Parker-Hannifin Corporation
Q1 2016 Earnings Call Transcript

Published: 22 Oct 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Quarter One 2016 Parker-Hannifin Corp. Earnings Conference Call. My name is Sue and I'll be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. As a reminder, this call is being recorded. I would now like to turn the call over to Mr. Jon Marten, Executive Vice President and Chief Financial Officer. Please proceed, sir.

[Jon P. Marten:]

Good morning and welcome to Parker-Hannifin's first quarter FY 2016 earnings release teleconference. Joining me today is 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 two, you'll find our 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 agenda appears on slide three. To begin, our Chief Executive Officer, Tom Williams, will provide highlights for the first quarter of fiscal year 2016. Following Tom's comments, I will provide a review of the company's first 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 session. At this time, I'll turn it over to Tom and ask you to refer to slide number four.

[Thomas L. Williams:]

Thanks, Jon. And welcome to everyone on the call. We appreciate your participation today. I'm going to take a few minutes to review the quarter and touch briefly on some of our end markets and also provide an update on the new Win Strategy. To start, a few comments on our first quarter. It continues to be a very tough environment in many of our markets. We are experiencing the negative effects of the strong dollar and we witnessed further deterioration in key end market demand. We have continued with actions to adjust to these conditions. These actions include

[Jon P. Marten:]

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 first quarter were $1.52 versus $1.89 for the same quarter a year ago. This excludes business realignment expenses of $0.11 and compares to $0.04 with the same quarter last year. On slide number six, you'll find the significant components of the reconciliation from adjusted earnings per share of $1.89 for the first quarter FY 2015 to $1.52 for the first quarter of this year. The impact of fewer shares outstanding equated to an increase of $0.13 per share. Reductions to adjusted per share income include

[Thomas L. Williams:]

Thanks, Jon. We are operating in a difficult environment, but as the first quarter demonstrates, we have responded well. I'm pleased with the progress we are making with our restructuring initiatives, which remain on track for the year. We also continue to find new opportunity to streamline operations through our simplification initiatives. What I am most encouraged by the response of our Parker team members. They are stepping up to the challenges before them and are embracing the changes we have initiated to build a stronger Parker. I am confident that we have a bright future ahead of us and I look forward to sharing with you our progress throughout this year. So at this time, we are ready to take questions. So, Sue, you could go ahead and start us off.

[Operator:]

Your first question comes from the line of Stephen Volkmann of Jefferies. Please go ahead.

[Stephen Edward Volkmann:]

Hi. Good morning, guys.

[Jon P. Marten:]

Good morning.

[Stephen Edward Volkmann:]

I'm wondering if we could dig in a little bit just on the change of the guidance sequentially. Obviously things sort of deteriorated through the quarter here. I think you made a comment that it kind of got worse as the quarter went along. And I'm wondering if you could just flush that out a little bit and if I am right about that. But more importantly, what really deteriorated? Do you have more energy exposure than you originally thought? It seems like the stuff that's not commodity-related has been fairly stable, but correct me if I'm wrong there. Maybe just a little bit more color on how this progressed through the quarter and what's really driving it.

[Thomas L. Williams:]

Yeah, Steve. This is Tom. And I'm sure that's the key question everybody has. And I'll start off by giving you an overview of how our thought process changed and what was behind revising the guidance. I'm going to hand it over to Lee to go ahead and go through the markets in more detail. But what really changed during the quarter was order entry levels weakened more than we anticipated and September was much more worse than we had expected. And as we had mentioned in the Investor Day, those of you that were there, September is always a key month. It's really a key indicator for how the quarter is going to be. July and August are always somewhat suspect because of the levels of vacation and holidays between North America and Europe. And September is your first good indicator for the quarter and also it's a really good indicator for what the rest of the year potentially is going to look like. So September turned worse; that was the first influence. Also based on the roll-up that we've gotten from our divisions, our customers, talking to our distributors, we're not forecasting any kind of recovery in the natural resource-related markets in the second half of our year, which we originally were forecasting some kind of recovery there. So oil & gas, construction, ag, and mining are soft and actually are softer than we had expected and they're going to continue that way through the remainder of the fiscal year. We're also anticipating more softness in the emerging markets. We had anticipated China and Brazil; they were soft. They have softened worse through the course of the quarter. And then what you were referring to, Steve, about kind of the oil & gas impact, clearly oil & gas impacted North America the most. But there's clearly a knock-on effect that is felt throughout the rest of our end markets, in particular for our distributor channel which is a big part of the company. It felt the reduction in oil & gas and it has felt it across the whole board. So we've seen distribution soften quite a bit in the quarter and that's a change for us for what we think the full year is going to be. So in general, we had forecasted softening in the first half with some small lift in the second half. That was our original guidance. So now what we're saying is that the first half is going to be softer than we thought before and we don't see any kind of recovery in the second half and the second half will be soft as well. So with that kind of as a overarching summary, I'm going to let Lee go through the end markets in more detail.

