Thomas L. Williams - Chairman and Chief Executive Officer Jon P. Marten - Executive Vice President and Chief Financial Officer Lee C. Banks - President and Chief Operating Officer.

Jamie Cook - Credit Suisse Joseph Ritchie - Goldman, Sachs & Co. Jeffrey Hammond - KeyBanc Capital Markets, Inc. Ann Duignan - JPMorgan Chase David Raso - Evercore ISI Group. Eli Lustgarten - Longbow Research LLC. Joshua Pokrzywinski - Buckingham Research Group Inc. Andrew Casey - Wells Fargo Securities, LLC. Nathan Jones - Stifel, Nicolaus & Co.

Joseph Giordano - Cowen & Co..

Good day, ladies and gentlemen, and welcome to the Parker-Hannifin Corp. Quarter Three 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will host a question-and-answer session, and instructions will follow at that time [Operator instructions] As a reminder, this conference is being recorded.

Now I will hand the floor over to Jon Marten, Chief Financial Officer. Sir you have the floor..

Good morning, and welcome to Parker-Hannifin's third quarter FY 2016 earnings release teleconference. Joining me today is Chairman and Chief Executive Officer, Tom Williams; and President and Chief Operating Officer, Lee Banks.

Today's presentation slides together with the audio webcast replay will be accessible on the company's Investor Information website at phstock.com for one-year following today's call. On slide number two, you'll find the company's Safe Harbor disclosure statement addressing forward-looking statements as well as non-GAAP financial measures.

Reconciliations for any reference to non-GAAP financial measures are included in this morning's press release and are posted on Parker's website at phstock.com. Today's call agenda appears on slide number three, to begin, our Chairman and Chief Executive Officer, Tom Williams, will provide highlights for the third quarter of fiscal year 2016.

Following Tom's comments, I will provide a review of the company's third quarter FY 2016 performance together with the revised guidance for FY 2016. Tom will provide a few summary comments and then we'll open the call for a Q&A. At this time, I'll turn it over to Tom and ask that you refer to slide number four..

Thanks Jon, good morning and welcome everyone on the call. We appreciate your participation. So today we are going to cover four key topics with you. First, I'll summarize the third quarter results.

Second, some commentary on key market trends, give an update on the revised full-year guidance and finally I'll highlight some of the progress we're making on the key initiatives under New Win Strategy.

So beginning with the third quarter results, sales declined 10.6% as the effects of the strong dollar negatively impacted us by 1.5% and organic sales declined approximately by 9.4%. Total order rates for the third quarter declined 6% compared with the same quarter last year. This is a sequential improvement from the second quarter.

Earnings per share for the quarter were $1.37 or $1.51 adjusted for business realignment, which was ahead of our expectations. Operating cash flow year-to-date includes a $200 million discretionary contribution to the U.S. pension plan. Excluding the contribution year-to-date, operating cash to sales was 10.5%.

During the second quarter, we repurchased $50 million in shares, bringing our year-to-date total to $450 million. We have now repurchased $1.8 billion in shares since October 2014. However, the most impressive accomplishment of the third quarter was our margin performance.

I’m very pleased to be delivered total segment operating margins of 13.8% or 14.7% on adjusted basis. This represents a 30 basis points improvement year-over-year in adjusted margins which is a significant accomplishment given the difficult economic conditions we are facing.

During the third quarter, we delivered decrementals margin return on sales of 17% or 11.8% adjusted for business realignment expenses. This demonstrates excellent performance by our team. This quarter remarks the 5th consecutive quarter with decrementals MROS of less than 30%, this is both on a reported and on adjusted basis.

Year-to-date we have also held SG&A flat at 12.1% of the sales despite of $1.2 billion drop in sales, another significant accomplishment by our team. Our performance during such a sustained period of lower sales and order rates is unprecedented.

It demonstrates Parker’s ability to create a more adaptable cost structure and deliver less difficult financial performance. So now a few brief comments on key end-markets, so reflecting on the order rates over the past year, we are encouraged with a point of moderating with the decline.

More specifically from Q2 to Q3, we saw number of end-markets moved from what we would classify as accelerating decline to decelerating decline, which is a good sign.

We will continue to monitor additional data points in the coming months to help solidify our interpretation of the direction of the macroeconomic trends, we will provide you an update in our August call. As usual we will provide more details on our specific end-market during the Q&A portion of this call. Switching to the outlook.

For fiscal year 2016, we’re increasing our guidance for earnings to the range $6.20, $6.40 per share on an adjusted basis, which resulted in earnings midpoint of $6.30 per share.

Adjusted guidance represents $0.20 increase from our previous estimate at the midpoint, increase can be attributed third quarter - and incremental savings we’re now seeing from the realignment actions we’ve taken year-to-date.

We also now anticipate higher business realignment expenses, which for the full-year will go from a $100 million to $120 million or $0.63 per share. As we move deeper into the New Win Strategy initiatives our global teams have identified additional near-term actions that will generate attractive front on investment.

These actions will position us well for future growth and profitability. Now let me give you some highlights from the New Win Strategy, we continue to make meaningful progress with our one strategy initiatives to increase team member engagement, deliver premier customer experience and drive over all growth and financial performance.

