Todd Leombruno :

Thank you, Kevin, and good day, everyone. Welcome to Parker's fiscal year 2024 fourth quarter and year-end earnings release webcast. As Kevin said, this is Todd Leombruno, Chief Financial Officer, speaking. And with me today is our Chairman and Chief Executive Officer, Jenny Parmentier. We appreciate your interest in Parker, and we thank you all for joining us today. If I could draw your attention to Slide 2, you will find our disclosures on our forward-looking projections for non-GAAP financial measures. Actual results could vary from our forecast based on the items we have listed here. Our press release, the presentation we're going to go through today, and reconciliations for all non-GAAP financial measures were released this morning and are available under the Investor section on our website at parker.com. We're going to start the call today with Jenny summarizing our record fiscal year 2024 that was really driven by our portfolio transformation and really some exceptional strength in our Aerospace businesses. She'll also touch on our bright future and what really is driving the company today. I'm going to follow Jenny with some more details on specifically the strong fourth quarter we just posted. And then both of us are going to provide some color on the Fiscal Year 2025 Guide that we released this morning that sets us off on our journey to achieve our FY’29 targets. After those remarks, we'll open the call for Q&A session. We'll try to take as many questions as possible within the one-hour time slot. And with that, Jenny, I'm going to hand it over to you and ask everyone to reference Slide 3.

Todd Leombruno :

Thank you, Jenny. It really was a fantastic year for the company. On Slide 9, I just would like to take some time to talk about the fourth quarter. Q4 was an exceptionally strong quarter for the company. Once again, every number in this gold box on this page is a Q4 record. They also happen to be the highest levels of performance that we experienced this fiscal year. Total sales growth was up nearly 2% from prior year. We reached almost $5.2 billion in sales in the quarter. Organic sales were positive at roughly 3%. That was a little bit better than what we were expecting with our guidance. Divestitures were just very slight, unfavorable impact, and currency really turned into another headwind, almost 1%, unfavorable on currency. If you look at adjusted segment operating margins, Jenny mentioned this, but we did improve them 130 basis points from prior year. And for the first time in the history of the company, we generated 25.3% segment operating margins for our quarter. Same story with EBITDA margins. The increase was a little bit greater, 190 basis points. For the quarter, we did 26.3% adjusted EBITDA margins. You look at adjusted net income, $884 million of adjusted net income. That is up 12% from prior year, and that is a little bit better from prior year, and that is a 17 return on sales. Earnings per share, Jenny mentioned this as well, $6.77 that was up $0.69 or $0.11 from prior year. And it was just really an exceptionally strong quarter. It was a great way to finish the fiscal year, really driven universally across the globe by our engaged team members, and it was really just a nice way to finish the year. And it's another data point on Parker being able to deliver on our commitments. If we jump to Slide 10, this is just the bridge on that 11% improvement and adjusted earnings per share. Again, the story is very similar to what we saw all year, strong operating execution continues to drive earnings per share growth. If you look at segment operating income dollars, we increased by $90 million, or 7%. That's basically $0.54 or 80% of the EPS growth quarter-over-quarter. And we've talked a lot about this already, but the Aerospace system segment, once again, is really responsible for over 90% of the earnings per share growth when it comes to segment operating income. The diversified industrial North American businesses made up the rest. If you look at some of the below segment operating income line, corporate G&A was $0.16 favorable in the quarter. That really, again, was a result of some favorable items from the prior year just not repeating. Interest expense favorable, again, $0.17 versus prior year. That really is the result of our successful deleveraging efforts that we've been working hard on all year. Tax was unfavorable, $0.12 against the prior year, and that was really just from slightly higher operating tax rate and, of course, the higher EBIT. And then other expense and share count were just both a bit higher than last year, but really the story here has been consistent throughout the whole year, strong operating execution, driving margin expansion, really keeping an eye on cost controls, and being disciplined with our debt pay down. Just a nice way to finish the year. If we jump to Slide 11, let's look at the segment performance. You can see, again, margin expansion across every business here. Really proud to see that. Incrementals for the company and really every part of the business were incredibly strong. Order rates inflected positive. It's 1% that's positive. We're really happy to see that. And our backlog remained at near record levels. We have $10.9 billion in shippable backlogs, so that was a nice way to finish the year. Let's look at the diversified industrial segment, specifically in North America. The U.S. sales volume really remained strong, $2.2 billion in sales. Organic growth was negative 3, but that was a full point better than our expectations. Softness in North America continues to be driven by off-highway markets and transportation markets. But despite those lower volumes, we were able to increase adjusted segment operating margins by 150 basis points, and the North American businesses achieved 25, that is a record. It is all driven by operational execution, executing the win strategy, and really working hard to deliver for our customers. Order rates in North America also did improve to flat. That ends our negative string of year-over-year order declines, and we were really happy to see that. If you look at the International businesses, sales were slightly over $1.4 billion. Organic growth was down 2.5% the prior year, but again, that was also better than our forecast. Off-highway markets continue to be soft. And if you look really across the regions, in Europe, we were negative 5%, in Asia-Pac, negative 1%, which did slightly improve from Q3, and Latin America just continues to be robust at 19% organic growth. Same story on the margins. Margins increased 60 basis points in the quarter. Our International businesses generated 23.9% segment operating margins, and really just continue to be focused on simplification, productivity improvements, and I'm really happy to see this in the continued margin expansion from those International businesses. Order rates in International finished at minus 1%, with positive order rates in Asia driving the majority of the improvement. So nice to see that improve from Q3 as well. But if we look at Aerospace systems, right, that business continues to shine. Sales reached a record $1.5 billion in Aerospace. First time we've had $1.5 billion of sales in our Aerospace business. Organic growth, 19%, with double-digit growth across all the platforms within Aerospace. Operating margins, a brand-new record, increasing 130 basis points to 27.1%, and it really is driven by great volumes and unbelievable strength in these. Aerospace orders still remain strong. We did get the highest dollar level of orders for the year, and order rates continue to grow at plus 7%, so all things are looking up in Aerospace. If we go to the next slide, Slide 12, I just want to highlight our cash flow performance for the year. We finished FY’24 with record cash flow performance. CFOA increased 14% to a record of $3.4 billion, that's 17% of sales. Free cash flow, nearly $3 billion. That's also a record. That was 15% of sales. It's also a 15% increase from prior year, and we did achieve a conversion of 105%. I really just want to thank our team. This has been a lot of effort by a lot of people across the company, really made some nice improvements in working capital, really nice efforts on AP and AR, but I really want to note this year we were able to reduce inventory by over $120 million, really showcasing the efforts and focus that we've had on supply chain excellence. Across the globe, we continue to focus on being great generators and great deployers of cash. If we jump to Slide 13, you can see what we did with all that cash. We reduced debt by over $800 million in the quarter, $800 million in the quarter alone, and since closing Meggitt, we have now reduced debt by over $3.4 billion. We had a target to reduce debt by $2 billion in the fiscal year. We hit that target, and if you look at our leverage ratios, gross debt to adjusted EBITDA is now 2.1 times, and net debt to adjusted EBITDA is now 2, so it's exactly what we had forecast. And it really wraps up just a solid Q4 and a great fiscal year. So with that, I'm going to hand it back to Jenny, and I'm going to get to what I know everyone is focused on, and that is our outlook for FY’25.

