Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Parker-Hannifin Corp (NYSE:PH)
Q1 2020 Earnings Call
Oct 31, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Parker Hannifin Corporation First Quarter 2020 Earnings Conference call. [Operator Instructions]

I would now like to hand the conference to your speaker today, Cathy Suever, Chief Financial Officer. Please go ahead, madam.

Catherine A. Suever -- Executive Vice President of Finance and Administration and Chief Financial Officer

Thank you, Joel. Good morning, everyone, and welcome to Parker Hannifin's first quarter fiscal year '20 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 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 materials and are also posted on Parker's website at phstock.com.

Today's agenda appears on Slide number 3. We'll begin with our Chairman and Chief Executive Officer, Tom Williams, providing highlights from the first quarter. Following Tom's comments, I'll provide a review of the Company's first quarter performance together with the revised guidance for the full year fiscal 2020. Tom will then provide a few summary comments and will open the call for a question-and-answer session.

Please refer now to Slide number 4, and Tom will get us started.

Thomas L. Williams -- Chairman and Chief Executive Officer

Thank you, Cathy, and good morning, everybody, and welcome to the call. We appreciate your interest in Parker.

So let me start with the first quarter highlights and I'm going to start like I normally do on safety. We had a 25% reduction in recordable safety incidents year-over-year, which is a great start to the year. When you look at it from a safety incident rate, so for those of you who aren't familiar with this, this is a number of safety incidents per 100 people. We came in at 0.46, which is a top quartile number. Top quartile happens to be 0.5, so this is the first time in the history of our Company that we came in a top quartile from an incident rate, so we're very proud of that.

Safety for us is a core value and zero accidents is not an aspirational goal. It's really an expectation that we're going to operate the business and lead the business in such a way that we're going to drive as zero accident culture. And as you've seen, there is a very strong linkage between safety and business performance. And you can see that if you look at our numbers over the last several years and plotted safety and our financial improvement, you'll see that they went hand in hand.

So switching to financial results. Q1 was a strong quarter on margins on a cash against a challenging macro environment on sales. Sales declined 4% and net composition was a minus 3% organic, minus 1.5% on currency and a plus 0.5% on acquisitions. Total segment operating margin remained level at 70% reported. Adjusted segment operating margins increased 10 basis points to 17.3%.

On a reported basis, EBITDA margin increased to 70 basis points to 18.4%, and adjusted EBITDA margin increased 110 basis points and reached 19.1%. So really when you look at it, operating margin or EBITDA margin really excellent performance at this part of the cycle. EPS reported was $2.60 and on an adjusted basis was $2.76. We had a very strong quarter on cash flow. Cash flow from operations came in at 13.5% of sales. We had a record as far as cash flow from operations in terms of dollars at $449 million, and free cash flow was 12%. And when you look at free cash flow conversion, that was a 118%, so really, really strong quarter on cash.

We had a number of exciting announcements in the quarter. We launched Win Strategy 3.0, so that's the third revision on the Win Strategy that follows the second revision we did in 2015. And we launched a new Purpose Statement for the Company. And we closed the LORD and Exotic acquisitions, so we've been busy in the quarter. And we're really excited to welcome the LORD and Exotic team members to the Parker team. The joint integration teams have been working hard in preparation for the closings, and they're hitting the ground running as we speak.

And as you heard me talk about the acquisitions, our transformational to Parker's portfolio really strengthening Engineered Materials and Aerospace with high growth, high-margin businesses that will definitely be more resilient over the business cycle. Our global Parker teams are very energized by all these announcements between the Win Strategy, Purpose and these acquisitions, so we're excited about the future.

Now, switching to the outlook. Revised guidance for FY '20, we've seen a market shift within the last 90 days, that's reflected in weaken order entry, primarily driven from macro conditions and trade uncertainties. So when you look at total sales for Parker in FY '20 are expected to be flat year-over-year at the midpoint, with guidance now -- these are all midpoint numbers at minus 6% organic, minus 1% for currency and plus 7% on acquisitions. Segment operating margin guidance is now at 15.2% as reported at the midpoint and the adjusted midpoint is now 16.3%.

I will just call your attention, there's two important impacts on here. When you look at it from a partial year is the amortization of the two deals. From a partial year standpoint for FY '20, that impact us by 70 basis points; when you look at it on a full 12 months, there is 100 basis points of deal, amortization as a headwind on margins.

Business realignment expenses are expected to increase to $40 million. This is reflective of the current macro conditions. This was $20 million in the prior guide. And of course, our guidance now includes LORD and Exotic Metals Forming for the balance of the year. And we'll go through discussing markets and the guidance assumptions in more detail during the Q&A.

So let's switch to cash flow and margin resilience. So hopefully, you saw on the cash flow numbers and my comments just a moment ago, cash flow was very strong record numbers. And then when you look at the operating and EBITDA margin performance, and I'm going to compare it to 2015 and '16, so the last downturn that we've experienced. When you look at this legacy Parker without acquisitions, that allows us to do apples-to-apples comparison.

So FY '16 which would have been the worst year in a downturn, on an adjusted operating margin was 14.8%. And then FY '20 guidance is 16.6% at the midpoint. So when you look at that delta, that's an improvement of 180 basis points. On adjusted EBITDA in FY '16 it was 14.7%, our current guide at the midpoint is 18.2%, so that's a 350 basis point improvement. So clearly, raising the floor on margins when you compare the '15, '16 downturn what we're experiencing now.

We fully anticipate to do double-digit cash flow from operations for the full fiscal year, like we've been doing for the last 18 years. And really this performance is driven by a combination of factors. The new Win Strategy which we introduced in 2015 is propelling our performance. All the previous restructuring activities we've done which has positioned us to be a more agile and lean operating Company.

So let's move to Slide 5 and talk about the future. We're very positive about the future. And I think we're absolutely poised to generate nice earnings growth after we clear these near term macro conditions. Couple of things influencing our confidence on the earnings potential. Win Strategy 3.0 and the Purpose Statement represent some important changes for the Company, plus we've added two great businesses via these acquisitions. And actually, in my view, the time in these acquisitions couldn't be any better, during the saw [Phonetic] part of the cycle, there's clear advantages here. We have the capacity to digest these much easier than when we're digesting Clarcor, we're trying to ramp up the base business as well to digest Clarcor.