Let me take a moment to update you on progress in a couple of select areas. Starting with safety, we’ve a 29% reduction in reportable injuries comparing to the third quarter of fiscal 2016 with the same period a year-ago on our rolling 12-month basis.

This reflects safety engagement across the organization and the progress of our safety focused high performance teams. Our goal is to reach zero accidents, the significance for our shareholders is that safe operations are productive operations, which translate to excellent financial results.

Our simplification initiative is gaining tremendous momentum throughout the organization. The focus is on four key areas, revenue complexity, organization structure and process, division consolidations and bureaucracy.

It’s a strategic revenue of our over head but also strategy review of our organization and process to improve our customers experience with Parker and also to only drive growth. I’ll give you few examples with that. Our division consolidations have yielded cost savings and will generate technology and products introduced for future growth.

Our sales force organization we designed is providing more effective alignment between our customers, distributors and divisions. An another example, normally at this time of the year, we’re working through an extensive annual planning process.

This year, we greatly simplified that process and dramatically reduced the amount of time that goes into developing our annual plan. what used to five-months, now takes eight-weeks. In August we will share the output from this process in the form of our guidance for fiscal year 2017.

Innovation activity continues to be strong and will position us well when the macro conditions stabilize, I’ll give you a three examples on innovation front.

Several years-ago, we commercialized a series of thermally conductive sensible gels to help cool delicate electronic components and mobile devices and automotive applications, such as closed room avoidance. That product series continues to do well for us today in these fast growing markets.

During the third quarter, we were particularly pleased to receive the FDA approval of our groundbreaking exoskeleton technology Indego. Indego was approved for clinical and personal use by individuals for spinal cord injury which allows them to walk again. With approvals now in the U.S.

and Europe, we’re positioned for a full commercial launch of Indego. Remarkably, we went from an idea to launch in less than three-years an already generate initial sales in FY 2016. Plan for launch next year is a C&G fuel regulator modular, which optimizes fuel emissions for class five to eight trucks.

This module is a one-piece design that increases multiple products into a central compact system. We’re optimistic about the commercial viability of this important product. These examples showcases just some of the highlights from the past, present and future innovations that creates vitality and growth from new products and technologies.

So in summary, by executing the New Win Strategy we are confident we’ll achieve our key financial objective by end of fiscal 2020, which includes targeted sales growth of a 150 basis points higher and the rate of global industrial production.

We’re also targeting [17%] (Ph) segment operating margins and progress total towards these goals is expected to drive in compound annual growth rate in earnings per share of 8% over this five-year period.

I am very pleased at how far we have come in such a short period of time and continue to be excited about the opportunities we have for the future as we strive to make Parker top cortile performing company as compared to our proxy peers. So for now, I’ll hand things back to Jon to review more details on the quarter..

Thanks Tom and at this time please refer to slide number five, I’ll begin by addressing earnings per share for the quarter. Adjusted earnings per share for the quarter were $151 versus $2.06 for the same quarter and year-ago. This excludes business realignment expenses of $0.14 and comparison $0.04 for the same quarter last year.

On the slide number six, you will find a significant components of the walk from adjusted earnings per share of $2.60 for the third quarter FY 2015 to a $51 for the third quarter of this year.

Increases to adjusted per share income include the impact of fewer shares outstanding equating to an increase of $0.05 per share and lower corporate G&A and interest equating to $0.04 due to reduction of long-term incentive accruals and our simplification efforts.

Reductions to adjusted per share income include other expense that total $0.33 per share as compared to the prior year in which last year sizeable one-time favorable currency adjustments were recognized lower adjustment segment operating income of $0.21 per share due to the impact of the weakened end-market and $0.10 from increase effective tax rate driven by various discrete items booked in the quarter.

Moving to slide number seven, with a review of the total company sales and segment operating margin for the third quarter. Total company organic sales in the third quarter decreased by 9.4% over the same quarter last year, there was a 3% contribution to sales in the quarter from acquisitions.

Currency impact as a percentage of sales was relatively in line with our guidance equating to a negative impact of reported sales of 1.5% in the quarter. Total company’s segment operating margins for the third quarter adjusted for realignment costs incurred in the quarter was 14.7% versus 14.4% for the same quarter last year.

We are especially pleased with this performance given the end-market softness. Realignment costs incurred in the quarter were $25 million versus $8 million last year.

As forecasted previously, the lower adjusted segment operating income this quarter of $417 million versus $456 million last year reflects the impact of a reduced volume and the unfavorable mix from the weakening of industrial end-markets.

Moving to slide number eight, I’ll discuss the business segments, starting with Diversified Industrial North America. For the third quarter, North American organic sales decreased by 12.7% as compared to the same quarter last year. There was a modest impact from acquisitions and a negative impact in currency of 0.8% in the quarter.

Operating margin for the third quarter, adjusted for realignment costs, was an impressive 16.9% of sales versus 16.4% in the prior year. Realignment expenses incurred totaled $9 million as compared to $1 million in prior year.

Adjusted operating income was $211 million as compared to $236 million driven by reduced volume as a result of the weakening in our key end-markets. On slide number nine, I’ll continue with the Diversified Industrial segment on this slide.

