Parker-Hannifin Corp (PH) — Q2 2019 Earnings Call Transcript

Thanks, James. Good morning. Welcome to Parker Hannifin's second quarter fiscal year 2019 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 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 also posted on Parker's website at phstock.com. Today's agenda appears on slide three. To begin with our Chairman and Chief Executive Officer, Tom Williams, will provide comments and highlights from 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 2019. Tom will then provide a few summary comments before we open the call for a question-and-answer session. Please refer now to slide number four. Tom will get us started.

Thank you, Cathy, and good morning everybody. Thanks for your interest in Parker and your participation today. So I'm going to start by first highlighting Parker's business model, which Cathy mentions on slide four, specifically those competitive differentiators that really help us stand out versus other companies and our competition. First on the list and foremost is the Win Strategy. It's our business system. It's a proven strategy that has a long track record of success. The second will be our decentralized divisional structure. We like that structure because it's close to the action. We want our people close to our customers and close to the P&L, so that we know whether we're making money or not. The breadth and integration of Parker's technology portfolio really creates a unique customer value proposition. I think this is best demonstrated by the fact that 60% of our revenue comes from customers that buy more and more of those technologies. We make engineered products. About 85% of our products have some kind of intellectual property wrapped around them. Our products have long product life cycles, which is a great thing. We're balanced between OEM and aftermarket and support this business model only requires low operating CapEx requirements, which is very positive. We've got a great track record on cash generation and deployment and we want to continue that over the cycle going forward. Regarding key takeaways for the quarter, safety is always our top priority. We had really strong performance; a 23% reduction in recordable incidents. This builds on great progress from prior quarters. My thanks to everyone for their efforts on prioritizing safety, including all the leaders and team members of the company. And I would just remind shareholders there's a very close linkage between safety performance, financial performance, and customer satisfaction. You can see that linkage as we improve safety; we see improvements in our customer and financial metrics. We posted a number of second quarter records. This includes sales, segment operating margins, net income, and EPS. We reached 16.4% as reported on operating margins in the quarter. This is an unprecedented level of performance for the second quarter; previously, it would normally be a Q4 type of performance. Our organic growth came in positive at almost 6%, partially offset by currency, and we had strong cash flow and free cash flow conversion for the quarter driven by operating income growth and good working capital management. As a result of all this, we're increasing earnings guidance for this fiscal year, and we remain confident in our ability to reach our new guidance for FY 2019 as well as our FY 2023 five-year financial targets. My thanks to the team members of Parker around the world for making great progress and achieving great results. Thank you so much. A couple more comments about the quarter: a strong quarter, nice earnings improvement year-over-year, as I mentioned, we set several records. From a net standpoint, our sales came in at 3%, again with almost 6% organic growth, which is very close to our guidance. Order rates moderated, reflecting tougher comparables as well as growth moderating, which we'll discuss further during the Q&A. Net income was a Q2 record, which included an income tax expense related to U.S. Tax Reform of $14 million. Segment operating margins again reached a record 16.4% as reported, compared to the previous Q2 record of 14.4%. Typically, when you beat a margin record, you beat it by 10 to 50 basis points. Thus, the fact that we beat this by 200 basis points is very significant and quite remarkable. Adjusted segment operating margins for the total company were 16.6%, which was up year-over-year 170 basis points versus Q2 of FY 2018. Aerospace had another great quarter, achieving three straight quarters with margins over 19%. This demonstrates the significant returns on the investments that we have made over the last decade in that business. Overall, we are confident in the future of the aerospace business and the momentum there. We'll continue to see improvement as we move forward. Cash flow remained strong, and we expect to exceed 100% free cash flow conversion with operating cash greater than 10% of sales for the fiscal year. This excludes discretionary pension contributions. Regarding share repurchase, we bought a total of $500 million in Q2, which included a discretionary repurchase of $450 million and $50 million through our 10b5-1 program. Now, switching to the outlook, we're increasing our EPS guidance by $0.09 at the midpoint to $11.29 on an as-reported basis, and we're now increasing it by $0.20 at the midpoint to $11.60 on an adjusted EPS basis. This reflects the strong first half we had and the outlook for the remainder of the fiscal year. We're forecasting moderating sales growth based on our current order entry and currency impact, with a forecasted organic growth range of 2% to 4% for the full fiscal year. We're in a great position, the best position we've ever been, to outperform regardless of market environment. Several factors underpin our confidence and ability to perform here. The new Win Strategy is demonstrating a distinct step-change in performance, highlighted by our margin expansion over the last four years—a clear indication of that. We still are in the early stages of Win Strategy execution, presenting us with several opportunities. First, our high-performance team process is focused on fostering an ownership culture within the company. As ownership develops, employee engagement and performance will improve. Our simplification initiatives are also in the early stages, with a growing innovation pipeline. The combination of lean practices, kaizen opportunities, and our supply chain strategies will continue to yield margin expansion moving forward. We are stronger as a company now than we've ever been, with a well-prepared cost structure to manage any softening in market dynamics. Our earnings growth, cash flow, and strong balance sheet provide us with numerous capital deployment opportunities, enhancing shareholder value. We maintain our confidence in the financial targets we communicated for FY 2023 during last year's Investor Day, which include organic growth 100 basis points faster than the market over the cycle, segment operating margins at 19%, EBITDA margins of 20%, free cash flow conversion greater than 100%, and an EPS CAGR over this period of 10% plus. In summary, we anticipate another record year for FY 2019 and are making good progress towards our new five-year targets. With that, I'll hand it back to Cathy for a more detailed review on the quarter.