And when you look at the timing -- when you look at the integration teams setting their stride, it's about the same time, the market will start to turn for us approximately nine months. And both of those factors will drive earnings growth as we look into the future.

We're going to be hosting an Investor Day, March 12, 2020, in New York City. And during that Investor Day, we're going to showcase Win Strategy 3.0 and the Purpose Statement, so we'll give you a lot more color on the key strategic changes for the future. We're going to highlight all six operating groups. And in the past, we've highlighted one group, and last time we highlighted three groups, so for the first time ever, we're going to give you insights all six groups, you'll see the entire Company. And we'll go through the three last acquisitions Clarcor, LORD, and Exotic.

So just a quick reminder, which is on this page, which you see the winning form for Parker, our competitive differentiators, the Win Strategy, now 3.0, the third revision is added, which is our business system. You couple that with our decentralized divisional structure. In my view that's best of both worlds, you get centrally led business system that's deployed locally with that closeness to the P&L.

The breadth of our portfolio technologies very interconnected, strong intellectual property, long product life cycles, very balanced between OEM and aftermarket with the best distribution channel in the motion control space, low capex requirements to actually generate growth and productivity. And all this equate -- ends up, culminating in being able to generate a lot of cash, and be able to deploy it on the best behalf we can for our shareholders.

So we have a lot of confidence on our ability to achieve the FY '23 financial targets. I just want to thank all the global team this listening in, for their hard work, their continued to dedicated effort. And I'll hand it back to Cathy for more details on the quarter and the guidance.

Catherine A. Suever -- Executive Vice President of Finance and Administration and Chief Financial Officer

Thanks, Tom. I'd like you to now refer to Slide number 6. This slide presents as reported and adjusted earnings per share for the first quarter. Adjusted earnings per share for the quarter were $2.76 compared to $2.84 for the same quarter a year ago. Adjustments from the fiscal year '20 as reported results totaled $0.16, including before tax amounts of business realignment charges of $0.04, acquisition costs to achieve of $0.04, and acquisition transaction-related expenses of $0.14, offset by the tax effect of these adjustments of $0.06. Prior year first quarter earnings per share had been adjusted by $0.05, the details of which are included in the reconciliation tables for non-GAAP financial measures.

On Slide 7, you'll find the significant components of the walk from adjusted earnings per share of $2.84 for the first quarter of fiscal '19 to $2.76 for the first quarter of this year. We benefited $0.02 per share in operating income from Exotic Metals Forming Company since closing on that acquisition September 16. For legacy Parker, a $166 million decline in sales contributed to a $0.15 reduction in operating income. The teams did a great job of controlling costs with lower volume by sustaining a 15% decremental margin for the quarter.

Incremental interest expense on the debt borrowed for the two acquisitions resulted in a $0.15 decline in the current earnings per share. Interest income from the pre-acquisition investments of that cash benefited the current quarter $0.09. Lower other expense of $0.13 came from several one-time gains in the current year and by not repeating several one-time losses from last year. Lower corporate G&A contributed $0.01, while fewer favorable discrete tax benefits in the current quarter resulted in a higher tax rate, causing $0.12 of incremental tax expense. Finally, a lower share count benefited the quarter $0.09.

Slide 8, shows total Parker sales and segment operating margin for the first quarter. Organic sales decreased year-over-year by negative 3.3%. Currency had a negative impact of minus 1.5%. These declines were partially offset by a positive impact of 0.6% from the September acquisition of Exotic. Despite declining sales, total adjusted segment operating margin improved to 17.3% versus 17.2% last year. This 10 basis point improvement reflects the operating cost improvements teams have been working hard on combined with additional positive impacts from our Win Strategy initiatives.

On Slide 9, we're showing the small benefit Exotic had on the first quarter FY '20 results post close on September 16. You can see they contributed $21 million in sales and $3 million in operating income on an adjusted basis during this pre-stub period. Exotic results are included in the Aerospace Systems segment.

Moving to Slide 10, I'll discuss the business segments, starting with Diversified Industrial North America. For the first quarter, North American organic sales were down 3.2%. Currency had a small impact on sales of negative 0.2%. Even with lower sales, operating margin for the first quarter on an adjusted basis was an impressive 17.3% of sales versus 16.6% in the prior year. North America continued to deliver improved margins, which reflects the hard work dedicated to productivity improvements, as well as synergies from Clarcor and the impact of our Win Strategy initiatives.

Moving to Diversified Industrial International segment on Slide 11. Organic sales for the first quarter in the Industrial International segment decreased by 8.7%. Currency had a negative impact of minus 3.9%. Operating income for the first quarter on an adjusted basis was 15.9% of sales versus 17% in the prior year, a detrimental margin of 25%. The teams continue to work on controlling costs during the more difficult drops in volume by utilizing tools of our Win Strategy initiatives.

I'll now move to Slide 12 to review the Aerospace Systems segment. Organic revenues increased 8.2% for the first quarter as a result of growth in all of the platforms, but the strongest growth in military, OEM and the commercial aftermarket. In addition, the Aerospace segment sales increased $21 million or 3.7% from the addition of the Exotic position. Operating margin for the first quarter was 20% of sales versus 19.5% in the prior year, reflecting the impact of higher volume in all the platforms, lower development costs and good progress on the Win Strategy initiatives.

On Slide 13, we report cash flow from operating activities. Cash flow from operating activities was a first quarter record of $449 million or 13.5% of sales. This compares to 10.3% of sales for the same period last year, after last year's number as adjusted for $200 million discretionary pension contribution. That's a year-over-year increase of 25%. Free cash flow for the current quarter was 12% of sales and the conversion rate to net income was 118%.