Organic sales for the third quarter in the Industrial International segment decreased by 8.7%, currency negative impacted sales by 3.1%. Operating margin for the third quarter, adjusted for realignment costs was 11.9% of sales versus 12.7% in the prior year.

Realignment expenses incurred in the quarter totaled $16 million as compared to $7 million in the prior year. Adjusted operating income was $121 million as compared to $146 million, which reflects the impact of weaker end-markets. I’ll now move to slide number 10 to review the Aerospace Systems segment. Organic revenues decreased 2% for the quarter.

Currency impact was negligible, sales for the period was impacted by some softness in helicopter and business jets. Operating margin for the third quarter, adjusted for realignment costs, was 15.1% of sales versus 12.9% in the prior year.

Adjusted operating income was $85 million as compared to $74 million last year reflecting a combination of higher aftermarket sales volume mix, reduced development costs as a percent of sales and implementation of the New Win Strategy. Moving to slide number 11 with the detail of orders changes by segment.

As a reminder, Parker orders represented 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 were a negative 6% for the quarter-end, reflecting less negative quarter rates and Industrial segments and Aerospace segment or orders turning positive. Diversified Industrial North American orders improved to negative 9%. Diversified Industrial International orders improved to negative 6% for the quarter.

Aerospace Systems orders improved to a positive 1% for the quarter. Now turning to slide number 12 on cash flow. Cash flow from operating activities year-to-date was $681 million, when adjusted for the $200 million discretionary pension contribution made in the first quarter, cash from operating activities was $81 million or 10.5% of sales.

This compares to 8.3% of sales for the same period last year. In addition to the pension contribution discussed earlier, the significant uses of cash year-to-date were $707 million returned to our shareholders via share repurchases of dividends, $68 million for acquisitions closed during Q1.

No acquisitions were announced in the Q3, $111 million for CapEx equating to 1.3% of sales year-to-date. The revised full-year earnings guidance for FY 2016 is outlined on slide number 13. Guidance is being provided on in adjusted basis.

Segment operating margins and earnings per share excluded expected business realignment charges or approximately $120 million, the balance of which are forecasted to be incurred in Q4 of FY 2016. Total sales are expected to be in the range of negative 11.9 to negative 9.9 or negative 10.9 at the midpoint as compared to last year.

Adjusted organic growth as in midpoint is negative 8.2. Currency in the guidance negatively impacted sales by three, the majority of which is attributed to the industrial international segment. We have calculated the impact of currency the stock range as of March 31, 2016.

And we have held those rates steady as we estimate the result in year-over-year impact for the balance of 2016. For total Parker, adjusted segment operating margins are forecasted to be between 14.7% and 14.9% or 14.8% at the midpoint, this compares to 14.9% for FY 2015 on an adjusted basis.

As Tom mentioned, we are very pleased to be guiding to those level of adjusted segment operating margins, given the magnitude of the end-market declines. The guidance for below the line items, which includes corporate admin, interest and other is $478 million for the year at the midpoint. The full-year tax rate is projected at approximately 28%.

The average number of fully diluted shares outstanding used in our full-year guidance is $137 million. And for the full-year, guidance on an adjusted earnings per share basis has been increased to $6.20 to $6.40 or $6.30 at the midpoint. The guidance excludes business realignment expenses of approximately $120 million to be incurred in FY 2016.

Savings from these business realignment initiatives are projected in the amount of $85 million, which are reflected in the segment operating margins.

Slide number 14, you will find the reconciliation of the major components of the revised FY 2016 as reported EPS guidance of $5.67 per share at the midpoint from the prior FY 2016 EPS of $5.60 per share.

Increases includes $0.18 in segment operating income as a result of simplification efforts, an increased savings from restructuring actions taken to-date and $0.08 from reduced corporate G&A, interest and share count. The company's decision to increase full-year realignment cost to $120 million results in an additional expense of $0.13 per share.

Income taxes and other expense projected comprise additional expense of $0.06, reflecting discrete items in current projections. On slide number 15, you will find a reconciliation of the major components of the revised FY 2016 adjusted EPS guidance of $6.30 per share at the midpoint from prior FY 2016 EPS of $6.10.

As previously detailed, increases included $0.18 and segment operating income and $0.08 from reduce corporate G&A, interest and share count. This is partially offset by $0.06 increased in other expense and taxes. Please remember that the forecast excludes any future acquisitions, divestitures that might be closed during FY 2016.

For consistency purposes, we ask that you exclude restructuring expenses from your published estimates. This concludes my prepared comments. Tom, I'll turn the call back to you for your summary comments..

Thanks Jon. I’m very encouraged by the response of our Parker team members around the world. We are well in the challenges of our end-markets and delivering impressive performance. Our team is embracing changes design to improve Parker and positions for the future under the framework of the New Win Strategy.

Together we are building a stronger and better Parker, I look forward to sharing more with you on our progress. And at this time, we are going to take questions. So Brian, if you could just get us started..

My pleasure [Operator Instruction] We ask an interest of time that you please limit yourself to one preliminary question and one follow-up [Operator Instruction] Our first question is from the line of Jamie Cook of Credit Suisse. Your line is now open. Please go ahead..

