Parker-Hannifin Corporation (PH) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Parker-Hannifin Q4 2016 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct and question and answer session, and instructions will follow at that time. As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Mr. Jon Marten, Executive Vice President and CFO. Please go ahead, sir. Jon P. Marten - Executive Vice President-Finance & Adminstration and Chief Financial Officer: Okay. Thank you, Candace. And, again, good morning, everybody, and welcome to Parker-Hannifin's fourth quarter FY 2016 earnings release teleconference. Joining me today is Chairman and Chief Executive Officer Tom Williams and President and Chief Operating Officer Lee Banks. Today's presentation slides, together with the audio webcast replay, will be accessible on the company's Investor Information website at phstock.com for one year following today's call. On slide number 2, you'll find the company's Safe Harbor disclosure statement addressing forward-looking statements, as well as our non-GAAP financial measures. Reconciliations for any references to non-GAAP financial measures are included in this morning's press release and are posted on Parker's website at phstock.com. Turning to today's agenda on slide number 3, to begin, our Chairman and Chief Executive Officer, Tom Williams, will provide highlights for the fourth quarter and full fiscal year 2016. Following Tom's comments, I'll provide a review of the company's fourth quarter and full-year 2016 performance, together with the guidance for FY 2017. Tom will then provide a few summary comments, and then we'll open the call for a Q&A session. At this time, I'll turn it over to Tom and ask that you refer to slides number 4 and 5. Thomas L. Williams - Chairman & Chief Executive Officer: Thanks, Jon, and welcome to everybody on the call. We appreciate your participation this morning. Today, I'd like to cover the following key topics: our fourth quarter results, review our fiscal year 2017 guidance, and finally I'll highlight the progress we are making with the new Win Strategy. Let me start with the fourth quarter and full-year results, which demonstrate the progress we are making in a difficult growth environment. Fourth quarter sales were $2.96 billion or a 6% decline compared with the same quarter a year ago. This represents the second consecutive quarter that we saw a sequential improvement in sales and a decelerating rate of decline in sales on a year-over-year basis. Total order rates for the fourth quarter declined 1% compared with the same quarter last year, and represented a sequential improvement from the third quarter level. By segment, North America is still weak, but our Aerospace Systems segment and international business order rates were positive on a year-over-year basis. Net income for the fourth quarter increased 35% to $242 million on an as-reported basis, or a 29% increase to $260 million on an adjusted basis. Earnings per share for the quarter were $1.77 as reported, or $1.90 on an adjusted basis. That represents a 33% increase compared to the same quarter last year on an adjusted basis. Despite ongoing weakness in our end markets this quarter, we were able to achieve total segment operating margins of 14.8%, or 15.6% adjusted. This is tremendous performance and represents a 70 basis point improvement year over year in adjusted segment operating margins. Our adjusted decremental MROS was 2.9% for the fourth quarter. This is the sixth consecutive quarter that our adjusted decrementals have been below 25%, which is the best level of performance I can remember in any previous downturn. Just a few other full-year highlights that I'd like to note. Cash flow was strong in the quarter and also the year, with cash flow from operations, excluding the discretionary pension contribution, exceeding 12% of sales, reflecting the stability of our cash generation during a downturn. We also held inventories as a percent of sales essentially flat at 10.3% in fiscal 2016 versus 10.2% in the prior year. We executed very efficiently on the $109 million worth of business realignment. Even including this restructuring, our as-reported decremental MROS was 19.5% for the full year. And, notably, we accomplished all this while sales dropped $1.35 billion, which is very difficult to do. Moving on to capital allocation. During the fourth quarter, we've repurchased $108 million in Parker's shares, bringing our total share repurchases for the fiscal year to $558 million. As we have now purchased $1.9 billion of Parker's shares since our share repurchase plan was announced in October 2014, we are on track to meet our commitments on capital deployment. Regarding FY 2017 guidance, we are forecasting a year of sales being flat compared with fiscal 2016. Our expectation is that organic growth will be soft in the first quarter, becoming essentially flat in quarter two, with the second half showing 1% to 2% organic growth on a year-over-year basis. For fiscal year 2017, we're issuing guidance for as-reported earnings in a range of $6.15 to $6.95 per share, or $6.50 at the midpoint. On an adjusted basis, we expect earnings per share in the range of $6.40 to $7.10, for a midpoint of $6.75. Business realignment expenses are anticipated to be approximately $48 million or $0.25 per share. So now just a few comments about our progress with the Win Strategy. We continue to make meaningful progress with the initiatives across our four broad goals: engage people, premier customer experience, profitable growth, and financial performance. Regarding our first goal, engage people. During this past year, we saw a 33% reduction in recordable injuries. We continue to target a zero-accident safety goal, not only because it's our responsibility to our team members, but also because improved safety performance can be a leading indicator of improved financial performance. Our high-performance teams are driving this improvement in safety as well as quality, cost, and delivery. Now on the second goal, premier customer experience. On July 1 of this year, we launched our Likely to Recommend (6:33) initiative, which is designed to get direct feedback from customers and distributors on areas where we can improve. Importantly, we are gathering this feedback in a way that every site at Parker can understand and track their performance and make improvements. This is a significant initiative, because a better customer experience will drive faster organic growth for Parker. We're also making good progress in building our e-business capabilities that will deliver a best-in-class online experience for customers. And we are making progress developing our pipeline of Internet of Things applications across groups and product lines to enhance the value we bring to customers. Now, moving to the third goal, profitable growth. We continue to drive innovative products and systems, expand distribution, and build our service business as part of our sales growth strategy. Acquisitions will play a role in our growth plans. We recently closed a transaction in Europe to acquire certain businesses of the Jäger group to strengthen our position in worldwide sealing markets as part of our Engineered Materials Group. And lastly, our financial performance goal. Profitability in Aerospace is improving as we benefit from lower non-reoccurring engineering costs that were associated with some of the large program wins that we had, and improved operational efficiencies. Our simplification initiative is also gaining momentum across the company, as we discover more ways to streamline operations and better serve our customers. The best way to illustrate this is to look at our employment trends. The total number of Parker team members employed at the end of FY 2016 is at 2004 levels, or approximately 48,000 people. In fiscal 2004, our reported sales were $6.9 billion, whereas today, our sales are $11.3 billion with the same number of team members. This is a tribute to our global team members who are working together to find better and more efficient ways to accomplish their jobs and serve our customers. The combination of our simplification and Lean enterprise initiatives is amplifying our ability to improve processes and make significant structural cost improvements. In addition, our strategic supply chain and value pricing initiatives give us sufficient horsepower to propel us to our profit margin goals in the future. So, in summary, by executing the new Win Strategy, we are confident we will achieve our key financial objectives by the end of fiscal 2020. And this includes targeting sales growth of 150 basis points higher than the rate of global industrial production. We're also targeting 17% segment operating margins. And progress towards these goals is expected to drive a compound annual growth rate and earnings per share of 8% over this five-year period. I am very pleased at how far we've come in such a short period of time and continue to be excited about the opportunities we have for the future as we strive to make Parker a top-quartile performing company as compared to our proxy peers. (9:30) So for now I'm going to hand things back to Jon, let him give you more details on the quarter, the full year, and 2017 guidance. Jon P. Marten - Executive Vice President-Finance & Adminstration and Chief Financial Officer: Thanks, Tom. And at this time please refer to slide number 6. I'll begin by addressing earnings per share for the quarter. Adjusted earnings per share for the quarter were $1.90 versus $1.43 for the same quarter a year ago. This equates to an increase of $0.47. This excludes business realignment expenses of $0.13, which compares to $0.16 for the same quarter last year. Adjusted earnings per share for the full year 2016 were $6.46 versus $7.25 for the full year 2015. Total realignment expenses and pension termination costs were $0.57 for the full year 2016, and that compares to adjustments for business realignment and voluntary retirement expenses of $0.28 for the full year 2015. On slide number 7, you'll find the significant components of the walk from adjusted earnings per share of $1.43 for the fourth quarter of 2015 to $1.90 for the fourth quarter of this year. Increases to adjusted per-share income include a reduction of corporate G&A; interest and other expense equating to $0.14 per share, which is a result of savings realized from FY 2016 simplification efforts, as Tom just mentioned; one-time credits booked in Q4 FY 2016; and the comparison to a higher expense in Q4 2015 from early retirement expenses incurred, and a lower effective tax rate in FY 2016 of 28% versus 40.9% in Q4 of 2015. This all contributed to $0.30 per share. The impact of fewer shares outstanding due to the company's share repurchase activity equated to an increase of $0.05 per share. A reduction of $0.02 in adjusted per-share income was a result of lower adjusted segment operating income, which was driven by the strengthened U.S. dollar currency translation and weakened end markets, which approximates a little bit more than $200 million quarter to quarter. On slide number 8, you'll find the significant components of the walk from adjusted earnings per share of $7.25 for the full year 2015 to $6.46 for the full year 2016. For the full year 2016, increases to adjusted earnings per share include reduced corporate G&A expense equating to $0.20 per share; $0.13 per share due to a lower effective tax rate of 27.6% in FY 2016 versus 29.3% in FY 2015, which is due to favorable discrete benefits booked during FY 2016; and $0.36 from fewer shares outstanding, reflecting the full-year impact of Parker's enhanced share