Catherine Suever - EVP, Finance & Administration and CFO Thomas Williams - Chairman and CEO Lee Banks - President and COO.

Adam Farley - Stifel Nicolaus Joel Tiss - BMO Capital Markets Jamie Cook - Credit Suisse Mig Dobre - Robert W. Baird & Co.

Ann Duignan - JPMorgan Joe Ritchie - Goldman Sachs David Raso - Evercore ISI Andy Casey - Wells Fargo Securities Jeff Hammond - KeyBanc Capital Markets Dillon Cumming - Morgan Stanley Neil Frohnapple - Buckingham Research Timothy Thein - Citi Research Steve Volkmann - Jefferies.

Good day, ladies and gentlemen, and welcome to the Q1 2018 Parker-Hannifin Corp. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] As a reminder, today's conference is being recorded.

I would now like to turn the call over to Ms. Cathy Suever, Chief Financial Officer. Ma'am, you may begin..

Thank you, Chelsea. Good morning, and welcome to Parker-Hannifin's first quarter fiscal year 2018 earnings release teleconference. Joining me today are Chairman and Chief Executive Officer, Tom Williams; and President and Chief Operating Officer, Lee Banks.

Today's presentation slides, together with the audio webcast replay, will be accessible on the company's investor information website at phstock.com for one year following today's call. On slide number 2, you'll find the company's Safe Harbor disclosure statement addressing forward-looking statements, as well as non-GAAP financial measures.

Reconciliations for any reference to non-GAAP financial measures are included in this morning's press release and are also posted on Parker's website at phstock.com. Today's agenda appears on slide number 3. To begin, our Chairman and Chief Executive Officer Tom Williams will provide highlights for the first quarter of fiscal year 2018.

Following Tom's comments, I'll provide a review of the company's first quarter performance, together with the guidance for the full year fiscal 2018. Tom will then provide a few summary comments and we'll open the call for a question-and-answer session. Please refer now to slide number 4, as Tom will get us started with the highlights..

Thanks Cathy, and good morning to everybody and thanks for joining the call, we appreciate your interest in Parker. So let me just make a few comments about general business conditions and we will talk about the quarter. So first on safety, that continues to be a top priority for the company.

[Analysis] is the right thing to do obviously, but the focus on safety is driving an increased engagement from our people, which is in turn driving safety improvements across the company which is also impacting our operational improvements across the company as well, so I'm very encouraged by all of that.

You saw the announcement on orders, broad based increase across markets and regions. The organic growth was greater than industrial production growth for the last three quarters in a row so we're excited about that. The Win Strategy initiatives continue to generate improvements in both growth and operating margins.

If I would characterize business confidence in general, feedback from our customers [indiscernible] a very positive, so there is a nice general business confidence out there from an environmental standpoint. So it's actually been about two years, since we announced and introduced the new Win Strategy, so thought I will reflect back.

I know it's kind of hard to imagine since it's been two years, but a lot has happened in two years. I think back the two years ago, we're in debt or pretty tough industrial climate, actually our second biggest down turn in sales in the history of the company and we performed better than we ever hard in any previous downturn.

But if you're looking for evidence on whether the new Win Strategy is working, I think if you look at the results of the last two years, I think it is clear and objective evidence that the strategy is working, you can see the numbers.

The good news for all of our people who are listening, the people within Parker and our shareholders, this is still early days of implementation. There is lots of upside with the new Win Strategy and we're excited about that.

So I wanted to say first of all thank you to all the Parker team members around the world for the great progress after two years from the launch and for being a partner in creating the new Win Strategy because when we went around and introduced it, they were a big part of creating the strategies that we're now rolling out.

So let's move on to the quarter, great start, it's always nice to come out of blocks well. Starting with safety as we normally do, 24% reduction in recordable injuries which was great performance.

And you look at the key performance metrics for the quarter, fully solid performance across all those, the sales was a first quarter record for us up 23%, organic growth slightly above 7%, order rates increased at double-digits and this is the highest level of order growth that we've had for a quarter, since Q4 of fiscal 2011.

The segment operating margins continue to make nice improvements and EPS for the quarter that was a first quarter record as well. When you look at the change in the EPS, EPS increased 36% as reported and 48% on an adjusted basis, so really nice increases there and we are on track to deliver strong operating cash flow going forward.

So just a quick comment or two on capital deployment priorities; so dividends continues to be our number one focus, increasing the dividends and maintaining our long standing track record of dividend increases.

We're going to continue to invest in organic growth with our CapEx, it's the most efficient way to grow the company and we're going to maintain the 10b5-1 plan that we have in place for a consistent share buyback program and we're continuing to focus on bringing down the debt.

So I want to talk about the outlook; so outlook was increased from an adjusted EPS standpoint by $0.60 at the midpoint from $8.80 to $9.40. This reflects the first quarter [beat] that we had and increased organic growth estimates that we baked into the guidance.

So for that we've increased total Parker organic growth from our previous guide at 3.7% to another new guide as 5.5% organic growth total company. So now going forward, obviously we're going to continue driving the new Win Strategy and I'm going to just make a quick comment or two about each one of the four goals, starting first with engage people.

So this is really all about creating an ownership culture, because if you're an owner and if you think like an owner and act like an owner, it creates a level of intimacy, level of accountability with your area of responsibility that drives much better results.

Second is premier customer experience; so we're going to focus on going from a service mindset to an experience mindset, have holistic experience interaction with our customers and our distributors.

So obviously to create quality and delivery that's being easier to do business with that's being digital leaders in our space, so that's Internet of Things, the fee business those type of areas. Third goal is profit growth; so we want to grow organically faster than the market, that's the global industrial production mix.

