Parker-Hannifin Corp

NYSE:PH

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to the Parker Hannifin Fiscal 2020 Third Quarter Conference Call and Webcast. [Operator Instructions]

I'd now like to hand the conference over to your host Chief Financial Officer, Cathy Suever. Madam, please, go ahead.

[Cathy Suever, Chief Financial Officer]

Thank you, Latif. Good morning and welcome to Parker Hannifin's third quarter fiscal year 2020 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 materials and are also posted on Parker's website at phstock.com.

Today's agenda appears on slide number 3. We'll begin with our Chairman and Chief Executive Officer, Tom Williams, providing comments on the current environment and related actions we've been taking. Tom will then discuss highlights from the third quarter.

Following Tom's comments, I'll provide a more detailed review of our third quarter financial performance. Tom will then provide a few summary comments and we'll open the call for a question-and-answer session. We'll do our best to take all the questions we can today.

Please refer now to slide number 4 and Tom will get us started.

[Tom Williams, Chairman and Chief Executive Officer]

Thank you, Cathy. good morning, everybody. Thanks for your participation today. Before I get into Slide 4, I just want to first extend our thoughts to all those that have been affected by the crisis and our deepest sympathies go out to those that have lost loved ones as a result of the virus.

A special thank you to all the health care professionals for their courageous efforts around the world and I'd also like to thank all the Parker team members for their dedication and their support and what we have done in really, in our own small way to help society through this crisis. I'll elaborate more about that later on in the presentation.

So this is unprecedented times and that's a word that's probably overused but very appropriate given the uniqueness of having a combined health and economic crisis. So on Slide 4, our performance and our strength for both of these crises really comes from The Win Strategy, which is a proven operating system and we're now in our third and very powerful revision of that.

A portfolio of products and technologies that are needed and this has never been more evident and important in today's climate. We make things that the world absolutely needs. Our culture and our values, which is why people join and stay at Parker and our purpose, which has been our North Star, and I'll talk more about the connectedness of our purpose to our actions later on.

And we have an engaged team of people. We have top quartile engagement scores and you couple that with our decentralized divisional structure, that is what has enabled us to move at the speed and agility that you've seen during this crisis.

So on Slide 5, our crisis management strategy is really threefold. First is the safety of our team members and their families; second is how do we help society through this crisis, we are essential, and I'll talk to you more about why we are essential. And that we want to emerge stronger than ever before after the crisis is over.

We have utilized the crisis response management team and that's structure we have in every key country and we have it for corporate as well, and their focus has really been on the health and safety side of things. We've had a daily cadence with that team, seven days a week, really, since this all started in January. I wanted to make a comment about how the executive team has been functioning.

So the executive team, say the top 20 executives in the company, have still been coming to the office, and we maintain physical distancing and do zoom conferencing, all those type of things, but it's very advantageous to have us co-located to where we very quickly can see each other, make decisions. That's been a key enabler to our speed and to decisiveness as well.

On Slide 6, we'll talk about the health and safety actions. They've been early and they've been decisive. They've been patterned off of the CDC and the WHO as well as lessons that we've learned from China. And this is a list that you probably are familiar with as you've listened to other companies. I won't necessarily go through each one of these, but I would just point to, we were early on with travel restrictions and we were early with cancellation of in-person meetings.

And I will highlight two examples. First, ConExpo. We're probably one of the first companies to withdraw from ConExpo, which is a very important show. So that sends a very strong message, I think, to everybody in our space as well as our people, the importance of what we wanted to do here, protecting our people. And then we were an early adopter of the virtual Investor Day, which all of you were part of, and we thought that was very successful. Not as good as in person, but it was very successful. And it was a smart move to do that.

So the takeaway on this page, the governing message to all of our people has been this takeaway. We wanted the two safest places for our people to be at work and at home, and we're going to do everything humanly possible to make sure that it happened. So I mentioned that we were essential.

And on Slide 7, I just wanted to highlight some examples of our purpose and action. And I'm going to go through these just real quickly. But our products have helped society through this entire crisis. So if you look at food supply, we have products from the farm all the way to the point-of-use in retail, helping patients, whether it's emergency transportation on a helicopter or on hospital beds. And we are a central manufacturer but we're also helping other people that are central manufacturers.

That little picture that you see in the upper right-hand corner there, is a picture of a typical manufacturing plant with the roof off of it. And I would tell you, we are in almost every manufacturing plant around the world, helping people make their products. So those eight motion control technologies, seen in the lower right, are being put to use to help society.

And if you go to the next page on Slide 8, a couple more examples, transportation, whether it's heavy-duty truck or air freight to get products to customers, power generation for electricity. We're on traditional as well as renewables. And I would – I think the best example and the poster child of this crisis is really the ventilator. We do a fair amount in health care but the ventilator in particular, we have almost doubled our sales in this calendar year 2020, and we have six of our eight technologies on the ventilator. And we've been supporting new and existing customers as well as countries from around the world.

And the divisions that have been doing this have just done a herculean job staying up with customers. It's just a fantastic job and my compliments to all of them. So on slide – the next slide is our purpose statement, enabling engineering breakthroughs that lead to a better tomorrow. We released this last September, and I can tell you, we probably never envisioned how positive an impact it's had on our people. And it's really is becoming a rallying cry for our organization through this crisis, and it illuminates, I think the purpose in what we bring to society and gives a great deal of meaning for our people on what they do, day in and day out.

Moving to Slide 10, a quick snapshot of the facility and supply chain status. And you go to that middle column, just at the major regions and total Parker. So this is percent capacity versus pre-virus. Using pre-virus as 100%, as an example, we're virtually back to normal at 97%, but there's obviously a lot of things that went on through the quarter and in April, with stay-at-home orders and all that, that moved us up quite a bit.

Our supply chain strategy on the right-hand side has done great and very effective during the crisis. You've heard me talk about this in the past but we may buy and sell in the region for the region. We've also got a very robust supply chain risk mitigation strategy that we've been doing for years, well before this started. So we're in very good shape on that. This is a nonissue for us.

Moving to 11. I want to talk about the quarter and I would just – if I had to summarize, I would tell you it's probably one of the best quarters that we've ever done, given the environment that we're in. It was really just remarkable performance by the team. Starting with safety, we had a 27% reduction in recordable incidents and that yields, when you look at reportable incident rates, so that's the number of safety instance per hundred people, we're a top quartile company, which is fantastic progress.