Todd Leombruno :

Okay. Thank you, Jenny. So I'm now on Slide 16, and let me share some of the details of the FY’25 guide. Reported sales is forecast to be in the range of 1.5% to 4.5% or 3% at the midpoint. That will equate to approximately $20.5 billion in sales. That is really supported by outside support in our Aerospace businesses. Total sales for the company are modeled at 48% in the first half and 52% in the second half, so right in line with what we've historically done on sales splits. If you look specifically at organic growth, we are forecasting organic growth in the range of 2% to 5% or 3.5% at the midpoint, and we're expecting high single-digit growth from Aerospace, roughly 8.5%, and a gradual recovery in the industrial markets throughout FY’25. For the North American businesses, we are forecasting organic growth of 2% at the midpoint, and for the International businesses, we are forecasting growth of 1.5% organic at the midpoint for the full year. If you look at the mix on organic growth, it's 2.5% first half, 4.5% growth second half. And I will note that this guidance does include sales from the recently announced divestiture that Jenny mentioned. We are expecting that to close sometime in the second quarter, and we will give an update once that closes to the impact it has on the company. We are based on June 30 currency spot rates, and we're forecasting that to be a slight headwind of about 0.5% or $100 million on currency versus prior year. Jenny mentioned margin expansion, 50 basis points of margin expansion is our plan. And in FY’25, we're going to get that by continuing to do exactly what we've done over the last couple of years, is really implement and advance the win strategy. Adjusted segment operating margin guidance is 25.4% at the midpoint. There is a range of 20 basis points on either side of that, and segment operating income is split 47% first half, 53% second half. If you do the math on incrementals, we're expecting slightly at 40% incremental margins. That's a little bit higher than what we normally have had just based on the growth in Aerospace and of course, continued mega synergies. Few additional items on the guide. Corporate G&A is expected to be approximately $230 million. Interest expense is $450 million. That is a reduction of approximately $50 million from FY’24 and other expense is expected to be about $5 million. Tax rate, we are modeling a 23% tax rate and full year as reported EPS of $23 or adjusted EPS of $26.65. Both of those figures are at the midpoint and the range on those, both of those ranges is $0.35 on the high end and the low end. And if you look at adjusted EPS, it is split 47% first half, 53% second half. In respect to cash flow for the full year, we are giving a range of $3 billion to $3.3 billion. That is $3.15 billion at the midpoint. That will be approximately 15.3% of sales and of course, we expect free cash flow conversion to be greater than 100%. If you look at the far right column on this page, you'll see some specifics, specifically about Q1. And these are all at the midpoint. Reported sales, we are forecasting to be plus 1%. Organic growth is 1.5% positive. Adjusted segment margins of 25.2% and adjusted EPS is expected to be $6.05. As usual, we've provided several other details for guidance in the appendix. If you look at Slide 17, this is a very similar story to what we just did in FY’24. Segment operating income is the main driver of our EPS growth. That is $1.51 of EPS growth. We'll continue to have lower interest expense as a result of our great cash flow generation and our deleveraging efforts. That will add $0.34 to EPS. If you look at the tax rate, that will be an unfavorable number. Just a reminder that that will be a 23% model tax rate. That is a headwind of $0.41, really compared to a favorable rate that we had in the full year of FY’24. Our corporate G&A is slightly unfavorable, just $0.06. Other expense is $0.10 unfavorable, and share count is just another headwind of $0.07. But if you look at that all in, that's our walk to the $26.65 midpoint or 5% increase year-over-year. With that, Jenny, I'm going to hand it back to you and ask everyone to reference Slide 18.

Todd Leombruno :

Yeah, okay, Kevin, we are ready to open the lines for Q&A. And we'll take the first person in the queue.

Julian Mitchell:

Hi, good morning. Maybe just a first question around the first quarter outlook. I think first off, maybe to talk about the organic sales guide a little bit. I think you're dialing in a bit of a deceleration from the June quarter year-on-year, even with better orders. So maybe just any commentary around kind of very recent demand trends, any big movement month-to-month? And then sort of on the firm-wide P&L for Q1, you're basically saying flat EPS dollars year-on-year but with sales growth and margins up. So is there something below the line moving around?

Julian Mitchell:

That's helpful, thank you. And then maybe just my follow-up would be around Slide 15. So you have that very helpful color on the end-market verticals outlook for the year. Maybe just any context you could give around sort of, maybe fourth-quarter rates in some of those end markets. And I suppose in plant and industrial I'm particularly focused on. It seems like the CapEx environment is getting a little bit worse out there. Just wondered what you're seeing in that in plant and industrial piece, please.

Julian Mitchell:

That's great, thank you.

Operator:

Thank you. Next question is coming from David Raso from Evercore ISI. Your line is now live.

Jennifer Parmentier :

Yeah. So I'll take that, David. So some of the things that Todd mentioned earlier, total company order rates did go positive to 1% in Q4. Industrial North America improved to zero in Q4 after being negative for -- so that was a positive sign. And as Todd mentioned, that did end five quarters of negative order entry. International orders improved to negative 1% from negative 8%, and that was driven by Asia-Pacific. When you look at the channel, that destocking in the channel started over a year ago, and we believe that it has pretty much played out. We see the distribution trend going up, but I would say it's not a step change yet. We aren't actually seeing them add inventory. But these are all the things that are placed into our guide. Todd mentioned also the backlog remains strong. Q4 flat with Q3, dollars at near-record levels. So all of these things are baked into the guide and the reason that we feel good with the organic growth numbers we have in the first half.

David Raso:

The reason I asked is it doesn't seem like there's much pricing -- new pricing for July 1. So I'm just trying to figure out what's the incremental bump may be. You're saying there's a little bit of comp and, obviously -- maybe some pickup --

David Raso:

And follow-up, if you could indulge me with one question, you don't have to answer it. But I'm curious, the verticals that we're now breaking out. We know the margins in Aerospace, obviously, they're highlighted separately. But the other 5 verticals, would you give us a sense of kind of force rank highest to lowest the margins between those 5, just so we get a sense of the mix looking at it in this format?