[Lee C. Banks:]

Great, Tom. Thanks, Steve. So just kind of reiterating what Tom said, if you look at it, it's continued softness in some of these natural resource-driven markets and then the continued softness regionally and by country in Europe, China and Brazil. And then let's not forget about currency; it continues to be a major headwind. If we look at North America, maybe starting there, we mentioned in Q4 a slowdown in distribution. And it's clear that that slowdown continued in Q1. I would say it was largely attributed to those distributors with exposure to oil & gas, but you couldn't help but see a knock-down effect in some of other distribution with some of their order entry and business. We do continue to see destocking in the channel. Our best bet is we'll continue to see that destock through Q2. As I mentioned earlier, distribution outside of oil & gas, in some areas it's okay and in some areas it's just moderate to slightly negative. So maybe it's an effect of a strong dollar in some key markets, but it's certainly not as robust as we saw last year. And then if I look oil 7 gas, we continue to see contraction across all sectors, but specifically the upstream sectors. Offshore activity and land-based activity continue to be very soft. The last rig count numbers I saw was down 57% versus prior year, so significant reduction. And I think the one thing, even though business is soft, we're encouraged really by some of the wins with new products we've had in these industries. And we are seeing great opportunities in service businesses that we've launched and are working with some of these key customers. Agriculture, we talked about earlier, continues to be very soft. In energy, and this is really around power generation, we do continue to see positive trends there, both in traditional and renewable. In the traditional, it's really not new plants being added; it's a conversion from coal to natural gas. And that's been a great opportunity for us. And we're also very encouraged by progress with our Energy Storage business unit. which we've highlighted before in the past. On heavy truck, Class 8 build continues to be strong, although at somewhat of a more modest rate here in Q4, but we're still expecting progress for 2015 over 2014, and the forecasts we have for 2016 continue to look good. And this is another industry where we continue to experience growth from a positive markets, but also with some of the technologies that we've introduced to aid in emission controls in that industry. On Mobile, really off-highway, continued softness in mining and construction equipment. Turning to Europe, General Distribution is up year-over-year, but like North America, those areas impacted by oil & gas are a major headwind. We have some distributors near the North Sea that are off as much as 55% to 60%, so significant impacts there. But from a country standpoint, we do see positive year-over-year performance in countries like Germany, Spain, and the Netherlands from an Industrial standpoint. On Construction, we do see positive trend in higher-end domestic construction equipment markets. But those customers that are focused really around export, their businesses are badly depressed, mainly by what's happening in Russia and some of the other emerging markets in the Middle East. Oil & gas, as I mentioned earlier, that activity is very slow. We have seen a lot of major capital projects in the Middle East and North Sea have been delayed and moved out for a significant amount of time. Agriculture, continued softness. Issues continue to be compounded by really what's happening in Russia and the Ukraine. And then in truck, there really continues to be excellent strength in the heavy end of the market. Let me just turn to Asia now, if I can. We do see continued contraction in China. I think that's a little slower at this point than what we had expected. And we're not really forecasting anything significant there in general. We've seen continued weakness in construction equipment markets there. I'm not sure it can go to zero, but it is getting close. Distribution still growing, really through added locations, but as a whole I would say we're flat to moderately down. Power generation, I mentioned earlier. That still is a positive for us in our participation there. And I'd say one key area has been rail. China has really stepped out as a leading provider in both high-speed and metropolitan transportation. And we've been working with those customers closely and have had some great success there. And then lastly I'll just touch on Latin America. I think you know really the story continue to be Brazil; significant currency devaluation, continued contraction in GDP. We do see positives. Again, this common theme around power generation. We see it throughout Brazil but also in countries like Chile, Colombia, et cetera. Heavy truck contraction, it's really down 50% year-over-year in Brazil. Same thing, continued softness in construction equipment and ag. But we're also, like North America, we've made some really great progress in maintenance and services businesses with some of the CapEx that's already been deployed around oil and gas. You got a lot there, Steve.