Sales were flat year-over-year. Acquisitions offset the decline we had in organic and currency. But the margins really were stellar. They really stood out. So we got two categories here, without acquisitions, and I would call your attention to the adjusted segment operating growth and you see, we came in at 17.3% for the quarter versus 17.2% in FY 2019, the same quarter. So a 10 basis point improvement, 16% decremental and remember, this is on about a 7.5% organic decline.

So just fantastic progress by the teams to pull that off. And then when you put acquisitions, it's easier to look at EBITDA to make it apples-to-apples. If you look at EBITDA margin on an adjusted basis, that last row, you can see that came in at 19.3%, so a 60 basis point improvement versus the prior period and this speaks to two things: one, the base business keeps getting better and is performing better, and we acquired companies that have accretive EBITDA margins to legacy Parker, which is helping fuel that margin expansion. One more page on the highlights for the quarter on Slide 12.

Our EPS performance, as you saw, was very strong, exceeded expectations. We had a record Q3 year-to-date casual. So records, meaning a record in the history of the company of $1.3 billion, which was great. The CFOA margin was 12.3% and the free cash flow conversion rate was 122%.

We are very pleased with our debt reduction of $611 million. That was a very nice reduction. And that helped reduce our leverage from 4.0 to 3.8 when you look at it from a gross debt to EBITDA. So you can see from these two slides and how the quarter went, we performed extremely strong. So we're going into this pandemic in a very strong financial position.

So on Slide 13, we had the order rates. And this was traditionally in Cathy's section, but I wanted to pull it up earlier to allow me to talk about April. Just a reminder, on this page, industrial orders are a three month year-over-year and aerospace is a 12 month year-over-year, rolling 12-month year-over-year comparison and excludes acquisitions and currency.

But I think the next – so you can see what happened here a little bit better, driven primarily by international, but it's probably a little more illustrative if you go to Slide 14, where we talk about April in particular. But I just want to emphasize that while Q3 got a little better, there was a distinct drop and that we felt it in March in the middle of the month.

So on a daily rate basis, you got to remember that the prior slide is three months rolling. When you look at the daily basis, we were clearly feeling this in March already and so that was impacting us. The pandemic was declared March 11 and we had IR day on March 12. And I think just as soon as the cameras stop rolling, the stay-at-home orders started up pretty much around every country and around the world. China had already started that.

And so what you're looking at this page is a 112, not a 312, so this is April, month-to-date, versus April month-to-date of the prior period. Again, it excludes acquisitions and currency. The month hasn't closed, hence why we have ranges on here. And orders were clearly influenced by those stay-at-home orders that I referred to and extensive customer plant shutdowns that happened through the month of April and started in March, for that matter as well. But one positive note here is that our orders have stabilized the last two weeks so that's a very good sign.

So as a result of that, on Slide 15, we've taken decisive cost reduction actions in the fourth quarter and I would give you a hockey analogy that we are skating to where the puck was going. We saw this decline happening. We felt it in the middle of March and we started these actions in March. And so we started rate at the beginning of April, these were effective April 1. Now these actions are really in two distinct buckets. The first is discretionary, which will vary based on order entry and it will flex to the amount of orders and business that we have.

So that's the first category. The second is permanent structural cost actions that are predominantly SG&A and that will be across the company, but in particular, focusing on aerospace and oil and gas end markets that are low for longer, that need structural actions, too. So let me just take one at a time here.

So on the discretionary side, we have salary-based wage reductions and you can see the various elements here. All of our salary team members around the world and our directors took a 10% base salary reduction. Our offers – officers are in the 20% to 30% range and myself at 50%. Now this is effective April 1 and it's effective for 90 days, and we'll evaluate whether we need to extend it when we get to Q1, and that valuation will be dependent on how order entry is doing and how the business is progressing.

The next category you see there is reduced work schedules. And that could range anywhere from a reduced work schedule of 10% to 100%. And we could take a plant down one day a week, it could go down for several weeks at a time. It depends on, really, with the activity in that plant, and we're very much matching work hours to order entry and we've had terrific, terrific collaboration around the world from all of our colleagues, works councils, et cetera, to use this as a very effective tool to adjust business to order entry.

We're foregoing annual merit increases and we're reducing travel and basically producing everything that's not moving, we're not spending. So that – you add up all that, that comes to a $250 million to $300 million cost reduction in Q4. And then as I referred to on the structural side, those are SG&A related reductions in force. And if I was to highlight aerospace, we are going to do an approximate 20% reduction in force in the number of people that we have in the aerospace group. And that yields a $25 million to $30 million cost reduction for the quarter. Add that up, that's $275 million to $350 million. So we're targeting an approximate 30% decremental margin.

We're planning for an L type of recovery here, where the L is going to have the bottom of the LD, horizontal side is going to have some variation and a variation that is not known at this point. But we're planning conservatively on the cost and cash side for an L. But you notice very distinctly with the way we've done in discretionary, we absolutely have the flexibility, that L turn into a modified V or to a U, that we could respond at a moment's notice to any kind of growth because our discretionary side is very flexible.

If you go to 16 on the cash side, we're conserving capital spending, as you might imagine, we're optimizing working capital, which is a traditional strength for the company. You go through all of our past recessions, this is a legacy that we've always done extremely well in. We're temporarily suspending the 10b5-1 share repurchase program, and we will maintain the dividend payout and the annual record of increasing dividends paid. Just as a footnote, our annual dividends paid in FY 2019 was $3.16 and FY 2020 was $3.52. It's a record we're proud of and it's a record that's going to continue. We're confident. You look at all these actions on the cost side and the cash side and generating a greater than 10% CFOA going into the future.

So I want to close out my opening section with the transformation of the company. And it starts with the Win Strategy, while it was the original Win Strategy almost 20 years ago, Win Strategy 2.0 in 2015 to today, Win Strategy 3.0, this is the engine behind our success. And it's going to create a very powerful future for us, but this is the highlight of Investor Day, so I won't go back through that as we just did that last month.

On Slide 19, this unmatched breadth of technologies is even more clear today because it's a portfolio that is unmatched and gives us a competitive advantage, but it's also a portfolio that is very much needed in society. And the fact that 60% of our revenue comes from customers that buy from four or more of these eight technologies, is recognition that our customers feel the same way.