David Raso:

That’s right. Thanks.

Jennifer Parmentier :

All the businesses are performing really well in margin expansion.

Scott Davis :

Hey, good morning Jenny and Todd, congrats on another great year.

Scott Davis :

I know it probably hasn't -- the answer probably hasn't changed much since the Analyst Day, but perhaps you could give us a little bit of an update on M&A and what you're seeing. I think you clearly have the balance sheet space to probably step up and get a little bit more aggressive. So just a little bit of an update would be helpful, I think. Thanks.

Scott Davis :

Okay. And Jenny, the portfolio optimization and the small divestiture, is the lens here that you guys are looking at -- the Slide 15 lens that -- the key market vertical stuff that's outside of that vertical? Or is there a -- or is it more a function of kind of margin growth potential and kind of more traditional metrics?

Scott Davis :

Okay. That makes ton of sense. Thank you. I’ll pass it on. Appreciate it.

Operator:

Thank you. Our next question is coming from Mig Dobre from Baird. Your line is now live.

Jennifer Parmentier :

Yeah. So thanks for the question, Mig. So if you think back to the on-purpose strategy that we had with our acquisitions to double the size of filtration, double the size of engineered materials and Aerospace. We've done that with the last four acquisitions. So if you take filtration for instance, with the acquisition of CLARCOR, we greatly increased our aftermarket exposure in filtration. And that business has become more resilient than it was in the past. And when you look at Lord, into engineered materials, that's where we picked up a lot of that longer cycle business. And so you see those two groups behaving a little bit differently than the other two that you mentioned. That is definitely the main reason.

Jennifer Parmentier :

The margin impact is accretive, just like the criteria that we give to the acquisitions that we would do in the future. These have been -- those have both been very successful deals where synergies were hit. And they continue to use The Win Strategy to improve margins.

Jennifer Parmentier :

Yeah. Wouldn't have happened without those two areas.

Jennifer Parmentier :

Those technologies are a very important part of our portfolio and participate in the secular trends that we talk about.

Operator:

Thank you. Next question today is coming from Jamie Cook from Truist Securities. Your line is now live.

Todd Leombruno :

Yeah, Jamie, let me start on the incrementals. This is Todd. Thank you for the recognition of the quarter. We appreciate that. You're right. The incrementals are a little bit higher than what we have historically forecast. That 30% is really kind of over the cycle, so sometimes we think we could do better, sometimes it might be a challenge on the top line. But the way the math works is a little bit funny, right? Aerospace, with the strong growth in Aerospace and the margin profile that Aerospace is operating at, it is driving the incrementals for the company a little bit higher than normal. We also are committed to the $300 million in synergies that we have promised for Meggitt. We expect $50 million of incremental synergies in FY '25 versus FY '24. So that's putting Aerospace a little bit higher than historically where we've been at. And when you look at the Industrial businesses, we still see margin expansion even in a low-growth top line environment. So when you put all that together, that's how we came up with the numbers. So we feel really good about that. But the team is energized and focused on making sure that we deliver that.

Jamie Cook :

Okay. Thank you. Nice job.

Jennifer Parmentier :

Thank you, Jamie.

Joe Ritchie :

Hi, good morning, Jenny and Todd, a terrific year, not just the quarter, it was a great year.

Joe Ritchie :

I'm going to tackle the margin question maybe slightly differently. And so, look, the exit rate for the Industrial businesses were really strong, right, both in North America and International. If you take a look at the 25% North America and the 23.9% in International, squarely either at the high end of your guidance for this year or the midpoint for the International segment. I guess why isn't it going to be better than that? If we're going to expect some growth, and typically, you guys have shown that you could expand margins even in a no-growth environment.

Jennifer Parmentier :

Yeah. I would just back that up by saying, obviously, it was a fantastic year, it's a fantastic exit rate. But this guide is realistic. And this isn't a slam dunk for our teams. We believe in The Win Strategy, we believe in our ability to continue to expand margins, but this is a -- this isn't easy.

Jennifer Parmentier :

We'll try.

Todd Leombruno :

Yeah, Joe, it's a great question. It's something we talk about constantly here. We've been very clear, our target was to get to and operate around a 2 net debt to adjusted EBITDA leverage. We got there, we're very proud about that. It was not easy, but the team worked really hard to get there. The way our debt is structured, we have a service debt that goes all the way out into 2026. So we feel good that we will not -- we'll be putting our cash to good work as we continue to pay down that debt. But I would tell you, our preference continues to be to deploy our capital optionality towards deals, as Jenny mentioned it earlier. It's going to be the right deal. It's not going to be one that just happens to be available. It's got to be able to grow the top line differently. It's got to be accretive to our margins. It's going to have to be EPS accretive. And it's going to have to help generate cash in a way that's different than what the company has been able to generate. And if we can't get those done, we have no worries about deploying that elsewhere. We're going to keep our dividend record going. And our share buyback is $200 million a year. We're going to do that at a bare minimum, and we will be active. I could assure you that.

Joe Ritchie :

Great. Thank you, both.

Stephen Volkmann :

Great. Thanks for taking the question. Todd, I just missed it when you said the Meggitt synergies in FY '24.

Stephen Volkmann :

Got it. Thank you. And then I'm trying to think, just mentally, if I back that out, how much did mix add relative to sort of other drivers for the margin in Aerospace?

Stephen Volkmann :

Great. I guess what I'm trying to think about is, assuming that the aftermarket OE mix kind of normalizes at some point, maybe that's a big assumption, I don't know. But if it does, should we be worried about potential kind of margin headwinds in that scenario?

Jennifer Parmentier :

Yeah. We feel very positive about air traffic growth. So we're not concerned about that.

Operator:

Thank you. Our next question today is coming from Nathan Jones from Stifel. Your line is now live.

Todd Leombruno :

Good morning, Nathan.