Moving to Slide 14, we show the details of order rates by segment. As a reminder, these orders results exclude acquisitions, divestitures, and currency. The Diversified Industrial segments reported on a three-month rolling average, while Aerospace Systems are based on a 12-month rolling average. Continued declines in the industrial markets drove total orders to drop 2% for the quarter-end. This year-over-year decline is made up of a 6% decline from Diversified Industrial North America, 10% decline from Diversified Industrial International orders, offset by a very positive 22% increase from Aerospace Systems orders.

The full year earnings guidance for fiscal year 2020 is outlined on Slide number 15. This guidance has been revised to align the current macro conditions and now includes the impact of the LORD and Exotic acquisitions. Guidance is being provided on both as reported and an adjusted basis. Total sales for the year, with the help from acquisitions, are now expected to remain flat compared to prior year. Anticipated full year organic change at the midpoint is a decline of 6%.

Currency is expected to have a negative 1.1% impact on sales and acquisitions will add 7.4% to the current year. We've calculated the impact of currency to spot rates as of the quarter ended September 30, and we have held those rates steady as we estimate the resulting year-over-year impact for the remaining quarters of this fiscal year.

For total Parker, as reported segment operating margins are forecasted to be between 15% and 15.5%, while adjusted segment operating margins are forecasted to be between 16% and 16.5%. We've not adjusted for the incremental amortization of approximately $100 million, which we will incur for the remainder of this year as a result of the two acquisitions.

The full-year effective tax rate is projected to be 23%. The first quarter tax rate was favorably impacted by discrete items, which we don't forecast. We are anticipating a tax rate from continuing operations of 23.3% for quarters two through four. For the full year, the guidance range for earnings per share on an as-reported basis is now $8.53 to $9.33, or $8.93 at the midpoint. On an adjusted earnings per share basis, the guidance range is now $10.10 to $10.90, or $10.50 at the midpoint.

The adjustments to the as reported forecast made in this guidance include business realignment expenses of approximately $40 million for the full year fiscal 2020 with the associated savings projected to be $15 million. Synergy savings from Clarcor are still estimated to achieve a run rate of $160 million by the end of fiscal '20, which represents an incremental $35 million of year-end savings.

In addition, guidance on an adjusted basis excludes $27 million of integrated costs to achieve for LORD and exotic, and $200 million of one-time acquisition-related expenses. LORD and exotic are expected to achieve synergy savings of $15 million this fiscal year. A reconciliation and further details of these adjustments can be found in the appendix to this morning's slides.

Savings from all business realignment and acquisition costs to achieve are fully reflected in both the as reported and the adjusted operating margin guidance ranges. We ask that you continue to publish your estimates using adjusted guidance for purposes of representing a more consistent year-over-year comparison.

Some additional key assumptions for full year 2020 guidance at the midpoint are a split first half, second half of 47%, 53% for all sales adjusted segment operating income and adjusted EPS. All three we expect to split 47%, 53%. Second quarter fiscal 2020 adjusted earnings per share is projected to be $2.22 per share at the midpoint. This excludes $15 million of projected business realignment expenses and $167 million of acquisition-related expenses and costs to achieve for both LORD and exotic.

On Slide 16, you'll find a reconciliation of the major components of revised fiscal year '20 adjusted EPS guidance of $10.50 per share at the midpoint compared to the prior guidance of $11.90 per share. Starting with just the legacy business, a $0.10 per share beat in the first quarter is quickly going to be offset by the challenging macro conditions facing the rest of the fiscal year. A drop of nearly $800 million in forecasted sales at the midpoint is driving a decline of $1.44 in operating income for the rest of the year.

Interest expense in our previous guide included the interest on $2.3 billion of bonds we were holding for the acquisitions. Since then, we have borrowed additional term loans and commercial paper to complete both acquisitions. Now that both acquisitions are closed, we've allocated $0.72 of interest expense to the acquisitions, which includes the interest on the bonds, the term loans, and the new commercial paper, causing a relief of $0.29 of interest expense within the legacy business.

Also in our previous guide, we had an assumption of earning $0.35 from interest income on the cash from the bonds. That cash has now been used for the acquisition, so the other expense line, which includes interest income has been reduced going forward. And finally, within the legacy business, we are anticipating a slightly higher tax rate for the rest of the year which will drop earnings per share $0.03, resulting in revised legacy Parker adjusted guidance of $10.50.

Exotic is estimated to contribute $0.28 and LORD $0.44 to operating income for the year, inclusive of the additional combined $100 million amortization expense we will be incurring. Offsetting this will be the $0.72 of interest expense related to the debt for these acquisitions. All in, this leaves $10.50 consolidated adjusted earnings per share at the midpoint for our guide for fiscal 2020.

On Slide 17, we show the impact the acquisitions will have on both an as reported and adjusted basis. On an adjusted basis, the acquisitions lower operating margin to 16.3% for total Parker from 16.6% for legacy Parker, impacted by $100 million of amortization expense. For adjusted EBITDA, EBITDA margins, the acquisitions provide 50 basis points of improvement moving from 18.2% for legacy Parker to 18.7% for total Parker. For those of you building forecast models, we've included more details regarding the LORD and exotic impact on the total year guidance in the appendix.

If you now go to Slide number 18, I'll turn it back to Tom for summary comments.

Thomas L. Williams -- Chairman and Chief Executive Officer

Thank you, Cathy. So we're very pleased with our progress. We are going to perform well with this downturn as demonstrated by our cash flow performance and raising the floor and operating margins. And we're well on our way to being that top quartile Company that we want to achieve and being best in class. And just a reminder, where we're trying to drive to, we want to transform the Company achieve targets we've set out in FY '23 of growing organically 150 basis points greater than global industrial production growth, segment operating margins of 19%, EBITDA margins of 20%, free cash flow conversion greater than a 100%, and EPS CAGR over that time period at 10% plus.

So again, thanks to everybody, all the global team members around the world for your hard work.

And with that, I'll hand it over to Joel to start the Q&A portion of the call.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Nathan Jones with Stifel. Your line is now open.

Nathan Jones -- Stifel -- Analyst

Good morning, everyone.

Catherine A. Suever -- Executive Vice President of Finance and Administration and Chief Financial Officer

Good morning, Nathan.