Thank you, Tom. I'd like for you to now refer to slide number 6, and I'll begin by addressing earnings per share for the quarter. Adjusted earnings per share for the second quarter were $2.51, representing a 17% increase compared to $2.15 for the same quarter a year ago. The differences between the as-reported results and the adjusted results include business realignment expenses of $0.01 and CLARCOR costs to achieve of $0.03 from the fiscal year 2019 second quarter operating income adjustments. This compares to prior-year adjustments of $0.07 for business realignment expenses and $0.07 for CLARCOR costs to achieve. In fiscal year 2018, we also adjusted other expenses to exclude a net gain of $0.05 from the sale of assets and the write-down of an investment. Income tax expense in the current year’s second quarter has been adjusted by $0.11 due to tax expenses related to U.S. Tax Reform. This updates the initial net one-time tax reform adjustment of $1.65 that was previously accounted for in the second quarter of fiscal year 2018. On slide number 7, you will find significant components of the walk from adjusted earnings per share of $2.15 for the second quarter of fiscal 2018 to $2.51 for the second quarter of this year. The most significant increase came from higher adjusted segment operating income of $0.41, attributable to earnings driven by meaningful organic growth, synergy savings from acquisitions, and increased margins resulting from Win Strategy initiatives. Lower average shares resulted in a benefit of $0.07, and lower interest expense contributed $0.03. Adjusted earnings per share was reduced by $0.06 due to higher income tax expense in fiscal year 2019 driven by higher earnings. Higher year-over-year corporate G&A expenses primarily due to losses in market-adjusted investments tied to deferred compensation resulted in a $0.09 per share reduction. Moving to slide 8, you will 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 5.7%. There was a 0.5% negative impact on sales this quarter from prior-year divestitures while currency negatively impacted the quarter by 2.2%. Total segment operating margin on an adjusted basis improved to 16.6%, versus 14.9% for the same quarter last year. This 170 basis point improvement reflects the benefits of higher volume, productivity improvements, synergies from acquisitions, along with the positive impact from our Win Strategy initiative. Moving to slide number 9, I'll discuss the business segments starting with Diversified Industrial North America. For the second quarter, North American organic sales increased by 5% compared to the same quarter last year. Our prior-year divestiture accounted for a 0.4% loss of sales while currency also negatively impacted the quarter by 0.3%. Operating margin for the second quarter on an adjusted basis was 16% of sales versus 15.1% in the prior year. This 90 basis point improvement for North America reflects hard work dedicated to productivity improvements, additional volume benefits, synergies from acquisitions, and the impact of our Win Strategy initiatives. Continuing with the Diversified Industrial International segment on slide number 10, organic sales for the second quarter in the Industrial International segment increased by 3.6%. A negative impact from a prior-year divestiture accounted for 0.8% of sales while currency negatively impacted the quarter by 5.3%. Operating margin for the second quarter on an adjusted basis was 15.7% of sales versus 14.2% in the prior year, reflecting increased volume, improved operating cost efficiencies from realignment initiatives, and the benefits of the Win Strategy. I'll now move to slide number 11 to review the Aerospace Systems segment. Organic revenues increased an impressive 12.2% for the second quarter due to strength in both military and commercial OEM businesses, as well as aftermarket businesses. Operating margin for the second quarter was 19.7% of sales compared to 16.0% in the prior year, reflecting benefits from higher volume and cost efficiencies, impact of a favorable sales mix, deferment of some development costs, and good progress on the Win Strategy initiatives. Moving to slide 12, 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 in absolute dollars year-over-year, excluding acquisitions, divestitures, and currency. The Diversified Industrial segments report on a three-month rolling average, while the Aerospace Systems segment reports on a 12-month rolling average. Total orders increased by 1% as of the quarter-end. This year-over-year growth is made up of flat order growth from Diversified Industrial North America, a decline of 2% from Diversified Industrial International orders, and a 10% growth from Aerospace Systems orders. On slide 13, we report cash flow from operating activities. Year-to-date cash flow from operating activities was $541 million. When adjusted for a $200 million discretionary pension contribution made during the first quarter, cash flow from operations was $741 million or 10.7% of sales. This compares to 6.8% of sales for the same period last year. The significant capital allocations year-to-date have been $200 