On Slide 20, we've been very strategic in upgrading the portfolio. This is a list of three transformational acquisitions, adding to filtration, engineered materials and aerospace. And even in these trying times, we see the power of these deals, their top lines, all three have been far more resilient than legacy Parker, and the EBITDA margins have been nicely accretive.

If you go to Slide 21, this is the chart we showed at Investor Day, and we've got two stair steps in here that the black is, as reported, operating margin and the orange is adjusted operating margin. And this is how we've done the last five manufacturing recessions and this is remarkable progress from where we were when the original Win Strategy was launched, five recessions and these stair steps, I think really speak to the improvement that we've done over many recessions and you get ready for your current recession, many years before. So the reason why we're performing as well as we are now is we've been changing the cost structure for the last five years and we've been working on this for the last 20.

Our Q3 year-to-date adjusted operating margin at 16.7% was already in a tough environment. I would remind you that year-to-date, if I add organic and currency together, it's about a minus 7% environment. So we are performing at remarkably high levels in a tough environment. That's an almost 900 basis point improvement from when The Win Strategy was first launched. Now obviously, Q4 is going to put downward pressure on that number but we will still end the year significantly better than we've been in any prior recession.

On 22, as I look at cash flow, and I would just call your attention to the blue line, which is the CFOA margin line. And you can see we've been extremely resilient over many cycles. Good times and bad times, this company generates 10% or greater CFOA and 100% greater free cash flow conversion. We did it before and we're going to do it again. This graph hopefully speaks to the resiliency of the cash flow for the company.

Then on 23, the outlook for FY 2020. The current environment is highly uncertain, as all of you, I think, can certainly understand and appreciate, making it very difficult for us to guide with any kind of accuracy or reliability, hence we're withdrawing FY 2020 guidance. The portfolio and the cost structure has been transformed over the last five years. It's why we've been performing as well as we have been. And the proof is really in those slides I just showed you. We have come out very rapidly and assertively to adjust cost to the current environment. And as I just spoke to, our cash flow is very resilient. And we have a bright future. The Win Strategy 3.0 and our purpose are going to propel us as soon as we get through this crisis and will propel us through this crisis as well.

So with that, I'm going to hand it back to Cathy for details on the quarter.

[Cathy Suever, Chief Financial Officer]

Okay. Thanks, Tom. I'd like you to now refer to Slide number 24, and I'll summarize the quarter. This slide presents as reported and adjusted earnings per share for the third quarter. Adjusted earnings per share for the quarter were $2.92 compared to $3.17 last year. Adjustments from the current fiscal year as-reported results netted to $0.09, including before tax amounts of business realignment charges of $0.10, acquisition costs to achieve of $0.06 and acquisition transaction expenses of $0.14. These were offset by the tax effect of these adjustments of $0.07 and the result of a favorable tax settlement of $0.14. Prior year third quarter earnings per share has been adjusted $0.03, the details of which are included in the reconciliation tables for non-GAAP financial measures.

On Slide 25, you'll find the significant components of the walk from adjusted earnings per share of $0.17 for the third quarter last year to $2.92 for the third quarter of this year. Starting with the net decrease of $0.07 in segment operating income. For legacy Parker, a $329 million decline in sales resulted in only a $54 million reduction in operating income or $0.31. The Parker teams did an excellent job of controlling costs on the lower volume, resulting in a legacy Parker decremental margin of 16% for the quarter. The LORD and Exotic acquisitions contributed $0.24 in operating income.

Lower net corporate G&A and other expense contributed $0.03 this quarter as a result of currency gains on forward hedge contracts. We incurred incremental interest expense of $0.19 year-over-year. And after adjusting out the benefit of a favorable tax settlement, a higher tax rate from continuing operations and less favorable discrete adjustments resulted in a $0.04 reduction from income taxes.

On Slide 26, you'll find the significant components of the walk from the previous third quarter adjusted earnings per share guidance at the midpoint of $2.36 to $2.92 for the third quarter fiscal year 2020 actual results. Segment operating income contributed $0.43 more to the quarter than anticipated. Our guidance was developed at the start of the COVID-19 scare in Asia and we anticipated a 16% drop in international organic sales but actually achieved only a 10% organic decline. The aerospace segment, on the other hand, experienced more impact in the quarter than was anticipated. Our quick reactions to controlling costs and the resulting higher margins also contributed to the higher than expected operating income.

Lower net corporate G&A and other expense contributed $0.10, due to the previously noted currency gains in the quarter. Lower interest expense due to reductions in debt and lower variable interest rates in the quarter, resulted in a $0.02 per share improvement

Slide 27 shows total Parker sales and segment operating margin for the third quarter. Organic sales decreased year-over-year by 7.4% and currency had a negative impact of 1.5%. These declines were more than offset by the positive impact of 9.3% from acquisitions. Total adjusted segment operating margins were 16.9% compared to 17.2% last year. This 30 basis point decline is net of the company's ability to absorb 100 basis points of incremental amortization expense from the acquisitions.

On Slide 28, we're showing the impact LORD and Exotic had on the third quarter of fiscal year 2020 on both an as-reported and adjusted basis. Sales from the acquisitions were $343 million and operating income on an adjusted basis was $42 million. The operating income for LORD and Exotic includes $35 million in amortization expense. Note the improvement of 10 basis points in legacy Parker operating income despite the $329 million drop in sales. The great work the teams did on controlling costs resulted in a 16.4% decremental margin for the quarter.

Moving to Slide number 29, I'll discuss the business segments, starting with diversified industrial North America. For the third quarter, North American organic sales were down 7.1%, while acquisitions contributed 8.9%. Operating margin for the third quarter on an adjusted basis was 17.1% of sales versus 16.5% in the prior year. This 60 basis point improvement is after absorbing 100 basis points of incremental amortization. North America's legacy businesses generated an impressive decremental margin of 4%, reflecting the hard work of diligent cost containment and productivity improvements together with the impact of our Win Strategy initiatives.

Moving to the Diversified Industrial International segment on Slide number 30. Organic sales for the third quarter in the Industrial International segment decreased by 10.2%. Acquisitions contributed 6.2%, and currency had a negative impact of 4%. Operating margin for the third quarter on an adjusted basis was 16.2% of sales versus 16.5% in the prior year. Without the incremental amortization expense, margins would have improved 10 basis points on an overall 8% reduction in sales. The legacy businesses generated a very good decremental margin of 19%, again, reflecting diligent cost containment and the impact of The Win Strategy.