Nathan Jones -- Stifel -- Analyst

Tom, it seems like you guys have taken maybe a bit more negative outlook going forward over the next three quarters here than some of your peers have. I think you mentioned you are planning on three more quarters of downturn here. Can you just maybe talk a little bit about what's going on in the end markets and your expectations around why you're thinking this downturn is as long as you guys have -- seem to have -- built into guidance here?

Thomas L. Williams -- Chairman and Chief Executive Officer

Yes. Nathan, it's Tom. And I'm sure this is the question top of mind for everybody. So let me -- I'll start off with going through kind of what was behind the guide, then I'll finish with a summary of end markets. So let's start first with our Q1 orders and you've seen that minus 2% total Company, but in particular minus 6% North America, and minus 10% internationally. And then you get to look at other external indicators that are typically flow through in our orders three to six months out, those things like [Indecipherable] and PMIs. So the U.S. ISM at 47.8 for September, that was a 10-year lows, everybody knows. Europe's PMI 45.7 for September, and of course, Germany, our third largest country at 41.7, obviously feeling the impact of the trade-related uncertainties. Asia PMIs are weak.

And so when we look -- part of what influenced our forecast was the trend of orders through the quarter. So August and September were about the same, but they were weaker than July. And then as you look at October, while October is not done yet, we look at October on a daily basis, we saw further softening from that August and September rate. So put those factors into also our bottoms up latest look from the divisions, and our view yielded a more challenging macro environment.

So I'll give you -- I'll peel back the organic piece a little bit more and I'll give you some of my thoughts as to why we did what we did. So you've seen organic at the midpoint of minus 6%, so that composition is North America, minus 6%, international at minus 11.5%, and Aerospace at plus 4.5%. So the first half, second half organic is both minus 6%, so minus 6% for first half and minus 6% for the second half. And so, given that organic growth was minus 3% in Q1, that implies that our low par point for the bottoming out of Parker is somewhere between Q2 and Q3 in this guidance.

And we also looked -- remember, I talked about the pressure curves last time and we had baked in about a 15-month duration, this -- now it looks like it's an 18-month duration a whole fiscal year, that's a difference versus the prior guide. When we look at the four phases of growth that we've talked about in the past, we've got -- the end markets are definitely moving to those phases. The largest phase is now in Phase 4, decelerating growth at 48%. Last quarter, that was at minus 10%, so that's encouraging that we're starting to move through there.

When you look at Phase 3, which is accelerating decline that used to be 67% last quarter, now it's 28%. So that's also an important point. So that's -- all these things are signaling some kind of a bottoming for us about the midpoint of our FY '20. So maybe now just to kind of walk from the prior guide to the new guide. So the prior guide was minus 1.5% at the midpoint, again, I'm talking about organic, and the new guide is minus 6%, so that's a 450 basis point step down.

Our order step down 200 basis points -- again I'm focused on the industrial piece for North America and International stepped down 200 basis points. And then if you -- then we had to try to project out those ISMs [Phonetic] and PMIs I just described that are pretty negative, and they're going to flow through in orders anywhere over the next couple of months to maybe a maximum of six months, and then also looking at the October orders, that we can from what you see in September. So that kind of made up the balance that you've got 200 that's already declined with orders the balance 250 make -- made up of that projecting those PMIs and ISMs into our future orders, and what we saw in October. So that kind of gives you the walk down.

So maybe if I give you comments on the end markets for Q1. I'll start with the positives. Aerospace continues to be very strong, lawn and turf, forestry and marine. And pretty much all the others are negative. So probably the best way for me to summarize the others is to kind of take them into major buckets. So distribution, I recognize is not a market, but it's an important channel for us. Distribution actually got a little bit better, I'm talking about going from Q4 to Q1 year-over-year, came in Q1 at about minus 2% and in Q4, it was a minus 2.5%.

That composition North America got better, Europe stayed about the same and Asia Pacific got worse. The industrial end markets stayed relatively the same, both were minus 9% -- minus 9% in Q4 and minus 9% in Q1. And the mobile market is where we saw the step-down. Mobile markets went from a minus 3% in Q4 to a minus 6%. In particular, what's stepped down in mobile was ag, construction, heavy-duty truck and material handling. So that's a quick run-through. That's at the global level, what I was describing as far as the end markets, and what causes from the guidance like we did.

Nathan Jones -- Stifel -- Analyst

I appreciate the transparency and the color there. Just moving away from things that are happening in the short term here, I'm sure, there'll be plenty questions for that on year. Maybe you could just talk a little bit about what's changed in the Win Strategy 3.0 from Win Strategy 2.0?

Thomas L. Williams -- Chairman and Chief Executive Officer

And I'll be happy to do that because that's going to be very exciting for the Company. And obviously, when we have you all together, we'll go through this in a lot more detail. But I will just paraphrase the key points. So underneath engagement, we're going to continue to expand whole ownership concept, with the idea that the more people we have thinking and acting like an owner, the better the Company is going to perform. But a big change on engage people is kaizen, and we'll take you through all the things we're doing on kaizen as far as our approach to it who we're working with and the results we're seeing, and our customer experience, a lot more emphasis on digital leadership, and we'll expand what we mean by that, and a new metric, which is not too dissimilar to what we had before, but we have a new metric called composite likely to recommend which is going to be a mixture of on-time delivery and feedback from our customers and distributors, earning profitable growth, we have this new strategic initiative called strategic positioning, which we'll give you more color on, new product blueprinting underneath innovation, and two new metrics renovation, product vitality index in gross margin for the product vitality and we'll explain more about that when we're in person. And then earning simplification a very new powerful concept called simplify design where we focus on simplifying the design of our products to reduce the total material complexity, the inventory and planning and scheduling complexity, and the ability to produce it, recognizing about 70% of our product cost where tied up and how we design it.

So we will talk a lot more about that when we have you all there. We will be somewhat careful on simple by design, because I don't want to teach all my competitors how to do that, but we'll give you enough color, so you all know that it's real and there's some big enhancements to the Company, both on a growth and a margin standpoint.