million for the payment of shareholder dividends, $550 million for share repurchases of common shares consisting of $100 million through our 10b5-1 plan and $450 million of discretionary share repurchases completed in the second quarter, and $200 million for the previously mentioned discretionary pension contribution. The revised full-year earnings guidance for fiscal year 2019 is outlined on Slide number 14. We have adjusted our sales outlook for the second half to reflect current order trends and current currency rates. Total sales increases for the year are now expected to be in the range of minus 0.4% to plus 2.0% compared to the prior year. Anticipated organic growth for the full year is forecasted in the range of 2% to 4%, or 3% at the midpoint. The prior-year divestiture negatively impacted sales by 0.4%, and currency is expected to have a negative 1.9% impact on sales for the year. This calculated the impact of currency at spot rates as of the quarter ended December 31, and we have held those rates steady as we estimate the resulting year-over-year impact for the remaining quarters of fiscal 2019. For total Parker, as reported segment operating margins are forecasted to be between 16.7% and 17.2%, while adjusted segment operating margins are forecasted to be between 17.0% and 17.4%. The full-year effective tax rate is projected to be 23%, anticipating a tax expense run rate of 24% for the third and fourth quarters. For the full year, the guidance range on an as-reported earnings per share basis is now $11.04 to $11.54 or $11.29 at the midpoint. On an adjusted earnings per share basis, the guidance range is now $11.35 to $11.85 or $11.60 at the midpoint. This updated guidance on an adjusted basis excludes business realignment expenses of approximately $19 million or $0.11 per share for the full year fiscal 2019, with the associated savings projected to be $10 million. The guidance on an adjusted basis also excludes $15 million or $0.09 per share of CLARCOR costs to achieve expenses. CLARCOR synergy savings are estimated to reach a run rate of $125 million by the end of fiscal 2019, representing an incremental $75 million of run rate savings as we exit fiscal 2019. We remain on track to realize the forecasted $160 million run rate synergy savings and $100 million revenue synergies by fiscal year 2020. Additionally, guidance on an adjusted basis also excludes $0.11 per share for the second quarter tax expense related to U.S. Tax Reform. Savings from business realignment and CLARCOR costs to achieve are fully reflected in both as-reported and adjusted operating margin guidance ranges. We ask that you continue to publish your estimates using adjusted guidance to represent a more consistent year-over-year comparison. Some additional key assumptions for the full year 2019 guidance at the midpoint are; sales are divided 48% for the first half, 52% for the second half; adjusted segment operating income is divided 47% for the first half, 53% for the second half; adjusted earnings per share for the first half and second half is divided 46%, 54%. Third quarter fiscal 2019 adjusted earnings per share is projected to be $2.99 per share at the midpoint, excluding $0.05 of projected business realignment expenses and $0.01 of projected CLARCOR costs to achieve. On slide 15, you'll find a reconciliation of the major components of fiscal year 2019 adjusted earnings per share guidance of $11.60 at the midpoint, compared to the prior guidance of $11.40 per share. Increases include $0.11 from stronger segment operating income, $0.03 from lower full-year tax expense, and $0.20 from reduced average shares. Offsetting these increases is an $0.11 per share decrease due to higher corporate G&A than previously forecasted due to market-adjusted investments tied to deferred compensation and higher other expense attributed to mark-to-market accounting of equity investments in the second quarter, as well as $0.03 from higher interest expense for the year. Please remember that the forecast excludes any acquisitions or divestitures that might close during the remainder of fiscal 2019. On slide 16, you'll find the components of our updated full-year increased guidance relative to the outperformance in the second quarter versus our initial guidance. Actual second-quarter earnings per share on an adjusted basis were $0.12 stronger than previously guided due to excellent operating performance, partially offset by higher corporate G&A and other expenses attributable to the market investment losses previously mentioned. For the balance of the year, we expect net incremental per-share benefits of $0.08. Lower tax expense will provide $0.03 and $0.16 will occur due to lower average shares. Offsetting these favorable items will be the impact of moderating growth on operating income in the second half of $0.10 per share, as well as an expected net $0.01 unfavorable impact from below-the-line items of corporate G&A interest and other expenses. All of this equates to a net increase to adjusted earnings per share for the full year of $0.20. This concludes my prepared comments. Tom, I'll turn the call back to you.