Jennifer Parmentier :

Well, just to run through it a little bit. Obviously, for Aerospace, as we talked about, we have 8.5% organic growth out there. In the first half is at 11%, second half is at 6%, and that's really because the comps get pretty tough when you get into the second half. So obviously, we feel really good about Aerospace. We have good visibility over -- we have a high backlog there, right? So no concerns there. When you look at North America, as Todd mentioned, we're guiding to 2% organic growth, minus 1% in the first half. And as we've talked about, that's based off of a typical Q1 and based off of what we see today in the orders and the information that we have from our customers. Again, we expect continued softness in off-highway all year and transportation in the first half. So kind of going back to those forecasts for the market verticals. We do expect a gradual industrial recovery, as we've mentioned here, and that's what we have baked in. So again, the growth uptick is mainly in the second half, and it is somewhat on easier comps. Those are the inputs that we're looking at. In International, 1.5% organic growth, again, negative 1% in the first half, second half at 3.5%. As we mentioned, order rates improved, but they're still in negative territory. Our guidance assumes that Asia-Pacific turns positive, offset by continued weakness in Europe. So that's what we're looking at right now. Again, softness around end-markets in Europe, neutral growth in the guide for the full year. So that's what we have built into the guide.

Todd Leombruno :

Yeah. Nathan, this is Todd. Those certainly would be helpful, there's no doubt about it. What we have baked into the numbers is really -- again, you've heard us talk about our AI forecast. So we have a variety of macroeconomic forecasts that we're using. There's nothing outside of anything that you're not seeing yourself. It really is driven by great Aerospace performance, a gradual recovery in the Industrial markets, mainly in the second half of the fiscal year. And that's based off of what we've seen orders do for many, many, many years. We were really glad to see North American orders turn not negative, and we were really happy to see the Industrial orders move to minus 1%. So all of that is what we've been using to build our forecast.

Todd Leombruno :

Thank you.

Jeffrey Sprague :

Thank you. Good morning everyone. A lot of ground covered here. A couple of things from me. First, just on the divestiture, Jenny or Todd. I think it sounds like it's kind of part and parcel to your kind of normal process of reviewing the portfolio and assets. But should we view this as largely kind of a one-off? And obviously, it just kind of came with something you recently acquired? Or there's kind of other pieces here and there that could be methodically coming out as your margin structure has moved up, right, and your threshold for what's good enough rises, does that cause some additional things to shake out of the portfolio?

Jeffrey Sprague :

And could you also just share with us your view on Aero for 2025 in terms of the big buckets, commercial OE versus aftermarket military OE versus aftermarket?

Jeffrey Sprague :

I’ll leave it there. Thanks a lot.

Todd Leombruno :

Appreciate, Jeff.

Nicole DeBlase:

Yeah, thanks. Good morning, guys.

Nicole DeBlase:

I just wanted to ask another question on the divestiture. And we all have the revenue number that was in the press release. But I guess, any color on whether the divestiture will be accretive to margins? And can you just confirm that that's all coming out of the Industrial North America segment?

Nicole DeBlase:

Got it. That's really helpful. And then on the outlook for International, it sounds like you guys are expecting Europe to be down again. If you could kind of confirm your thoughts there. And I know it's small for you, but any color on what you're seeing in China. Thank you.

Nicole DeBlase:

Thank you. I’ll pass it on.

Jennifer Parmentier :

Thank you.

Operator:

Final question today is coming from Brett Linzey from Mizuho Securities. Your line is now live.

Jennifer Parmentier :

Thank you.

Todd Leombruno :

Yeah. Brett, this is Todd. Thanks for noticing that. We've been working hard on all elements of profitability for a long time here. When you look at that 50 basis points of segment operating income expansion, the vast majority of that will come in the gross margin line.

Jennifer Parmentier :

I mean, I don't have a good picture of that that I could share with you today, but perhaps we can pick that up in a callback.

Todd Leombruno :

Appreciate, Brett.

Todd Leombruno :

Okay, Kevin, thank you. This concludes our earnings webcast. Thanks to everyone for joining us today. As always, we do appreciate your attention, interest and support of Parker. If anyone's got any more follow-up questions, whether that's on the quarter, the year or the FY '25 guide, Jeff Miller, our VP of Investor Relations; and Yan Huo, our Director of Investor Relations, will be available throughout the day and even if tomorrow, if needed. I hope everyone has a great day. We appreciate it.

Todd Leombruno:

Thank you, Rob, and good day, everyone. As Rob said, this is Parker's fiscal year 2024 third quarter earnings release webcast. This is Todd Leombruno, Chief Financial Officer speaking. With me on the call today is our Chairman and Chief Executive Officer, Jenny Parmentier. We appreciate your interest in Parker, and we thank you for joining us today. If we move to Slide 2, you will find our disclosures on our forward-looking projections and non-GAAP financial measures. Actual results could vary from our forecast based on the items listed here. The press release, this presentation and reconciliations for all non-GAAP measures that we will discuss today were released this morning and are available under the Investors section on parker.com. We're going to start today with Jenny reviewing the highlights of our strong third quarter performance, and then she's going to highlight how the competitive advantage of our high-performance culture is getting our global team members to deliver consistent margin expansion. I will follow up then with some color on the financial results of the quarter, and I will provide some assumptions to our increase in the fiscal year 2024 guidance. We're going to end the call with a Q&A session, and we'll try to take as many questions as we possibly can. Just a reminder, please try to limit your questions to one and a follow-up, if needed, so we can get to all of those in the queue. With that, I now draw your attention to Slide 3, and Jenny, I will hand it over to you.

Todd Leombruno:

Thank you, Jenny. It's great to see those results. Let's take a look at the quarter. This is just a high-level financial summary for the company. As Jenny said, Q3 was another strong quarter for Parker. Once again, every number in that gold highlighted box is a Q3 record for the company. If you'll see total sales, we did grow -- it's up slightly from prior year. We reached $5.1 billion in sales. Organic growth was just over 1% positive, slight negative impact from divestitures. That's just 0.3%. Our sales and currency did shift to a slight headwind this quarter, not terrible at 0.6%, but it's the first time the sheer currency has been a headwind. If you look at the adjusted segment operating margins, that's an improvement of 150 basis points versus prior year. We did finish at 24.7%. And a similar story on EBITDA margins. We finished at 25.5%. That is an increase of 130 basis points from prior year. Moving to adjusted net income. We generated $851 million of net income. That is an loss of 16.8%. And adjusted earnings per share were $6.51, and that's a $0.58 or 10% increase from prior year. Net income is also an increase of 10% from prior year. Q3 was really just a solid quarter when you look at the sales, when you look at segment operating income, when you look at net income and earnings per share, each one of those generated the highest levels that we produced this fiscal year. So a very strong quarter. If we can move to Slide 9. This just shows the walk of that $0.58 or 10% increase in adjusted EPS. I'm really glad to say again, the main driver of segment operating income dollars increasing. We increased by $76 million in the quarter. That accounted for $0.45 of the EPS growth. That's nearly 80% of the EPS growth in the quarter. Again, Jenny mentioned this, but it's just impressive operating performance across the company, but specifically, the strength in our Aerospace Systems segment was again a main contributor this quarter. Interest expense is again favorable. That really is the result of our successful efforts to deleverage after the Meggitt transaction. Tax was favorable $0.06 versus prior year. Simply, that's just a few discretes that are certainly hard to predict. Corporate G&A was higher from prior year, but really, that's just more a result of prior year favorable items not repeating this fiscal year and you can see other expense and share count were just a little bit higher than prior year. So the theme really remains the same this quarter as it has in the first half of the year. Our team members are generating strong operating performance that is driving margin expansion, really in a tepid top line industrial environment. And our debt paydown efforts are really reducing our interest cost. So it's just great to see the team work together to generate those results. If we go to Slide 10, this is the segment performance. You can see we continue to see positive growth as a result of the higher concentration of Aerospace in our portfolio. Margin expansion does continue across all of our businesses. That is great to see. Order dollars did remain strong against a very tough comp in the prior year. Order dollars did improve sequentially from last quarter. So we're happy to see that. If you look at the North American businesses, sales volume reached $2.2 billion. Organic growth was down 4.6%, as you can see on the slide, but that was in line with our expectations. It was driven by softness in off-highway and transportation markets specifically. We did continue to see destocking throughout the quarter, but I will say it did continue at a decelerating rate. Despite the down volume, margins increased 120 basis points to a third quarter record of 24.1% in the North American business. This just really is a shining example of operation excellence and how the teams continue to see opportunities to drive margins even higher. Order rates in North America did remain constant with last quarter. They finished at minus 4 in the quarter. If we move to the international businesses, you can see sales volume reached $1.4 billion. Organic growth was down 3.1% on those businesses. But again, that was in line with our guidance. If you look at EMEA, that was the most negative at negative 5.1 and just some contraction again in highway transportation and implant industrial markets. Asia Pac growth was minus 2.8%. China remains generally soft. Latin America is a strong point. They continue to be positive at 19% versus prior year. What we're really proud about is the team, even on that lower volume, expanded margins by 10 basis points, and they also generated a third quarter record of 23.5%. Focus remains on productivity improvements and cost controls in these businesses with orders in the international businesses at minus 8. In EMEA, we are seeing some choppiness on orders, while Asia Pac we are seeing some improvements. If we look at Aerospace, Aerospace delivered another stellar quarter for the company. Sales reached a record of $1.4 billion, that's the highest we've ever had in the aerospace business. Organic growth was 18% across every market segment we have in aerospace. This is the fifth quarter of double-digit organic growth within Aerospace. Aftermarket strength continues to be outstanding. This quarter, we were up 26% in the commercial aftermarket area and operating margins are fantastic, reaching a new record, increasing by 320 basis points versus prior year to come in at 26.7%. Demand just remains robust, aftermarket strength continues and the team is just doing great driving margins ever higher. Order rates in aerospace continue to be very strong at plus 15. So just great performance across all of our businesses. If we go to Slide 11, let's talk about cash flow. So first of all, I think most of you have probably seen this last week, our Board approved a quarterly dividend payout of $1.63 per share. That is a 10% increase over the prior dividend payout. With that increase, this does increase our annual record of paying higher dividend dollars per year from 67 years to now 68 years, just an unbelievably impressive record. Looking at cash flow. We've got a record on cash flow of $2.1 billion of cash flow from operations, that's 14.6% of sales. That is a 20% increase over prior year. And I said it already, but it is a record. When you look at free cash flow, we did $1.9 billion that is 12.6% to sales and that also is a 22% increase versus prior year. The team really remains focused on being great generators and great deployers of cash. We are reaffirming our full year target of free cash flow dollars of over $3 billion, and we certainly are committed to free cash flow conversion of over 100 for the full fiscal year. So great performance on cash. Let's move to Slide 12. I'm happy to give an update on our deleveraging progress. We did reduce debt by over $420 million in the quarter. Since we closed the Mega transaction, it was just six quarters ago. We have reduced debt by over $2.6 billion. That, coupled with the continued expansion in EBITDA growth, we have reduced our leverage by over 40% just since the close. Both of those are ahead of our original commitment. And you can see on the slide here, gross debt to adjusted EBITDA is now 2.3 times and net debt is down to 2.2 times. We still feel confident that we will get the $2 billion of debt paid down in this fiscal year and we certainly are on track to achieve net leverage of 2 times by June of this fiscal year, just in two months. So if we go to Slide 13, just some color on our guidance. We are reaffirming our full year organic growth midpoint and increasing our margin and earnings per share expectations for the year. Our reported sales growth for the year is expected to be 4% at the midpoint. And on organic growth, we are increasing aerospace once again. We're increasing it by 300 basis points to 15% for the full year. Both North America and international diversified industrial businesses. Organic growth is now forecasted to be negative 2.5. But for the company, full year organic growth remains the same at 1.5% positive. So you can see how aerospace is helping the portfolio on our top line. We're raising adjusted segment operating margins. We're raising that to 24.6. That's 30 basis points higher than prior guidance, and that now forces the full year margin expansion to be approximately 170 basis points versus prior year. Corporate G&A and interest, unchanged from prior guide. Tax rate is down a little bit, just really based on Q3 actual results. We expect that to be 22% now. Full year as-reported EPS has increased to $20.90 and full year adjusted EPS has increased to $24.75. Both of those are at the midpoint and there's a range narrowed to plus or minus $0.10 for the fourth quarter. Finally, if you look at the fourth quarter, our adjusted EPS is expected to be $6.13 at the midpoint. So as usual, we've got some more specifics in the appendix if needed. And now, I'm going to hand it back to you, Jenny, and I ask everyone to turn to Slide 14.

Todd Leombruno:

Rob, we're ready to open the lines for Q&A, and we'll take whatever you got first in the queue.

Scott Davis:

Hey. Good morning, Jenny and Todd and Jeff.

Todd Leombruno:

Good morning.

Jennifer Parmentier:

Well, I often say, Scott, we really like Meggitt, and we wish there were a lot of Meggitt like deals out there for us. Listen, we -- first and foremost, as Todd was talking about, we're committed to paying this debt down, right? We're doing it earlier than we said we would. We're forecasting to be at two times by the end of this fiscal year. But we're always working on that pipeline, building the relationships. The pipeline is robust. There are targets in there of various sizes, some bolt-ons, some larger ones. Really, it's about making sure that we have the right one. It has to be accretive to growth, margins, follow the secular trends and really be the right fit for Parker, fit with our interconnected technologies and be the right business. So we continue to work that pipeline, and we'll have more to talk about that in the future.