Good morning. I guess a couple questions. One, Tom, I guess everyone is interested in sort of the order sales trends that you saw throughout the first quarter and potentially what you are seeing in the month of April.

Are there any markets that you sort of see bottoming or perhaps even seeing some green shoots without being too optimistic? And then I guess just my second question to you is, with one quarter left - in the year, you upped your restructuring again.

As we are thinking about 2017, do we think we've done enough restructuring given your view on the markets that we just have to execute on what's already out there, or could there be potential for more as we think about 2017? Thanks..

Okay Jamie this is Tom. So I’ll start first with order trends. So orders during the quarter sequentially got better as we saw January going through March, and obviously what we saw in April is consistent with the guidance that we gave you.

As far as the markets go, I finish all my comment and will let Lee give you some deeper color, but I made the comment about that we saw a number of markets move from accelerating declined to decelerating declined.

So I think the theme of what we are seeing is this moderation of decline and the movers from accelerating to decelerating have really lead to charge or distribution general industrial ag, mining and similar account and you asked for some of a positive markets.

The positive markets are refrigeration and air conditioning, rail, turf, aerospace, commercial MRO and powergen. and now I'll let Lee go into more details in a minute on all the market color.

On the restructuring we moved to from a $100 million and $120 million and just to clear the year for people listening on the phone, this isn’t because we saw some market change or worsening of orders that we felt we need to do this.

It really was we saw more opportunities as we started unpeel the New Win Strategy being implemented within the company, there were just more opportunities that our team members around the world identified in traditional restructuring and simplification and et cetera, that we thought would be a very good to take now and that will put us in good position in FY 2017.

But you asked about 2017, now in my opening comments I talked about we moved this to an eight-week process, we are only three-weeks into it, so I won't comment about 2017, as you might imagine commenting about 2017 in April is harder than commenting about it in August. However, I will you give some color on the restructuring.

So restructuring is year I would call a high watermark, $120 million and if you looked at us traditionally before kind of the restructuring we've done over the last several years, we are more in that $20 million $25 million range.

Now well the restructuring is not finalized, what we think next year and we are only about half way through our reviews, I think we are looking at something that’s in between the traditional $20 million to $25 million and $120 million that we did this year.

So that’s my take in your comments Jamie, if it’s okay, I'll let Lee take over with giving you a lot more color on the markets which I'm sure other people on the phone have questions as well..

Okay great..

Okay, hi Jamie. So as Tom talked about sequentially total Parker organic growth moved to a better direction during the quarter. if you look at it, it was widely a result of North America followed by EMEA. I’m going to walk you through the different regions and try and give you as much color as I can.

So starting with North America industrial distribution, total North American distribution still is annualizing at a high single-digit year-over-year decline for FY 2016.

Now this is mostly as we've talked about in past impacted by oil and gas, so we continue to see tightening of CapEx and OpEx budgets which has really been a drag for distribution, its most aligned with those end-markets. If you get away from that we continue to see real positive growth out of distribution in the Great Lakes.

Mid West areas and cover auto plants, Tier-1 machines all these et cetera. So it’s certainly a couple of different tails depending to the story depending on where you are in the country.

Tom mentioned air conditioning and refrigeration that’s really a bright spot for us, we continue to experience really strong residential air conditioning growth much of that growth can be attributed to some product introduction we've done, it's really given us a strong market participation.

Our commercial air conditioning refrigeration businesses that’s up low single-digits and our aftermarket business organically with the market with some new product introductions that continues to be real strong.

The story around oil and gas, I guess major OEMs really continue to indicating no significant improvement until the end of calendar 2016 early 2017 and this is really massive and I'm sure you have covered this restructuring plans taking place. It looks like everybody is trying to restructure and look to be profitable around $40 per barrel.

And we looked at some of those different segments, the consensus appears that really the offshore rig markets for new builds could take years to recover.

I think the land base will come back sooner, but on the positive side you have heard us talk about this, we continue increase demand for some of our aftermarket service capability such as our Parker Tracking System that enables asset integrity management of field and we've had good traction with that.

On agriculture, we expect sales of farm equipment down industry wide and our demand continues to be consistent with that. By focusing on energy, we continue to increase our market position with large frame turbine OEMs and this has been a plus because there continues to be a strong conversion of power plants from coal to natural gas in the U.S.

so it has allowed us to participate in that. And we did see benefits from our wind and solar business, it did get a boos with the production tax credits and investment tax grants that were extended so that was a positive for us in the quarter.

Turning to heavy truck in North America, current forecast, ACT forecast is now 275,000 units, which is really up from the November forecast and our North America transportation business is down high single-digits better than industry build rate declines and I would attribute this to some new product introduction.

And really our aftermarket exposures there kind of softens some of that down turn. On the mobile markets, I think a real positive Tom mentioned turf, its North American central market but continues to be a real strong highlight for us and then with all the major construction equipment that continues to experience top-line decline.

But there does seem to be a lot of industry commentary about finding a bottom here, which I'll comment more later on. And the in plant automotive, really this is a key North American distribution that covers that and we're up Q3 versus prior and continue to do well there.