Nathan Jones -- Stifel -- Analyst

I appreciate all the color and all the transparency there. I'll pass it on. Thanks very much.

Catherine A. Suever -- Executive Vice President of Finance and Administration and Chief Financial Officer

Thanks, Nathan.

Operator

Thank you. Our next question comes from Ann Duignan with J.P. Morgan. Your line is now open.

Ann Duignan -- J.P. Morgan -- Analyst

Hi. Good morning. I'm not sure that there are any questions left for all of that color. That was -- I think you gave us global end markets, industrial versus mobile; would you mind breaking those up by region, please? Or any notable differences across the major markets that have declined ag, construction, heavy duties, material handling?

Thomas L. Williams -- Chairman and Chief Executive Officer

Yes. Ann, this is Tom. So I'll give you the high points by region. So North America was about 3% organic decline. On the positive side was machine tools, heavy-duty truck, forestry and lawn, and turf, flat was distribution and automotive. And then on the negative side, we had low single digits was mining, telecom and life sciences mid single-digit decline -- these are all declines, refrigeration, mills and foundries, and tires, and then switching to more -- the mobile markets, mid single-digit declines was construction and marine, and mid-teen declines was ag, material handling, and rail. So again I mentioned that distribution fared better in North America than any other regions as far as how it performed.

Then on -- and Europe came in about a minus 7% for the quarter. On the positive side was refrigeration, power, semicon, life science, and oil and gas. And then on the negative side, starting with the industrial end markets, we had a couple that were greater than 20% mills and foundries, machine tools. Obviously, Europe being more export sensitive feeling the impact of trade uncertainty. Those are very trade centric type of end markets. Mid teen decline was mining, tire, and rubber. Distribution came in around minus 4.5%, about the same as it was versus prior period. And mobile, we had low single-digit declines in construction and ag, and about 10% in heavy-duty truck and auto. So actually mobile faired OK in Europe. The industrial end markets suffered -- worsen in Europe.

And then on Asia, the positive side, Asia came in a 12% decline for Q1. And on the positive side were oil and gas, mining and marine. Although the clients' distribution was down about 5.5%, and on the industrial space, we had about mid-teen declines our mills, refrigeration, machine tools, greater than 20%, on some of those big secular end markets like power-gen, semicon. Of course, telecom being somewhat impacted by the Huawei challenges. And then on the mobile side is where we saw some of the steepest declines greater than 20%, in construction, ag, material handling, and rail. So you can see mobile feeling the worst in Asia Pacific. So that's quick spin to the regions.

Ann Duignan -- J.P. Morgan -- Analyst

Okay. And then just as a follow-up. I think you've already answered this. But are you seeing any signs of -- I hate to like use the word we use every time when we're coming out, but any green shoots anywhere?

Thomas L. Williams -- Chairman and Chief Executive Officer

Well, what it has been nice is that distribution got a little bit better, so we like that, the fact of that went into Phase 4. And we had a number of other things move in the Phase 4, automotive and life sciences, and oil and gas. So -- and actually the power-gen and semicon, even though they're down mid-teens for us, the fact that they went into the Phase 4. I always like when things move in a Phase 4 because then you know -- guess what the next phase is accelerating growth. So that's encouraging. And we still had the ones that were strong and continued to be strong like aerospace. Lawn and turf as you're seeing some seasonal help there. And forestry, with all the paper related goods tied to e-eommerce has continued to be strong. So those are what I would say is indicators.

Again for us, this -- by -- we're -- what we are signaling with this guidance is a bottom forming for us. I can't call a bottom for the anybody else, but a bottom for us is somewhere in the middle of our fiscal year.

Ann Duignan -- J.P. Morgan -- Analyst

Okay. I'll leave it there in the interest of time. I'll get back in queue. Thank you. Appreciate it.

Catherine A. Suever -- Executive Vice President of Finance and Administration and Chief Financial Officer

Thanks, Ann.

Operator

Thank you. Our next question comes from Joel Tiss with BMO Capital Markets. Your line is now open.

Joel Tiss -- BMO Capital Markets -- Analyst

Hi. How is it going?

Catherine A. Suever -- Executive Vice President of Finance and Administration and Chief Financial Officer

Hi, Joel.

Joel Tiss -- BMO Capital Markets -- Analyst

I just wonder on the last discussion and super-duper color there. Can you just give us any sense of how you take? It feels like things are a little worse now or maybe in the next couple of months, future because of inventory reductions. How do you take the amplification of that in the near-term, out of your forward guidance? I'm just curious how to think about that.

Thomas L. Williams -- Chairman and Chief Executive Officer

Yes, Joel. It's Tom, again. So the destocking that's always a tough question. But the one area where we do have a good data on is North America distribution. And you've heard both Lee and I talk about this in the past that it's been -- the destocking has been improving, but about a 100 bps, and that's actually what happens again. So to refresh people's memory, in Q3 of 2019, it was down 300 bps of destocking, Q4 was 200 bps and now Q1 was a 100 bps.

So we had guided to that we felt distribution was going to -- at least, North America was going to get into some -- somewhat of equilibrium at the end of the calendar year, so end of Q2. But we clearly are seeing destocking at the OEMs, especially the mobile OEMs destocking, and how long that takes to play through is very difficult because we don't have the kind of visibility into that we have with the U.S. distribution. But what we're guiding to, it's very hard to split end-market demand versus destocking. What we gave you is kind of our view all-in of this impact.

Joel Tiss -- BMO Capital Markets -- Analyst

And then just like a strategic question. And not so much thinking about a forecast, just thinking about how do we think about Parker's earning resiliency going forward like beyond the obvious? Okay, aerospace is a bigger part of the Company, but like some of the ways that you guys think about that could help us. Thank you.

Thomas L. Williams -- Chairman and Chief Executive Officer

Yes. Joel. It's Tom. It's a good question and I'm actually glad that you asked because we've been working very hard at this as you might imagine. And it's -- there was a number of factors. First it would start with some of the portfolio moves that we made over the last number of years, Clarcor LORD and Exotic. So let me give you some for instances.