And we're doing that through our growth initiatives and the Win Strategy as well as the new incentive plan that rolled out a couple of years ago that really underpins driving that kind of behavior on growth. Fourth goal is financial performance; so 17% segment operating margins is still our focus. Growing EPS 8% year-over-year or higher.

And the focus there for financial performance as well as big four initiatives we have under our new financial performance; the simplification, lean enterprise, strategic supply chain and value pricing. So one comment about CLARCOR, I'm sure it'll come up with the Q&A. Integration is going very well. Synergies are track, we've communicated to you.

And really the new filtration group is really acting as one team and we're very proud of how that team has functioned and really it's one Parker team, it's no longer a separate CLARCOR or a separate Parker team, it's just one combined Parker team. So in sum, we're looking forward to and anticipating a record year.

And we're really driving continues improvement across the board. And so with that I'm going to give it back to Cathy to give you more details on the quarter..

Thanks, Tom. I'd like you to now refer to slide number 5. I'll begin by addressing earnings per share for the quarter. Adjusted earnings per share for the first quarter were $2.24 compared to a $1.61 for the same quarter a year ago. This equates to an increase of 39%.

For year-over-year comparison purposes, first quarter fiscal year 2018 earnings per share have been adjusted by a total of $0.14. Operating income adjustments include business realignment expenses of $0.04 and CLARCOR costs to achieve of $0.03. The low operating income has been adjusted by $0.07 per share for a loss related to an investment.

Prior year first quarter earnings have been adjusted for business realignment expenses of $0.06. On slide 6, you'll find the significant components of the walk from adjusted earnings per share of $1.61 for the first quarter of fiscal 2017, to $2.24 for the first quarter of this year.

The most significant increase came from higher adjusted segment operating income of $0.62 attributable to earnings on meaningful organic growth, income from acquisitions and increased margins as a result of our new Win Strategy initiatives.

I'd like to point out that this $0.62 improvement is net of incremental depreciation and amortization expense, taken on with the CLARCOR acquisition.

A lower income tax rate due largely to the stock option expense tax credit equated to a year-over-year increase of $0.12, while lower other expense primarily due to lower pension expenses equated to a favorable $0.06.

Adjusted per share income was reduced by $0.11 due to higher interest expense and $0.06 due to higher corporate G&A, primarily as a result of higher performance compensation expense. Moving to slide number 7, you'll find total Parker sales and segment operating margins for the first quarter.

Total company organic sales in the first quarter increased year-over-year by 7.4%. There was a 13.9% contribution to sales in the quarter from new acquisitions, while currency positively impacted the quarter by 1.4%. Total segment operating margins on an adjusted basis improved to 16.0% versus 15.4% for the same quarter last year.

I would like to remind that the fiscal year 2018 operating margins include incremental depreciation and amortization from a prior quarter acquisition, so better comparison will be the EBITDA margins. EBITDA margins for the same periods on an adjusted basis improved to 17.0% in fiscal 2018 from 15.0% in fiscal year 2017.

This 200 basis points EBITDA margin improvement reflects the benefits of higher volume, combined with positive impacts from our new Win Strategy initiatives. Moving to slide number 8, I'll discuss the business segments, starting with Diversified Industrial North America.

For the first quarter, North American organic sales increased by 9.7% as compared to the same quarter last year. Acquisitions contributed 26.4% to sales, while currency also positively impacted the quarter. Operating margin for the first quarter on an adjusted basis was 16.7% of sales versus 17.5% in the prior year.

I'll continue with the Diversified Industrial International segment on slide number 9. Organic sales for the first quarter in the Industrial International segment increased by 11.7%, acquisitions positively impacted sales by 7.3%, while currency positively impacted the quarter by 3%.

Operating margin for the first quarter on an adjusted basis was 15.7% of sales versus 14.2% in the prior year. I'll now move to slide number 10 to review the Aerospace Systems segment. Organic revenues decreased 5.5% for the first quarter.

Reduced volume in OEM sales and commercial aftermarket sales, were partially offset by strength in the military aftermarket during the quarter. Much of this reduced volume was timing related and increased year-over-year volume is anticipated for the rest of the fiscal year.

Operating margin for the first quarter, adjusted for realignment costs, was 14.7% of sales versus 13.1% in the prior year, reflecting the impact of greater aftermarket sales mix and timing of development costs during the quarter. Moving to slide number 11, we show the details on order rates by segments.

As a reminder, Parker 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 continue to be strong improving a positive 11% for the quarter end. This year-over-year improvement made up 10% from the Diversified Industrial North American orders, 15% from the Diversified Industrial International orders and 4% from Aerospace Systems orders. On slide number 12, we report cash flow from operating activities.

Year-to-date cash flow from operating activities was $239 million or 7.1% of sales compared to 4.2% of sales for the same period last year or 12.2% last year adjusted for the $220 million discretionary pension contribution made in fiscal year 2017.

The significant capital allocations year-to-date have been $88 million for the payment of shareholder dividends, $79 million or 2.4% of sales for capital expenditures and $50 million for the company's safe harbor repurchases of common shares. The full year earnings guidance for fiscal year 2018 is outlined on slide number 13.

Guidance is being provided on both an as reported and an adjusted basis. Total sales increases are expected to be in the range of 14.2% to 17.8% as compared to the prior year. Anticipated full year organic growth at the midpoint is 5.5%.