[Stephen Edward Volkmann:]

I appreciate it. Just one quick follow-on. Can you guesstimate how much of the distribution exposure is in energy? And then I'll pass it on.

[Lee C. Banks:]

I wouldn't really be able to guesstimate right now. I would say those distributors around Southwest, Gulf and Western Canada have more exposure, but I'd be hard-pressed to give you a number right now.

[Stephen Edward Volkmann:]

Okay. Thank you.

[Operator:]

Thank you. And your next question comes from the line of Hammond from KeyBanc. Please proceed.

[Jeffrey D. Hammond:]

Hey. Good morning, guys.

[Jon P. Marten:]

Morning, Jeff.

[Jeffrey D. Hammond:]

So decremental performance, very good in the quarter. And it seems like in the guide, you're seeing that as sustainable. So I guess as you get further into this downturn, what's your confidence level you can sustain that? And maybe just speak to what you think you're doing differently in the cost structure maybe this cycle versus last cycle to be able to hold those decrementals?

[Jon P. Marten:]

Well, Jeff, I think one of the things that we're most proud of is our ability to maintain these margins, as Tom said, given the downturn that we saw in Q1 and, like you said, as we are foreseeing for the balance of the fiscal year. As we've been speaking about in many of our forums, we have done quite a bit of restructuring last year and the year before. That prior restructuring is serving us very well as we continue to get the savings from that this year and throughout the balance of the year. We also have been responding very quickly at each one of our operations throughout the world to the changing market conditions and we are much quicker responding today than we were in the prior downturns. And that is something that is serving us very well. And then lastly, with the new Win Strategy and our simplification efforts that we talked about last year, that has been kicking in in a very, very good way for us. We're very enthusiastic about our ability to maintain our margins in the area that you see in our guidance. And our simplification efforts we see being a very powerful driver for us from a margin standpoint going forward here. And that is one of the very important elements of the financial performance in the new Win Strategy that we're going to be focusing on going forward here. So I would say that those are the three major changes and things that are a little bit different than we've seen in prior downturns for us.

[Jeffrey D. Hammond:]

Okay, great. And then you mentioned September worsening. Can you just maybe speak to how that trended into October? And then also on the distributor destocking, I think, Lee, you said you thought that continues through calendar year end. What's really in the guidance around distributor destocking?

[Thomas L. Williams:]

Jeff, it's Tom. I'll start first with September. So September worsened. We saw July come out about how we expected. August turned a little bit better, so we were a little bit optimistic. Then September got worse and that continued. And basically what we've seen in October is reflective of what we've done in our revised guidance. And I guess just on the destocking part, what's in the guidance is destocking finishing end of this calendar year, so end of Q2, early into Q3.

[Jeffrey D. Hammond:]

Okay, thanks.

[Jon P. Marten:]

Thanks, Jeff.

[Operator:]

Thank you. And your next question comes from the line of Jamie Cook from Credit Suisse. Please go ahead. Jamie L. Cook - Credit Suisse Securities (USA) LLC (Broker) Hi. Good morning. I guess my question centers around just pricing as well as material costs. I think there's increased scuttle in the channel that pricing has deteriorated. So I'm wondering if you could give some color on what you're seeing and what your assumptions are in terms of pricing for 2016 and then also what your assumptions are on the material cost side. Thanks.

[Lee C. Banks:]

Yeah, Jamie. It's Lee. So overall, you're right; it's a challenging environment on pricing and it's a favorable environment on material costs. So I would say in our guidance, it's just basically flat going forward. It's going to continue to be a challenging environment. That's the best way I can characterize it for you. Jamie L. Cook - Credit Suisse Securities (USA) LLC (Broker) But I guess when you think about – is it specific to a certain end market or type of customer? You know what I mean? Or can you talk just more broadly competitively like what you're seeing, just any color I guess besides it's bad?