repurchase program. Decreases to adjusted earnings per share for FY 2016 were lower segment operating income of $1 per share due to the impact of the weakened end markets and higher interest and other expense equating to $0.48 per share, which compares to a sizable one-time favorable currency adjustment recognized in FY 2015 and the full-year impact of interest expense on incremental debt issued in November of 2014. Moving to slide number 9, with a review of the total company sales and segment operating margins for the fourth quarter and full year, total company organic sales in the fourth quarter decreased by 5.3% over the same quarter last year. There was minimal contribution to sales in the quarter from acquisitions. Currency impact as a percentage of sales was slightly higher than our guide, equating to a negative impact on reported sales of $31 million or 1% in the quarter. Total segment operating margin for the fourth quarter adjusted for realignment costs incurred in the quarter was 15.6% versus 14.9% for the same quarter last year. Business realignment costs incurred in the quarter were $25 million versus $27 million last year. The lower adjusted segment operating income this quarter of $462 million versus $468 million last year reflects the meaningful impact of the weakened industrial end markets, partially offset by the savings realized from our very large simplification and restructuring actions taken throughout the year. For the full year, organic sales in fiscal year 2017 (sic) [2016] decreased by 7.7%. Contributions to sales from acquisitions were minimal. The effect of foreign currency translation resulted in a negative impact to reported sales of $404 million or 3.2% of sales for the full year. Total company segment operating margin for fiscal year 2016, adjusted for realignment cost incurred during the year, was 14.8% versus 14.9% in fiscal year 2015. Business realignment expenses incurred in FY 2016 was $107 million. Slide number 10 discusses the business segments. And I'll start first with the Diversified Industrial North America segment. For the fourth quarter, North American organic sales decreased by 10.3% as compared to the same quarter last year. There was a nominal impact from acquisitions and a negative impact from currency of 0.6% in the quarter. Operating margin for the fourth quarter adjusted for realignment costs was 18% of sales versus 17.3% in the prior year. Business realignment expenses incurred totaled $5 million, as compared to $15 million in the prior year. Adjusted operating income was $226 million, as compared to $244 million, which was driven by the reduced volume as a result of the key industrial weak markets. For the full year, organic sales for the fiscal year 2016 decreased by 12.4%. Contributions to sales from acquisitions were minimal. The impact of foreign currency translation resulted in a negative impact to reported sales of $60 million or 1% of sales for the full year. For the full year 2016, operating margin adjusted for realignment cost was 16.8% of sales versus 17% in the prior year. Business realignment expenses incurred totaled $42 million as compared to $16 million in fiscal 2015. Adjusted operating income for fiscal 2016 was $832 million as compared to $972 million in the prior year. Now, turning to slide number 11, I'll continue with the Diversified Industrial segments. Organic sales for the Diversified Industrial International segment – organic sales for the fourth quarter in the segment decreased by 3%. Currency translation negatively impacted sales by 2%. Operating margin for the fourth quarter, adjusted for business realignment costs, was 12.6% of sales versus 10.9% in the prior year. Realignment expenses incurred in the quarter totaled $18 million as compared to $6 million in the prior year. Adjusted operating income was $137 million as compared to $124 million, which, despite the weakened top line, reflects the offsetting savings resulting from realignment actions taken in the current year as well as the prior fiscal years. For the full year, organic sales for fiscal year 2016 decreased by 6%. The impact of foreign currency translation resulted in a negative impact to reported sales of $339 million or a negative 7.1% of sales for the year. For the full year 2016, operating margin, adjusted for realignment costs, was 12.3% of sales versus 12.9% in the prior year. Restructuring expenses totaled $61 million as compared to $27 million in fiscal 2015. Adjusted operating income for fiscal 2016 was $509 million as compared to $611 million last year. And I'll now move to slide number 12 to review the Aerospace Systems segment. Organic revenues increased 2.2% for the quarter. Neither acquisitions nor currency really impacted revenues. Strong growth in military OEM and military aftermarket sales were the drivers for the quarterly performance. Operating margin for the fourth quarter, adjusted for realignment costs, was 16.4% of sales versus 16.9% in the prior year. Business realignment expenses incurred in the quarter totaled $1 million as compared to $6 million in the prior year. Adjusted operating income was flat at $99 million for both Q4 2016 and the prior year, reflecting the impact of the reduced commercial sales volume in the quarter, albeit partially offset by reduced development costs as a percentage of sales. For the full year, organic sales for fiscal year 2016 increased by 0.5% of sales. For the full year 2016, operating margin adjusted for realignment costs was 15.1% of sales versus 13.5% in prior year. Business realignment expenses incurred totaled $4 million as compared to $6 million related in the prior year. And adjusted operating income for the fiscal year was $341 million as compared to $305 million last year, which was largely attributed to the reduction of development cost to slightly less than 8% of sales, together with the savings from the business realignment activities. Going to slide number 13. Moving to that slide is a detail about order changes by segment. As a reminder, our orders represent a trailing average and are reported as a percentage increase of absolute dollars year over year excluding acquisitions, divestitures, and currency. The Diversified Industrial segments report on a three-month rolling average, while Aerospace Systems are based on a 12-month rolling average. Total orders improved to a negative 1% for the quarter-end, reflecting a decelerating rate of decline in key industrial end markets, including oil and gas, construction, and agricultural. Diversified Industrial North America orders decreased to a negative 10%. Diversified Industrial International orders improved to a positive 3% for the quarter. Aerospace System orders increased to plus 14% for the quarter. Looking at slide number 14, we report the cash flow from operations. For the fourth quarter, cash from operating activities was very strong at $488 million or 16.5% of sales. This compares to 16.2% of sales for the same period last year. For the full year, cash flow from operating activities for fiscal 2016 was $1.170 billion or 10.3% of sales, as compared to 10.2% last year. When adjusted for the $200 million voluntary pension contribution made during the year, adjusted cash flow from operating activities was $1.370 billion or 12.1% of sales as compared to 10.2% in fiscal 2015. There was no pension contribution made during FY 2015. The significant uses of cash during the year included $158 million for the company's repurchase of common shares and $342 million for the payment of shareholders' dividends. And there was $149 million for CapEx, equating to 1.3% of sales for FY 2016. Now, turning to guidance for FY 2017. The full-year earnings guidance for FY 2017 is outlined here. Guidance is provided on an adjusted basis. Segment operating margins and earnings per share exclude expected business realignment charges of $48 million, which are forecasted to be incurred throughout FY 2017. Total sales are expected to be in the range of negative 1.5% to positive 2.1% as compared to the prior year. Adjusted organic growth at the midpoint is flat. Currency in the guidance is not forecasted to impact sales. We have calculated the impact of currency to spot rates as of June 30, 2016, and we hold those rates steady as we estimate the resulting year-over-year impact for the upcoming FY 2017. Total Parker adjusted segment operating are margins forecast to be between 15.2% and 15.6%. This compares to 14.8% for FY 2016 on an adjusted basis. The guidance for below-the-line items, which includes corporate G&A, interest, and other expense, is $469 million for the year at the midpoint. The full-year tax rate is projected at 29%. The average number of fully diluted shares outstanding used in the full-year guidance is 135.5 million. And for the full-year guidance, on an adjusted earnings per share, is $6.40 to $7.10, or $6.75 at the midpoint. This guidance excludes business realignment expenses of approximately $48 million to be included in FY 2017. This is the only adjustments that we make to our guidance. It's just realignment expenses. The effect of this restructuring on EPS is approximately $0.25 savings from these business realignment initiatives are projected to be $30 million and are fully reflected in the adjusted operating margin guidance range. Some additional key assumptions for the fiscal year guidance are sales are divided 48% first half, 52% second half, which is a normal distribution split for a year for us. Adjusted segment operating income is divided 46% in the first half, 54% in the second half. EPS in the first half versus the second half is $2.93 and $3.82 for the second half. Q1 FY 2017 adjusted earnings per share is projected to be $1.52 at the midpoint, and this excludes $0.09 of business realignment expenses. On slide number 16, just some influences on EPS for 2017 as compared to 2016. On slide 16, you'll find a reconciliation of the major components of FY 2017 adjusted EPS guidance of $6.75 per share at the midpoint from the prior FY 2016 EPS of $6.46 per share. Increases include $0.40 from an increased segment operating income and $0.11 from fewer shares outstanding and reduced interest expense. Key components of the decrease include a $0.13 per share reduction from taxes, reflecting a rate from continuing operations of 29%, and $0.09 per share reduction from increased corporate G&A and other expense as a result of normalized levels, not including one-time favorable settlements realized in the prior year, primarily in Q4, in part by reduced pension expense due to the company's adoption of the spot rate methodology for calculating annual pension expense. This has a total impact of $0.11 for FY 2017. Please remember that the forecast excludes any acquisition and divestitures that might close during FY 2017. For consistency, we ask that you exclude only the restructuring expenses from your published estimates. This concludes my prepared remarks. Tom, I'll turn the call back over to you for your summary comments. Thomas L. Williams - Chairman & Chief Executive Officer: Thanks, Jon. We are very proud of the fiscal 2016 results. I'd like to thank Parker team members around the world for their efforts. These accomplishments carry even greater significance given the $1.35 billion drop in sales that occurred during the year. While we still have much more to achieve, we are positioned well for fiscal 2017 and beyond under the framework provided by the Win Strategy. Together, we are building a stronger and better Parker. I look forward to sharing more with you as the year progress. So at this time, Candace, we're ready to take questions if you want to go ahead and open the lines.