Acquisitions in the guidance are expected to positive impact sales by 8.3% and currency is expected to have a positive 2.3% impact on sales. We have calculated the impact of currencies to spot rates as of the quarter ended September 30, 2017.

We have held those rates steady as we estimate the resulting year-over-year impact for the remaining quarters of fiscal year 2018. For total Parker, as reported segment operating margins are forecasted to be between 15.3% and 15.7%, while adjusted segment operating margins are forecasted to be between 16.1% and 16.5%.

The full year tax rate is now projected to be 28% down from our previous guide of 29% as a result of a favorable stock option tax credits realized in the first quarter. For the full year, the guidance range on an as reported earnings per share basis is now $8.45 to $9.05 or $8.75 at the midpoint.

On an adjusted earnings per share basis, the guidance range is now $9.10 to $9.70 or $9.40 at the midpoint. In addition to the loss related to the sale of an investment of $14 million or $0.07 per share, this guidance on an adjusted basis excludes business realignment expenses of approximately $58 million for the full year of fiscal 2018.

Savings from business realignment initiatives are projected to be $25 million. In addition, guidance on an adjusted basis excludes $52 million of CLARCOR costs to achieve expenses. CLARCOR synergy savings are estimated to be $58 million in fiscal year '18.

We remain on pace to realize the forecasted $140 million run rate synergy savings by fiscal year '20. Savings from all business realignment and CLARCOR costs to achieve are fully reflected in both the as reported and the adjusted operating margin guidance ranges.

We ask that you continue to publish your estimates using adjusted guidance for purposes of representing a more consistent year-over-year comparison.

Some additional key assumptions for the full year 2018 guidance at the midpoint are, sales are divided 48% first half, 52% second half; adjusted segment operating income is divided 46% first half, 54% second half; adjusted EPS first half, second half is divided 45%, 55%; second quarter fiscal 2018 adjusted earnings per share is projected to be $1.96 per share at the midpoint; and this excludes $0.09 of projected business realignment expenses and $0.09 of projected CLARCOR costs to achieve.

When comparing to Q2 FY '17 results, please remember that last year included $0.21 gain per share on the sale of a product line which was not adjusted out.

On slide number 14, you'll find a reconciliation of the major components for fiscal year 2018 adjusted earnings per share guidance of $9.40 per share at the midpoint, compared to the prior guidance of $8.80 per share.

Increases include $0.43 from stronger segment operating income, $0.16 from a reduced tax rate and $0.05 from lower projected corporate G&A. Offsetting these increases is a $0.04 per share decrease from higher interest and other expense than previously forecasted.

Please remember that forecast excludes any acquisitions or divestitures that might close during the remainder of fiscal 2018. This concludes my prepared comments. Tom, I'll turn the call back to you for your summary comments..

Thanks, Cathy. So we're very pleased with the start of the year. I think what we have going on here is a combination of couple of factors; sales growth, the lower cost structure that we have been working on past but we will continue to work on to lower even further, integration of CLARCOR and the execution of the Win Strategy.

All of these forced together are combining to provide a very powerful combination that's driving us to project a record year in fiscal 2018. So again thank you to the global team for all your hard work, all your efforts and your dedication. And I want to hand it off to Chelsea to start the Q&A portion of the call..

Thank you. [Operator Instructions] Our first question comes from the line of Nathan Jones with Stifel..

Hi good morning, this is Adam Farley on for Nathan. So it looks like the -- one of the big changes in revenue guidance came from International Industrial, going out to 16.9% at the midpoint.

What regions are driving this growth and what end markets are also driving the growth?.

So Adam let me start that and then hand it over to Lee to give you more details. But what's changing in our guide is just looking at order entry over the last three months. Well it was interesting order entry was pretty consistent throughout the quarter both in North America and in international.

But in international particularly we saw Asia continue to be strong, Europe, Middle East and Africa region was growing in the low teens and Latin America was kind of in the low single digits. So that combination was pretty strong. Aerospace grew plus 4%, that against a pretty tough comp of plus 14%.

So when you put that all in and we looked at what we were projecting for the year and our feedback from customers and distributors, we looked at -- I'm looking at Industrial only, so we raised the whole guidance for the company at 5.5%.

But if you look at the Industrial piece by itself taking North America and Africa it's about 10.5% for the first half, and then 3.7% for the second half. I recognize the second half is comparing to a plus 6% that we had in the second half of FY17.

So remember we really started clicking from an organic gross standpoint of January of this calendar year and so we're comparing against this but there is still pretty nice growth on top of plus 6%. So I would say that -- let Lee comment about the details here. This is broad base for every end market and every region participating.

So I will let Lee give you further color..

Yeah. I think just piggy backing off Tom and maybe to give you a little added commentary on the different segments, it will continue to move in the direction we expected from the last call and order entry was really broad based and all regions participated.

Maybe just walking through one of the segments just because I know the question will come up, I will start with Aerospace and then I will work my way into the Industrial markets. Aerospace did fall short of our regular expectations for Q1, but we're still forecasting growth for the year.

Just breaking that down, I'd say on the headwind side, it's clearly commercial OEM was negative for us. It really was impacted by a mix of different platforms being manufactured with different [varying] amounts of content for us. But we do see that to close the gap as the fiscal year goes on.

We see it being slightly negative for the year but not by much. Commercial MRO was slightly negative for us for the quarter, but we really look at this primarily as timing. All the underpinnings of a strong MRO market are still in place and we expect growth in that market as we move through the fiscal year.

And then the last headwind would be military OEM was soft. Again we see this really as timing, F-35 production will continue to accelerate as the year goes on and we're confident in that market.