I'll now move to Slide number 31 to review the Aerospace Systems segment. The Aerospace Systems sales increased 16.7% from acquisitions, while organic sales declined 2.4%. Declines in OEM volumes, primarily commercial, were partially offset by higher commercial and military aftermarket sales. Operating margin for the third quarter was 17.4% of sales versus 20.7% in the prior year. Incremental amortization expense impacted the change in margins, 160 basis points. Lower earnings were driven by the OEM volume declines, higher engineering development costs and a less favorable aftermarket mix. Good margin performance from Exotic and hard work by the teams on cost containment and productivity improvements helped contribute to the solid performance in the quarter.

On Slide 32, we’re showing the impact Lord and Exotic has had year-to-date fiscal year 2020 on both an as reported and adjusted basis. Sales from the acquisitions total $651 million and operating income on an adjusted basis contributed $82 million. This operating income includes $65 million of amortization expense. Adjusted EBITDA from Lord and Exotic is 26.3%. With this meaningful contribution from acquisitions, total Parker adjusted EBITDA has increased to 19% year-to-date compared to 18% for the same year-to-date period in fiscal year 2019.

On Slide 33 we report cash flow from operating activities. Year-to-date cash flow from operating activities was a record $1.3 billion or 12.3% of sales. This compares to 12.1% of sales for the same period last year after last year’s number is adjusted for a $200 million discretionary pension contribution. Free cash flow for the current year-to-date is 10.5% of sales and the conversion rate to net income is 122%.

Moving to Slide 34. I’d like to discuss our current liquidity and credit positions. Our cash as of the end of the quarter was $0.7 billion. The majority of this cash is overseas allowing the international operations to be self-financed. Our long history of free cash flow exceeding net income during growth periods as well as recessionary periods gives us strong confidence in our cash flow outlook. With additional emphasis on our well-established cash management practices, we are optimizing working capital, taking advantage of the government tax payment deferrals and reducing our capital expenditure investments.

We have temporarily suspended our 10b5-1 share repurchase program, but as Tom described, we remained committed to paying our shareholders a dividend and we’re confident we have the cash available to do so. We have a $2.5 billion revolving credit facility readily available should we need it, and we have no major debt repayments due until fiscal year 2023. We remain active in the commercial paper market and as of the quarter end, we held $0.9 billion in commercial paper debt. The only active financial covenant in place is to maintain a gross debt to total cap ratio below 65%. We are currently at 59.4% and we have $2.5 billion of headroom where we in need of additional debt. Our gross debt to EBITDA leverage metric at the end of the quarter was 3.8 times, down from 4.0 times at December 31. We were able to pay down $611 million of debt during the quarter and as we build a full 12 months of EBITDA from the acquisitions, the metric will become more meaningful.

As Tom mentioned, we are withdrawing our fiscal year 2020 guidance due to the uncertainties we are still facing through this quarter. We ask that you continue to publish your estimates using adjusted results for a more consistent year-over-year comparison. As a reminder, we will be revising our method of reporting adjusted results to include adjusting out the amortization related – the acquisition related amortization expense, but we do not intend to make that change until fiscal year 2021. We ask that you do not adjust for amortization expense in your estimates until we all consistently make that change.

If you’ll now go to Slide number 35, I’ll turn it back to Tom for summary comments.

[Tom Williams, Chairman and Chief Executive Officer]

Thank you, Cathy. We are confident in our ability to emerge stronger than we’ve ever been before. And that confidence and that hope really comes from a couple of factors: The Win Strategy, the portfolio we have of needed products and technologies, our culture and our purpose, and probably most importantly, is the last page, our team of people, fantastic team of people, which we try to show as many as we could here on this page from all around the world. And what this crisis has clearly exposed and shown is just how – what an important role everybody plays within the company. I would just like to again thank the global team for an extraordinary job, thanking what they’ve done to date and thank them for what we’re going to do in the future.

And with that, I’ll turn it over to Latif to start the Q&A.

[Operator]

Thank you, sir. [Operator Instructions] Our first question comes from the line of Nigel Coe of Wolfe Research. Your line is open.

[Nigel Coe, Wolfe Research]

Thanks. Good morning. Can you hear me?

[Cathy Suever, Chief Financial Officer]

Good morning, Nigel. We can hear you well. Yes.

[Nigel Coe, Wolfe Research]

Okay. Great. So Tom, you mentioned that you’re planning on analysis recovery. And I’m just wondering what that means in terms of balance sheet liquidation inventories and it suggests that you’re going to be very aggressive in terms of liquidating the balance sheet. So my real question is, 4Q guidance obviously being withdrawn, but do you have confidence that you could still generate $1.8 billion of free cash flow versus the $1.3 billion year-to-date?

[Tom Williams, Chairman and Chief Executive Officer]

Nigel, yes. Because we – typically, our fourth quarter, even in tough times is always a very strong quarter for us, and we will have the advantage of working capital generating a lot of cash for us in Q4 and that should help us quite a bit. And so we still see that, that 10% or greater CFOA as a percent of sales is going to continue, and we’ll do a good job in Q4. I think what I want to emphasize is we’re planning for an L to be conservative, but we have the flexibility with whatever shape, letter it turns out to be. And of course, nobody knows at this point, but we have the supply chain flexibility. We have the people flexibility to respond in whatever direction it works.

[Nigel Coe, Wolfe Research]

Great. Thanks, Tom. And then my second question is on the decremental margins. You’ve obviously done a fantastic job, especially on the legacy Parker businesses. Your comments on the 4Q seems to suggest that there’s going to be some deterioration in the run rate given the volume drop-off that you’re expecting. But given the cost countermeasures you’ve put in place, a little bit surprised that maybe decrementals can’t be managed below 30%. So I’m just wondering what you’re expecting in terms of decremental margins based on your scenario planning?

[Tom Williams, Chairman and Chief Executive Officer]

Well, like I have on that slide that I outlined all the cost reductions, we’re targeting a 30% decremental. A 30% decremental is still best-in-class, if you benchmark other companies. And doing a 30% decremental approximately in this kind of climate is really, really good performance. Who knows what the quarter is going to turn out to be, I would suggest to the folks listening, that April is probably our low point and that we would see May start to improve a little bit and then improve a little bit after that with June. But if you can do decrementals like this in this kind of environment, that’s really outstanding performance.

