Earnings Call Transcript - PH Q1 2021

Cathy Suever, Chief Financial Officer

Thank you, Sonia. Good morning, everyone. Welcome to our teleconference this morning. 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 a year following today's call. On Slide 2, you'll find the company's safe harbor disclosure statement addressing forward-looking statements as well as non-GAAP financial measures. Reconciliations for any reference to non-GAAP financial measures are included in this morning's materials and are also posted on Parker's website at phstock.com. Today's agenda appears on Slide 3. We'll begin with our Chairman and Chief Executive Officer, Tom Williams, providing a few comments and some highlights from the first quarter. Following Tom's comments, I'll provide a more detailed review of our first quarter performance, together with the revised guidance for the full year fiscal 2021. Tom will then provide a few summary comments and we'll open the call for a question-and-answer session. We plan to end the call at the top of the hour. Please refer now to Slide 4, and Tom will get us started.

Thomas Williams, Chairman and Chief Executive Officer

Thank you, Cathy, and good morning, everybody. Thanks for your participation today. I hope that you, your family and your friends are all safe and healthy. So before I go through the quarter results, I wanted to highlight Slide 4, which is really our strategic positioning slide on one page. It's how we create value for our customers, our shareholders and our people. And I'm going to highlight some of these through the course of my remarks in the opening slides here. But really, the output of all these differentiators is really that last bullet. It enables us to be great generators and deployers of cash over the cycle, which is a proven strength of ours that has only gotten better over the years. This list is what sets us apart. It is what enables us to be a top-quartile company. Hopefully, a company that you'll want to be a shareholder of. If you go to Slide 5. This is one of those competitive differentiators, which is the breadth of our technologies. This is a portfolio of 8 motion control technologies that are all interconnected and complementary to each other. It's how we bring value to customers. It's how we solve problems for our customers. Our customers see the value in it, too. It has 60% of our revenue comes from customers who buy from 4 or more of these technologies. So if you go to Slide 6, we'll talk about the quarter. It was an outstanding quarter, great results really in the face of unprecedented times. And a big thank you goes out to our entire global team for all their hard work, dedication and the great results here. So starting with the first bullet, something that we take great pride in. We are a top-quartile safety performance company. In addition to that, we continue to reduce recordable injuries and incidents by 31%. Sales declined 3%. Organic decline was 13% year-over-year, but that showed nice improvement versus the prior quarter, which was a 21% decline. So we are pleased to see the progress there. EBITDA margin was 19.5% as reported or 20.1% adjusted. That makes two quarters in a row that we've been greater than 20% EBITDA margins we're excited about, and it was a 100 basis point improvement versus the prior year. We did a great job on debt reduction. We paid down debt in the quarter of $557 million. And our cash flow from operations was just an outstanding level at 22.8%. So I call your attention to a little table at the bottom of the page. And go to that last row, the total segment operating margin adjusted row. See, we came in at 19.9% for the quarter. That was 110 basis point improvement versus the prior year. Our decrementals were just terrific. If you look at our decrementals on an adjusted basis with acquisitions, they were favorable, meaning that we had less sales and we had more income versus the prior year. On a legacy basis, so Parker without acquisitions, again on an adjusted basis, was a 14% decremental. Just great results by the operating team. So if we go to Slide 7. The deleveraging progress has been just dynamite. You can see we paid down $2 billion worth of debt in the last 11 months. We've now paid off 37% of the LORD and Exotic transaction debt. And you can see the multiples, whether it's on a gross basis or on a net basis, we continue to make nice progress reducing those leverage multiples. So we're very proud of that. Moving to Slide 8. These outstanding results are really underpinned by a couple of factors versus the prior period restructuring that we've done, The Win Strategy and the performance enhancements that it's driving and the speed and agility of our pandemic response. And just for clarification, when you look at these numbers, these are cost-out actions that represent the savings that are recognized in the year as a result of our pandemic response. The incremental amount is footnoted at the bottom of this page. That was $210 million year-over-year incremental. But the big thing that I want to make a point on this page is the shift to more permanent reductions. And while we didn't put it on here -- we didn't put Q4. But if you go back and look at your Q4 notes, we were 90% discretionary, 10% permanent. This quarter, Q1, we are now 30% permanent and moving to a full year of 60% permanent. If you just go to that full year section of the page and looking at FY '21, see $175 million discretionary. It's a little bit less than what we showed you last quarter, primarily because our volume is better, and we didn't need to act as many of those discretionary type of actions. Most of our wage reductions have been restored to normal effective October 1, with some minor exceptions in countries where those government support supplementary income or short work weeks, which we've continued. Permanent actions stayed the same at $250 million, and we're right on track to deliver that. And really, I think this bodes well when you look at the shift to more permanent actions for the remainder of FY '21, it sets us up very nicely for FY '22. So if we go to the next slide, we talk about our transformation. And clearly, I'm going to show you a couple of numbers here. Hopefully, you're going to believe the company is definitely transformed. And we'll talk about how, and we'll talk about more importantly where we're going to go in the future. Next page is on the how portion of it. It's been a combination of portfolio of things we've done as well as just sheer performance improvements. And on the performance side, it all starts with the Parker business system, which is The Win Strategy; and two major updates that we've made that you're familiar with, which is really propelling our performance. We simplified the organization from a structure standpoint. And we acquired three outstanding companies that were accretive on growth, margins and cash