So when we look at our order entry without getting into things that I want to -- don't want to disclose publicly, our filtration platform is holding up much better than the rest of the industrial platform, and that was by design with Clarcor, with its density and aftermarket. So that is -- it's living up to its billing, what we had hoped for. LORD is coming in at -- with about a 4% organic growth, and that compares to what we just told you or guiding to a minus 6% for Parker. And Exotic's growth is coming in around 11%, and so that's better than the Parker and better than Parker Aerospace. So you get some portfolio things that are -- that we're doing to drive resilience and enhance organic growth.

And then you've heard us talk about what we've been doing on distribution, growing international distribution in particular. And we've changed that mix from one, we started with Win Strategy 2.0. We were at 35% international mix and distribution announced 40%. So that doesn't seem like a lot, but moving that number a 100 bps a year is meaningful, and that enhances margins, and it provides more resilience, again, because our channel there is servicing primarily aftermarket.

We're doing a lot of things on innovation, which we'll give you a lot more color with 3.0 when we see you all in March. But the new product blueprinting, product vitality index, our gross margin that we're tracking on these products, for all design because when you look at our innovation growth, it is growing faster than the base business, so it's going to hold up better in the downturn. The things we're trying to do to drive customer experience are really important because you can't really grow with the customer view, give them a good experience.

And then all the things we've been doing operating wise, simplification, lean supply chain, etc., and now kaizen to make the Company more agile and then just a better operating Company. So those will be the things that I would say in the top line, and then just from an operating standpoint, how we're going to get to those FY '23 targets.

Joel Tiss -- BMO Capital Markets -- Analyst

Great. Thank you very much.

Catherine A. Suever -- Executive Vice President of Finance and Administration and Chief Financial Officer

Thanks, Joel.

Operator

Thank you. Our next question comes from Jamie Cook with Credit Suisse. Your line is now open.

Jamie Cook -- Credit Suisse -- Analyst

Hi. Good morning. I guess just a couple of questions. I guess the first one just understanding the guide, the international or the implied international adjusted margins I guess fall off a little more than I would have expected in the remaining nine months of the year. Understanding, there's a lot of moving parts. Is there any way you could sort of help me -- help us with what the puts and takes are there besides increase them more? [Phonetic]

And then, just -- obviously, the cash flow in the quarter was very strong and as we are in sort of a slowdown here, leverage becomes more topical. So just Tom, how we should think about cash flow for 2020, whether there is any structural improvements we should be looking for? Thank you.

Thomas L. Williams -- Chairman and Chief Executive Officer

So, Jamie, let me start, I'll have Cathy add-on as far as debt and maybe comment on cash flow. But one thing I want to try to make sure everybody understands, this new guide has got still some really good decremental margins. And we've always -- if you benchmark companies, which I know you all do this, a minus 30 decremental is still best in class decremental. So I'm just going to read to you, total decrementals for the Company Q2 through the rest of the year, so Q2 and these are approximate -- these are at the midpoint, so there's going to be a range around these numbers, a 27% decremental, Q3 a 28% decremental, Q4 23% decremental. So we end up with the full year at about a 25% decremental. So those are really I think very excellent performance.

Given that if you look at Industrial, it's going to be down minus 6% North America, and minus 11.5% in International. That's why International is a little bit worse. On its decrementals, North America is coming in around 24%, and International at 29% just because it's about a 2 times difference on volume. And so that's pretty a lot more challenged.

And then in addition to the volume side, International has currency, which we have always struggled to identify a currency impact on financials. And we basically decided not to try to figure -- to try to communicate taxes, [Phonetic] you can't get a consistent number with it. But we do all know that when currency becomes a headwind to us, it becomes a pressure point on margins, so that's another factor for international.

On cash flow note, I'll hand it over to Cathy. I will just -- I would have shareholders rest assured that 18 years of 10% plus CF away is going to turn into 19 years because we've got a proven track record of being able to work working capital. And these operating margins like you heard me talk about in my opening comments are 180 basis points better than our last downturn. So we have better-operating margins and we'll work the working capital like we normally do.

And Cathy, anything to add on?

Catherine A. Suever -- Executive Vice President of Finance and Administration and Chief Financial Officer

Yes. Jamie, we finished the quarter-end at a leverage gross debt to EBITDA of 3.6. [Phonetic] We did bring in small amount of additional debt in the form of term loan when we -- to be ready to or to close LORD this past week. And so it's going to go up slightly. But if you look historically, we do have a great track record of managing the working capital very well during a down cycle, so we're pretty confident.

In addition to that, both LORD and Exotic have a history, a very strong cash flow, stronger than Parker, so they will be great contributors to it. And we're confident, we will be at a level that we have that we were with Clarcor when we closed that deal and we brought that down very quickly. And we feel that we can do the same even though we are seeing things slow down. Also, keep in mind, we do carry about $1 billion of international cash, so our net debt to EBITDA, it was actually 2.1 [Phonetic] at the end of the quarter.

Jamie Cook -- Credit Suisse -- Analyst

Okay. Thank you. I appreciate the color.

Catherine A. Suever -- Executive Vice President of Finance and Administration and Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from David Raso with Evercore ISI. Your line is now open.

David Raso -- Evercore ISI -- Analyst

Hi. Thank you. Just looking at the organic growth, first half-second half. Obviously, the second half a big change from used to be up 1% to negative 6% now. Can you take us through your thoughts on how you see orders playing out underneath that decline? I mean it seems like the second quarter, you are expecting the biggest organic decline. But the second half is still pretty healthy at down 6%. I mean healthy meaning a large decline. So I'm just trying to get a sense of how you're viewing the order patterns underneath that negative 6% in fiscal second half.

Thomas L. Williams -- Chairman and Chief Executive Officer

Yes, David. It's Tom. And that's where the forecast gets more and more challenging as further as you go out. What really we're trying to project some of those macro indicators that I mentioned in my comments U.S. ISM, Germany's number, Asia's PMIs, the Rest of Europe PMIs, etc., recognizes as we plotted those historically, they tend to lag and impact our orders three to six months out. So we know when we saw weakening in October, which that's going to influence Q2, and then these other macro indicators three to six month -- months out start to impact the second half.