[Lee C. Banks:]

I would say pricing is most challenged around those markets that are down significantly. So if you think about the oil and gas markets we talked about, where there is just really no significant demand right now. We continue to have great pricing opportunities in markets outside that. But there is some momentum in some of those key end markets that do make it a challenging environment. And that, plus coupled with the fact that you have this deflationary effect going on with materials, it just makes it a – we're still positive, but it's a challenging environment. Jamie L. Cook - Credit Suisse Securities (USA) LLC (Broker) Okay. And then I guess just my second question just relates to capital allocation. I know this year your guidance implies your share count doesn't change from where we are in the first quarter. Can you just talk about has there been any change in priority or acquisition or acquisitions popping up as more favorable? I don't know if pricing is getting any better relative to like a year, 12 months to 18 months ago, when the pricing environment on acquisitions just wasn't in your favor?

[Thomas L. Williams:]

Yeah, Jamie. This is Tom. So I'll start with the capital allocation priority. So they haven't changed versus the dividends. We want to maintain that increased record. And our target is 30% pay-out to net income. And we're at that and we're above that, on going the last 12 months, we're quite a bit above that. The next would be organic growth to fund CapEx for organic growth and innovation as well. And then when we look at share repurchase and acquisitions, it's really looking at a case-by-case basis and making the best decision that generates the best long-term value for our shareholders looking at those two in comparison. On the share side, you saw what we did in the quarter. So we bought $310 million of shares, approximately $112 a piece. So we're now at $1.64 billion, so we're 82% of the way to the low end of our commitment. And we're still committed to that $2 billion to $3 billion range and I think we're making good progress on that. On the acquisition front, we continue to work that pipeline. But just by nature, how acquisitions work, they're going to be lumpy, they're going to be difficult for us to predict and give you any kind of visibility to. But I would tell you valuations still from our perspective are high. And we're disciplined buyers and so there's been several properties that we've passed on because of that. And we'll just continue to work it and we'll have to see what yields out of it. But, again, it's looking at that in conjunction with share repurchase and making the best long-term decision here. Jamie L. Cook - Credit Suisse Securities (USA) LLC (Broker) Okay, thanks. I'll get back in queue.

[Operator:]

Thank you. Your next question comes from the line of John Inch from Deutsche Bank. Please proceed.

[John G. Inch:]

Thank you. Good morning, everyone.

[Jon P. Marten:]

Morning, John.

[John G. Inch:]

Morning. So, hey, Jon, you called out unfavorable mix as part of the walk from the $7 to the $6.10 within the $1.14 drag versus your prior expectation. And then, Lee, you just said that you're not expecting any pricing, so I want to square those two. In other words, what's actually happened with respect to mix in three months that warranted calling that out, especially if price is only flat, right? So unfavorable mix implies there's price degradation or realization in some manner. Could you just talk to that and maybe the context? Is it significant, the $1.14? I mean, just trying to make sure I'm triangulating all these points.

[Jon P. Marten:]

Sure. I think when I talked about mix, I talked about the change in volume. And as we go forward and we look at all of our end markets, as the volume in the higher margin end markets reduces, that is having a impact on our margins that outweighs all the other end markets that we have. And so historically, John, North America has been progressing very well in terms of our sales growth over the last several years. What we're starting to see now, and you see it in our orders and you see it in our guidance, is that North America sales increases, this is actually now of course decreases are more pronounced in North America than they are in our International Industrial markets. And so from a mix standpoint on that volume, we are being impacted disproportionately, so.

[John G. Inch:]

Okay. Okay, so you're saying basically lower volume in North America is translating into lower realized overall profit within Industrial. I think that's what you're saying.

[Jon P. Marten:]

Right. More of a volume issue than a pricing issue here for us.

[John G. Inch:]

So, in other words, Jon, when you look at North America rolling orders down 11%, is that all volume? Or is there also little bit of degradation – like is that all a unit volume or is there any kind of price degradation that bakes into the 11%?

[Jon P. Marten:]

It's primarily almost all volume; it is not pricing, John.

[John G. Inch:]

Okay. So then, Lee, when you said pricing is now going to be flat, can you just remind me what was that versus? Did you previously think it was up like 0.5% or something? Or is it, kind of squaring with Jon's comments, not really that material?