flow. And they're performing very well during the pandemic. And I think the best evidence, which is the slide you've seen before is on Slide 11, which is the transformation across the last 5 manufacturing sessions on how we've been raising the floor operating margin. We wanted to put this slide in again because we've updated it based on the latest adjustments, where we include deal-related amortization in our adjustments. And we did that through all the prior periods. So the reported in change, that's in gray, and gold is the adjusted. And you can see that the improvement now is even more pronounced, 1,100 basis points over this period of time. Just dramatic improvement. And obviously, we intend to keep moving in this direction. If you go to Slide 12. We're going to talk more about the future now and where we're going. And it's going to be all around Win Strategy 3.0, which we just recently changed in our purpose statement, which is in that blue box then at the bottom. Both of these changes have created excitement within the company and an inspiration from our people on that higher purpose that we're all trying to live up to. Slide 13, where I'm going to spend a little bit of time going through 3.0 to give you a little more context and color as to why we think our future performance is going to continue to accelerate. I'm going to make a comment on each one of these. So start with simplification. You've seen what we've done on structural things, and organization design work continues. Simplification is going to expand into more 80/20 and Simple by Design. And of course, you're all familiar with 80/20. For us, it's still early days with lots of upside. The Simple by Design is the realization that 70% of your cost is tied up in how you design the product. And what we want for our company is design excellence and operating excellence. We want both of those things. And the way you get design excellence is through Simple by Design. It's going to have 3 major buckets that's going to be a complexity assessment of our existing and new designs. We're going to use 4 guiding principles on how we design products. We're going to design with forward thinking. We're going to design to reduce how we use material. We're going to design to reuse things that we use across the company. We're going to design the flow. And we're going to enable all this with the use of AI, which is going to allow our engineers to be able to do these things in a much faster and knowledgeable fashion. Second bullet is innovation. In our stage gate process, we call internally Winovation. So that's taking an idea to launch for a new product. And we're making three changes there. One is in metrics, and that's called PVI, product vitality index, another new metric for most of you be familiar with this. It's the percent of revenue that comes from new products and things that we've launched and commercialized over the last five years. We're holding people accountable to that, and we're seeing nice progress. We've also included two key process changes. One is new product blueprinting, which is an outside-in orientation for engineers. So it's spending more time with customers and end users to understand their pain points and their needs so that we design and develop better products to solve those. And of course, Simple by Design is embedded into the new Winovation as well. Third bullet is digital leadership. Now we put this on there before the pandemic but, of course, with the pandemic, this is even more important. We've got 4 big areas that when we say digital leadership, we mean 4 things: digital customer experience; digital products, which would be IoT; digital operations; and then digital productivity. And digital productivity is where we would do include our data analytics and artificial intelligence. Next bullet is growing distribution. We just want to continue the great progress we've been making, especially growing international distribution. The next one is kaizen and kaizen -- our brand at kaizen is unique. And it's really combining kaizen; our high-performance team structure, which is how we build the company; our natural work teams; and that ownership that creates in our plants, warehouses and the offices; and the use of Lean. And I would just tell you that COVID has not slowed us down 1 second on the use of kaizen. We are continuing to have the same activity and the same results. We're very pleased with that progress. On the acquisition front, we want to be the consolidator of choice and continue to buy great companies like you've seen us do the last several years. And then underpinning all this and supporting this is going to be a new incentive program, which is called the Annual Cash Incentive Program, so ACIP for short. And we're going to roll this out over the next 2 years, FY '22 and '23. We've been piled again over the last 2 years, '20 and '21. And it's going to replace return on net assets as our annual incentive. It's going to have 3 simple components: earnings, revenue and cash. So it will be easy to explain, easier for our people to understand. Those 3 metrics are highly aligned to total shareholder return. And this will provide a better linkage to our annual performance. So we feel very excited to continuing the performance changes we've been making and the performance lift we're going to get with 3.0 that the transformation that you've seen is going to continue in the future. Moving to Slide 14. You probably saw on Monday, we've made -- Monday this week, we made some important organization announcements. And the first one, the lady that's sitting right next to me is strategically positioned 6 feet away from me, though. Cathy Suever is retiring January 1. This is part of Cathy's long-term plan. And she has 33 years with the company and 33 great years. And that everything she's done, she's excelled in, and she basically helped us a tremendous amount. Whether it was bad times in recessions or good times with expansions, it's been a big part of the Win Strategy. And her team -- her and her team did what we did in those acquisitions as a huge led by the finance team and really made a big difference for us. A great example of values and results, and a great example for the rest of our leadership team. So this is Cathy's last earnings call. And I could see she's pretty torn up about that. But she's going out in style because these are fantastic results to do as your last earnings call. Now succeeding Cathy on Slide 15 is Todd Leombruno, and Todd will be our CFO on January 1 of next year. I think a lot of you know Todd. Todd was in Investor Relations and knows the company extremely well, 27 years with the company. He's been a Division Controller, Group Controller, now Corporate Controller. And he'll be joining Lee and myself in the office as Chief Executive and CFO. So Todd, if you want to just make a few introductory comments to everybody?