Thank you. And our first question comes from Jamie Cook of Credit Suisse. Your line is now open. Jamie L. Cook - Credit Suisse Securities (USA) LLC (Broker): Hi. Good morning. I guess a couple questions on the guidance. One of the things that struck me is generally when you guys guide for the fiscal year you come in well below consensus and you're sort of at the midpoint, which struck me. So any comment on that? But specifically, I'm trying to get comfortable with – can you give color on the orders in North America, which I think were down in the 10% range, which I guess surprised me. So I'm trying to bridge that with your sales guidance in North America, which seems more optimistic. And then at the same time, on a down sales year over year, you're expecting margin improvement on an adjusted basis. So if you could address those issues, I'd appreciate it. Thank you. Thomas L. Williams - Chairman & Chief Executive Officer: Okay. Jamie, it's Tom. Let me just – the topics are kind of interwoven, so I'll start with the guide, what was behind it. And I'll start with, in case those of you that were on the phone didn't hear my opening comments, this is going to be year of sales leveling off, which after the sharp reduction that we had last year is going to be a very refreshing change for all of our people around the world. But the way we forecasted this is Q1's going to be soft, moving to essentially flat in Q2 with 1% to 2% sales growth in the second half. So our thoughts behind the numbers. The natural resource related end markets – so construction, ag, mining, and oil and gas – are moderating. Now, they're going to continue to be, year over year when we finish 2017, negative. But they're going to get to be less and less of a drag, especially in the second half. When you look at order entry that we had in Q4, in particular what drove our thoughts with international is that we had a positive international, plus 3%, and that was made up of Europe being basically flat, minus 1% in that area; Asia, plus 6%; and Latin America, plus 19%. So what's really driving our international sales forecast is a forecast of Europe being relatively flat and Asia-Pacific and Latin America being up a little bit, driving an international forecast of plus 2%. Now, you talk about North America. Now, what we saw in Q4 I characterized as continued choppiness around what we saw from Q3 to Q4. I mean, during the quarter, April started off a little bit softer than we would've liked. And then May and June were a little bit better. What we're seeing for North America for the full year, to give you some context as to the negative 3% that we have out there, is that we have a first half of minus 5% and a second half of minus 1%. And what's driving that is if you look at the natural resource related end markets that I described, they really bottomed the North America in our second half of the year. So we're not really anticipating any new catalysts – any new activity that's going to drive growth or sustainability beyond our current levels for natural resources. But what you're seeing in North America is easier comps in the second half, and we do have growth in North America in non-natural resource related markets like machine tools, telecom, life sciences, turf, refrigeration, that is going to now help to offset some of that – not completely because we're still end the North America at a minus 3%. Now, if I could, I'm just going to give you context – our view for the total end markets for the whole fiscal 2017, and I want to put an asterisk by this. I'm not trying to describe the entire end market. I'm just trying to describe our performance in that end market. So I have them in three buckets, positive, neutral, and negative. So on the positive side, what makes up our forecast is aerospace, lawn and turf, passenger rail, refrigeration and air conditioning, semicon, and telecom. In the neutral area is automotive, distribution, and life sciences, and power generation. Now, of significance is distribution in neutral now. Well, that's not an end market, it's a big channel for us, and the fact that distribution moves to neutral helps the year stabilize quite a bit. And then under negative is construction, farm and ag, forestry, general industrial, heavy-duty truck, marine, mining, and oil and gas. So that's the landscape, and I probably gave you more than you wanted to know, but that's what we think for 2017. Jamie L. Cook - Credit Suisse Securities (USA) LLC (Broker): That's helpful on the top line. Sorry, just to clarify, though, because I'm trying to understand the margin story. Thomas L. Williams - Chairman & Chief Executive Officer: Yeah, all right. Jamie L. Cook - Credit Suisse Securities (USA) LLC (Broker): Like if you could tell me the incremental savings from restructuring actions taken in 2016 that help 2017, and then the $48 million of charges in 2017, how much of that do we realize? The $48 million in cost, how much of that do we realize in savings? And I'm assuming most of that's in North America. And then I'll get back in queue. Thank you. Jon P. Marten - Executive Vice President-Finance & Adminstration and Chief Financial Officer: Yeah. Jamie, Jon here. Just for the restructuring in FY 2017, of the $48 million, we're expecting $30 million in savings in FY 2017. And the restructuring savings that would have been incurred based on FY 2016 actions rolling into FY 2017 is about $25 million. So that is obviously helping our margins going forward, and it's a big driver to our future health, as Tom outlined earlier. So those are the details there. They are about half North America, half international. And one other way to describe them is that they're about one-half simplification efforts and one-half traditional restructuring, which would include some plant closures. Jamie L. Cook - Credit Suisse Securities (USA) LLC (Broker): Okay. Thank you. I'll get back in queue. I appreciate the color.