Thank you, Cathy. We're very pleased with our continued progress. With the execution of the Win Strategy, we're projecting another earnings record for fiscal 2019. I just want to conclude by saying thank you to the global team for all their hard work and dedication, and I thank our shareholders for their continued confidence in us. With that, James, I'll hand it over to you to start the Q&A portion of the call.

Hi, good morning. I think maybe you could give us some color on the regions and what you're seeing in various end markets. We used to discuss the 3-12 and 12-12 trends around the end markets and the regions. Could we start with that, Tom?

Okay, and this is Tom. I'll start. I'm going to give you an overall framework and then I'll hand it to Lee for more details. Let me start with the new guidance, and I will focus on organic growth. We guided to a range of 2% to 4% as far as our organic guide. In terms of the regions and Aerospace, here's how they break down: for organic growth at 2% to 4%, Latin America would be above that range; Aerospace is above it; North America would be right at the midpoint; Asia-Pacific would be at the low end; and EMEA would be flat. That's our view on organic growth for the full year. More importantly, what we are seeing for the second half of fiscal 2019 is that our organic guide is approximately a little less than 1%. This is how it splits out: North America is a little bit north of 1%; international is about minus 0.5%; and Aerospace is at 2.5%. If we look more closely at international, that minus 0.5% is around the following: Latin America is plus 5%; Asia-Pacific is flat; and EMEA is a decline of about 1.5%. These are all second-half projections from us. To provide a bit of context on what's behind the second half guidance, let's start with the most recent order entry. North America was at flat; international at minus 2%; Aerospace ran at plus 10%; total company at 1%. If I step back for a minute and look at where we were two years ago, we were clearly in an accelerating growth environment, which typically transitions to moderating growth as is expected in most business cycles. However, there have been some weights placed on growth currently due to macroeconomic and geopolitical issues such as trade-related matters, Brexit, monetary policy, oil and gas price softening, and the government shutdown. I'm very optimistic; we’re optimistic that those weights will resolve themselves, even if not completely, several of them likely will. If that happens, our organic growth guidance for the second half, which currently stands at slow growth, could spring back to moderate growth. The big question is when. However, our guidance assumes that these macro issues will not be resolved timely to make any material changes to our current second half guide. So that's the backdrop, and I will hand it over to Lee for more detail on the markets.