Todd Leombruno, Incoming Chief Financial Officer

Yes. Good morning, everyone. First of all, I just want to say congratulations to Cathy on a wonderful 33-year career with Parker-Hannifin. There are so many people across the company that have you to thank for all you've done for the company, and that includes me. We worked so closely and so well together for so many years. I want to personally thank you on behalf of the Parker finance and accounting community for all you've done and for me personally as well. So we wish you nothing but the best in retirement. And we look forward to hearing all about your retirement and ventures, and we will stay close. So congratulations, and thank you very much. Tom and Lee, thank you for your confidence and your support in me for many, many years. I couldn't be more humbled and appreciative for this opportunity. We have a fantastic global team, and we are committed to delivering top-quartile performance and continuing the transformation of the company. Couldn't be happier. And for the investment community, Tom already mentioned this, but I still remember many of you from my time in Investor Relations. I look forward to reconnecting and also seeing some new faces very soon. Thanks.

Thomas Williams, Chairman and Chief Executive Officer

So thank you, Todd. But Cathy is not retiring yet. We're putting her to work, and I'm going to turn it back to Cathy for details on the quarter.

Cathy Suever, Chief Financial Officer

Thank you, Tom and Todd. I'd like you to now refer to Slide 17, and I'll summarize the first quarter financial results. This slide presents as reported and adjusted earnings per share for the first quarter. Current year adjusted earnings per share of $3.07 compares to the $3.05 last year, an increase despite lower sales. Adjustments from the fiscal 2021 as reported results netted to $0.60, including business realignment expenses of $0.12; integration costs to achieve of $0.03; and acquisition-related amortization of $0.63, offset by the tax effect of these adjustments of $0.18. Prior year first quarter earnings per share were adjusted by a net $0.45, the details of which are included in the reconciliation tables for non-GAAP financial measures. On Slide 18, you'll find the significant components of the walk from adjusted earnings per share of $3.05 for the first quarter of fiscal 2020 to $3.07 for the first quarter of this year. Despite organic sales declining 13% and total sales dropping 3%, adjusted segment operating income increased the equivalent of $0.09 per share or $16 million. Decremental margins on a year-over-year basis were favorable, demonstrating excellent cost containment and productivity by our teams. In addition, we realized an $0.08 increase from lower corporate G&A as a result of salary reductions taken during the quarter and tight cost controls on discretionary spending. Other income was $0.14 lower in the current year because the prior year included higher investment income and gains on several small real estate sales. Moving to Slide 19, we show total Parker sales and segment operating margin for the first quarter. Organic sales decreased 13% year-over-year. This decline was partially offset by favorable acquisition impact of 9.1% and currency impact of 0.8%. Despite declining sales, total adjusted segment operating margin improved to 19.9% versus 18.8% last year. This 110 basis point improvement reflects positive impacts from our Win Strategy initiatives and the hard work and dedication to cost containment and productivity improvements by our teams. Moving to Slide 20. I'll discuss the business segments, starting with Diversified Industrial North America. For the first quarter, North American organic sales were down 14.1%, and currency negatively impacted sales 0.3%. These were partially offset by an 8.5% benefit from acquisitions. Even with lower sales, operating margin for the first quarter on an adjusted basis was an impressive 21.0% of sales versus 19.4% last year. This impressive favorable incremental margin reflects the hard work of diligent cost containment and productivity improvements and the impact of our Win Strategy initiatives. Moving to the Diversified Industrial International segment on Slide 21. Organic sales for the first quarter in the Industrial International segment decreased by 7.3%. This was offset by contributions from acquisitions of 9.1% and currency of 2.9%. Operating margin for the first quarter on an adjusted basis increased to 19.2% of sales versus 17.0% in the prior year, an impressive incremental margin of 66.5%. The teams continue to work on controlling costs and utilizing the tools of our Win Strategy. I'll now move to Slide 22 to review the Aerospace Systems segment. Organic sales decreased 20.1% for the first quarter partially offset by acquisitions, contributing 10.8%. Significant declines in the commercial businesses, both OEM and aftermarket, were partially offset by higher sales in both military OEM and military aftermarket. The diversity of our aerospace portfolio, which includes business jets, general aviation and helicopters, is providing some additional balance against the current market pressures. Operating margin for the first quarter was 18.1% of sales versus 20.4% in the prior year for a