And -- so that was the thought process behind that. But it does become more challenging, as we try to figure that out because our backlog doesn't care as outside of aerospace doesn't care out that far, so we had to kind of look at historical trends and lagging peers between these macro indicators and what we do.

David Raso -- Evercore ISI -- Analyst

Yes. I'm just trying to think how you thought about managing your own inventory through the end of the year. And that interplay between -- OK, the second half a lot weaker than we thought. But do we see some bottoming process and that's how we're managing, be it not even just inventory, but how you're thinking about pricing that usually gets announced Jan 1 and so forth?

I mean is it fair to say at this stage, you're not thinking of the orders improving much in the back half fiscally? It just the comps get a lot of easier, so I think for a lot of people seeing there the cut organic is obviously not pleasant. But if you felt the orders were improving in the back half to some degree, you can call it temporary. So what you're speaking to the business is, you know, it's kind of a temporary macro environment. I know it's hard to call. I was just curious -- have some sense of where your head is and how you're managing the Company for that fiscal second half. It doesn't sound like you're planning for orders to be say up in the latter of part of the year. Is that a fair assessment and how you're trying to manage?

Thomas L. Williams -- Chairman and Chief Executive Officer

Yes, David. I think that's fair. We projected orders to continue to be weak because our orders -- organic growth in orders are typically within a month or two of each other when you plot it historically. So for us, on inventory, Inventory is never good. It's always a -- it's a waste when you run it on lean operation. So we're continuously whether we have volume going up or volume going down, we're looking to optimize inventory period all the time. And the kaizen efforts that we're doing and unity was our Parker lean process will continue to work at managing inventories down. Obviously, when orders go down, you need to update all your planning tools. Your plan for every part, which is part of our lean system, so we're doing that.

And then on pricing, I'll let Lee comment on pricing what we're doing with that.

Lee C. Banks -- President and Chief Operating Officer

Well, David, I would -- I'll just -- maybe I'll put price and cost together. I would say cost and puts, it's a mixed bag. There's some going down, some going up. But from a price cost standpoint, as always, we just try to stay margin neutral. And that's what we're planning going forward.

David Raso -- Evercore ISI -- Analyst

Okay. And just to make sure, just to wrap up here. The first quarter organic was in line with your expectations, maybe 20 bps or even better. I actually thought the orders even not that bad in the first quarter relative to some of the peers out there. But then obviously you took a big chunk out of the rest of the year on organic sales and even your thoughts on orders. Sort of surprised, I guess, must have really been this last month that you really thought to see at least some beginning of bottoming process. So is that fair? It's really been the last month I really drove the change in the guide.

Thomas L. Williams -- Chairman and Chief Executive Officer

David. It's Tom, again. So there is two things. You're right, October, but then also the sequencing we saw within the quarter, the fact that August and September got worse from July. So we are starting to see a weakening through the quarter that another step down in October. That's why we changed the guide.

David Raso -- Evercore ISI -- Analyst

All right. That's helpful. I appreciate it. Thank you.

Catherine A. Suever -- Executive Vice President of Finance and Administration and Chief Financial Officer

Yes. Thanks, David.

Operator

Thank you. Our next question comes from Andrew Obin with Bank of America. Your line is now open.

Andrew Obin -- Bank of America -- Analyst

Yes. Good morning.

Catherine A. Suever -- Executive Vice President of Finance and Administration and Chief Financial Officer

Good morning, Andrew.

Andrew Obin -- Bank of America -- Analyst

Just a question on cash flow, and it's not more a question. But a lot of companies that do deals have shifted to reporting sort of cash earnings given a massive discrepancy between new cash flow generation and reported earnings. Have you guys considered moving to reporting cash numbers? And what has the feedback been from your investors?

Thomas L. Williams -- Chairman and Chief Executive Officer

Yes, Andrew. It's Tom. It's a good question. And we have thought about it and we have reached out to shareholders. And that's been pretty uniform from shareholder feedback saying don't make that change. To continue to obviously, we will just, for one-time cost and then the other things we normally be doing, but other than continue to report on a GAAP basis. And if you think about it, just it creates a more -- a bigger hurdle that business needs are to absorb to generate returns on behalf of the shareholders. And I think that was the feedback I heard from shareholders as we want you to incorporate that bigger challenge into how you run the place. And -- but it's a good comment. I know there's been good companies that have made the change. At this point, we've elected to stay with what we've been doing.

Andrew Obin -- Bank of America -- Analyst

Thank you. And then just a question. As your numbers have decelerated, what has the feedback been from LORD and Exotic? What have they experienced relative to expectations when you announced the deals?

Thomas L. Williams -- Chairman and Chief Executive Officer

Yes. So Andrew, it's Tom, again. So actually they've held up really nicely. LORD and the outlook that we've given -- just given you is coming in about a 4% organic growth, and we had in our model, above 5.5%, that's what I was verbally -- I verbally said during the announcement that was kind of our five-year CAGR. So if you think of everything that's going on that has changed from when we made that announcement to today, that's pretty good.

And again that 4% positive compares to minus 6% for Parker. That's why we like LORD so much as why we bought them. It's accretive from a growth standpoint. And then when you look at Exotic, Exotix coming in a little over 11.5%. We -- in our model that we've built for the DCF, we had about a 7.5% CAGR. So that's held up nicely.

I would say two things a little better, F-35 sales and we model the more conservative 737 MAX. We modeled Exotic going down to 42%, but Boeing is not done that yet with Exotic and probably won't because Exotic with its long lead time for materials. When you look at what Boeing has done on our management and supply chain, the rest of our aerospace for the most F-42. But as they've managed long lead time type of suppliers, Exotic being one of those have kept them at 52 [Phonetic] because of obvious reasons. You can't ramp back up with that kind of long lead time. So that's part of why they've over produced on the revenue.