I'd say the positive was really strong military MRO growth which put some provisioning for new platforms and then just an increase in spares for some of the fleets being used today. So that's kind of a high level on Aerospace.

On Industrial, as we look through our end markets and we have a heat map by region, it's really hard to find any significant market a natural positive year-over-year order entry growth during the quarter. Really just to highlight some of those markets, if you talk about natural resource end markets we continue to see growth during the quarter.

This would include agriculture in some areas but mostly construction equipment, mining very strong, oil and gas land based North America continues to be strong. I'll talk more about that in a second. Micro electronics industry is really broad based and strong. And Class A truck in North America very strong. Just a little bit about oil and gas.

Rigs have nearly doubled since last year, although some did come out. But really all these rigs are coming out of cold storage and they're all being refurbished which is great for our distribution base. And we also see an appreciable pick up in quotes and order entry activities. So that continues to be very good.

We're also continuing [to see] rebound activity from our distributor partners around the world. They're very optimistic.

I think one of the telltale signs for me when I talk to our distributor partners, when they see an increase in project activity from end customers, that's a real sign for us that capital is starting to be a lot loose in the economy and they've all seen an increase in project work. It's not just strictly MRO work.

I'd say the only notable end markets we saw around the globe, was really in power generation. This really has to do with the mix of turbines being applied today and in marine. And then just real quickly on some regional commentary. I talked about North America but we're very encouraged by the increasing end market activity.

I talked about the natural resource end markets and our distributor base been very positive across the country. EMEA we continue to see strong year-over-year order entry growth. And we are forecasting a second year of organic growth for EMEA which is -- we feel really good about. And then Tom mentioned on Asia, very strong.

China continues to lead with strong industrial and natural resources end markets. And then really the strength of China from our opinion has been led by continued infrastructure investment and the strong housing market.

So I would just say we're encouraged by what's happening with our end markets both domestically and internationally and really there is just a very strong clear positive global sentiment to growth right now..

All right. That's great. Thank you so much. I will pass it along..

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

That's going to take me a second, I was not prepared.

Can you say that if CLARCOR was accretive or dilutive to the operating margins, including the amortization?.

Yeah. Joel at the beginning of the year, we gave guidance that we see $0.20 of accretion from CLARCOR for the year, we're on track for that. That includes the impact of depreciation and amortization as well as the additional interest that we are incurring because of the deal, so accretive $0.20 on the year..

I meant on the operating margins, what was the change in the operating margins from putting CLARCOR in there?.

Yeah. They are in line with what you saw historically for CLARCOR and in line with our filtration group, so normal margins..

Okay. And I just wondered, why the operating cash flow was down on the year-over-year? Then I am done. Thank you..

Sure. First quarter is always our low quarter for cash from operations. We still expect the year to be at 10% or greater as a percent of sales. In the quarter we're building capital to match the higher volume that we're incurring.

We're also building some inventory to prepare for some of the footprint moves that we are doing to integrate CLARCOR, so a little bit higher investment in working capital than unusual. But not out of the normal trends for us for first quarter and we will recover that through the rest of the year..

Thank you. The next question comes from the line of Jamie Cook with Credit Suisse. Your line is open..

I guess couple of questions, you sort of talked about -- sorry, the strength in the international markets. Was that all just Parker's core business or are you seeing any traction in terms of CLARCOR starting to gain some traction sort of on the international front? I guess that's my first question.

And then my second question, just in terms of CLARCOR [gaining] potential revenue synergies, should we see that in '18 and how we're tracking to the savings plan that you guys laid out the $140 million?.

Okay. Jamie this is Tom. The international strength, because CLARCOR's end markets and legacy Parker end markets are the same, that's all one of the same as far as the strength that we saw across international.

On the revenue synergies as I've mentioned before we have always -- we also working them hard, but we have always view them continuously to make sure we deliver on our commitment to all of our shareholders on the $140 million of synergies.

Regarding the -- so on the revenue synergies, if some of you are trying to bake them into FY18, I would encourage you not to do that because even if we were going to publically disclose it, which we're not, we won't see any of that stuff realistically into FY19 anyhow.

So I would just encourage you on revenue synergies to factor based on the comments we're making on end markets and regions. But on the savings target, overall $140 million, we still feel very good about that. And remember we formed these -- we've an integrated management office, we have got a great cadence around product management here.

We have value creation teams all around a couple of the key synergy buckets; manufacturing, footprint, productivity, material, adjusted SG&A would be the major categories and all of them are on track. So we're very encouraged by what we've seen both the fit the technologies culturally and the projected savings. So we feel very good about them..

And sorry just a follow-up on the end market commentary.

Tom, is there any markets that you're looking at based on in terms of the markets overheating or where the strength is not sustainable?.

Jamie, [the last thing]….

Sorry can you hear me?.

Yeah, go ahead..

Just -- I know everything was very positive in terms of end market commentary, but are there any markets that you're concerned are overheating? A lot of the people talk about the strength in China not being sustainable. I'm just wondering for seeing any warning signs..

Yeah. I think in general, China is not going to continue to grow at the pace that it's growing now. And we look at some macro indicators like electrical output usage and rail -- freight rail usage.

And those are -- just naturally when you look at the comparables, China is going to glide from strong double digits to something that's going to be a low double digits but it's going to continue to be very good for us.

But it's going to bump up against comparables that will make it -- it's going to have to glide down some more normalized type of growth plan there..

Okay. Thank you. I'll get back in queue..

Thanks, Jamie..

Thank you. And our next question is from Mig Dobre with Baird. Your line is open..