decremental margin of 43.5%. Realigning the businesses to current market conditions and strong cost controls are helping to offset the less profitable mix imposed by the pandemic and the lower volumes. On Slide 23, we report cash flow from operating activities. Cash flow from operating activities increased 64% to a first quarter record of $737 million and an impressive 22.8% of sales. Free cash flow for the current quarter was 21.5%. And with a drop in net income of just $17 million, the free cash flow conversion from net income jumped to 216%. This compares to a conversion rate of 118% last year. The teams remain very focused and effective in managing their working capital and consistently generating great cash flow. Moving to Slide 24, we show the details of order rates by segment. Total orders decreased by 12% as of the quarter ending September. This year-over-year decline is a consolidation of minus 11% within Diversified Industrial North America, minus 4% within Diversified Industrial International and minus 25% within Aerospace Systems orders. Just a reminder that we report the Aerospace Systems orders on a 12-month rolling average. Looking ahead, the updated full year earnings guidance for fiscal year '21 is outlined on Slide 25. Guidance is being provided on both an as-reported and an adjusted basis. Based on our current indicators, we have revised our outlook for total sales for the year to a year-over-year decline of 3.5% at the midpoint. This includes an estimated organic decline of 7.3%, offset by increases from acquisitions of 2.8% and currency of 1%. This calculated the impact of currency to spot rates as of the quarter ended September 30, 2020, and we have held those rates steady as we estimate the resulting year-over-year impact for the remaining quarters of fiscal year '21. Please note our revised guide does not forecast any additional demand pressure caused by further shutdowns as a result of a second wave of increasing COVID infections. You can see the forecasted as-reported and adjusted operating margins by segment. At the midpoint, total Parker adjusted margins are now forecasted to increase 30 basis points from prior year. For guidance, we are estimating adjusted margins in a range of 19.0% to 19.4% for the full fiscal year. For the below-the-line items, please note a significant difference between the as-reported estimate of $400 million versus the adjusted estimate of $500 million. In October, as a subsequent event to the quarter, we reached a gain on the sale of real estate of $101 million pretax or $76 million after tax that will be recognized as other income. Since this is an unusual onetime item, we plan to remove this gain as an adjustment to our adjusted earnings per share. The full-year effective tax rate is projected to be 23%. For the full year, the guidance range for earnings per share on an as-reported basis is now $9.93 to $10.53 or $10.23 at the midpoint. On an adjusted earnings per share basis, the guidance range is now $11.70 to $12.30 or $12 even at the midpoint. The adjustments to the as-reported forecast made in this guidance at a pretax level include business realignment expenses of approximately $60 million for the full year fiscal '21. Savings from current year and prior year business realignment actions are projected to result in $210 million in incremental savings in fiscal year '21. Also included in the adjustments to the as-reported forecasts are integration costs to achieve of $18 million. Synergy savings for LORD are projected to be an additional $40 million, getting to a run rate of $80 million by the end of the year. And for Exotic, we anticipate a run rate of $2 million savings by the end of the year. Acquisition-related intangible asset amortization expense is forecasted to be $322 million for the year. Some additional key assumptions for full year 2021 guidance at the midpoint are sales are now divided 48% first half, 52% second half. Adjusted segment operating income is split 46% first half and 54% second half. Adjusted earnings per share first half, second half is divided 45%-55%. Second quarter fiscal 2021 adjusted earnings per share is projected to be $2.38 at the midpoint. And this excludes $0.63 or $106 million of projected acquisition-related amortization expense, business realignment expenses and integration costs to achieve, offset in part by the gain on real estate of $0.59 or $101 million. On Slide 26, you'll find a reconciliation of the major components of the revised fiscal year 2021 adjusted earnings per share guidance of $12 even at the midpoint compared to the prior guidance of $10.30. The teams outperformed our original estimates, beating the first quarter's guidance by $0.92. With this performance and our continuing efforts to control costs, we are raising our estimated margins, which will in turn generate $0.81 of additional segment operating income over the next 3 quarters. This calculates to an estimated decremental margin of 11.4% for the year. Other minor adjustments to below operating income line items reduces our estimate by a net $0.03. All in, this leaves $12 even adjusted earnings per share at the midpoint for our current guide for fiscal '21. If you'll now go to Slide 27, I'll turn it back to Tom for summary comments.