[Nigel Coe, Wolfe Research]

Great. Thanks, Tom. Good luck.

[Cathy Suever, Chief Financial Officer]

Thanks, Nigel.

[Operator]

Thank you. The next question comes from the line of Mig Dobre of Baird. Your line is open.

[Mig Dobre, Baird]

Thank you. Good morning, everyone. I’m glad to hear you doing well. I’d like to ask a question on aerospace. The color that you’ve given us on April is quite different than the orders prior to coronavirus becoming an issue. And I just – I guess I’m wondering, how should we be thinking about this softness in orders playing through to fundamentals next quarter and over the next couple of quarters? How does it flow to revenues and how should we think about decremental margins in this segment specifically?

[Tom Williams, Chairman and Chief Executive Officer]

Mig, it’s Tom. So I think, obviously, we never disclosed – haven’t disclosed until this time, aerospace on a 112 because it is lumpy, and there’s a lot of multimonth, multiquarter, multiyear type of orders that get in there. So it can sometimes be misleading, either on the positive or the negative side when you look at it. But aerospace, what we’re planning for is a significant change to aerospace. It’s going to go through a tough time. And you’ve got the commercial side, it’s going to come down very strongly, but we have a really great military business. So we’re basically two-thirds commercial, one-third military and that military business is growing very nicely.

So our 20% reduction in force will be in addition to those discretionary things for aerospace. So we’ll do the 20% reduction in force, that’s a permanent SG&A challenge to kind of reshape aerospace for this new normal, but we will continue the reduced work schedules, the salary reduction of the things I have on the discretionary page that I outlined so that aerospace can flex as well. And we feel very good that aerospace will be able to do well in this new environment.

The Exotic team that’s come on is performing well. They’re performing better than legacy Parker and it has over 60% military business. So aerospace long term, long, long-term is still a great business. It’s going to have a couple of years here of challenges, and we’re reshaping the portfolio to win in this new reality, and we’re doing it very quickly.

[Mig Dobre, Baird]

Understood, Tom. But is there a way to maybe talk about this business sequentially from a revenue standpoint? Just trying to make sure that we have our expectations properly gauged there.

[Tom Williams, Chairman and Chief Executive Officer]

Well, we’re not guiding. So I’m not going to start spouting off what I think Q4 is going to be. But I think you can look at order entry there. And you can also recognize that we do have very strong backlogs in this business. So we had the ability to continue to work backlog. And actually, the backlogs have held up fairly well. When I look at backlogs going from March to April to date, commercial OEM is at about 11 month backlog and military OEM is almost two-year backlog. Commercial MRO, if you remember at IR Day, we talked about at 2.5 months, it’s still about 2.5 months. And military MRO is at about a 16-month backlog. So the backlogs are holding up. I would tell you what customers are doing is they’re more rescheduling quantities. And that’s what we’re doing is we’re reshaping our supply chain demand and our people to that new reality.

[Mig Dobre, Baird]

Appreciate the color. Thank you.

[Cathy Suever, Chief Financial Officer]

Thanks, Mig.

[Operator]

Thank you. Our next question comes from Andrew Obin of Bank of America. Your line is open.

[Andrew Obin, Bank of America]

Can you hear me? I apologize.

[Cathy Suever, Chief Financial Officer]

Yes. Good morning.

[Andrew Obin, Bank of America]

Good morning. Just a question. Can you just talk maybe about region-specific trends on orders? You provided great granularity on orders by segment in April. But maybe just compare and contrast how Asia, Europe and U.S. – well, U.S., you have, but how the pace of recovery in Asia and what do you see at the end of the tunnel in terms of your China experience?

[Tom Williams, Chairman and Chief Executive Officer]

Andrew, it’s Tom. So I’ll address that. Let me start with – I’ll give you the Q3. I recognize maybe a lot of you won’t need Q3 but I just – I’ll give it to you for context. And then I’ll go into April and China, your specific question. So you saw the orders on Q3 and the improvement that we saw before middle of March was really international. It was both EMEA and Asia. And you saw aerospace orders stay level, and that was because we had very strong military OEM orders. When you look at it by kind of subsegment, and this is organic, and you’ve already seen total Parker minus 7.5%, aerospace at minus 2.5%. But distribution was down about mid-single digits, pretty much steady versus the prior quarter. Again, this is a Q3 market summary.

Industrial was down mid-single digits, a slight improvement of about 200 bps improvement versus Q2. And then mobile was down low teens. And it had a slight improvement versus Q2. The markets that were positive, we had some very strong end markets that were positive in Q3. Greater than 10% was power gen and semiconductor. We had two markets that were positive, low single digits, marine and mining. And then on the declining markets, I’ll just give you in various buckets, low single-digit decline was mills and foundries, mid-single-digit declines, refrigeration, oil and gas wanted tariff on distribution, high single-digit declines in life science and automotive. And then that 20% to – and that 10% to 20% decline was tires, telecom, construction, heavy-duty truck, agriculture and rail.

Now to April, Andrew. So what we saw in April so far, now – so you saw the segments. So let me give you color on international. So in a page, Slide 14 in the deck, it’s 25% to 30% down, but Asia Pacific was down about minus 5% to minus 10% and then EMEA and Latin America down minus 35% to 40%. We did have some positive end markets in April. Life sciences, I mentioned the amount of ventilator work that we were doing, power generation, semiconductor as well as aerospace military OEM and aerospace military MRO, all the negative.

The positive, as I mentioned earlier on, was that orders stabilized the last two weeks at these levels. So they did not continue to decline, which is kind of the first sign of healing. In May, and this is a guess on our part, is that this will be somewhat similar, but slightly better as most of our customer shutdowns start back up in May, but there’s been a lot of variations as part of why we’re not giving guidance is their start dates have moved very much. Almost every day, we get a new letter from a customer moving a start date and their levels of production have moved and really won’t be finalized until they start-up. And they’ll start at low levels. But we expect May to be slightly better and then June should build slightly better on that.