Just touching on Europe distribution trends are consistent with really last quarter distribution side, the industrial MRO automotive markets continue to be flat to slightly positive and then anything tied to oil and gas as I mentioned before continues to be weak.

I think one of the bright spots for us really contained in our Win Strategy initiatives is distribution is up in emerging markets Eastern Europe, Africa. These are high single-digits, combination of organic growth within the region, but cost effective increased market participation by us.

Oil and gas demand across all those related markets continue to contract.

We've talked about North Sea investment and that really still is a bit of a standstill, but then again this is another area where we've had some really decent experience with our aftermarket integrity management initiatives offsetting some of the contraction that we see at a first fit level.

And then on Ag, we have seen sequential growth quarter-to-quarter, still flat year-over-year, but the production we're seeing now I would call an increase in normal seasonality. On heavy truck stronger demand continues in the quarter and this is really following a strong fiscal Q2, we saw demand sequentially from Q2 to Q3.

And mobile demand is stabilized at current activity level. We did have a large exhibitive at the recent [indiscernible] show and I think all of us were encouraged by one of the attendance, but also the favorable settlement taking place at the show. So may it gives us some freedom to do somewhat positive going forward.

Turning to Asia now, really distribution then is flat to moderately down year-over-year, China is the biggest issue, it’s the most sluggish it’s down high single-digits year-over-year.

If I take that out, we’re up across the region, I give this a lot of credit to what our guys are doing on expansion and we've talked to you about such as [indiscernible] in some of these developing markets. So we continue to expand there.

Energy across the region, we still seeing increased activity and renewable which wind solar and hydro and traditional thermal energy, coal, gas and nuclear store taking the major share and we are participating in those.

We always talked about, Tom mentioned that is an accelerating growth, it continues to be great story, we've commented for some time on the strengths of this in market in China.

And China has really become a preferred builder, we’ve recently signed high speed rail contracts with Laos, Thailand and Indonesia and we continue to have strong exposure to build rails. And then on mobile construction, we have seen some modest growth in China and I have heard some industry comments regarding that.

I will tell you that for the most part, the OEM inventory is still extremely high, so I think it will take some time for us to see that but our business has stabilized in current levels.

And then lastly, just touching on Latin America, I think it’s really dominative by the Brazil story, our construction equipment, Ag markets, etcetera is still very soft. But there is decent activity if you get outside Brazil, but the whole story in Latin America is really dwarfed by Brazil.

So taking all together total Parker organic growth sequentially moved in a better direction, largely as resulted of I mentioned North America and EMEA. And I think moderately declining and the words that keep coming to our minds to describe what we’re seeing on a year-over-year basis..

Okay, thank you. I’ll get back in queue..

Thank you. Our next question comes from the line of Joe Ritchie with Goldman Sachs. Your line is now open please go ahead..

Thanks. Good morning, everyone. I guess my first question is around the restructuring actions. I know it's hard to comment much at this point on 2017, but it seems like the payback that you got on these actions, the additional realignment actions, is really good.

I guess my question is how are you thinking about - when you are thinking about the magnitude of restructuring for next year, how are you thinking about the potential payback and is it going to be mostly headcount-related?.

Jo, this is Tom. So, on the restructuring I would just say in general, we’re really pleased with our team, team around the world.

The execution has been timely, we've been thoughtful on how we've done it and I'm just very proud of how the team has performed on the restructuring and that’s been a big part of the timeliness and that has been a big part of what's helped our margins perform this year.

As far as next year, we’re going through, I still think my characterization would be somewhere between the $120 million to $120 million to $125 million, is probably a good indicator.

I still think that for the most part as restructuring is a pretty good payback from a time period standpoint, usually the 12-month indicator obviously it’s in a more traditional or international orientated type of restructuring, will take longer, probably 18-month to 24-months.

But in general it would still be aimed at the more strategic restructuring that we've been talking about which is at the forehead of the company, but we’ll continue to look at as we just traditionally have the footprint optimization as it makes sense..

Okay.

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

Joe this is Lee, I’ll just give you some comments on that. So I would characterize price realization is very tough candidly. We did raise prices to distribution in this past January, its mostly around non-core and late lifecycle type of products, but we did realize price there.

But one thing we do track and you’ve heard us talk about this in the past, we have an SPI Index which tracks year-over-year pricing by partner. And we have a PPI which tracks our input costs. And we do have a positive spread here and we look at continuously. So I would say if you had to characterizes overall, it’s pretty much flat..

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

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

Okay, great. Thanks guys..

Thank you. Our next question comes from the line of Jeffrey Hammond with KeyBanc. Your line is now open..

Hi. Good morning, guys..

Good morning, Jeff..

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

Maybe just update us on how you are thinking about buyback?.

Jeff, this is Tom. So in the buyback, we continue to look at that on a dynamic basis, looking at what makes the most sense for our shareholders and obviously, we’ll update you every quarter. But some things to just keep in mind from consideration. When you look at our cash that’s on the balance sheet 99% of that is permanently invested overseas.

It’s important to us to maintain A rating, so that’s a factor that we consider. And then when we rolled out $2 billion to $3 million initiatives that was in October 2014, we were a $13 billion company then and now we were $11.3 billion. So a number of things have changed. Our cash flow as a percent of sales continues to do very well at 10.5%.