Thank you. And our next question comes from Joshua Pokrzywinski of Buckingham Research. Your line is now open.

Hi. Good morning, guys. Jon P. Marten - Executive Vice President-Finance & Adminstration and Chief Financial Officer: Hi, Josh.

Yeah. Just maybe to follow up on Jamie's question a little bit. Can you talk about some of the mix dynamics that you're seeing in North America that could maybe support a bit of a margin lift here? Maybe ex restructuring, how should we think about the underlying incrementals and decrementals and the progression through the year, and maybe what you saw in the fourth quarter that gives you the confidence in that launch pad? Thomas L. Williams - Chairman & Chief Executive Officer: I mean, if I take Q4 sequentially, I was talking about there's really kind of two things that we saw: the natural resource related end markets – Josh, this is Tom, by the way, sorry. We still saw those in that minus 10% to minus 15% range, mining, oil and gas, ag, and the distribution that had exposure to that. But what gives us confidence is when you look at the non-natural resource related end markets in Q4, those saw anywhere from flat to a plus 15%, so distribution being up mid-single digits, which is a big part of North America. Machine tools, telecom, life sciences, turf, refrigeration and air conditioning has been very strong for us and automotive about flat, slightly positive. So that was really the mix that felt us good about the North America forecast. The other part is that we do know that the natural resource comps in those particular end markets gets much easier in the second half, which is why our first quarter for North America, we're not anticipating anything much differently than what we saw in the current quarter. Maybe a hair better because the comps get easier in the second half, is why we forecasted a better comp in the second half.