But to your point, and what we’re looking at related to what you were getting to, is Asia. So Asia was the first to go in and the first to come out of this. So Asia, while maybe not necessarily being foreshadowing what the rest of world is going to do, it’s illustrative to understand what happened in Asia. So in particular, if I look at China, because that’s really the bulk, it’s half of Asia, at least. In Q3, the trend there, I’m using round numbers on sales, was a minus 30 in January, minus 40 in February and then flat in March. So we had a very sharp rebound in China orders in March. This is restocking due to the pent-up demand from January and February.

And so our thoughts and about the only region I’m going to give you thoughts on Q4 is Asia. And so I’ll give you what we – our initial estimates are might be for Asia, again, indicative of what might happen as you think about the rest of the world, subsequent months down the road. Is that we have North Asia, China, Japan and Korea, kind of in that minus 5% to minus 10% for the quarter, Q4. Southeast Asia is slightly positive and then India being down probably in the high teens. Most of India is taking a very hard line on their manufacturing capacity shutdowns that puts total Asia in that minus 5% to minus 10% range for Q4.

I would just comment that, that visibility is cloudy, clearly dependent on how global trade does and probably mostly dependent on China’s economy. The same challenges that we have seen in the rest of the world on small to medium-sized companies, China has the same issue, those company cash and then the rest of Asia is still operating with partial shutdowns. If you look at New Zealand, Singapore, Malaysia, Indonesia and India, in particular. So Asia is the first to start to heal and that’s the indicator that we see at this moment, Andrew.

[Andrew Obin, Bank of America]

That is incredibly helpful. And just a follow-up question. How do you gauge the financial health of your distributors, the ability to access capital, the ability to access in this environment? And where do you think financial health for your distribution stands right now? Thank you.

[Lee Banks, President and Chief Operating Officer]

Yes. Andrew, this is Lee. So I mean, as you know, we’ve got incredibly close relationships with all our distribution. And we have constant health checks with them, very current on receivables. Just very frank conversations on credit and we don’t have any issues looking through the channel right now to speak of.

[Andrew Obin, Bank of America]

That’s was helpful. Congratulations and thank you. And congratulations on a great quarter.

[Operator]

Thank you. Our next question comes from David Raso of Evercore ISI. Your line is open.

[David Raso, Evercore ISI]

Hi, good morning, I’m trying to think of a setup exiting this calendar 2Q. I mean, it looks like the way the revenues are playing out the orders with your decrementals, it seems like your sort of wide range EPS for the quarter is like $1 to $1.50 or so. But typically, the next quarter, you have sales down mid-single digit. I would think just given what’s happening here, it should be the opposite. They should be improving from calendar 2Q to 3Q? But I’m trying to understand the setup. When you’re saying stabilization, are you getting any indication, is this – distributor inventories low enough that they’re restocking, OEMs were not stocking up before they’re shutdown, so they have a catch-up? I’m just trying to get a better sense of how comfortable can we be that the first quarter of fiscal 2021 can really leverage off that, say $1 to $1.50 range. I think people are just trying to get a sense of what’s the earnings power after what could be obviously difficult calendar 2Q?

[Tom Williams, Chairman and Chief Executive Officer]

So David, it’s Tom. So I probably won’t surprise you. I’m not going to comment on Q1, but I’ll give you maybe some thoughts on the other parts of your question. So when I make comments about being more stable, it’s the daily rate stabilizing for the last two weeks. And our distributors are smart business people and they’re conserving cash just like everybody else. So they are pretty much being very careful with what kind of things they’re going to do on inventory and they’re managing inventory very appropriately. I think our Q1 is going to have an advantage because our cost structure is going to be extremely lean going into Q1.

What I can’t predict is what’s going to happen on the top line. I do think that we will progressively improve April to May, May to June. But I can’t guess necessarily what the year-over-year is going to be because the pandemic, you have to cycle the pandemic before you start to show really positive gains. But I think sequentially, you’re going to start to see improvement. The big question is just the rate of improvement. Is this an L? Is it an L where the bottom of the L starts to move up more aggressively than a traditional L? Is it a U? We don’t know. That’s why we’ve designed our ability to flex to that demand if it happens, but have a cost structure that can be there, if it doesn’t happen as well.

[David Raso, Evercore ISI]

That was sort of the genesis of the question. So if there’s any reopening that can be stabilized at all, you would think your revenue sequentially would go against the historical norm. It won’t decline mid single, it should improve. But from your answer, it sounds like it’s more OEM right now than it is distributor. And to your point, I’m just trying to figure out the incrementals coming out because if it’s OEM over a distributor, you’d argue you’d rather have distributor. But to your point, you’re going to have cost-outs that should not automatically come back. Right? You should have some leaned out costs. But again, it’s more OE improving from here, stabilizing, let’s say, then I should think it’s the distribution. It’s more OE. Right?

[Tom Williams, Chairman and Chief Executive Officer]

Okay. So I get your question more, David. So I think you’ll see improvement – marked improvement across both channels, OE and distribution because those order rates that we showed you on that slide for April are pretty equally representative distribution and OEM, maybe slightly better in distribution, but they’re pretty much the same. So you’re going to see both of them come back. It won’t be like, hey, we’re just going to rebound in OEM and distribution stays the same. You’ll get both coming back.

[David Raso, Evercore ISI]

Okay. That’s helpful. I appreciate it. And lastly, anything about how you’re viewing the world now, that changes how you feel about what leverage you want to come down to before? And I know it never was imminent anyway, but we used to talk kind of 12, 18 months. Have you rethought at all what you are comfortable with on leverage before you would lean back forward, be it M&A or repo?

[Tom Williams, Chairman and Chief Executive Officer]

David, it’s Tom again. So we would – we still feel strongly we want to get back down to that approximate 2.0 level on a gross debt to EBITDA. That was our feeling before the crisis, it’s still our feeling.

[David Raso, Evercore ISI]

Okay. Thank you very much.

[Operator]

The next question comes from Nathan Jones of Stifel. Your line is open.

[Nathan Jones, Stifel]

Good morning, everyone. Just a question on the decrementals first. You guys have some noise going on in the decremental margins with the acquisitions folding in. Is that 30% decremental that you’re targeting, including the acquisitions, excluding the acquisitions? How should we think about that?

[Tom Williams, Chairman and Chief Executive Officer]

Nathan, it’s Tom. That would be excluding the acquisitions, the legacy business. But I would just tell you, the two acquisitions are doing extremely well. And I would just want to make one quick comment in case there’s – people have more – might have more questions in acquisitions. Part of why you see the improvement in North America is our synergies on LORD have accelerated. We’ve gone from what we told you last quarter at $18 million in FY2020 to $30 million. And we’ve been able to accelerate our SG&A on LORD.