Jennifer Parmentier:

Yes. It's a good question, Scott. I haven't heard of any concerns of double ordering in aerospace. I think there's still supply chain constraints out there that everybody has their orders. There's long lead times but no, I've heard nothing about double ordering. As we go through this balance of air traffic returning to pre-COVID levels, different manufacturers ramping up to higher rates, it's a balance and MRO, I believe, will continue to be strong. So for the foreseeable future, we see that as strong.

Scott Davis:

Yes. Well, it looks like they certainly need to replace some wheels and brakes based on what we read out there. So good luck guys. Thank you.

Operator:

Our next question is from the line of Andrew Obin with Bank of America. Please proceed with your question.

Jennifer Parmentier:

Good morning, Andrew.

Jennifer Parmentier:

Well, as we were just talking about the mix, Q3 was actually -- aftermarket mix was actually 48%. Year-to-date, we're at [Indiscernible]. So the combination of what we had in our portfolio and adding to what we got with Meggitt, it's been a big increase. And it is excellent growth from our braking business in other areas. Also military aftermarket growth is higher because of these public private partnerships we have with the Department of Defense. So a lot of things going well really pleased and well positioned with this portfolio of complementary technologies, so really positive about this going well into the future.

Jennifer Parmentier:

Okay. So I'll just -- I'll do a little run-through of the markets. Obviously, we know aerospace is very strong, and we've raised our guidance because of that. If you take a look at energy, oil and gas, that remains positive. Implant industrial equipment, low single-digit negative, more negative in Europe, less in North America. Transportation, mid mid-single-digit negative, Automotive is down globally. And I would again say that Europe is more negative there. Off-highway, high single-digit negative, primarily construction and Ag and both of them are equally negative, Andrew. Again, Europe a little more negative. When we take a look at HVAC refrigeration, it is still double-digit negative, but it's some pretty tough comps to prior it was quite positive this time last year, mainly driven by the residential business. It is improving. There's an improvement in commercial and as you were just mentioning, destocking, distribution is slightly negative, and we saw that destocking lingering through the quarter. So when we take a look at where we're at today, Industrial North America orders have been negative for five quarters now. And we're still very proud of it, still guiding to 1.5% organic growth for the company. And historically, you would see that orders go negative for an average of six core years. And both portfolio, total Parker went negative same quarter as industrial North America. So a big difference here. What I would also say is the backlog remains strong. Backlog dollars are at near record levels. And as we spoke about in quarters past, consistent coverage really holding in there, as we've talked about before, pretty much double what they've been historically. And while we have Q3 order conditions reflected in the guide, I would have to say that April orders are off to a better start, and we might be seeing the end of destocking here.

Operator:

Thank you. Our next question is from the line of David Raso with Evercore ISI. Please proceed with your question.

Jennifer Parmentier:

Yes. Thank you, David. So obviously, orders went from minus 5 in Q2 in international to minus 8. So that is definitely what is reflected in the guide. Destocking continued, as I was mentioning earlier, softness in off-highway and transportation and industrial equipment. We just really see that the macroeconomic indicators are still in contraction in Europe. Really, the sales for the quarter were in line with our expectations, but the orders in the quarter are really what has driven us to take that down in Q4 and slightly for the year, we had -- had a negative two for the year, and now we have it at a negative 2.5%. So we're not seeing the same thing that we're seeing in North America at the start of this quarter. So not signaling any turn there yet, but we're keeping a close eye on it.

Jennifer Parmentier:

Usually, North America, historically, the average has been six quarters, and then we see a turn, right? And international has just -- it's been choppy. It's been really choppy over the last several quarters. So it's hard to call at what point that would follow North America. We're just going to have to keep a close eye on it, and we'll have a better update for you next quarter.

Jennifer Parmentier:

Yes. So we're back to what we would call a normal pricing environment. We're doing our twice a year price increases. As a reminder with price, we went out early and often. We believe that price to be sticky. We still have inflation out there. And I think we've done a really good job. The team has done a good job at maintaining our margin neutrality. So we're back to more of a normal environment right now.

Jennifer Parmentier:

Thanks, David.

Joe Ritchie:

Hi. Good morning.

Joe Ritchie:

And so we're getting lots of questions, obviously, on the turn in North America. And I'm just curious, so really helpful to hear that April is a little bit better and that we maybe were towards the end of destocking. Just curious like how do you think that this potential inflection actually will work? And what I'm asking specifically is with your distributors, what are the conversations like you feel like things could be low and slow just given we've been -- we've seen this destocking now for several quarters. Just any comment around that would be really helpful.

Joe Ritchie:

Okay. Yes. No, that's great to hear. I guess maybe just kind of thinking through also the questions around the industrial international business as well. Like -- you guys have done a really good job of expanding margins even at a time when things haven't -- volumes have been negative. I'm just curious like if we're if it's slower to pick up in the international business, how do you feel about the margin trajectory of that business from here?

Joe Ritchie:

Awesome. Thanks, Jenny, look forward to seeing you in a couple of weeks.

Operator:

Thank you. Our next question is from the line of Jamie Cook with Truist Securities. Please proceed with your question.

Jennifer Parmentier:

Thanks, Jamie. So first of all, I would say we're really proud of our teams in this margin expansion that we have achieved. And as I mentioned earlier, we're not done. We feel like there's still a lot of runway, no pun intended in Win Strategy 3.0, a lot of opportunity to expand margins. We feel very strongly about our ability to grow differently with this portfolio and with the secular trends. And we'll have some more updates for you at the investor meeting here in a few weeks. But we're not pulling together a strategy right now that limits us on one or the other. We're just going to stay focused on margin expansion and growing that top line organically. On your acquisition question, for more aerospace or what the mix needs to be, it does need to be that longer cycle business, accretive to growth, accretive to margins, EPS, complementary technologies. All of those things have encompassed the last couple of acquisitions that we've done and is one of the reasons that I believe that we've been so successful with them. So that's the kind of business we're looking for. No magic number on a percentage of aerospace. We obviously like the aerospace business, but we like all of our technologies. We think there's real power in these technologies being together, and that's why we often talk about them being interconnected and most of our customers buying 4 or more of these at a time.

Nathan Jones:

Good morning everyone. I guess a bit of a follow-up on some of the questions on the order rates and expected improvement in those in the short term. I think by historical standards, this has been a relatively shallow downturn in the industrial businesses for Parker as well. So I was just interested in your commentary on how you envision the shape of that recovery as well, just given that it's been a relatively shallow downturn, should that lead to maybe shallow or upturn or just kind of your expectations on what the recovery looks like when it comes.