Thomas Williams, Chairman and Chief Executive Officer

Thank you, Cathy. So the portfolio, our motion control technologies, gives us a clear competitive advantage versus our competitors. We continue to transform it with the three acquisitions, and we really feel strongly with the Win Strategy 3.0 in our purpose statement that our best days are ahead of us. And with that, I'll hand it over to Sonia to start the Q&A.

Operator, Operator

[Operator Instructions]. Our first question comes from Jamie Cook of Crédit Suisse.

Jamie Cook, Analyst

Nice quarter. I guess just first question, on the aerospace side, you narrowed the guide -- sorry, you raised the top line a little relative to before in the margins. But Tom, any view on how you're thinking about the recovery out of the commercial business? And how we think about the correlation between global aircraft miles flown or revenue passenger miles? Like should we expect a greater lag than usual in terms of how we think about Parker's pickup versus those 2 items? And then obviously, the margin performance was very strong in the quarter. I guess you'll attribute that to Win. But were there any sort of anomalies or price, cost or mix or anything else that was sort of viewed as favorable to the margin performance in the quarter?

Thomas Williams, Chairman and Chief Executive Officer

Okay. Jamie, it's Tom. I'll come back to the margins. I'll start with aerospace. So when we look at aerospace, we think, again, this is just our initial look, is that it will bottom out next quarter for us. But when you look at the components for our full year forecast to the 4 major segments, I'll go one at a time here. Commercial OEM, we've got in the guide assuming a 25% to 30% reduction. And that's basically using the current production rates that our customers have given us times are bill of material. Military OEM will be low single digits, which seems reasonable with the F-35 and the F135 engine tied to that. Commercial MRO, which is one of the questions you're asking, we have at a minus 35% to 40%. And that compares to -- we were at minus 40% in the last quarter. So we see a little bit of improvement there but not significant improvement. Available seat kilometers are currently around 55%. And that's not unusual to see our MRO run a little bit better than available seat kilometers. Airline departures are supportive of that kind of forecast that we've given you out there. And then on the military MRO side, we've got positive mid-single digits, really being supported by fleet upgrades and trying to extend service life of some of the older military aircraft and then the mission-critical 80 -- or MC80 initiative were to make sure the fleet is 80% ready to go. And all those things, we think -- so we still feel good about this forecast. I would tell you, one of the things we like about aerospace is we've been very aggressive on our cost to us. We've taken 25% of our people out, unfortunately, given the conditions. And we are in a position from a margin standpoint and a return on assets, it's a very attractive business for us. And longer run, this will be a longer return. And it bottoms in Q2 and starts to turn for our second half. Over the next several years, with the cost structure we have in place, it will be a very attractive business for us, almost just showed nice gradual growth before it eventually gets back to where it was, which will obviously take time. Margins for Q1. In general, obviously, you're right, it's the Win Strategy is 2.0 and now 3.0. It's all that restructuring we've done in the past, etc. But I do think we had the advantage in Q1. We're pretty much at our run rate on the permanent savings actions because we came out of the gate very aggressive on the permanent restructuring. And then we also still had the peak discretionary actions that we were able to have in Q1. And with restoring salaries, that will come down. So I think that was part of what helped Q1. But when we look at margins, if you compare our first half to second half, we're going to still show a nice improvement in our second half with this guide versus the first half. And like I said in my closing comments, our best days are ahead of us both on the top line and on margins.