And so we look for that – the decrementals on legacy, but we look at the two acquisitions. Both acquisitions, as you saw, are coming in at a really nice – LORD is significantly beating where we thought they’d be on EBITDA. They’re on approximately 27% EBITDA for Q3 and Exotic was in the mid-20s. And both of those businesses are executing the same kind of cost reductions and cash actions that the rest of the business is doing. So they will continue to be helpful. Their top line is holding up better than legacy Parker and our margins are better. So they will continue to help. But that decremental-like quote, it was on the legacy business.

[Nathan Jones, Stifel]

Okay. And then on the cost out numbers, the $250 million to $300 million, it sounded like that was in place on April 1. Are you already at the run rate there? And then the $25 million to $30 million that’s structurally coming out of the aerospace business, how long does that take before that falls into your cost structure?

[Tom Williams, Chairman and Chief Executive Officer]

The numbers that are on that page are what we will feel in Q4. So that’s for a full quarter, you’ll feel it. And it’s more than just aerospace and the structural, there’s oil and gas, things we’re doing. And there’s things really across every group that we’re doing as well. But clearly, a lot of it is aerospace driven.

[Nathan Jones, Stifel]

And then just one quick one on the Exotic synergies. You talked about the LORD synergies there. Does the – the large drop in the expectation for aerospace here reduce the expectation of the amount of synergies that you can get out of Exotic over the next year or two?

[Tom Williams, Chairman and Chief Executive Officer]

Yes, for Exotic, we’ve had a pretty minimal amount of synergy, if you remember, it’s $30 million. And we recognized that with material savings for Exotic, you’ve got long supply agreements, and they really weren’t going to start to kick in until year 2022 and 2023. And most of Exotic’s synergies were productivity and The Win Strategy, which we feel very good about. So the $50 million, the short answer is we feel good about that. That’s not changing. And I would just highlight again for Exotic, their top line in Q3 was still significantly better than legacy Parker. We’re clearly fortunate that over 60% of that business is military. And we’ve been able to pull in and accelerate our F135 work to kind of help cushion what’s happening on the commercial side. And so for Exotic to deliver mid-20 EBITDAs, given what’s going on, it’s just really fantastic performance by them.

[Nathan Jones, Stifel]

Okay. Thanks for taking my questions.

[Operator]

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

[Jamie Cook, Credit Suisse]

Good morning and nice quarter. I guess, two questions. Tom, you kept talking about the resilience of Exotic and LORD through the third quarter. Can you sort of talk about trends that you’re seeing in April for those businesses? And then my second question was with regards to the 30% decremental, I assume that’s specific to the fourth quarter. And my question is, if we’re in a prolonged sort of downturn, how confident are you with decremental margins because of some of the actions you’re taking seem like more short-term versus like salary cuts and stuff like that, versus long term? Thanks.

[Tom Williams, Chairman and Chief Executive Officer]

Okay. So let me start with the second part. So the 30% decremental in Q4, that will continue going forward. We’ll continue to do the things we have to do to flex the business to deliver that. And again, I’m saying approximate 30% regardless of what’s happening with the top line. I believe that this will eventually start to turn, so you had to be careful that you don’t do too many permanent structural actions and prevent your ability to respond. So we will watch that.

We obviously won't let the temporary things go on forever because that would be unfair to people and we would then have to turn them into permanent. But we will look at that quarter-to-quarter and make those decisions as a team. But I think you can expect the detrimental and the resilience. Remember, the resilience you're seeing now is five years in the making. Its work we've been doing on – and I would say it's even before that. That stair steps on those margins happen because of all the actions we've done over the last 20 years.

We've been building a more resilient business model for 20 years now. So this is why we're able to perform here. But specifically, you've seen the margins significantly increase the last five years and that you could point directly to Win Strategy 2.0 for that. The trends on – in April for LORD and Exotic. So I don't really want to go into too much detail on this. I would just say that LORD would be probably half as better than what you saw for legacy Parker, at least half better, I mean, less – half less bad. That's a way to say that in English. And I would say the same thing for – and even better for Exotic because Exotic is probably going to be able to hang in there at a high single-digit type of decline because of their very strong military business. And that's what's really helping that. We've been able to pull forward and our customers have approved this, the F135 work, and we just happened to be very fortunate and thank you to the Exotic team for having such a big bill of material on one of the premier military programs really in our history.

[Jamie Cook, Credit Suisse]

Okay. Thank you. I appreciate it.

[Tom Williams, Chairman and Chief Executive Officer]

Thanks, Jamie.

[Operator]

Thank you. Our next question comes from Nicole DeBlase of Deutsche Bank. Your line is open.

[Nicole DeBlase, Deutsche Bank]

Yes, thank you. Good morning guys.

[Cathy Suever, Chief Financial Officer]

Good morning, Nicole.

[Nicole DeBlase, Deutsche Bank]

So I just wanted to talk a little bit more about distributor imagery levels. If you could just comment on, do you think distributor inventories have rightsized for the current level of demand? Just trying to gauge how much restocking would be required as we come out of this and end-user demand increases?

[Lee Banks, President and Chief Operating Officer]

Nicole, this is Lee. My sense is that inventories are in line with demand. They're not buying anything, they're conserving cash. So what I think you would see is a pull through on real demand through the channel back to Parker-Hannifin.

[Nicole DeBlase, Deutsche Bank]

Okay. Got it. Thanks, Lee. That's helpful. And then on the leverage, is the expectation that you guys have more opportunity to continue paying down debt in the fourth quarter? Or is the next tranche of that likely to be coming in 2021?

[Cathy Suever, Chief Financial Officer]

Yes, Nicole, this is Cathy. We'll watch how things are going through the fourth quarter, but if you look at our expectation for cash flow, we will have some flexibility I believe to pay down additional debt during the quarter. And if we're comfortable going into next year in the position that we are then I think we will definitely do that.

[Nicole DeBlase, Deutsche Bank]

Got it. Thanks, Cathy. I'll pass it on.

[Cathy Suever, Chief Financial Officer]

Thanks, Nicole.

[Operator]

Thank you. Our next question comes from Ann Duignan of JP Morgan. Your line is open.