Nathan Jones:

That would be good to say. A couple of questions on margins or any question on margins. Obviously, North America margin is up 120 basis points on down revenue. And international margins up 10 points on a 6% decline in revenue, a very strong margin performance. As we envision the return to growth in the end to this destocking and down cycle here, what kind of incremental margins should we be expecting as you see those industrial businesses return to growth?

Nathan Jones:

Okay. Thanks very much for taking my questions.

Operator:

Our next question is from the line of Julian Mitchell with Barclays. Please proceed with your question.

Todd Leombruno:

Yes, Julian, we're not expecting that to linger like that. What we really were just trying to signal was that things look better in the month of April than the way we finished to Q3. So no, there's no long lingering expectation for negative growth in North America.

Todd Leombruno:

Julian, we do -- thanks for pointing that out. We do believe that those businesses could and should grow differently than the motion systems and flow and process platform, those businesses, motion systems, flow and process, those are the most levered to the distribution network, highest percentage of distribution sales. You've seen the destocking continue over the last couple of quarters in that space. We do think that, that's kind of nearing an end. Jenny already mentioned it, but filtration, heavy aftermarket, engineered materials, a little bit more longer cycle business, both in automotive end markets and then some of the transportation markets. So it kind of supports our strategy over the last many, many years to help the company perform differently no matter what's going on in the global industrial market that we could perform differently. And I think if you look back over the last 18 months, that's why the order downturn has been less shallow, that's why we've been able to post organic growth as a positive, even in industrial in light of some negative orders. So I think it's part of our shaping of the portfolio.

Julian Mitchell:

That’s great. Thank you.

Operator:

Next questions are from the line of Mig Dobre with Baird. Please proceed with your question.

Jennifer Parmentier:

I would say that I do think we saw destocking start earlier for distribution. But as we've seen with many of our large OEs, they talked about higher dealer inventory, right? And so that's kind of a sense of their own destocking when the dealer inventories are high, they're not placing as big orders as they had in the past. But I would tell you, though, there's nobody canceling orders or pushing them, pushing them out to any great extent. So I don't feel like this is going to last longer. We're not seeing any signs that are telling us that right now. Just the early Q4 signs here that it looks different than it has.

Mig Dobre:

Okay. And on capital deployment and maybe you'll comment on this at your upcoming Investor Day, but I'm sort of curious as you're evaluating M&A if there is -- there is something to be said about expanding portfolio -- the portfolio outside of the core areas that you've been targeting over the past couple of years. So more expansive strategy or if sort of the lanes that you've been active in are still the areas that you're looking to build. Thanks.

Mig Dobre:

Appreciate it.

Operator:

Our next questions is from the line of Jeffrey Sprague with Vertical Research Partners. Please proceed with your question.

Jennifer Parmentier:

[indiscernible]

Jennifer Parmentier:

No, I don't think so, Jeff. I don't think we should be thinking that way. I think that, again, if I go back to the strength of the backlog and the change in the portfolio. It's different than it was in the past. It's a different company than it was 10 years ago, five years ago, right? And we really believe that once this turns, we're going to grow differently because of that.

Todd Leombruno:

Yes. Jeff, I would add, obviously, every one of these things we go through is a little bit different. We did come off two years of double-digit organic growth, right? So there was a significant amount of demand that we had to deliver through those industrial businesses. I think if you've seen that inventory levels moderate throughout the year, we've kind of reduced that thing. But as Jenny said, the backlog really pretty strong. It's at near all-time levels. We continue to pressure test that to make sure that it's real and legitimate. I think it's just part of having a longer cycle mix within that portfolio.

Jennifer Parmentier:

For Q3, Jeff, you're asking?

Jennifer Parmentier:

Yes. Commercial OEM was up 18%, and that was mainly based on strong narrow wide-body growth. MRO up 26%. And same thing. Their traffic recovery, things we've talked about, military OEM 7% and MRO 14%.

Todd Leombruno:

Jeff, I would just remind everyone, that's all organic at this point, too.

Operator:

Thank you. Our next question is from the line of Joe O'Dea with Wells Fargo. Please proceed with your question.

Jennifer Parmentier:

Yes. So as I mentioned earlier, the guide is based off of Q3 order rates, and they -- you are right, they did stay at negative four, but if you look at the sales dollars, Q4 dollars are in line with Q3. So that's why we're signaling that minus 4 versus the approximately minus 1 that we had previously.

Jennifer Parmentier:

Yes. First of all, I think the Parker brand is very strong and people are looking for Parker products when they walk into a Parker distributor. And they need a part and they need it now, right? So it's not what I would characterize as price shopping, it's availability. And then having that person standing behind the counter who knows how to apply that part, how to help them get the right part if they don't know exactly what they need or they don't know exactly what replacement is an order. So they're walking in to get help and they're walking in to get a product. And that really is what is so special about the partnership that we have with our distributors. They're just an extension of our engineering team, and they provide a great value and service to many customers.

Operator:

Thank you. Our next question is from the line of Joe Giordano with TD Cowen. Please proceed with your question.

Todd Leombruno:

Hey Joe.

Joe Giordano:

Hey. On the aerospace side, so given all that's happening, I know you're in your aerospace portfolio is very broad. But if we just kind of narrow into like OEM commercial, like given what's going on with Boeing. And the reduction in rates there, like it doesn't sound like they've told any of their suppliers anywhere to slow down what they're shipping to them given supply chains. But like is there -- at what point do you see risk to that dynamic where build rates are down, but everyone is still shipping the same and inventories must be building over there?

Todd Leombruno:

Joe, too, we talked about it, but if you think about that mix, it's nearly 50-50 aftermarket versus OEM in the aerospace business. So that's helpful as well.

Jennifer Parmentier:

Well, I think we've talked about how our pricing team, our pricing muscle is strong. And one of the things that I think we even got stronger during these last couple of years is really looking at the total cost of inflation. So it's not just material, right? It's all those things that just hit extraordinary levels all at once. And while those aren't easy conversations, you know their conversations that we had and if we would need to have them again, we would. They're based on facts, they're based on data. And we would cross that bridge when we come to it. But as I mentioned earlier, we're back in more of a normal pricing environment, but I believe it's sticky because inflation is still out there.

Todd Leombruno:

Thank you.

Brett Linzey:

Hi. Good morning all.

Jennifer Parmentier:

Good morning.

Todd Leombruno:

Yes. It's just a minor tweak. I would call it more timing than anything, maybe getting some of those done at a little bit of a lower cost as well. So we just kind of updated it based on the best that we had from the team.

Jennifer Parmentier:

No, you're right. We don't comment on the exact price. And as I mentioned earlier, we went out early and often. So we've protected our margin to make sure that it maintains neutral going through everything that's gone on in the last couple of years, and that's where we stand today with price.