[Lee C. Banks:]

I'm sorry, John. I lost you the last half there, but...

[John G. Inch:]

Oh. Jon is making the point that it's kind of the change here, which is fine, is volume and there's associated decrementals. But you made the comment to Jamie that now you expect price to be flat. So I'm just trying to understand is, what was that versus? In other words, you had been hoping that price was going to improve, but it's now flat? Or it's actually gone a little softer? That's all. I'm just trying to make sure I'm dotting all of my i's.

[Jon P. Marten:]

Yeah, just to try to connect the dots here for you. When Lee was talking about pricing being flat, we're really talking about our process inside the company that where we take every part that we ship today in every single one of our divisions and we compare the price of that part today to that price of that same part that we shipped the exact same time last year and we calculate a sales price index. And in that sales price index that Lee is talking about, it's basically flat. And that is the flat pricing that we're seeing overall that Lee I think was referring to. Does that help?

[John G. Inch:]

Yeah. He also – well, he is right there. Lee, you also made the comment that pricing is – you almost implied it was increasingly perhaps challenging. The reason I'm harping on this is price is one of these buzzwords right now that people are throwing out. And the companies are sort of not suggesting, including your own, that there's really that much realized price degradation versus the chatter of potential. I just want to make sure you're not really (42

[Lee C. Banks:]

So realized price degradation is not something I worry about...

[Thomas L. Williams:]

Okay.

[Lee C. Banks:]

...for the company. There are certain end markets that are price challenged and there are certain markets that are not price challenged. When you kind of sum it up across the board, it is kind of a zero-sum game. But I don't worry about price degradation as a whole for the company.

[John G. Inch:]

Got it. Just lastly, $70 million of restructuring savings. How does that delineate over the next three quarters?

[Jon P. Marten:]

It's a total of $20 million in the first half and $50 million in the second half, John.

[John G. Inch:]

Okay, got it. Thanks very much.

[Jon P. Marten:]

Sure.

[Operator:]

Your next question comes from the line of Josh Pokrzywinski, Buckingham Research. Please proceed.

[Joshua Pokrzywinski:]

Hi. Good morning, guys.

[Jon P. Marten:]

Hi, Josh.

[Joshua Pokrzywinski:]

This is a follow-up to Jeff's question earlier on the decremental margin management. It looks like as it pertains to the 2Q guide, you guys actually did a little better managing that sequentially. And I would think with all the comments around destocking, particularly in distribution where you have some better mix, presumably you're also destocking in your own facilities, so maybe absorption is a little lighter, I would imagine that something between some of the input cost deflation, restructuring savings are helping bridge that. Can you maybe talk about how that squares out, either by 1Q, 2Q, first half, second half, just so we can help square up volume versus some of the other discreet items coming through?

[Jon P. Marten:]

Yeah. I think that it's really hard to articulate very quickly the depth and breadth of the restructuring that we've done in the prior years and how that is impacting as the year goes on our decremental margins. One thing to just point out, Josh, would be the early retirement that we announced in Q4 of last year. That is largely going to start having major impacts on our business in Q2. So what we did is go through each one of our operations and, with this new volume that we're looking at, make sure because we saw how favorable these decrementals look, that we've got the actions either already completed and the savings started, or that we are realizing benefits from programs that we put in place last year and the year before, frankly, in some economies, that are going to be impacting the bottom line for Q2. So we feel very good about the guidance that we gave there. And we realize that the decrementals are something that are, at first glance, could appear to be aggressive.

[Joshua Pokrzywinski:]

Is that fair, though, the earlier supposition that you guys are destocking internally to go along with what your customers are doing? So, I guess, should we look at that performance as even kind of better versus the absorption headwind?

[Jon P. Marten:]

I think so. I think so. We're able to handle the absorption headwind with the reduced volume with the amount of restructuring that we've planned on doing. And I can't emphasize enough the power of a simplification program where we are trying to make the company a lot more efficient, a lot less reliant on indirect overhead that is really not adding value, and really being able to push our margins in directions that we've never seen before in the history of the company. And so, yes, we're able to overcome the lack of absorption overhang that we're going to see in Q2.

[Joshua Pokrzywinski:]

All right. Thanks, guys.