[Bill McMullan]

Hi, thanks. This is Bill McMullan on behalf of Ann. Her question is, can you provide a little bit more of an update of a lower discount rate environment and weaker equity returns on your pension plan funding?

[Cathy Suever, Chief Financial Officer]

Sure. This is Cathy. The discount rate that we're currently booking expense to was set last June and we set it once a year at our June 30 timing, and we're at a discount rate of 3.28%. As we disclose in our queue, if the rate drops 50 basis points, that'll have an impact of about $15 million to our expense. We're watching it. We in as of the June rating last year, we had no required pension contribution due until fiscal year 2023. As the rate will likely drop and will have some impact on the need to fund, we don't anticipate it being any sooner than fiscal year 2022. And so we have a good year plus before we have any and that repayment we think would be a pretty minimal amount required. So no funding requirements we don't think for the rest of this year and fiscal 2021.

[Bill McMullan]

Great. Thank you. That's all I have. I’ll pass it on.

[Cathy Suever, Chief Financial Officer]

Thank you.

[Operator]

Thank you. Our next question comes from Steve Volkmann of Jefferies. Your line is open.

[Steve Volkmann, Jefferies]

Great. Maybe I could do a couple of longer-term questions here, and I'll just sort of take them together. I'm wondering, it's probably too early to answer a lot of it, but I'm wondering if there's any change in your long-term margin expectation as you have laid out recently? And second to that, given that things look like they could be a little bit different going forward for some of the end markets like you mentioned, aerospace and oil and gas. Does that potentially free up some businesses that might be candidates for divestiture going forward? Thanks.

[Tom Williams, Chairman and Chief Executive Officer]

Steve, its Tom. So the margin targets that we gave you at Investor Day are still the targets and we're not moving off of those. We're still what we're striving to get to for FY 2023, and we still think we can do that. From the divestiture side, oil and gas and aerospace are still great businesses. And we are able to perform well in those end markets. And we use all eight of the technologies into those end markets. So they meet all the performance criteria to stay part of the team and we'll get through this near term challenges and we're going to reshape those businesses to win in this new market. But these are really strong businesses for us, have all the right kind of returns. So yes, they will stay part of the portfolio.

[Steve Volkmann, Jefferies]

Thank you. Good luck.

[Cathy Suever, Chief Financial Officer]

Thanks, Steve.

[Operator]

Thank you. Our next question comes from Julian Mitchell of Barclays. Your line is open.

[Julian Mitchell, Barclays]

Hi. Good afternoon. Maybe just a quick question around aerospace again. So you've taken some fixed costs measures in that business. So the assumption understandably is for a prolonged downturn. Maybe just help us understand what you're thinking about aerospace aftermarket within the commercial side specifically? And is it fair to assume similar to peers that decremental margins on that aftermarket decline will be very, very severe? And then sticking to aerospace, one of the large defense contractors talked about some production choppiness for the F-35 program. Just wondered if you'd seen any of that or expecting any type of slow down or disruption on that program on the military side? Thank you.

[Tom Williams, Chairman and Chief Executive Officer]

Okay. Julian, its Tom. I'll start with that one. On the F-35, no, we've not seen any choppiness. As a matter of fact we are accelerating our deliveries. So everything has been fine on that. And then the commercial MRO, you're right. As you might expect, that's feeling a very sharp decline. It's probably in the greater than 50% type of decline area. And that will take a while to heal. You'll need the public to want to get back and airplanes. But they will if you think about it over time here, I think the leisure traveler wants the right kind of safeguard and comfort are there. Will come back, and who knows how long that takes, but they will come back.

And the business traveler will come back, but probably not the levels that you've seen because we've all learned that there's a lot of digital productivity that you could do. And that's why we're designing structure of aerospace to be able to win because it might take a little while for this to heal. Nobody fully knows, but I think you'll see the leisure side heal faster. The business travel will come back – will probably not come back to 100%. But then you'll have the demographics that were there before is that aerospace tends to follow GDP historically and tends to follow GDP at 2x GDP. So once you get through this kind of reshaping of aerospace, it will start to then follow that kind of growth rate, which is a nice growth rate, and we will continue to have this business perform well. We will do the things to make aerospace as creative business as it is now, be great in a tough environment.

[Julian Mitchell, Barclays]

Great. Thank you.

[Cathy Suever, Chief Financial Officer]

Thanks, Julian. Latif, we have time for one more question.

[Operator]

Yes, ma'am. Next question comes from Andy Casey with Wells Fargo Securities. Your line is open.

[Andy Casey, Wells Fargo Securities]

Thanks so much, and hope everybody is well.

[Cathy Suever, Chief Financial Officer]

Hey, Andy.

[Andy Casey, Wells Fargo Securities]

I just was looking for a little bit more color on the – what you may be seeing on the distribution inventory actions. Going into the quarter, it looked like those might be stabilizing a little bit. Clearly, April, they probably fell off. But is the pattern kind of stabilization and then reacceleration?

[Lee Banks, President and Chief Operating Officer]

Andy, I think the way I would characterize it, you're right. They were declining to stabilizing in March. I think the second half of March, there was – the channel saw what was coming, there was a conservation of cash, really not buying anything. We saw a direct impact through our divisions from distribution. I would tell you in April, as Tom characterized, they're down about as much as the OEMs are down right now. So I think any kind of rebound we get in demand will facilitate a rebound in demand directly to our divisions.

[Andy Casey, Wells Fargo Securities]

Thanks, Lee. And then should we kind of look at the distribution in terms of regions as similar to what Tom had laid out in terms of China getting a little bit better, down less, maybe getting better? And then the other regions, still down?

[Lee Banks, President and Chief Operating Officer]

Yes. I think the way to think about distribution is really the reemergence of the manufacturing base. So a lot of our distribution is dealing with MRO activities inside the manufacturing space. And when they're closed, they're not buying anything. So we've seen a rebound in distribution in Asia, China specifically, Europe has been incredibly soft along with North America and Latin America.

[Andy Casey, Wells Fargo Securities]

Okay. Thank you very much.

[Cathy Suever, Chief Financial Officer]

Okay. Thanks, Andy. This concludes our Q&A session and the earnings call. Robin and Jeff will be happy to take your calls should you have any further questions. Thank you for joining us today. Stay safe and enjoy the rest of your day.

[Operator]

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