Is it fair to say that of the – and I'm sorry, Jon, I missed all the numbers that you gave for restructuring, plus carry-over restructuring. Sounded like something around $40 million, $45 million. If I take those and maybe the gap in your guidance is another $30 million or so to get to the midpoint for segment op income, fair to say that that other $30 million is mix? I mean, I guess there's really not a lot of revenue growth. Presumably, price-cost isn't an inordinate benefit this fiscal year. Just trying to bridge that extra little piece to get to the midpoint. Jon P. Marten - Executive Vice President-Finance & Adminstration and Chief Financial Officer: Yeah. I mean, Josh, altogether I think you've got it. I mean, it's going to be mix. It's going to be further productivity that we're going to realize. It's going to be Lean. It's going to be the normal Parker operating protocols that we use. And we are expecting, without regard to the realignment that we did in FY 2016 and we plan to do in FY 2017, to become even more productive in FY 2017. And so, yes, that's how we bridge that gap internally here.

Okay. So, there's not a scenario, though, where on an underlying volume basis when things are still tough, decrementals kind of ex all the productivity in Lean and restructuring are very low and then you still expect them to accelerate. It sounds like volume is neutral-ish, but there's just a lot of heavy lifting that's going on behind the scenes doing most of that op improvement. Jon P. Marten - Executive Vice President-Finance & Adminstration and Chief Financial Officer: Yeah. I would say that that's correct. I mean, the volume being flat, as Tom described, in North America, maybe getting a little bit better as the year goes on, and FY 2017 is going to help us from a marginal standpoint in North America and internationally. We are seeing good productivity gains that we've made from the restructurings that we've done in FY 2016 and really, frankly, for FY 2015 also. So we feel like we are very well-positioned from a cost structure standpoint, and we are poised with any tailwinds at all at the high level to really be able to generate some impressive incremental margins, once the volume turns around.

All right. Thanks for the color, guys. I'll get back in queue.

Thank you. And our next question comes from Nathan Jones of Stifel. Your line is now open. Nathan Jones - Stifel, Nicolaus & Co., Inc.: Morning, everyone. Jon P. Marten - Executive Vice President-Finance & Adminstration and Chief Financial Officer: Hey, Nathan. Nathan Jones - Stifel, Nicolaus & Co., Inc.: So, I think, Jon, you're talking a little bit here about volume in natural resource markets being essentially flat and the comps get easier as the year goes on. I think we kind of entered last year with a similar expectation of some improvement in the back half of the year, which obviously didn't materialize. Could you talk about the differences between what you're seeing in the market now versus 12 months ago that gives you that confidence that you are going to see a potential uptick in the second half? Thomas L. Williams - Chairman & Chief Executive Officer: Nathan, it's Tom. I think the confidence would be, if you just took oil and gas as an example. Nobody could've anticipated going back 12 months ago the rig count reduction that happened, but now the rig counts have stabilized, and the last several weeks, minus maybe a week or two, have actually improved. We're not forecasting them to get any better, but just by the comps, and the fact that they've decelerated or are starting to hold that level, it makes our second half naturally a little bit better. I don't think we're out on a limb with North America at a minus 1% in the second half, given that we normally have a second half a little bit better, and the fact that I think we've seen the worst behind us in the natural resource areas, and those non-natural resource areas that I mentioned starting to show some growth for us. So I think that's why we picked what we did. And at this point, we're as confident as we can be. Of course, every quarter we'll update you as that changes. Nathan Jones - Stifel, Nicolaus & Co., Inc.: Thanks. Is it possible for you to parse out what you think the impact might be on North American orders from the natural resource markets? I mean, you had a nice plus 3% in international and still minus 10% in North America. How much do you think natural resource markets are impacting that in North America versus international? Thomas L. Williams - Chairman & Chief Executive Officer: Nathan, it's Tom again. It's hard to do on an order basis. I'll give you what we saw sequentially on sales. This is what I was mentioning earlier. We saw natural resources in that minus 10% to minus 15% range, including the distribution related to natural resources. And then the non-natural resources were all zero to plus 15%, depending on – refrigeration and air conditioning being the strongest given this time of year. So that's the mix. And the natural resource areas – again, that's about where we've been, give or take a little bit. And as we look to the second half of the year, those comps just get easier for us, and that becomes less of a drag. And the positive end markets start to get us to the minus 1% second half that we forecasted. Nathan Jones - Stifel, Nicolaus & Co., Inc.: Okay. And just one on how to think about the incremental margins, Tom, you mentioned in your prepared comments that you've had historically low decrementals during this down cycle, which is obviously a tribute to the business. Does it also change the profile of the incremental margins that we should be thinking about when volume returns? Is the cost structure structurally changed to the point where you would expect higher incremental margins on volume as volume comes back? Thomas L. Williams - Chairman & Chief Executive Officer: Nathan, it's Tom. I think we would. I mean, historically, when we've come out of a downturn, we would be maybe at plus 40%, and then start to – every quarter that went from the initial uptick, we start to glide down to a plus 30%, and then as you get deeper into a growth segment (42:19) you're in the 20s, potentially probably bottoming out in the upper teens. But I think what we've done structurally, and the fact that we are simpler, leaner, and have a much better cost structure, we would never been able to put up the MROSes that we put up without doing the actions that we've taken. And just – it's worth repeating again, the all-in reported MROS, 19.5% – so that's all the restructuring – $109 million, which is the highest restructuring we've done in the history of the company. Even with all that, we put up a 19.5% MROS. So, yes, I think it can be higher. Could I peg a number? No, that would be difficult to do, but I would expect it to be higher than we've done historically. Nathan Jones - Stifel, Nicolaus & Co., Inc.: All right. Thanks very much for the help.