Nathan Jones, Analyst

Just like to start with the top line guide. Cathy, you said you're intending or you're planning for that to split 48-52, which I think is what it typically splits for you every year and kind of the way that you typically guide at this point in the year, which also then implies that you don't really see any fundamental sequential improvement in the businesses. Is that the way you've gone about framing this guidance? And if we do see the economy gradually get better as we go through the rest of the year, would that tend to suggest that maybe your second half of '21 guidance could be a little bit better than where you're at the moment?

Thomas Williams, Chairman and Chief Executive Officer

So Nathan, this is Tom. Maybe I'll start. So part of what we looked at, when we looked at improving the organic guide from minus 11% to minus 7.5%, was that we looked at our Q2 it being very similar to Q1. The industrial piece, maybe a little better; aerospace, a little worse, as I mentioned, bottoming up. Then we'll see Q3 get better and Q4 be a positive -- or forecast for our Q4 is positive high single digits. When you look at the second half as a whole, we'll have industrial up -- just I'm combining North America and international, has a positive low single digits, aerospace around a minus 12%. So we get to flat because of the aerospace being negative. I think part of what we're looking at with Q2 and Q3 is just understanding, well, we have a lot of positive trends with order entry, PMIs moving in the right direction and markets moving to more of a decelerating decline -- or shifting to more accelerating decline. It works, so they're not decelerating. But the realization that there's risk in the next 2 quarters tied to the virus activity -- and we're not assuming that it's getting any worse, but I think there's a fair amount of uncertainty as we go into Q2 and Q3, which is the winter part for most of the world. And you've got COVID and the flu season together, which creates a bit of an unknown. So we still are very positive. But we think it's going to -- the next 2 quarters will be a little bit of a slower sequential. There are still better quarters in the top line that we'd guided to just last quarter. So we are reflecting that improvement. We were just a little bit, I think, realistic as far as what's going on.

Catherine Suever, Chief Financial Officer

Yes. Nathan, this is Cathy. I'm glad you asked. We had a tremendous first quarter, and a lot of that came from managing the working capital, as you suggest. I do not anticipate that it will continue at the pace that we saw in the first quarter as the working capital will be -- there will be more need, for example, for inventory. And then payables will also have an impact in receivables. So yes, it will slow down. We still confidently believe we'll be at over 100% conversion each quarter and for the year. It was a great start to the year and will remain above that 100% conversion, but it won't continue at the pace that we were able to enjoy this quarter.

John Inch, Analyst

Congratulations, Cathy. Great to see that. And Tom, I wouldn't worry about the coronavirus. Joe Biden is going to defeat the virus anyway.

Thomas Williams, Chairman and Chief Executive Officer

Thank you, John.

John Inch, Analyst

$64,000 question in the industry is like when does -- when does the economy normalize, is CapEx, not OpEx but CapEx, likely to prospectively come back? And if so, how do you see the landscape across the multiplicity of your end markets in terms of customers' predisposition to spend CapEx? And obviously, I would leave out commercial aerospace and oil and gas because we know those are pretty challenged. But it kind of is a framework to even understanding where the verticals operating, Tom and Lee, kind of close that, if not even above pre-COVID levels. You have a lot of visibility into that, and we don't have the same kind of visibility. So if you could share your thoughts, that would be great.

Thomas Williams, Chairman and Chief Executive Officer

So John, it's Tom. I think what you're getting at is what does the future hold. And obviously, CapEx is a key ingredient to potentially driving more industrial activity. And when we get through FY '21, we're going to characterize FY '21 -- we have 2 quarters where I think there's still a fair amount of uncertainty, Q2, Q3. Q4, we have an easy pandemic comparison. But by then, I think we will have had -- we will round the corner. But I'm very optimistic about FY '22, so really for everybody else in the second half of the calendar year '21 and beyond. There's low interest rates. There's fiscal stimulus that's in place and maybe more might come. The vaccine will be there. Air travel is going to slowly resume. Our order entry by then will have turned positive. The end markets are going to continue to shift and will shift it into accelerating growth. Our forecast for global industrial production growth, which is a good indicator of CapEx spending, is positive. And you couple what I would characterize as a much better industrial environment with our own growth initiatives, and I'm pretty optimistic on what the number of years look like. The way I would look at it, John, Lee and I since we took our jobs, we faced 2 recessions together and a pandemic. And so it can't be any worse than that. And all indicators that this is a much better environment. And I do think CapEx and people making more strategic longer-term investments will come back more into play, which -- and that will just add to it.