We’re going to continue to deploy cash as efficiently as we can, we look at the best ways to deploy it and what gives the long-term value creation to our shareholders. On the acquisition side, the pipeline is active, but it’s always hard to predict the output there, it tends to be lumpy.

But I would say valuations are still challenging at this point with pricing probably starting to moderate a little bit, but we’re disciplined buyers and we buy things that are in spaces that we understand. And we understand the growth rates, so we’ll continue to be that way.

But I think you’ll look to see us be as efficient and aggressive with our deployment of cash as we possibly can weighing all the variables to try to do the best thing we can on the long-term behalf of the shareholders..

Okay. That's helpful. And then it looks like the guide is mostly North America feeling a little bit better and I think you mentioned some of the restructuring.

But just go into a little more detail on what is surprising you to the upside in the North America business?.

Well, Jeff, I think Lee probably did a pretty good job of taking you all through that, but in North America, when you look at it sequentially, almost everything was positive in North America.

Some of that we get just from the calendar helping us, but in particular the part that I like is that when you look at - in case people don’t understand what I’m talking about these market phases, so you have got accelerating growth and decelerating growth and you have got accelerating decline and decelerating decline.

And if I was to show you this dot map of our end-markets in these four phases and if you look at it in Q2, you could see a lot of dots in the accelerating decline.

And what’s moved and I would say in particular in North America, it’s been distribution, Ag, semicon, mining, general industrial, but I think the thing we are cautious about is that I think we are getting help from comps for the most part and that at this point still too early, I think to say that there is a general market shifts.

So we’re going to continue to look at that data, we need a few more months and another quarter or two to help confirm that. But in the healing process of order entry, step one is to have a decelerating or moderation of decline, so that’s the good thing we are very happy about that.

And to put up the kind of numbers we are putting up in this kind of climate I think if you look at us historically is remarkable. And I’ve told a lot of people, when we get to flat, you are going to love the numbers, because flat will be the new high and then we’ll continue to grow from there..

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

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

Okay thanks a lot Tom..

Thank you. Our next question comes from the line of Ann Duignan with JPMorgan. Your line is now open, please go ahead..

Good morning. Can I touch back on the share repurchases? Traditionally you have always talked about having your own internal model, which you use to determine how much shares you think you should buy back or not.

With the $50 million buyback, was your model telling you that Parker shares were fairly valued in the quarter?.

Ann, it's Tom. It's always a good time to buy Parker shares. We just looked at - again it's fair to looking at all the opportunities and opportunities we can't share all opportunities with it. When we look at all the opportunities we thought the amount that we did was the right amount.

We will continue to look at every quarter, we wave obviously dividends first, investment for organic growth. And if you look at the balance between acquisitions and share repurchase i.e.

For the reasons I talked about earlier would be an indicator why we are going to be at the low end of that range because the dynamics of the world have changed once we announce that proposal.

We are absolutely committed to the low end of that range, I don’t want anybody to misunderstand me, but things have changed as far as we look at to the top end of the range. The balance above that is all depending on what is the best use of cash for our shareholders..

Right. That's very helpful clarification. And then my follow-up is back to some of the comments you made about restructuring the sales force. We get nervous when we hear other companies talking about restructuring the sales force. It doesn't always work out very well.

Could you just give us a little bit more detail on what you are doing there and how comfortable you feel about the progress you are making?.

Yes Ann, this is Tom again. We are very, very happy with what we are doing there. I can understand your reservations, but this was done with a lot of thought and here they change, so our groups are organized with exception Aerospace organized around technology and products.

And it's easier alignment for our division that they can find the people that own those income products and technologies.

So in Europe as an example, we went from a sales force that was maybe heavily dominated on alignment at the markets to being more products centric was still not giving at the markets having that they have lesser concentration or more concentration on technologies and markets, so that we can have a real good technology discussion with our customers.

The other part we did to help simplify interface with the global OEMs with our regional OEMs is in Europe as we now have a 10 Europe OEM teams, which is very similar to what we had in North America, which had someone to access. So we had that two, because it didn’t make sense to be calling on OEMs country-by-country that span the entire Europe.

So that’s been in place, in probably six-months to nine-months and we are very incurred with the kind of market share actions that we are seeing coming out of that from that team. And then just in Japan that was the other example that comes in my mind when I made that comment.

In Japan if you look at us historically, we had a very fragmented sales force, we now have a sales force that is all aligned that is kind of because of the combination of acquisitions that we had in joint ventures years-ago.

Now we have a one Japan sales force with a much better alignment on the operating side and we are seeing the results that Japan is doing very well for us. So the organization changes to give you comfort are showing in the numbers and in the market concentrations, so we go account-by-account in various regions..

Okay. Thank you so much. I will leave it there and get back in line. Appreciate it..

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

Apologies in advance. I've been hopping between a few calls.

But quite simply, looking at the rate of businesses that you have right now and their various growth rates and not thinking of any change, but incorporating seasonality, when would you expect your organic sales to be back to flat?.

Dave it's Tom again. So that is of course the question everybody would like to know and at this point it's difficult for me to predict. And I won't try to predict that I mean at this point our guidance for the fourth quarter is a minus seven organically, so that’s was a improvement from the minus 9.4 we had in Q3.