Thank you. And our next question comes from Joe Ritchie of Goldman Sachs. Your line is now open. Joe Ritchie - Goldman Sachs & Co.: Thanks. Good morning, everyone. And nice job on the cost control this quarter. Jon P. Marten - Executive Vice President-Finance & Adminstration and Chief Financial Officer: Thanks, Joe. Joe Ritchie - Goldman Sachs & Co.: My first question is really around just distribution. So, Tom, your comments that distribution's going to be neutral – or your (43:25) expectation is neutral in 2017. Can you give us some thoughts there? I mean, clearly as we ended the quarter, the data points that we got from the industrial markets were pretty weak. We got a slightly more positive data point today from Fastenal. And so maybe just comment on what you're seeing in distribution that will give you the confidence that it actually can be neutral in 2017. Thomas L. Williams - Chairman & Chief Executive Officer: Hey, Joe. This is Tom. I'll start off, and I'd like Lee to just tag-team. I mean, the confidence here is that when we look at how the quarter came out, sequentially distribution was basically flat, and those non-natural resource related areas that we've talked about in the past in the various regions are growing mid-single digits. And we have a really on-purpose program to add distribution, especially in the emerging areas in Asia, in Eastern Europe, Africa, Latin America. And our teams are working very hard at that. And when we look at the emerging markets, they're showing some positive growth in distribution. So I think that combination of all those gives us confidence that we can come in at a neutral for distribution. I don't know if Lee has anything else to add. Lee C. Banks - President, Chief Operating Officer & Director: No, Joe, I'd just say commenting on North America, and I've spent quite a bit of time with these guys. There's just no doubt that there's still a big hangover from the natural resource markets, oil and gas being a big one. But have we seen that, (44:54) you do get this impression that things are flattening out. We do see some signs of MRO spend taking place, and it's really a lack of cannibalization of idle rigs that are out there. So we see activity there. And then I think there's just general encouragement through the channel that with the continued strength in the automotive end markets and continued positive PMI data that they are cautiously optimistic that there's some positive signs going forward. Joe Ritchie - Goldman Sachs & Co.: So, Lee, is it your sense that from an inventory standpoint, we've now gotten to levels that we need to be in order for your growth rates to reflect end market demand? Lee C. Banks - President, Chief Operating Officer & Director: Yeah. I mean, I would say in general that the whole destocking question, I don't see big evidence of that in place. That's not to say there may not be a pocket here or there. But in general I would say inventories are in line with the current activity. Joe Ritchie - Goldman Sachs & Co.: Okay. And then maybe one follow-on question for Jon. Can you maybe talk a little bit about your cash bridge for next year? So specifically I'm interested in your pension-funded status, whether there's going to be an additional contribution in 2017, and then any other puts and takes that you could talk about from a cash flow perspective for next year? Thank you. Jon P. Marten - Executive Vice President-Finance & Adminstration and Chief Financial Officer: Yes, Joe. I think, first, on the pension contribution, that is possible. I don't want to say that we are doing it or we're not. We're going to have to really look at that very hard, but that is possible. And, if we do it, it would be in the normal range that we've done it over the last several years, other than in FY 2015, which we didn't do anything. And I think that, from a capital standpoint here, from a CapEx, we would be at about 2% of sales. And those are the kind of the big drivers here for us. Our pension expense for next year, as I tried to mention in my comments, was going to be impacted positively in total, all together, by $0.11 impacting FY 2017 due to the spot rate methodology that we've adopted, as well as many other puts and takes that go into making those estimates and doing the accounting for that. So the CapEx of 2%, we never forecast acquisitions, of course, and from a pension expense standpoint, it's quite possible that we would have a normal contribution there, and that's about what I can give you right now. Is there any more color that you would want at this point? Joe Ritchie - Goldman Sachs & Co.: I guess just what the funded status of your pension is today and whether you expect working capital to be positive or negative next year. Jon P. Marten - Executive Vice President-Finance & Adminstration and Chief Financial Officer: Yeah, I think working capital is going to be positive. Now, we're going to show sales growth in Q4, so that will be a slight drag. But we are making tremendous progress on our cost controls, as well as our inventory management. Our inventories are, with this kind of a decline in sales, are at a historic low as a percent of sales. We expect our ability to manage through inventories to more than offset the drag that we might have from the AR as our Q4 shows a little bit better. Our funded status right now for our pension plans is at 65%, which is a little bit lower than we would want it to be, and that's pure assets to liabilities. Of course, regulatorily, we're well over 100% required, but there would be an argument to make that from a voluntary contribution standpoint that it would make sense given our assets and liability funded status at 65% right now. Joe Ritchie - Goldman Sachs & Co.: Okay. Thank you, guys.

Thank you. And our next question comes from David Raso of Evercore. Your line is now open.

Hi. A quick clarification first before my question. The savings, the carryover plus the incremental from this year, what's the exact number again? Jon P. Marten - Executive Vice President-Finance & Adminstration and Chief Financial Officer: Okay. The savings carryover into FY 2017, $25 million. The savings related to the FY 2017 restructuring, $30 million.

Okay. So basically the segment profit for the year, total company, has guided up about $72 million, $55 from savings and $21 million from pension. Is that essentially the number you have? (49:56) Jon P. Marten - Executive Vice President-Finance & Adminstration and Chief Financial Officer: Yeah, those are the numbers. I hate to draw a straight line between the restructuring and the savings and our increased guidance, because there's a lot of other factors, as you well know, Dave, that go into that. But, yeah, that would be one way to look at it.

That's a generic flat revenues, keep profit flat ideally on it, at $20 million plus for pension and $55 million for save, and that's the generic framework. Jon P. Marten - Executive Vice President-Finance & Adminstration and Chief Financial Officer: Yeah.

My question was the international growth cadence. Can you walk us through – and you said it earlier, I apologize – I know you said it for North America, but I might have missed it internationally. The up 3% for the year, 3.2% to be exact – how do we get there from the down 3% we're exiting the year? Comps get easier, orders are up, but if you can help us with the cadence. Thomas L. Williams - Chairman & Chief Executive Officer: David, it's Tom. So international, up 3%, 1 point of that is acquisitions; that's the Jäger acquisition for the year. So it's 2 points of growth for international, and our forecast is that that's Europe at flat, Asia plus 4%, and Latin America plus 15%. Now, recognize Latin America is a small number, and it's balancing off a very sharp decline. And what's supporting that is the orders that we saw in Q4 and has continued into July is that of the international orders, we saw Europe around flat. We've seen Asia orders plus 6%, and Latin America orders plus 19%. So we see some opportunities in Asia and Latin America in particular, and we see Europe as neutral. That's what's making up the plus 2% for international.