Okay, Ann. I thought I would start by giving some color on Aerospace. We are very pleased with our performance in Aerospace with strong organic growth. I’ll share some breakdowns: Commercial OEM for us was up 11% in Q2 and we are guiding at the midpoint for 5% for the full year. Military OEM is up 24% in Q2, guiding to 14% for the full year. Commercial MRO is up 8%, while we will guide to 4% for the full year. Military MRO showed strong growth of 9% in Q2 and a guide of 3% for the full year. Some parts of this business are quite lumpy—there are tougher comparisons, but that's our current thinking. For the industrial side of the business, we categorized our markets into three buckets: those that are still stable and growing, those that are moderating, and those that are soft or negative. Markets that remain positive include: refrigeration, telecom, life sciences, construction, and heavy-duty trucks in both North America and Europe, displaying fantastic build rates. The one area that is down significantly is Asia-Pacific, China specifically, which I'll comment on further. Agriculture, lawn and turf, forestry, and material handling also remain positive. Moderately growing markets from Q1 to Q2 include distribution (mostly North America), oil and gas (mainly land-based oil and gas), and general industrial sectors. Soft or negative markets include automotive, machine tools, tires, and rubber, all affected by trade uncertainties. We also want to mention that we’ve seen flat sectors like power generation that haven’t gotten worse and are now stable, while semiconductor and microelectronics have worsened in Q2. Stability is seen in the rail and marina industries at low levels. Overall for North America, we're still relatively bullish. Our distributor base is optimistic, but we did see a moderation, primarily in distribution serving the microelectronics and land-based oil and gas markets. Also, we've observed channel partner inventory rebalancing in North America during Q2. As for EMEA, we've noted pressures from Turkey, Brexit, tariffs, and ongoing protests that impact various areas. We expect slightly negative growth for the second half but did see some positive trends in offshore North Sea oil and gas markets. In Asia, after two great years of strong comparisons, we’re now expecting flat growth in the second half. Overall, we remain encouraged; while we see some pressure in some areas, it does not feel like there's going to be a steep pullback. I think we're just passing through a phase of slower growth. I will stop here and hand it back.

You did indeed, and I don't want to hog the call, but could I just clarify without putting words in your mouth, that North America distribution would have been the one that inflected the most during the quarter?

It definitely took a step back in North America. However, I wouldn’t classify it as an overall downturn. There was rebalancing from some channel partners in Q2, particularly concerning land-based oil and gas.

Thanks, Ann.

Thanks. Good morning, everyone. I'm wondering how to view the Industrial International guidance for the second half. You're guiding the top line down a little bit, yet the margins appear pretty resilient. I'm curious whether the resilience is primarily due to the structural cost work you've done for that region, is it mainly comp-related, or is there something else at play?

Andy, it's Tom. What you're observing is a combination of factors, including the structural work that we have done across the regions. We've done more restructuring in international over the past years compared to North America. There's also new Win Strategy changes and the all-important focus on simplification. Our SG&A costs have come down, and the productivity at plants continues to improve and is expected to maintain that momentum in the second half. So, yes, we're doing a great job of execution, which is why our margins remain resilient despite some softness in the top line.