Yes. Good morning everyone. And before I ask my question, just a quick word here. Tom and the team your performance has really been impressive over the last couple of years, especially the last 12 months. And that's coming from someone who has been on the sidelines on the stock. So I tip my hat to guys, great job..

Mig before I let you ask the question, just thank you on behalf of all of us. Go ahead and ask your question..

So here is my question. I remember last quarter one of the discussions that we had collectively was progression of organic growth and how to think about more difficult comps in the back half of the year. Looking at your order intake at least what we're seeing from this quarter is that you are able to buck those more difficult comps quite nicely.

I guess from your perspective, how are you thinking about the puts and takes of these more difficult comps? Do you think the business has enough momentum to potentially ride that out?.

Mig this is Tom. On the order entry remember our -- on the Industrial portion of the business, our visibility will be typically like in that [6 to 8 week] standpoint. So obviously we have a lot more visibility and confidence in the first half of the year and going into January.

So, but like I mentioned before for the first half Industrial 10.5% growth, again a little bit easier comps but that's reflective of what we did internationally -- industrially this last quarter and the order pattern that we're seeing. Then the second half is in that 3.5% range.

Remember again that we had 6% organic growth the first two quarters of this calendar year, the last two quarters of our fiscal year. So I feel pretty good about that, given that on top of the 6% growth feels pretty good.

Especially when we were living in a world that was negative and we all were feeling like if we got 1% or 2% growth it will be the new norm. So that kind of growth rate feels very good. It doesn't feel like we're too far over our SKUs.

And then of course we'll give you an update in January, if we think there is more there than that, we'll certainly give you an update in January..

Understood. And my follow up, maybe a little more color on the margin in Aerospace. You've called out some things that helped this quarter.

Maybe help us understand exactly what's kind of changing for the rest of the year in order to get to your margin guidance?.

Yeah, Mig, I will take this one. In the quarter we saw a better mix of aftermarket just in general terms of the overall mix. We also were a little bit lighter than usual on our development costs. Now some of that was timing of the development costs, and will incur the rest of those costs during the rest of the year.

We expect the development costs for Aerospace to still be around 7.5% to 7.8% sales for the year. They were lighter than that in the first quarter. And the mix of the aftermarket will shift back we think to normal trends in subsequent quarters..

Any sense on the dollar value or margin impact from these from this cost shift, the development costs?.

The development costs roughly $10 million to $11 million light this quarter compared to the normal..

Thank you. Our next question comes from the line of Ann Duignan with JPMorgan. Your line is open..

Can we talk just a little bit about CLARCOR and the integration? I mean coming into the year you have cost cuts pulling forward, costs to accelerate the integration.

How should we think about that? Are we going to achieve the $140 million in synergies there, or are we going to achieve more than a $140 million? How should we think about that from our model perspective?.

Ann, this is Tom, so we're still staying with the $140 million. The one thing that I do want to at least let people know, because this is obviously a part of our question, I think some of you should have seen we posted a whole -- [save the date], for our Investor Day in the spring of next year.

We picked that time because that would have marked the one year anniversary of the acquisition and we like to go in a lot more detail on how we are progressing in and what we think at that point.

But $140 million still feels like the right number and with a couple of more quarters we give you at the investor update, in the spring of next year, also might be lot smarter and educate us to where we think the number is going to land..

Okay. I appreciate that. That will take time.

Most of my other questions have been answered, but would you be willing to share with us how big China is for Parker total?.

No. You know me and I probably won't be able to give you that. But you know it is our second or third largest country you know after the U.S., with Germany and China kind of competing for that second spot. But I would look at our Asia progression. It's not just the China only story.

We see really good effort across the entire region, so North Asia, Korea and Japan are probably better than I can remember in a lot of years. India is having one of our better years than any. Then South East Asia is doing strong. Australia has comeback from where it was, coming off of the bottom.

So for us the part I feel good about with Asia is that it's a broad based Asia story, it's not a singular China story..

And as for better, I mean it's hard to find anything negative right now but look, [I wanted] to have sustainable as always. Is there any cloud out there that you are worried about that see, we've never seen such a coordinated recovery at top speed in the end markets before.

What will you do about this?.

I think your point is spot on. It is encouraging because you right, if you look at the PMIs across the regions it's very rare in my memory where you've gotten this much strong PMI activity pretty consistently across the board. But I think this is a different I think time period for Industrials. There has been a lot of data and analysis that we've done.

When you look at the last 15 years for Industrials and this is going to be maybe a long way to answer to your question the '03 to '08 time period was a really strong Industrial time period, where Industrials kind of outpaced GDP driven little because of China and the whole globalization of Industrials.

Then we have the great recession '08 and to '09 and '10 starting to recover a rebound to '11. And then most Industrials somewhat treaded water from '11 to '15. And then we had the industrial recession which was really natural resource led '15 and '16 and of course we have seen a recovery now start, beginning this calendar year.

My feeling is this feels and as the word common sense made at the beginning that general business conditions and the sentiment from customers and distributors feels different than the previous eras I've just described, in more like an '03 to '08, but it's not going to have the same pull that China had back in that era.

So I look for Industrials to break out of their kind of treading water pattern that was in the '11 to '15. Where that finally ends up nobody -- I'm not spotting up this day but this does feels slightly different. Trees don't grow to the sky so PMIs are not going to go forever.

But I think what we have [influenced] have heard of a more sustainable industrial growth that what we have may be expected. I think number one we launched the new Win Strategy, we're talking about 1.5% world. Doesn't feel like that right now, but when it lands we're all going to learn over the next several quarters and years..