And the cadence of that then? Could we be positive by fiscal 2Q? How quickly do we get positive to get the full year to 2%? Thomas L. Williams - Chairman & Chief Executive Officer: At the end of the first half.

End of first half. Terrific. Thank you very much.

Thank you. And our next question comes from Jeff Hammond of KeyBanc. Your line is now open.

Hey. Good morning, guys. Jon P. Marten - Executive Vice President-Finance & Adminstration and Chief Financial Officer: Morning, Jeff.

Hey. So you mentioned capital allocation, you'd be kind of within your range of targets for buyback. And just with six months to go from kind of completing that, can you just update us on as we look past that how you may be thinking about capital allocation, the same or different, or do we get some formal multiyear announcement? Just flesh that out. And maybe while you're at it, touch on acquisition pipeline. Thomas L. Williams - Chairman & Chief Executive Officer: Okay, Jeff. It's Tom. So let me start with just a clarification. We only have one more quarter left in the share repurchase plan. It was October to October, 2014 to 2016. So we'll come in at the $2 billion level of that range that we said. And what's really kind of – the factors that we've considered of what that is that 99% of our cash is permanently invested overseas. We do have a desire to maintain that A rating, and our debt to total cap is at around almost 40%. And when we started the program, we were at $13 billion company; now we're $11.4 billion. Now, we're very proud of the double-digit cash flow that we've been able to generate, but it's double digits off of a smaller number. So that's what is kind of framing why we're going to come in at the low end of the range. Now, going forward, our desire – let me first state that we want to be great generators of cash, and I think we've done a great job there. We're going to continue to do an even better job, and we want to be known as a company that really spins off a lot of cash. On the flip side, we want to be known as a company that deploys it very effectively on behalf of the shareholders, and you've heard me say this before, but those maybe have not, I'll repeat it. First and foremost, as far as our priorities, is to continue our dividend track record. Then we're going to fund organic growth because it's the most efficient growth that you can fund. And then really it's a dynamic review on a case-by-case basis between share repurchase and acquisitions, and really with the goal of generating the best long-term value for our shareholders. On the share repurchase, you won't see us do another announcement type of process. I think what's better for shareholders is to be active, to have a muscular balance sheet, but to tell you after the fact, because when we announce in advance, we're buying into our own wind, and I don't think that helps shareholders. I think we want to do it after the fact. That's the most effective way to use our cash and to help shareholders. Regarding acquisitions, the pipeline is active. But I talked last quarter, and the valuations continue to be, I would call it, historically high. But I do think time is on our side here because we buy properties in spaces that we understand. So we understand the growth rates. I think sellers' expectations on growth rates is going to start to temper as they recognize that the growth rates that they think their business is going to do is not going to actually come to fruition. And I think you'll see our pipeline become more actionable. We've always been disciplined buyers. And we'll always continue to buy properties that we know we can deliver on for our shareholders. So we'll look at all that. And, again, the goal is to have a muscular balance sheet and do what's best for our shareholders.

Okay. Then just as a follow-on on international. Can you speak to what's inflecting in Asia to drive that plus 6%, and then conversely in Europe, any kind of near-term signals of deterioration around Brexit? Thomas L. Williams - Chairman & Chief Executive Officer: Yeah. Jeff, I'll start on Asia. I'm going to let Jon make some comments on Brexit. But what we saw on Asia, we actually had positive sales in Asia for June and with the positive order entry that we had in Q4 and will continue into July. We saw plusses in life sciences – I'm speaking about Asia in general – passenger rail, power gen, machine tools, and probably of significance, because for the many years we've been talking about this, we've started to see some signs of life in mobile construction, in particular India and Japan, but the good thing is China has finally flattened out, and we've actually saw some new incremental orders in China. And we have all the countries across Asia growing, with the exception of Korea, and Korea just has a little more exposure to some of those global OEMs, and so that will to start to recover as well. So that's what behind our thoughts on Asia, and I'll let Jon talk about Brexit. Jon P. Marten - Executive Vice President-Finance & Adminstration and Chief Financial Officer: Just a quick comment on the Brexit impact, Jeff. We're in a position where we manufacture and ship out of the UK more than we buy into the UK. And so, since we export more than we import, we don't see that really having an impact on our near-term financials. Now, to the extent that the Brexit impact long term starts to impact the economics there, we'll be watching that very closely, but the UK overall, in terms of our sales there, will not meaningfully drive our top line numbers in any event.

Thanks a lot, guys. Jon P. Marten - Executive Vice President-Finance & Adminstration and Chief Financial Officer: Okay, Jeff.

Thank you. And our next question comes from Steve Volkmann of Jefferies. Your line is now open.