John Inch, Analyst

Yes. I think that makes a lot of sense. You called out 80/20 as part of your framework. Just in the spirit of another 80/20 company, ITW has been probably realizing and targeting some share gains to try and take the offense. Do you envision opportunities for Parker for share gains across your businesses and perhaps because, say, smaller players have pulled back? Or conversely, I guess, have -- there've been tougher competitors emerge, let's say, in China, for instance?

Thomas Williams, Chairman and Chief Executive Officer

Absolutely, John. It's Tom again. We think that there's a big opportunity there, and we track that now. That's part of our quarterly cadence. We have all the commercial leaders present top accounts' share in the prior quarter or share of the next quarter. And it's going to be able to a multitude of things, and a lot of it's on the Win Strategy. It starts with creating a great customer experience for our customers. That's the first thing you got to do to grow. And then we think with Winovation, Simple by Design and all the other things that we're doing, we have an opportunity to take share. We have obviously gotten stronger through this, and we think we can take advantage of that. Our service capabilities have gotten better. We've acquired companies that are growing faster than -- and we were doing extremely well, and they're adding to our offering to customers and creating more value when we go to them. So yes, I do think there's a sheer shift here opportunity.

Jeff Sprague, Analyst

Congrats to Cathy. Two from me, if I could. First, just on the margins, Tom, a couple of questions around that, but I was hoping you could just help us a little bit more understand the cadence. It does appear that on similar revenues, you've got a step-down in Q2. I get you don't have quite as much discretionary actions, but it seems like there's still a lot of positivity flowing through. And the year guide is below kind of what you did in Q1, right, as revenues are expected to build as the year progresses. So understand you might want a little dose of conservatism going into the winter here. But is there really something going on, mix or otherwise, that we should think about to kind of understand that margin profile?

Thomas Williams, Chairman and Chief Executive Officer

So Jeff, it's Tom. A couple of comments. The implied change from Q1 to Q2 is a pretty normal sequential shift that we have. If you go back and look at our Q1 and Q2 over the years, it's pretty much in the same neck of the woods. Yes, you are right, in Q1, we had the benefit of all the permanent actions because we were pretty much at our permanent actual run rate, and we had almost all the discretionary actions. So that was a big opportunity. But I would just -- the guide right now is still 30 basis points better than last year. And if I look at just the first half, second half, we go from 18.5% -- I'm talking about the total company now, 18.5% to 19.8% in the second half. So we see an improvement. And obviously, Q4 will be better than Q1. So the improvement is there. We do have, as I mentioned earlier, a little bit of a mix headwind with more mobile, and that's very typical the beginning of a upturn. The mobile end markets speed up faster than any other end market, and those markets and that customer base have all less margins and when you compare to distribution and industrial. Then on the deleveraging side, yes, that gives us lots of opportunities and as we continue to work down that. Our pecking order, which you'll be familiar with, and first and foremost is dividends. And our next dividend target to raise the dividend to keep our track record going is Q4. And you can rest assured we're going to do that. The next is continue to fund organic growth and productivity, which we'll do that. And that's about 2% of sales. We will continue to delever. But as we glide down there, we have an opportunity to look at reinstating the 10b5-1, and we'll update you all on our thinking of that in the next earnings call. And then there's an opportunity as we go down the glide path here to look at acquisitions and share repurchase. And I think because our cash flow has been so strong that we don't necessarily have to wait until we get to 2.0 again to finally dust off the acquisition pen. There's probably opportunities of properties that are a more reasonable size, say, versus doing a CLARCOR or a LORD that would allow us to do and glide down and basically not be impacted at all, so to be able to meet our commitment to all the credit rating agencies and delever at the speed we wanted to. And then the EBITDA is so much higher now that we can probably absorb some things as we glide down and not miss a beat as we try to get down there. So it does give us a lot more opportunities, and those opportunities will depend on what's available. And that trade-off is something we look at every time.

David Raso, Analyst

Really two quick questions, if you don't mind. The margins for the rest of the year appear to be sort of flat 9 months over 9 months. And I can understand aerospace is down a lot. But even the industrial businesses, you don't really have the margins up much year-over-year. And I do appreciate some of the cost savings are a little less dramatic than we just saw in the first quarter. But when you highlight distribution as maybe ready to restock a little bit or definitely improve to some degree, is there something else about the mix or something we're missing about price/cost that would not allow the margins to improve much industrially? I think when you strip out the A and just do it old-school EBIT, you really don't have the North American margins much up at all, maybe 20 bps year-over-year and international only up 50 bps when it was just up 150 bps. So I just want to make sure I'm not missing something.