And then on that note are you seeing any labor inflation yet anywhere in the world? And I will leave it there. Thanks..

Ann, again I will say -- I'll continue, it's Tom. No, nothing out of the norm..

Okay appreciate. I'll get back in the queue, thanks..

Thanks, Ann..

And our next question comes from the line of Joe Ritchie with Goldman Sachs..

Thanks and good morning everybody..

Good morning, Joe..

Maybe still with the growth rates of [Parker] clearly really strong this quarter. And I think you mentioned in your prepared comments that typically 1Q is seasonally you tend to see inventory build for you guys in 1Q which makes a lot of sense.

I'm just curious like when you think about the selling versus sell through on the distributor side, maybe you can provide a little bit of a color on where you think distributor inventories are today?.

Joe this is Lee. I would say last quarter we talked about a little bit of a rebound in inventory build at the distribution level. I will characterize at the distribution level and at the OEM level right now, it feels like end market pull through for the most part.

People have reacted to the rapid increase in order entry and as a general statement I would say its end market pull through..

And then if I kind of follow it on some of the questions were asked earlier around CLARCOR and the synergy targets. One thing I noticed this quarter is that you put through I think about $6 million of costs to achieve through versus $52 million for the year.

Just curious was there any reason why the spend wasn't more front end loaded just to support the synergy expectations and just once again any color on that?.

Yeah Joe this is Cathy. We did shift a little bit the timing of some of the footprint mergers that we had planned in the whole integration. And so as the costs were originally projected for the quarter those shifted more towards later in the year.

However, we have some offsetting other favorable savings that are coming through earlier than we expected, so we're on track for the savings as we had predicted we would get. We're going to see about 40% of the savings in the first half and 60% of the savings in the second half for the year with about $58 million for the year..

Joe, this is Tom, if I could just add on.

In general if I were to characterize whether its CLARCOR related or just on traditional restructuring, when we do planned closures, our teams tend to be more ambitious on thinking they are going to accelerate the timing of the closure and we tend to let them run to a more aggressive target, so they can try to get things done.

But we're always conservative on forecasting their savings that came from that recognizing the planned closures and the timing and all the announcements is sometimes tricky to coordinate all that.

So we were conservative on the savings projections, that's why you don't see us come out with our savings for this year and the actual costs, what Q1 was like you will see that come back up in Q2, Q3 and Q4 for the rest of the year..

Got it. That's great to hear and I know may be a last question. I know Ann just asked about wage inflation. I'm just curious whether you saw commodity inflation impact the North America margins this quarter. I know clearly there was the mix issue going on as well.

But, was there any -- was there much of an impact from price costs this quarter on North America margins?.

Joe, its Lee, I mean the net is no. We have seen some commodity inflations such as copper, but really where we have that is an issue where we have a lot of exposure. We have got contracts with our customers that it hits a certain level we pass that through.

So that's the only really volatile one that I can think of, the others are up year-over-year but they are kind of flattened out..

Thank you. And our next question comes from the line of David Raso with Evercore ISI..

I'm just trying to think through sort of the back half of the year, the way you laid out the sequencing and the splits.

It doesn't appear in the second half of the year, you're assuming really much by way of any real improvement on the year-over-year incrementals, even though by then you have anniversaried majority at least of the second half of your anniversary the CLARCOR deal.

And just given the comments that you have about the order book and the breadth of it and so forth, I'm just trying to understand, am I reading that properly and if so where are we on ability to push price in this market?.

Let me adjust the margins first David. We're currently seeing it -- we're struggling to break out with good enough numbers to share with you, what legacy Parker looks like today, because we're doing a nice job integrating CLARCOR.

But as we look at it internally in very rough estimates, we're anticipating still 30% incrementals for the balance of the year or for the total year for legacy Parker.

So we will have CLARCOR for the full year by the end, we're being impacted by the additional amortization and depreciation expense, but we're on track to have incrementals in the low 30s..

Well I guess I'm just thinking the improvement, I mean if you put the all-in numbers, you're looking for a 80% incremental in the first half, and about 21% in the second half, given the natural help from anniversarying CLARCOR, I would have thought it to be a bigger improvement in the second half incrementals versus the first half? I'm just trying to think through are we not getting pricing or maybe you could give us little more color on price costs for the second half of the year.

Just as people try to think of the earnings run rate exiting a fiscal year of thinking about calendar '18..

David its Lee. I would say on price costs going back to the guidance we gave. We're expecting a positive separation -- our selling price index, we forecast it ever year. We expect that to be mildly positive for the year and we expect a separation between that and our purchase price index.

So we're not forecasting any wild acceleration in pricing in the second half of the year..

And on the second half, the slower growth rate in Industrial, you've mentioned it was largely calm.

And is that actually the case in the guidance, there is really no slowdown per se in any of the end markets in the guide it's just a function of comp?.

It's Tom, David. And that's how I would characterize it..

All right terrific. Thank you..

Thank you, David..

And our next question comes from the line of Andy Casey with Wells Fargo Securities. Mr. Casey, your line is now open..

Sorry about that. Good morning and thanks.

With the broad based strength, have you seen any supply chain constraints and if you did can you give us some color on maybe what sort of components?.

Andy it's Lee. So anytime we have a ramp like this it was obviously noise. But there is nothing that I would consider to be abnormal. It's everything that we're managing through. So there is nothing I would strike out. And there is, really no components that I could strike out that are really causing us major problems right now..

Andy this is Tom, just to tag on. One good indicator of whether we are okay or not is if you look at our total company backlog, it's basically stayed flat even with three quarters of a pretty, strong increases from the order entry standpoint.