[Operator:]

Thank you. And your next question comes from the line of Andrew Casey of Wells Fargo Securities. Please proceed.

[Andrew M. Casey:]

Thanks a lot. Good morning, everybody. Wanted to ask a question on the revenue guidance. If I take your midpoint and the comment about the split, 48% to first half, it kind of implies Q2 revenue down about 15%. And I'm trying to square that with the comment about fiscal second half being down about 5%. So could you talk about the components of that Q2 forecast, meaning organic and currency? Because I'm trying to understand the step-up from 15% down to 5% down. Is that all currency or is there something else built into the outlook?

[Thomas L. Williams:]

Andy, it's Tom. I'll start and then Jon can fill in details if there's more follow-up that you have. But in the second half, that 5% I was talking about was total company. So that has the Industrial piece being down worse and Aerospace being more positive. Currency is around, for our mid-point, currency is about 2.7 points of the 9.5% for the full year. And you are about right with what you thought for Q2; we have it around 14% down on sales.

[Andrew M. Casey:]

Okay. Thank you, Tom. And then one specific question, maybe Jon can help out. In the quarter on cash flow, there was about a $265 million consumption related to other assets and liabilities. And that's the highest in a few quarters. Can you kind of detail what was in that?

[Jon P. Marten:]

Well, in that case, there was – we really only did three major things in the quarter. We bought stock, and that's $310 million, we made a pension contribution of $200 million and we made acquisitions of $67 million for the quarter. So those are the major changes. There are some movements in the cash flow related to tax, the equity investment that we made in the Internet of Things company that Tom referred to and a few other things, Andy, but that's really the lion's share of the uses of cash here for us in the quarter.

[Andrew M. Casey:]

Okay. Just a follow-up on that, Jon. Thank you. So the $200 million of pension funding, would that be within that $265 million?

[Jon P. Marten:]

Yeah.

[Andrew M. Casey:]

Okay. Thank you.

[Operator:]

Thank you. Your next question comes from the line of Joe Ritchie, Goldman Sachs. Please proceed.

[Joseph Alfred Ritchie:]

Thank you. Good morning, everyone.

[Jon P. Marten:]

Morning, Joe.

[Joseph Alfred Ritchie:]

So my first question, I guess just trying to get my head around the top-line reduction was roughly about $1 billion in revenue. And you guys kept the restructuring plans and simplification plans at roughly $100 million. How much of that is a question of internal capacity to actually do additional restructuring, given what you have in place today, as opposed to just feeling like the $100 million is the right number and aligned and you'll be at the right place even in a lower-growth environment?

[Thomas L. Williams:]

Joe, this is Tom. I think what we're finding on the restructuring is a couple things. One, we're able to do a lot of the projects less expensive than what we anticipated. So we're actually adding to the project list. We didn't change the number to you, but we're adding extra projects because we've been more efficient on the ones that we already looked at. Simplification in general is a more efficient way of deploying restructuring spend because it's not dealing as much with footprint consolidations, plant closures and all that, which carry typically more cost. It's more focused on SG&A, the overhead piece of things. And so when you do division consolidations, you look at optimizing organization, structure, processes. When we did the early retirement, we looked at organization design changes to not have to replace people in kind, at least not one for one. All those changes can be done more efficiently without the same level of restructuring. So we are actually doing more within that envelope of $100 million. We just didn't need to change the dollar amount because we're just being more efficient.

[Joseph Alfred Ritchie:]

All right. That's helpful color there, Tom. Maybe just asking a little more detailed question on one of the segments. Haven't really heard much about Aero yet. Orders deteriorated double-digits now for the second quarter in a row. I'm just curious what's going on there. How should we expect that to read through to growth, not just in this year but also into next year? Because it tends to be a little bit longer cycle.

[Jon P. Marten:]

Yeah, Joe, Jon here. Just to give you first top-level answer to that. Keep in mind that when we publish our Aerospace numbers, they are a 12-month rolling forecast. And last year – the comparables are tough for us for right now because last year we booked several multi-year, multi-program large orders. And those large orders that we booked ran our 12-month number way up. We were up, approximately this time last year, we were up 12%. And so we're looking at we're down 16% now. It's not really nearly as severe as it appears. We're still confident in our growth rates going forward in the 4% level in Aerospace. So I completely appreciate the question and how that looks very unusual. We've been taking a really hard, hard look at that and we feel confident that it was just that series of multi-program, multi-year orders that we booked based on contracts that we received that were fully priced and scheduled out that drove our orders up at that point in time.