So in a nutshell, both acquisitions holding up on revenue. Both acquisitions coming in at the EBITDA level that we expected actually lowered to slightly better on EBITDA margins because we pulled in $15 million -- the $15 million that Cathy referred to in her comments as the synergies for LORD and we were able to pull them a little bit earlier than we thought.

Andrew Obin -- Bank of America -- Analyst

And if I may squeeze just one in. Want to exposure with LORD, you did comment that auto is bottoming. Was that referring to sort of the old Parker exposure? Was that referring to LORD's exposure as well? And that will be it for me. Thank you.

Thomas L. Williams -- Chairman and Chief Executive Officer

That was total Parker. We haven't -- that was based on Q1. So we didn't have LORD in Q1. But their auto has held up better than our auto has, so pretty comparable.

Andrew Obin -- Bank of America -- Analyst

Thank you.

Catherine A. Suever -- Executive Vice President of Finance and Administration and Chief Financial Officer

Thanks, Andrew.

Operator

Thank you . Our next question comes from Andy Casey with Wells Fargo Securities. Your line is now open.

Andrew Casey -- Wells Fargo Securities -- Analyst

Thanks a lot. Just wanted to go back to the decrementals that you talked about. Tom, were those all-in, including the acquisition over those Parker legacy?

Thomas L. Williams -- Chairman and Chief Executive Officer

Parker legacy without the acquisitions. You know, trying to -- Andy, trying to do it with the acquisitions is apples and oranges. Acquisitions are not in the prior period. We've got the $100 million of intangible amortization. So the MRO West is when you look at it all-in versus prior -- basically non-sensical, you can't really read anything into it, which is why I gave you the ones without.

Andrew Casey -- Wells Fargo Securities -- Analyst

Okay. Okay, I appreciate that. And then, basically over the long term you had talked about 30% incrementals. The decrementals you gave were lower than that which is good. When you embed the two new acquisitions, that seem to be a little bit similar to Clarcor, a little bit more resilient. With the downside over the long term relative to the mid to high 20%, decremental that you gave kind of even shrink further?

Thomas L. Williams -- Chairman and Chief Executive Officer

Well, I think there is definitely potential, because they -- to your point, they will be more resilient. Their higher margins as well, so they should help us with that. So -- and we're going to work to make them even better than they are today. The whole goal is to take the best of what we do and the best of -- and of course now we [Phonetic] all of us and the best of what the acquisitions had and make it even better.

So I still think again for purposes a bottling, I don't want to get too far over my skies. I would just encourage you to continue to use the plus or minus 30 [Phonetic] is still best in class. And of course, our goal is to try to do better than them.

Andrew Casey -- Wells Fargo Securities -- Analyst

Okay. Thank you very much.

Catherine A. Suever -- Executive Vice President of Finance and Administration and Chief Financial Officer

Okay. Thanks, Andy. Joel, I think we have time for one more question.

Operator

Thank you. Our final question comes from Jeff Sprague with Vertical Research Partners. Your line is now open.

Jeff Sprague -- Vertical Research Partners -- Analyst

Thank you. Good morning. Hey, just two from me if you don't mind. Just first back on the acquisitions. At the time they were announced, I thought LORD's run rate sales were about $1 billion one and Exotic was about $450 million. And when I look at what you laid out here, it looks like they're both actually kind of on an annualized basis tracking flattish, not. Is there something in timing or do I have this basis wrong?

Thomas L. Williams -- Chairman and Chief Executive Officer

Jeff, it's Tom. I think the main thing you would have, we gave it was based on calendar year over calendar year. Now, these numbers are and in -- are FY in Parker's fiscal year, so it's the -- prior periods are not comparable.

Jeff Sprague -- Vertical Research Partners -- Analyst

Those growth rates you gave us, so Tom were for the year in your plan, or just in the quarter, those organic?

Thomas L. Williams -- Chairman and Chief Executive Officer

Yes. The growth rates I gave Jeff for our FY '20, so it would be comparing a period of time there in part of Parker FY -- our FY '20, and then using the same Parker fiscal year in FY '19 prevents way to go back and kind of reconstitute that with the two acquisitions.

Jeff Sprague -- Vertical Research Partners -- Analyst

And then just one other question on incrementals, if you don't mind. And perhaps, it goes to the FX point you were making, Tom. But the decline in -- 6% organic sales decline rate is about $650 million in sales, I think, Kathy, said $800 million, if I think about it on a core basis, and $1.44 of EPS had one would gross up to like $230 million. So that's like a 35% decremental on the core business, if I think about it relative to the walk that you gave us, where you showed kind of legacy Parker versus the deals.

Am I missing something there or is it FX?

Catherine A. Suever -- Executive Vice President of Finance and Administration and Chief Financial Officer

Yes. Jeff, it's the FX differential, so the number I quoted was top-line total drop that we had in our guidance for the second, third and fourth quarters. And when you're quoting organic, you're probably correct that it's closer to $600 million.

Jeff Sprague -- Vertical Research Partners -- Analyst

Okay, great. Thank you for that color.

Catherine A. Suever -- Executive Vice President of Finance and Administration and Chief Financial Officer

Okay. Thank you. All right. This concludes our Q&A and our earnings call. Thank you to everyone for joining us today. Robin and Jeff will be available throughout the day to take your calls should you have any further questions. Everyone, have a great day. Thank you.

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

Catherine A. Suever -- Executive Vice President of Finance and Administration and Chief Financial Officer

Thomas L. Williams -- Chairman and Chief Executive Officer

Lee C. Banks -- President and Chief Operating Officer

Nathan Jones -- Stifel -- Analyst

Ann Duignan -- J.P. Morgan -- Analyst

Joel Tiss -- BMO Capital Markets -- Analyst

Jamie Cook -- Credit Suisse -- Analyst

David Raso -- Evercore ISI -- Analyst

Andrew Obin -- Bank of America -- Analyst

Andrew Casey -- Wells Fargo Securities -- Analyst

Jeff Sprague -- Vertical Research Partners -- Analyst

More PH analysis

All earnings call transcripts

AlphaStreet Logo