So if any of our customers are listening, we recognize we want to do better and improve to our delivery times with our customers. But we've been able to absorb this pretty strong increase and not have our backlog go up..

Okay, thank you. And then if I step back and look at the longer term Win Strategy. You talked about a whole bunch of multichannel selling techniques to get above Industrial production. You're kind of running there already.

Is there any big thing left within the Win Strategy to accomplish or is it just certain parts of it are running better than you would have thought?.

Andy it's Tom. I think there is still lots of opportunities. If I look at services, innovation, systems still a lot of opportunities there. Our distribution mix is still lighter than we would like to see it internationally, so there is opportunity to do that.

Collectively, I'm just going to use round numbers, we're still only about 10% market share in this whole motion control space. So there is big opportunity to take share. But I would -- for us and what we want to demonstrate is that we can grow 150 basis points greater than global industrial production over the cycle.

It's easier to do that at the beginning of cycle when people are refluxing -- rebounding and refluxing up. What we want to demonstrate is over a multi-year period of time can we average 150 bps, because really top quartile companies and that's also our intention to be demonstrates that over a cycle.

So that's why we're really happy with three quarters in a row, believe me we're quite happy with that. The real trick will be doing it over a longer period of time..

Okay thanks and then last question more kind of capital allocation.

Can you comment on the pipeline, I know you're still integrating and on track with the CLARCOR acquisition integration, but I'm wondering if there are any opportunities that you're looking at?.

So Andy it is Tom again. So I've mentioned earlier, so dividends will still be first on the capital deployment side of things, CapEx for organic growth, because organic growth is still the most efficient way to grow the company. We're going to do the share repurchase plan and we're going to pay down debt.

But you're right at some point as we glide down the debt path we're going to have the ability to start looking at acquisitions as part of our growth strategy as well. And I would just -- obviously I can't give line of sight on anything there -- I will just let everybody know that we continue to work that pipeline, all those relationships.

Those are reviewed as a long standing effort because not something we can turn the switch off, turn it back on. We're going to work those relationships and those strategies. These are obviously targets that fit our strategic vision of our respective groups in the corporation. So we have -- we know what those are and we will continue to work them.

As some of you have heard me say before, we want to be great generators of cash and great deployers of cash side and that great deployers of cash side that includes acquisition.

And we will continue to [whatever characterize] have an assertive balance sheet at the appropriate time, and we will work those and we will certainly let you know when we're ready..

And our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets..

Just on CLARCOR, I know you don't want to talk or quantify revenue synergies yet, but just as you get the groups together what are some of the early opportunities that you have identified where they are showing up as clear revenue synergy opportunity?.

Jeff this is Tom, I will just characterize it at a high level. [indiscernible] the channel opportunities, number one our channels are complimentary, so you can have product line being carried on the line curve for the various channel partners.

Those are regional opportunities because North America is really CLARCOR strong, since we are more balanced globally, so these are regional opportunities. And then there is OEM opportunities, CLARCOR which is we why we love this so much is 80% aftermarket business, and we are stronger on the OEM.

So if we're going to leverage those OEM relationships, which may be we have a broader breadth of technologies growing in, as well as filtration that we can leverage. So those are the three broad areas, channel, region and OEM portfolio that we could go to the OEM with. And we're working those hard.

Again I would just encourage the analysts to not take numbers into '18 because as we work those if and when they hit they are going to be more in the '19 area. And again I think we will give you a lot more clarity, you can certainly plan on CLARCOR update and the more extensive discussion being a big part of Investor Day in the spring..

And then if you look at those three opportunities, which one -- where would you expect it to move the fastest?.

Not going to comment on that Jeff, as you know we're working all of them equally..

And our next question comes from the line of Nigel Coe with Morgan Stanley..

Good morning guys. This is Dillon Cumming on for Nigel, just wanted to come back on CLARCOR, you guys talked last quarter a bit about some possible margin pressures in integration and will that be through back to consolidation there, some short-term manufacturing efficiencies.

Obviously margins sort of [indiscernible] here in 1Q, so are you guys still expecting some kind of pressure here at CLARCOR in the next couple of quarters or do you kind of still have a clear line of sight there, you kind of have worked through those headwinds?.

Some of the inefficiencies will come when we're emerging the footprints and we did push that out, so we did less footprint merging in the first quarter than we had originally planned. And you'll see more of that come into play in the third quarter and fourth quarter.

Other than that though we're on track for the synergy savings and we're seeing savings in other areas other than footprint consolidation..

Got it that's helpful. And then maybe just a longer term question here. I think you still have a desire to kind of grow out the distribution footprint in the international segment.

I just wondered if you could see how that strategy is progressing and to what extent, and are we driving some of the upside in the international sales growth in the region?.

This has been a key --this is Lee talking. This has been a key initiative for us as a prior refresh of our new Win Strategy. And we've got some really senior dedicated people working on this around the globe.

We've had great progress throughout Asia, Southeast Asia and continued progress in EMEA and really developing parts of EMEA, the Middle East and Africa and developing parts of Europe. So bottom line is we're making great progress. I think you see that reflected in our sales and in our margins..

Got it. Appreciate the time guys..

Okay. Thanks Dillon..

Thank you. And our next question comes from the line of Neil Frohnapple with Buckingham Research..

Hi congrats on a great quarter. Pertaining to the sales guidance, I'm curious on what you're factoring in pertaining to CLARCOR organic revenue growth for this year? I think last quarter you indicated that you're expecting low-single digit organic growth.

So wondering if you can provide an update on that?.