Hi. Good morning, guys, for two more minutes. Can I just follow up? I think, Tom, you made some initial comments about simplification plans. And I'm curious if there's kind of more to come in that area in terms of things like SKU reduction, or business unit consolidation, or maybe even have some more divestitures. I know you've done a couple of small ones here and there. Can you just talk a little bit about what that's going to look like over the next couple years? Thomas L. Williams - Chairman & Chief Executive Officer: Yeah, Steve, it's Tom. I think there's really been great momentum for us across the company on simplification. I think I mentioned in my opening comments, the combination of putting simplification with our Lean enterprise efforts is really giving us an amplification of being able to look at costs and processes differently than maybe we have in the past. But, as I've mentioned before, and I'll kind of give you some comments as to where I think we can go on these, there's four big areas that we're focused on. The first is that whole revenue complexity, or maybe another way of saying it is that product line simplification, the tail of revenue, the last couple percent of revenue. We are in very early days on that. That is probably our biggest opportunity going forward, and that will be a multiyear journey as we continue to find more efficient ways to service that tail, take care of our customers, but work on the SG&A, the speed at which we can handle those type of orders, speed at which we can service customers. A lot of organization design activity will happen related to that. So that will be a net win for our customers as well as us, but very early days on that. That's the harder part because there's thousands and thousands of part numbers to go through. That's the more complicated part of it. We've done a lot of work organizationally and process-wise; that's the second bullet. And I still see lots of opportunities there. I think you'll see a focus on the number of levels within the company, span of controls, just putting together an organization design that is the most effective design for our customers and for our people. On the division consolidations, I think we've taken a pretty big step already on that piece. We had 28 divisions, so basically a quarter of all of our divisions going through some kind of consolidation, down to 14. So that dropped our total count of divisions from 115 to 101. Lee is working with the presidents on that. And we don't have anything to announce because, in fairness to our people, we would not announce that in a public forum like this. But we've already taken a big step there. I think you'll see just more fine-tuning on that as we go. And then on bureaucracy, there's lots and lots of opportunities within the company. The whole annual plan process that we redid was a huge upside for people as far as being able to free up their time to do other things. So I would say we're very pleased with where we've come so far, but there's a lot more to go on that. And if you have anything else, Steve, I'd be happy to answer any more.

Just on potential divestitures going forward? Thomas L. Williams - Chairman & Chief Executive Officer: Oh. Yeah, so we continue to look at the divestitures. That's an ongoing basis. But we like the portfolio as a whole. And you look at our nine motion control technologies, and you look at the seven operating groups. 60% of our customers buy from four or more of those seven groups. So our customers see the power of the systems we can do, the synergies that we can do, across those technologies. That being said, we still look at properties that we think potentially weren't strategic to us or where we weren't the best corporate owner. We'll continue to do that, but I would characterize that as very small, trimming around the edges type of divestitures.

Great. I appreciate it. Thanks. Jon P. Marten - Executive Vice President-Finance & Adminstration and Chief Financial Officer: Okay. And Candace, I see that we're running up against it here. Could we just take one last phone call here, please?

Absolutely. Our final question comes from the line of Andy Casey of Wells Fargo Securities. Your line is now open.

Thanks a lot. Good morning, everybody. Jon P. Marten - Executive Vice President-Finance & Adminstration and Chief Financial Officer: Hey, Andy.

Got a question on Aerospace, one backward-looking and then a little bit forward-looking. The first – can you give a little more color about the relative performance of commercial versus military, if you want to break it OE versus aftermarket in the quarter? And then also, a little more color behind what drove the 50 basis point margin decline versus last year? Jon P. Marten - Executive Vice President-Finance & Adminstration and Chief Financial Officer: Okay. On the margin decline, basically, last year, there were a few contractual settlements in the Aerospace numbers. They did not repeat for this year. Of course, those are lumpy, and they can come sporadically. And so that's really the driver there, Andy. Now, from breaking those numbers down a little bit in terms of the sales, we are basically essentially flat in the commercial market. That's being kind of impacted by the ability for us to be in a position where our bizjet reduction is being overcome by our normal commercial increase. There's not been a significant change in the aftermarket there, and it's been basically flat for us. From a military standpoint, both OE and commercial, that has been up low double digits for us in the quarter, and that would be reflected not only in our sales but in our orders, and again all of these data that I give to you, because it's such a long-term business, it tends to be very lumpy. Our perfect world, we would be 50% commercial, 50% military. We're not now. I mean, we are 65% commercial, and the balance military right now. And in a perfect world, we'd be 50%-50% OEM versus aftermarket, and we're at 66% OEM right now. So that would be indicative of further aftermarket revenues to come as we are successful in our entry into service for all the commercial aircraft, and as the military ramps up over the next several years on some of the key programs that we're on. And so we have a lot of very high expectations for our performance and our growth there in Aerospace, and it's been a key to our successful FY 2016, and key to our guidance in FY 2017, too. So I hope that gives you some color there, Andy.

It does, Jon. Thank you. And then I guess two more – I'm sorry to belabor it. But on Aerospace, on the guidance, modest growth, kind of flattish to modest growth, and margins flat to up 40 basis points. Is the margin growth or the potential expansion really mix driven, or are there other factors that are driving that? Jon P. Marten - Executive Vice President-Finance & Adminstration and Chief Financial Officer: Well, I think it's going to be efficiency. It's going to be the same adherence to all the programs that Tom has outlined before in our Aerospace segment. And it is going to be a natural mix, a positive for us here into FY 2017. Our growth on our new programs is going to be in the low single digits, and our growth in the repairs and aftermarket is going to be in the low single digits for FY 2017. And we also would expect to see our normal growth in our military aftermarket in FY 2017. So there's no one segment of the Aerospace that is driving the growth, and there's no one answer for you on the margins. It's more mix, and it's our ability to just continue to be productive in Aerospace on the margins, and it's across-the-board increases at each one of the major segments there in FY 2017, too.

Okay. Thanks. And I'll follow up on that offline. On the diversified international, if I strip out – take kind of 50/50 split on the savings literally, if I strip that out, it looks like the core incrementals are somewhere around mid-20% range. Is that just application of what you'd expect in year one of some sort of recovery after the downdraft we've seen? Or is there upside opportunity given the Lean operations relative to the past? Jon P. Marten - Executive Vice President-Finance & Adminstration and Chief Financial Officer: Yeah. I think that it is a reflection of our ability to implement Lean. There is an uptick in of course the incremental returns they're going to get, because as Tom and Lee have kind of described, we're going to see an upturn in sequential revenues as the year goes on, especially in Industrial international. That's our best estimate right now. And so we will see some marginal returns there. That 20% number, it seems, off the top of my head, reasonable, but I don't want to give you the impression that there's not also a lot of favorable disposition in our international Industrial margins because of our ability to continue to penetrate markets, gain market share, and grow in ways that are really quite favorable for the company here and helping us with our guidance in 2017.

Okay. Thank you very much. Jon P. Marten - Executive Vice President-Finance & Adminstration and Chief Financial Officer: Okay. Thank you. And I think this will be the balance of our call here today. I appreciate everybody's questions. I want to thank everybody for joining us. Robin and Ryan will be available throughout the day to take your calls, should you have any further questions. And I want to thank everybody again and wish everybody a good day.

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