[Joseph Alfred Ritchie:]

Okay, great. I'll get back in queue. Thanks, guys.

[Operator:]

Thank you. Your next question comes from the line of Nathan Jones from Stifel. Please go ahead.

[Nathan Jones:]

Good morning, everyone.

[Jon P. Marten:]

Hi, Nathan.

[Nathan Jones:]

A question on the guidance first. There is a $30 million reduction in corporate expense for the year. Can you give us some more color around that?

[Jon P. Marten:]

Nathan, that is primarily – the biggest driver there is as a result of the pension contribution that we did in August, our pension expense for our underfunded plans is going down. And that's the major driver.

[Nathan Jones:]

Okay, that makes sense. And then on the free cash flow conversion dip down 90 basis point year-over-year, been hearing several companies talk about difficulty with collections, primarily in emerging markets in this environment. Is there any impact there to you? Or what is the reason for that 90 basis point lower conversion?

[Jon P. Marten:]

Yeah. Well, if you're talking about – we really have two things going on here in the quarter. We are looking at DSO very carefully. We are not seeing any degradation whatsoever. But we are very aware of the issue and we are very focused on that. The issue for us was really in our inventories. We will see that correct in Q2 and Q3 and we'll see better cash. We always perform much better from a cash environment and we've been able to prove that over the years as things start to slow down a little bit. So we're fully confident. But I think it's mainly our performance in inventory that is the outlier there that we'll see correct as the year goes on.

[Nathan Jones:]

Okay. And then you were talking about the sales price index not changing. I know you also track a cost price index. Are you seeing any more or less favorable outcomes there?

[Thomas L. Williams:]

Yeah, Nathan. This is Tom. Yes, we're working that hard as one of the initiatives that we have. If you remember from our walk to 17% ROS on the operating margin side is working the supply chain. And, yes, we are seeing improvements and we will continue to work that. We'll work that on the indirect side, which doesn't necessarily show up in our purchase price index, but shows up in lower expenses, which is part of helping us in our margin on returns. But, yes, we're working that hard. And when I look at SPI to PPI, it's neutral to slightly positive, that comparison.

[Nathan Jones:]

Do you think you can hold that positive for the year?

[Thomas L. Williams:]

I think so, yes.

[Nathan Jones:]

All right. Thanks very much.

[Thomas L. Williams:]

Okay. Sue, we'll just take one more question, please.

[Operator:]

Thank you. And that question comes from the line of Andrew Obin, Bank of America Merrill Lynch. Please proceed.

[Andrew Obin:]

Hi, yes. Good morning. Thanks for fitting me in.

[Jon P. Marten:]

Hi, Andrew.

[Andrew Obin:]

So the question in terms of leverage versus lower earnings forecast, how should we think about your willingness to take on leverage in this notably weaker environment yet an environment that could down the road present M&A opportunities?

[Thomas L. Williams:]

Well, Andrew, this is Tom. I think, as always, we want to make the best long-term decision for our shareholders looking at acquisitions versus share repurchase. We still are committed to our A rating, and so that's a function that we look at all the time. So when we do our cash allocation discussion every quarter, we look at cash generated versus where we are in our debt to debt equity relationship and we make the best decisions that we possibly can on behalf of the shareholders. But certainly the A rating is a controlling device that we use. And I think it's been helpful for us. And the bulk of our peers, if you look at they're all A rated. And we think that's an advantage for us to continue to do that.

[Andrew Obin:]

And in your view, I know that rating agencies have been company-specific, but what does it mean in terms of sort of the upper band of leverage you would be comfortable with?

[Thomas L. Williams:]

We typically work to a 37% debt to total cap.

[Andrew Obin:]

Thanks.

[Jon P. Marten:]

Thank you, Andrew. And this concludes our Q&A and our earnings call for today. Thank you so much for everybody joining us today. Robin will be available throughout the day to take your calls should you have any further questions. And thank you. Have a great day.

[Operator:]

And thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a very good day.