Yeah. I would say now we're looking at more mid-single digits..

Okay. So similar to the base business..

Correct..

And then maybe as a follow-up to David's question. I mean could you talk more about the increased margin outlook for Diversified International. I think the implied incremental margin for the segment at the midpoint similar to the implied incremental margin in the original guidance.

So is there something precluding you guys from experiencing a higher flow through to step up in organic growth expectations or is it more of a wait and see approach given how early we are still in the year?.

Yeah. I would say it's early in the year still. We are seeing the margin improvement as a result of a lot of the Win Strategy initiatives we've been working. We've eliminated fixed costs in Europe and that's helping. But as the growth comes through we're hoping to see the incremental margins but it's a little early yet..

Okay great. Thanks, I'll pass it on..

Thank you. And our next question comes from the line of Timothy Thein with Citi Research..

Great. Thank you. Just circling back on the discussion earlier on the strength in Asia and which obviously has been going on for a while. Is that a region where that going back a few years you had [facilitated], obviously we are operating at extremely low rates.

And I'm just wondering given the revenue pick up that you've benefited from just where those facilitated facilities are operating today? And I guess really the spirit in the question is whether there is additional costs that start creeping back in or is there still ample room within their facilities to be able to meet the higher volumes?.

Tim it's Tom. So on Asia you're right. You have a good memory. Over the last 10 years we've made some investments to really -- in advance of Asia growing into those things and really have grown in some. But from additional CapEx it will be very selective. It will be more a piece of equipment here or two.

We don't [lease] any brick and mortar, pretty well add what we need and with the combination of lean and some very targeted equipment purchases, we'll be in good shape..

Okay.

In that region and just thinking about international margin as a whole, I'm guessing Asia is still well at least above that average relative to -- at least relative to Europe?.

So Tim, this is Tom again, yes it is. And that's why as Asia grows that's why we get a nice corresponding lift international margins..

Okay.

And then just Tom on the group consolidation, where are you there? Just thinking about potential -- obviously when those savings come rather quickly, I'm just curious what you're thinking in terms of the division count and where you're looking to end FY18?.

Just as to refresh -- its Tom again, refresh for people on the phone. So we started as a 114 and we're going to approximately 90 for this year. And that's something that we constantly look at.

It's not something we're [editing] a number, truly what makes sense logically as far as the cost synergies and our growth synergies, people are working in common end markets or common technologies. The pace of consolidation is going to slow.

We're not going to continue to grow from 114 to 90, remember if you go from 114 to 90 that's 24 divisions but that will require 48 divisions to be combined, so that's roughly 45% of the company going through some kind of change process. So we will not continue at that pace.

And it will be whatever makes sense for our customers and from a cost stand point. So it's going to glide down, by go out a year or so a little bit more. But the simplification actions that will become less of the big driver and more the whole revenue complexity the 80-20 look on being able to be some positive business with.

Our business strategy is around the 80-20 concept of revenue complexity. That was [indiscernible] we're carry simplification to the next level going out the next several years..

Okay. Great. Thanks Tom..

Thank you Tim. Okay. We have time for one more question..

Thank you. And our last question comes from the line of Steve Volkmann with Jefferies..

I wanted to circle back to, kind of the discussion I guess everybody is obviously trying to get a sense of sort of sustainability of these current positive trends and I'm wondering, Lee you might have a view, because I think you mentioned that there was a lot of rebuild activity in oil and gas and we're seeing that in some of the mining as well.

But it's sort of begs the question of sort of once you are redone rebuilding what's out there things could sort of flatten out or even slow down a little bit and I wonder, if that is something that you guys worry about or not?.

So obviously there is a lot of that activity going and this Lee. Steve this is Lee. But it's not the only thing going on.

So I mean just -- I think the point I try to make when I survey our partners, the really one plus for me is, there is just a lot of pick up in project work happening out there in the field, which, I flow that through to just CapEx being let go with some of these major companies out there and they are working on that, so for me that's a big plus happening.

So I can tell you that the activity right now is still good, with a lot of the -- with the work going on in mining, oil and gas, but it's not the only thing that's happening..

Okay. Fair enough.

And then may be a quick one just follow up for Tom, you mentioned that your new incentive compensation plan was kind of working, now that you're two years into that, I thought that was an interesting comment can you just provide a little more color on that?.

Steve this is Tom, a reminder for what that is. We have a return on net assets as incentive plan which really touches almost 95% of our team members around the world and for the senior leadership team, the divisional leadership team we've added a growth element to this.

So if you grow faster in a market, whatever your incentive payout would be, there would be a positive multiplier on top of that. If you grow less in a market there will be a negative hair cut to your payout. So we've rolled that out a couple of years ago.

And unfortunately the timing was not appropriate because there was a negative hair cut for people, and this was really the first time in the history of the company we did that. But as you might imagine that drove a lot of attention and drove the right kind of behaviors.

So what it does is it encourages people to what we set on the Win Strategy, want you to grow faster on the market and if you do that you're going to be rewarded handsomely for that. And so that's I think the incentive plan, any good incentive plan you want to drive behavior and the indicators are striving with the right kind of behavior..

And that's starting to payout as a multiplier rather than a hair cut now?.

Yes..

Great. Thank you..

Okay. Thanks, Steve..

Thank you. This concludes today's question-and-answer session. I would now like to turn the call back to Ms. Cathy Suever for closing remarks..

Thanks Chelsea. Thanks to everybody for joining us today. Robin and Ryan will be available throughout the day to take your call if you any more questions. Thank you everybody. Have a great day..

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