Thomas Williams, Chairman and Chief Executive Officer

So David, it's Tom. So I'll give you guys a little more color because the margins are doing quite well. If I just compare the second half of '21 to second half of '20, and I'll give it to you by segment. 20.5% for North America versus 19.8% in prior period. 19.0% in international versus 18.3%. So very nice improvement and then 19.5% aerospace versus 20.6%. So obviously, aerospace feeling more pressure. And we end up at 19.8% versus the 19.5%. So the margins are improving. We do have, as I mentioned earlier, a little bit of a mix headwind with more mobile, and that's very typical the beginning of a upturn. The mobile end markets speed up faster than any other end market, and those markets and that customer base have all less margins and when you compare to distribution and industrial. Then on the deleveraging side, yes, that gives us lots of opportunities and as we continue to work down that. Our pecking order, which you'll be familiar with, and first and foremost is dividends. And our next dividend target to raise the dividend to keep our track record going is Q4. And you can rest assured we're going to do that. The next is continue to fund organic growth and productivity, which we'll do that. And that's about 2% of sales. We will continue to delever. But as we glide down there, we have an opportunity to look at reinstating the 10b5-1, and we'll update you all on our thinking of that in the next earnings call. And then there's an opportunity as we go down the glide path here to look at acquisitions and share repurchase. And I think because our cash flow has been so strong that we don't necessarily have to wait until we get to 2.0 again to finally dust off the acquisition pen. There's probably opportunities of properties that are a more reasonable size, say, versus doing a CLARCOR or a LORD that would allow us to do and glide down and basically not be impacted at all, so to be able to meet our commitment to all the credit rating agencies and delever at the speed we wanted to. And then the EBITDA is so much higher now that we can probably absorb some things as we glide down and not miss a beat as we try to get down there. So it does give us a lot more opportunities, and those opportunities will depend on what's available. And that trade-off is something we look at every time.

Andrew Obin, Analyst

Congratulations to Cathy, and thank you. And congratulations to Todd. Maybe I will ask you more questions on margin pace in the second -- no, I will not do that. Just a question on your hydraulics business and just sort of trying to figure out your performance versus your competitors. A, can you talk about the pace of orders throughout the quarter? And when do you think we should hit positive orders for your hydraulics business, industrial business, yes, month, quarter, however you want to answer it? So that's question one.

Thomas Williams, Chairman and Chief Executive Officer

Okay. So Andrew, it's Tom. First, I would just remind everybody, our industrial business is not just hydraulics, it's 8 motion control technologies. And if I was to compare my neighbors across the street, our organic decline was 15%. And our industrial declined, if I add North America and international, is more like 10%. So again, I think it shows the more diversified portfolio that we have. The order trends in the quarter improved sequentially for North America and international. And we actually had international -- we had Asia Pacific and Latin America turn positive in the quarter. And when we would turn positive as a total company, it's hard to pin that down exactly, but more than likely sometime in Q3.

Andrew Obin, Analyst

Got you. And just a follow-up question. Aerospace, could you remind us post the Exotic transaction, what was the mix between commercial and military in the aerospace portfolio? And where are we right now?

Thomas Williams, Chairman and Chief Executive Officer

Yes. Andrew, it's Tom again. So the mix right now is 50-50. And in the past, it was about 2/3-1/3. 2/3 -- I'm just round numbers, 2/3 commercial, 1/3 military. So you have 2 things going. You have much higher military content with Exotic. And then of course, you have the commercial market softening. So we're about 50-50. And I think the thing that's really helped us in aerospace -- if you go look at our sales decline versus other aerospace businesses, we're at the top of the list. And we're not thrilled that we declined 20%. But if you compare our decline to others, we're in a top quartile. Go compare our margins to our aerospace peers, we're in the top quartile. Go compare our decrementals, we're in the top quartile. So why? The Win Strategy, but it's been the diversification of that portfolio. We have a very diversified technology portfolio. Our percent on engines, commercial, military, bizjet, generally patient, helicopters, regional transportation, it's very diverse. And so that allows us to kind of weather the storm. And certainly, the 50-50 now in the military content being much more stable, has helped us quite a bit.

Catherine Suever, Chief Financial Officer

Thank you, Ann. So this concludes our Q&A and the earnings call. Thank you for joining us today. We appreciate your interest in Parker. Robin and Jeff will be available throughout the day to take your calls, should you have any further questions. Stay safe, everyone.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call and webcast. Thank you for participating. You may now disconnect.