividends first, investment for organic growth. If you look at the balance between acquisitions and share repurchases, i.e., for the reasons I talked about earlier, that would be an indicator why we are at the low end of that range; because the dynamics of the world have changed once we announced that proposal. We are absolutely committed to the low end of that range; I don’t want anybody to misunderstand me, but things have changed as far as we look at to the top end of the range. The balance above that is all depending on what is the best use of cash for our shareholders.

Right. That's very helpful clarification. And then my follow-up is back to some of the comments you made about restructuring the sales force. We get nervous when we hear other companies talking about restructuring the sales force. It doesn't always work out very well. Could you just give us a little bit more detail on what you are doing there and how comfortable you feel about the progress you are making?

Yes Ann, this is Tom again. We are very, very happy with what we are doing there. I can understand your reservations, but this was done with a lot of thought and here they change, so our groups are organized with exception Aerospace organized around technology and products. It’s easier for our division to find the people that own those income products and technologies. In Europe, as an example, we went from a sales force that was maybe heavily dominated on alignment at the markets to being more product-centric while still giving at the markets having lesser concentration or more concentration on technologies and markets. So we can have a real good technology discussion with our customers. The other part we did to help simplify the interface with the global OEMs is in Europe, we now have 10 Europe OEM teams, which is very similar to what we had in North America, allowing for someone to access. We took that approach because it didn’t make sense to be calling on OEMs country-by-country that span the entire Europe. So that’s been in place for probably six to nine months, and we are very encouraged with the kind of market share actions that we are seeing coming out of that from that team. Another example comes from Japan; in Japan, historically, we had a very fragmented sales force. Now we have a single sales force with a much better alignment on the operating side, and we are seeing positive results, with Japan doing very well for us. The organizational changes should give you comfort and are showing in the numbers and the market concentrations, so we go account-by-account in various regions.

Apologies in advance. I've been hopping between a few calls. But quite simply, looking at the rate of businesses that you have right now and their various growth rates and not thinking of any change, but incorporating seasonality, when would you expect your organic sales to be back to flat?

Dave, it's Tom again. So that is of course the question everybody would like to know, and at this point, it's difficult for me to predict. I won’t comment on that; I mean at this point our guidance for the fourth quarter is a minus seven organically, so that’s an improvement from the minus 9.4 we had in Q3. That’s the first good sign. As I said in these market phases, when we look at all the markets, we went from a concentration in accelerating decline to now more than move into decelerating decline. We would hope to keep moving clockwise around these phases to start moving into some kind of growth. But I think it's too early to honestly, we haven’t given an indicator of that we can tell you when. We need a few more data points, a couple more months and a couple more quarters obviously before we are in much better position to tell you. But I would say this with the first step in the healing process.

Good morning, everyone. Can we talk a little bit about where inventory levels are both in the distribution sense and the OEM, as best you can tell? Are we really past all the inventory organization, or is there still some going on? And with the pricing, you raised prices at distribution, but we keep hearing distribution people are having trouble passing anything on. Are they taking the price increase and absorbing it, or are they able to pass it through?

Eli, it’s Lee. I was expecting this inventory destocking, so I researched this 10 times before this call. The consensus when I checked not only from our guys but through my contacts is this: If you are involved in oil and gas and you had a lot of OEM exposure, you're still sitting on a lot of inventory. If you get away from that, inventory is pretty much normalized at this point in time. I think some of the guys may have gotten hit a little bit from side effects from oil and gas, but that’s fairly normalized. I would say on OEM inventory where I still see issues is in construction equipment and mining markets, especially in Asia. If you tour some of the equipment yards, I mean, there are excavators and wheel loaders that go on for miles. Our North American distribution, I'm most comfortable that outside of oil and gas, it’s not a big issue. Regarding your second question on pricing, I can’t really comment on that. What we did there was really non-core, so I can’t really comment too much on that. I have not had any feedback that it’s been a big issue.

Hi. Good morning, guys.

Good morning, Josh.

Just maybe to ask Raso's question a little differently. On the orders front, you guys can see the comp getting easier there; orders quarterly down a little bit more than maybe the comp was, got easier this quarter. Is there a potential for orders to get back to flat in June, understanding that it may be a while longer before sales quite get there?

Josh, Jon here, just to be responsive to your question. Of course, we are not calling for that in our guidance going forward. When you take a look at the orders overall for Parker, we’re just looking at - we were at this time last year down four and we were down nine, down 11, down 12, now we are down six. So the question is about the rate of the incline in the reduction of your letters. While we don’t have that forecasted, we’ll be looking at that closely; it’s going to be fully aligned with the end market progress that Lee and Tom have been discussing. We are gaining market share; we are launching into end markets. As Tom said, our best characterization is that it’s a moderating decline, and obviously moderating. We’ll come out with that answer when we provide our guidance in August, but right now in April, it’s a little too early.

Good morning, everyone. Can we just clarify on that last point, the $40 million restructuring savings in Q4. So is $160 million annually the new run rate you are looking at from the $120 million, or should it be a little bit higher than that?

I do not think it’s going to be higher than that. It’s not going to be $40 million per quarter going forward here Nathan. So I want to research that further. That’s just the way that we calculate the savings based on the restructuring we’ve done year-to-date; that will be most of the restructuring, of course, that we’re doing in Q4 will give us savings next year.

Thanks. Good morning, everybody. You mentioned mining as showing decelerating declines. Can you help us on whether that was related to shipments into OEMs or an MRO comment?

I think on the mining, what we saw in general is that it’s probably a little bit more help on the OEMs. Comparing Q2 to Q3 got a little bit better; distribution got a little better as well, but for the most part it's probably more the comps that are helping us at this point. We aren’t ready to declare victory in any of these areas, but give it a couple more quarters and we’ll be able to say it’s more than the markets. For now, it’s probably the comps helping us more than anything.

Okay, thank you very much.

Brian, I see that we are at the top of the hour, so we could just take one more question, please.

Thanks for sneaking me in here. Quick on the decrementals, kind of like what Nathan hinted at; when I'm comparing North America to international - both are decrementals have been great on both pieces of those businesses - but we are seeing more pronounced organic declines on a year-on-year basis in North America, but margin is actually going up. Can you walk us through what might be driving even more pronounced decremental reductions in North America?

Yes. Joe, sure. Just real quick at a top level, although we’re down higher organically, and you are absolutely right, in North America than we are in international, our decremental MROS on an adjusted basis is 13 for North America versus about 19. Now in any environment, that 19 in our history is a very impressive number. But it is distinguished from North America; I believe it has something to do with the level and depth of some of the restructuring we're doing; a bit of the quicker payback in restructuring in North America versus internationally. But in both cases, we’re making great progress and we’re kind of - we are seeing a little bit of difference, but this historically in North America and in our industrial businesses. The best we’ve ever done in a downturn like this, especially considering the magnitude of this downturn. We’re talking of a negative nine, 9.5 for the quarter and our guidance of negative seven coming up. So the short answer is very quick actions, quick recovery, dedication on the part of our management teams both internationally and in North America, and our ability to be resilient and adaptable as a company today versus prior downturns.

Great. And then just last for me, in terms of scale, maybe you could put this in the appropriate context for us on the simplification efforts and removing of divisions and things like that. How many SKUs have you guys gotten rid of on a percentage basis or something just to give us a sense of how much this has really changed?

Yes, this is Tom. That will be very difficult to answer. I couldn’t even hazard a guess. But just recognize that we are working at last couple of percent of revenue; it carries a disproportionate amount of costs and part numbers and quote activity, and that’s the focus. But I couldn’t give you a guess on that amount.