So that’s the first good sign and like I said in these market phase is when we look at all the markets, we went from a concentration in accelerating decline to now more than move decelerating decline. We would hope to keep moving kind of clockwise around these phases and start to moving to some kind of growth.

But I think it's too early to - honestly we haven’t given indicator of that we would tell you when. Few more data points, couple more months and couple more quarters obviously we are going to be in much better position to tell you, but I would say this with the first step in the hilling..

Okay. That's fine. Just wanted to get your perspective on that. Thank you..

Thank you. Our next question comes from the line of Eli Lustgarten with Longbow. Your line is now open, please ahead..

Good morning, everyone. Can we talk a little bit about where inventory levels are both in the distribution sense and the OEM the best you can [indiscernible].

Are we really passed all the inventory organization, or is there still some going on? And with the pricing, you raised prices at distribution, but we keep hearing distribution people are having trouble passing anything on.

Are they taking the price increase and absorbing it, or are they able to pass it through?.

Eli it’s Lee. I was expecting this inventory destocking, so I researched this 10 times before this call. So here is the consensus when I checked this not only from our guys and then I just go out and cal our contacts. If you are involved in oil and gas and you had a lot of OEM exposure, you are still sitting on a lot of inventory.

If you get away from that inventory is pretty much normalized at this point in time. I think some of the guys may have gotten hit a little bit by some side effects from oil and gas, but that’s fairly normalized. I would say on OEM inventory where I still see this kind of construction equipment, mining markets especially Asia comes to mind.

If you tour some of the equipment yards, I mean there is just excavators and wheel loaders that go on for miles so. But our North American distribution, I'm most comfortable that outside of oil and gas, it’s not a big issue. And then your second question on pricing, I can’t really comment on that.

What we did there was really non-core, so I can’t really comment too much on that. I have not had any feedback that it’s been a big issue. If anything, it’s been positive with our [indiscernible]..

Alright. Thank you very much..

Thank you. Our next question comes from the line of Josh Pokrzywinski with Buckingham. Your line is now open. Please go ahead..

Hi. Good morning guys..

Good morning, Josh..

Just maybe to ask Raso's question a little differently. On the orders front, you guys can obviously see the comp getting easier there, orders quarterly down a little bit more than maybe the comp was, got easier this quarter.

Is there a potential for orders to get back to flat in June, understanding that it may be a while longer before sales quite get there?.

Josh, Jon here just to be responsive to your question. Of course, we are not calling for that in our guidance going forward. When you take a look at the orders overall for Parker, we are just looking at - we were at this time last year down four and we were down nine, down 11, down 12, now we are down six.

So the question is what is the rate of the incline in the reduction of the orders for the company. We don’t have that forecasted or we’re going to be looking at that very closely, it’s going to be fully aligned with the end market progress that Lee and Tom have been making. And we are gaining market share, we are launching the end markets.

And as Tom said, I think our best characterization is that it’s a moderately decline and obviously moderating. But we’ll coming out with that answer when we do our guidance in August. But right now in April, it’s a little too early to give you a very detailed answer to that..

Okay. And then just to revisit the buyback discussion.

It sounded like maybe there were some mitigating factors in the quarter that stayed your hand, but is there a period of time that passes when some of those other opportunities go away or aren't actionable, or are actionable and you guys are left with buyback, or is this something that is a little bit more structural in nature? Just trying to get the overall strategy there maybe versus like a one-quarter event..

Yes. Well, the overall strategy hasn’t change. We want to be great generators of cash and great deployers of cash. And I think the generators of cash, the Win Strategy continue to work that aggressively with the changes that we’ve made we are 10.5% now. We like being that and we would like to work that even higher.

And we are going to do that through continue to grow our operating earnings and continue to working capital down. On the deployment, it’s the same priorities that I’ve mentioned. It’s just trying to make the businesses and I wouldn’t read one thing to aggressively into one quarter on this.

The buyback announcement is going to expire and my preferences to tell you every quarter what we are doing as appose to making some big announcements what we are going to do from the period going forward.

There are some natural considerations given the amount of cash that’s permanently invested overseas, our desire to keep an A rating and the fact this program was rolled out two-years ago, and a lot has changed two-years, or approximately two-years ago.

But we like all those avenues and we want to be as deploying cash as we are great at generating the cash, and I would look for us to do that. And I can’t show you everything that we see, but we’ll continue to do the best we can on behalf of the shareholders for what we think is best long-term..

Alright. Thanks again..

Thank you. Our next question comes from the line of Andy Casey with Wells Fargo. Your line is now open. Please go ahead..

Thanks. Good morning, everybody. You mentioned mining as showing decelerating declines.

Can you help us on whether that was related to shipments into OEMs or an MRO comment?.

I think on the mining, what we saw in generals that probably a little bit more help on the, I would say it would be both. OEM in general comparing Q2 to Q3 got a little bit better distribution got a little better as well, but for the most part it’s probably more the comps that are helping us at this point.

We’re not ready to declare a victory in any of these areas, get a couple of more quarters and we see this move then I think we already say it’s more than markets, at this point it’s probably the comps helping us more than anything..