Okay. Thanks, Tom. If investors seem to be worried about a downturn across several markets, I'm curious about what you would expect from Parker in terms of performance during such a downturn. Are we looking at not only raised margin performance as demonstrated with this record second quarter but also decreased sensitivity to swings in end market demand?

While it depends on the severity of any downturn, I would tell you we are continuously focused on being cost leaders. The Win Strategy execution aims to make us nimble and agile. Evidence of our progress can be seen in our margin improvements over the past four years. We have guided for slightly lower sales in the second half, yet expect margins to equal or exceed those in our previous guidance. Traditionally, we expect around a 30% decremental margin, but we believe the work we’re doing allows us to mitigate some of that risk.

Thanks, Andy.

Good morning, everyone. I would like to dig a little bit further into the margin in North America. The incrementals were in the mid to upper 30s in the second quarter versus the 10 to 20 you guided for the first half, clearly a positive outlier. I think this is likely due to productivity improvement following the closure of CLARCOR and Parker facilities. Could you share your insights on this productivity advancement and whether these businesses are running at anticipated levels or if we can expect further improvement into third quarter?

Yes, Nathan. You are correct that productivity has improved across the board, not just in the plants involved in closures. The entire management team is focused on executing our Win Strategy and we see improvements in productivity across all facilities. Although we were encouraged by the 37% incrementals in North America this quarter, we expect that to continue climbing higher, as there's still plenty of room for improvement. We believe this offers positive momentum as we look toward the second half and even into FY 2020.

One last question on the order rates. Orders in North America were flat in the quarter. I understand there was some rebalancing. Do you see this trend continuing into the third quarter, or should we expect to see any significant change in inventory levels among OEMs or other channels?

I believe the rebalancing in the North American distribution channel is largely complete. There is substantial demand pull occurring now, so I do not see further pullback based on current market conditions.

Thank you very much. I will pass it on.

Hi, good morning. Just following up in the industrial businesses, could you provide commentary on the cadence of order changes you've observed in recent months? Did you see a significant drop in orders very late in fiscal Q2, or was there a steady deceleration beginning early October? Also, what’s the current outlook for organic growth in the current quarter versus the fourth fiscal quarter?

Julian, this is Tom. Order trends were relatively equal across the board; there wasn’t significant timing to the decline. The North American orders mirrored the prior year’s increases. As for the international regions, EMEA and Latin America also saw sequential sales drops. In terms of organic growth, we expect a little better in Q3 than Q4, driven primarily by comparisons, particularly within Aerospace. The strong Aerospace Q4 will serve as a tough comparison but, in general, our guidance holds steady.

One last question regarding the balance sheet. Can you comment on the share buyback activity of $500 million in Q2? Given demand slowdown, does it affect your appetite for acquisitions? Are you still as interested in M&A as you were?

Julian, regarding capital deployment, dividends will remain a priority. Our share repurchase strategy is highly contingent on the most beneficial long-term investments for our shareholders. The M&A pipeline remains active, as we're continuously looking for opportunities that align with our strategic objectives. While we're open to share repurchases, acquisitions remain important. That being said, we are committed to maintaining a healthy balance sheet and focusing on maximizing shareholder value.

Great. Thank you.

Thanks, Julian.

Good morning. How are you guys doing?

Good morning, Andrew.

I recall you mentioned last year that we were still in the early innings of the industrial cycle. Considering your growth and accuracy thus far, I'm curious why you foresee growth rates at 5% and 6% for hydraulics in 2019, or 7% to 8% for Aerospace? What has transpired in the industrial cycle that would set you apart from other short-cycle sectors, and have your long-term perspectives changed?

Andrew, I can't speak for others, but for us, we see strong growth in Aerospace driven by robust orders and solid first half performance. Our industrial outlook is driven by our organic growth metrics and backlog, typically measuring four to six weeks. I still stand by my message that this is a favorable environment for industrial growth, even with uncertainties impacting demand.