Okay thank you Tom and then if you cover this, I missed it I apologize on the incremental $85 million benefit you expect during this year from restructuring in simplification, how much have you realized year to data and if you can give it in the quarter?.

Yes Andy of the $85 million that is we are expecting $40 million of that in our Q4 so $65 million for the second half, $85 million for the year of the second half $42 million in Q4..

Okay and then thank you Jon and that should that step up, kind of continue into the next fiscal year or would you expect with the additional restructuring that you kind alluded to it have even more it’s step up kind of back half loaded next year?.

Yes there is no doubt that the savings that we’re getting from this year we’re carefully carry through for a period of time into next year and it’s too early for me to give you too much color on the numbers that the Tom was referring to early in his comments about the restructuring and the savings that we get for next year.

So I don’t want to give you an answer to that would be misleading, I just wanted to kind of tell you that clearly we are not going to taking a step back for saving that we’re getting on, its permanent that is going to be a very helpful tailwind for us for next year..

Okay. Thank you very much..

Thank you Andy..

Thank you. Our next question comes from lines of Nathan Jones of Stifel. Your line is now open. please go ahead..

Good morning, everyone. Can we just clarify on that last point, $40 million restructuring savings in 4Q.

So is $160 million annually the new run rate that you are looking at from the $120 million, or should it be a little bit higher than that?.

I do not think it’s going be higher than that. It’s not going to be $40 million for quarter going forward here Nathan.

So I want to research that one further here but that’s just the way that we calculate the savings here based on the restructuring that we’ve done year-to-date and that would - be most of the restructuring of course that we’re doing in Q4 the actual restructuring is going to give us savings next year..

Okay. If I could get into North American margins from a different angle here, on a year-over-year basis for the quarter you just reported, organically, you lost about $200 million of revenue. All else equal, I would think the decrementals on that should be somewhere in the vicinity of 25%.

So you started about $50 million in the hole on operating income and you are up about $25 million. So from other avenues, you gained about $75 million of operating income.

Could you bucket the main places that that came from, where the savings came from, what is improved execution, what is productivity, those kinds of things?.

Well certainly I can’t detail it down to you for dollar, but as Tom and Lee had talked about the productivity that we’re saying from the New Win Strategy is a significant portion of that number Nathan and as we apply the techniques that we've known for years and the ones that we’re really focusing on here with the New Win Strategy, we’re seeing margins in a declining environment that we’ve never seen before.

And so what gratified by that as significant portion is just additional incremental productivity that’s not necessarily you know to take the place of the savings that I’ve been taking about when we do those simplification efforts or the restructuring efforts that we've done in the company.

So I can’t detail it down to you, dollar-by-dollar, but what is happening with the margins and the reason why our decrementals are so impressive is because of the dedication of our employees to rebuild our efforts on productivity in the company and our ability to get savings from the restructuring that we’ve done you know in the past year..

Yes, they were really very impressive. Just one for Lee. Lee, you talked about mobile OEM China inventory. This is an issue we've been dealing with for probably going on five years from the overstimulation coming out of the last recession in China.

Any attempt at guessing when that inventory may clear?.

You know to be clear with you, there does seem to be some positive sentiment with some of the stimulus that the Chinese government is trying to use, but it’s way too early to tell on that..

Okay. That's fair. Thanks very much..

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

My pleasure. Our last question comes from the line of Joe Giordano with Cowen. Your line is now open..

Thanks for sneaking me in here.

Quick on the decrementals, kind of like what Nathan hinted at, when I'm comparing North America to international and granted both are - decrementals have been great on both pieces of those businesses - but we are seeing more pronounced organic declines on a year-on-year basis in North America, but margin is actually going up, so can you walk us through what maybe the different types of initiatives going on, on the restructuring side between the two segments as to what might be driving even more pronounced decremental reductions in North America?.

Yes. Joe sure, just real quick on a top level, although we’re down higher organically and you are absolutely right, in the North America than we are in international, our decremental MROS on an adjusted basis is 13 for North America versus about 19. Now in any environment that 19 in our history, in our company is a very impressive number.

But it is distinguished from North America, I believe it has something to do with the level and depth of some of the restructuring that we’re doing a little bit of the quicker payback in restructuring in North America versus internationally.

But in both cases, we’re making great progress and we’re kind of - we are seeing a little bit of difference, but this historically in North America and in our industrial businesses.

The best we’ve ever done in the downturn like this especially considering the magnitude of this downturn that we’re talking of a negative nine, 9.5 for the quarter and our guidance of negative seven here coming up.

So the short answer is very quick actions, quick recovery, dedication on the part of our management teams both in internationally and in North America and our ability to be resilient and adaptable as a company today versus maybe in some of the prior downturns in the past periods..

Great. And then just last for me, in terms of scale, maybe you could put this in the appropriate context for us on the simplification efforts and removing of divisions, things like that.

How many SKUs have you guys gotten rid of on a percentage basis or something just to give us a sense of how much this has really changed??.

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

Alright good enough. Thanks guys..

Okay..

Ladies and gentlemen, thank you very much. This is all the time we have for questions and answers today. Thank you for your participation on today’s call. You may now disconnect. Everybody have a wonderful day..