Okay. Thanks. I observe that pricing in the industry appears more robust this cycle than in the past. What factors contribute to the fundamental ability of pricing to hold up amidst the current downturn you mentioned?

Andrew, we're constantly measuring our input costs using our PPI metric and identifying inflation. Recent cycles have seen significant inflation driven by commodity pricing and tariffs. The strength of brand recognition for Parker also plays a role in maintaining pricing power, as high demand puts value on our offerings.

Thanks, Andrew.

Good morning. On Aerospace margins—having recently experienced strong gains—could you discuss mix changes that may influence margin progression over the next 12 to 18 months? Additionally, considering the macro uncertainty and market slowdown, are you contemplating additional restructuring actions?

Aerospace margins continue to perform well. We anticipate a rise in entry-of-service OEM activities relatively lower margins, resulting in pressure on margins despite the efficient work conducted. We expect to finish the fiscal year with a midpoint Aerospace margin of 19%.

Regarding restructuring, Jamie, we are always vigilant, ready to adjust to any softness in demand. However, we are not experiencing triggers that would alter our current restructuring strategy. There are numerous operational levers we can adjust without undertaking formal restructuring, including staff reductions and controlling overheads.

Okay, thank you. I’ll return to the queue.

Thanks, Jamie.

Hi, Good morning. As a company, it's essential to illustrate how Parker handles slowdowns compared to previous cycles. This quarter showed you can raise guidance despite weaker orders. As we approach fiscal 2020, please help frame your order patterns, particularly as you enter into a more challenging comp period. Should we anticipate North American orders to trend negative through calendar Q1?

David, it's Tom. While I can't predict FY 2020 specifics yet, I think order patterns will reflect our organic guide. For North America, expect orders to fluctuate around a slight positive. We anticipate international trends to remain somewhat negative based on current entries. Those fluctuations will mirror our organic guidance as we make the transition into the next fiscal year.

Just a follow-up on year-over-year benefits. With a shoulder season heading into FY 2020, what key elements will support your margin performance? How do you prioritize benefits from plant closures, share repurchases, or other strategies? And how do you expect to balance below-the-line items?

We have ongoing realignment activities for the year, forecasting $10 million in savings that will carry forward. Our synergy realization with CLARCOR is also a major contributor, enhanced through operational integration up toward $125 million. That cumulative effort supports future growth, alongside share repurchase activity.

As Cathy mentioned, we continue to cultivate avenues for improvement through cost structure enhancement initiatives, which we believe strengthen our resilience to market dynamics. Our robust balance sheet will enable us to balance capital deployment to maximize long-term shareholder value.

Thanks for the insights.

Thank you, David. I believe we have time for one more question.

Thank you. Regarding the longer-term operating margins, how far along are you in the process of achieving 19%, or are there additional keys that still need to be pulled? Should we consider volume profiles to drive those targets?

Joel, this is Tom. We have all the elements we need to inch towards the 19% target as per the Win Strategy. Key factors include the integration synergies from CLARCOR, simplification programs that enhance process efficiency, and ongoing cost management initiatives. However, we must also be mindful of varying volume implications to achieve these targets, but we are increasingly confident.

Is there any unusual mix that could pressure Aerospace margins over the next 12 to 18 months?

Yes, good question Joel. We will see increased volumes of OEM projects with some newer platform activity. This typically comes with lower initial margins but should not deter us from overall projections, with a forecast midpoint of 19.1% for the aerospace margin we anticipate stability despite these expected changes.

In summary, Joel, our strategy remains intact. We are constantly evaluating opportunities to optimize operations while enhancing efficiencies. We're in a favorable position to capitalize on long-term potential as we continue executing our plans.

Thank you so much for your questions. This concludes our Q&A session and earnings call for today. Thank you, everyone, for joining us. Robin will be available to take your calls should you have further questions. Thanks, everybody. Have a great day.