Brett Linzey:

Okay. Great. Congrats on a performance.

Jennifer Parmentier:

Thanks Brett.

Operator:

Sure. Sure. Our next question will be from line of Nigel Coe with Wolfe Research.

Nigel Coe:

Thanks. Yes. I am here. Can you hear me?

Nigel Coe:

Yes. Yes. Good. Thanks for squeezing me in. Okay. So coming back to April, let's look at it again. Maybe could you just hone in the North America, where you're seeing the improving trends. And the spirit of the question is that it feels like in your off-highway and even in the on-highway customers, things aren't necessarily getting better. So I'd be curious on which pockets of customer groups are you seeing that improvement? And then if we do move to Europe, are we seeing a similar degree of improvement over there? Or do we still see pretty negative trends?

Nigel Coe:

Yes, it's got to come down at some point, I suppose. And then switching over to margin and SG&A productivity is really impressive. I think underlying SG&A came in at 13.5% this quarter. So I think for the full year, we're sort of in that 14% zone. Is that the right range going forward? Do you think you can maintain sort of 15% SG&A to sales? That's the question, really. Is there anything sort of like discretionary you're controlling at this point? Or is this a good range going forward?

Nigel Coe:

Great. Okay. Thanks.

Operator:

Thank you. Today's conference and webcast has concluded. You may now disconnect your lines at this time and log off your computers. Thank you for your participation, and have a wonderful day.

Todd Leombruno:

Thank you, Diego. Welcome to Parker's Fiscal Year 2024 First Quarter Earnings Release Webcast. As Diego said, this is Todd Leombruno, Chief Financial Officer, speaking. Thank you to everyone for joining us this morning. With me today is Jenny Parmentier, our Chief Executive Officer; and Lee Banks, our Vice Chairman and President. Our comments today will be addressing forward projections and non-GAAP financial measures. Slide 2 of this presentation provide specific details to our disclosures in respect to these areas. Actual results could vary from our projections based on the items listed here. Our press release, this presentation and reconciliations for all non-GAAP measures were released this morning and are available under the Investors section at parker.com. And they will remain available there for 1 year. Today, Jenny is going to start with some highlights of our outstanding first quarter. She will also reiterate how our portfolio transformation, along with strong aerospace secular trends, position Parker for a promising future. I will then provide some financial details on the quarter and detail our increase to our fiscal year '24 guidance. Jenny is going to wrap up. And then Jenny, Lee and I will take as many questions as we could fit in the hour. And with that, I would ask you to move to Slide 3. And Jenny, I'll hand it over to you.

Todd Leombruno:

Thank you, Jenny. I'm going to begin here on Slide 11 and just touch on some of the financial results. Jenny mentioned this, our FY '24 is off to a very strong start, really speaks to the alignment across our global team. We broke several records this quarter. We set records for sales and on an adjusted basis, segment operating margin, EBITDA margin, net income and earnings per share. If you look at the sales growth, it's up 15% versus prior year, obviously, strongly impacted by the net of acquisitions and divestitures. You look at that impact, that was a little over 11% positive to our growth. Organic growth remained positive at 2.3%, and currency was actually a slight favorable 1% impact in the quarter. When you look at adjusted segment operating margin, it was 24.9%. That is an increase of 220 basis points versus prior year. And if you look at adjusted EBITDA margin, that was 24.8%, an increase of 150 basis points versus prior year. If you look at adjusted net income, we generated $776 million in net income. And adjusted EPS was a record at $5.96. If you look at both of those items, it's a 26% improvement versus prior year. And we can't say this enough, it's our portfolio transformation and really consistent execution across the global team, just great work delivering a standout quarter here. And I'm really pleased to say that these results are consistent across all of our businesses. If you can move to Slide 12, this just kind of details the 26% increase in earnings per share, that's $1.22 of improvement. What I really like about this chart, the main driver continues to be standout operating performance. We increased segment operating margin dollars by nearly $250 million. That was $1.46 of our EPS growth. And while all segments contributed to growth, really the strength in our aerospace business was a major driver this quarter. If you look at income tax, that was $0.17 favorable this year. Really, that is solely based off of a few discrete items that settled in the quarter. We did have some headwinds on the other expense line of $0.27 and also the interest expense line of $0.10. But I will tell you, both of those items are simply related to timing with last year's funding of the Meggitt transaction. We do not expect those to repeat going forward. And finally, corporate G&A and share count were just slightly [indiscernible] at $0.02 each, and that is -- really that is in line with what we guided to. So nothing of concern there. So that's the walk to the record $5.96 in EPS, and it really is just driven off a broad-based offering improvements. Obviously, the Meggitt results are in there. The synergies are in there. And as you can see, strong record margins across all of the businesses, just great job by the team. On Slide 13, we'll just talk a little bit about segment performance. Every segment delivered adjusted operating margins over 24%. That's the first time in the history of the company that, that has happened. And it was really, again, just driven by strong performance, good volumes. Obviously, Meggitt synergies helped quite a bit, and really just the global team is very aligned. If you look at incrementals, we did 40% incrementals versus prior year, really proud of that number. And orders are positive at plus 2 versus prior year. And backlog coverage, as Jenny mentioned, really remains elevated. And again, aerospace activity remains especially robust on the order line. So just great work there. And then lastly, I would just say as we celebrate that 1-year anniversary with Meggitt, we're really very pleased that those businesses continue to outperform. It's been a great addition to the company. If you look at North America specifically, sales volume is up 4.5%. We generated $2.2 billion of sales. Organic growth was slightly positive, just 0.5% there. And that was impacted by some destocking and channel rebalancing that we've kind of mentioned throughout the quarter. If you look at adjusted operating margins, we did increase operating margins 150 basis points to 24.9%. And that was really just great execution and obviously cost controls. So great work there. And if you look at orders in North America, they did improve versus last quarter. They are minus 4. They did improve from minus 8. And backlog coverage in North America obviously remains strong as well. So great work to our North America team. In the international businesses, sales were $1.4 billion. That is an increase of about 2.5% versus prior year. Organic growth in the segment was about negative 2. So that was down. Organic growth in EMEA was positive 2, right? So that was a plus. Latin America, also very positive at plus 8. The impact of the segment was really driven by Asia Pacific, and that was about a negative 8 organic growth. And that's really just a result of mostly China softness that I think is well documented and also some tough comps that we had in the prior year. However, if you look at operating margins, even with that negative 2 organic growth, we expanded operating margins by 100 basis points. And the segment finished at 24.1%. So our team members there are focused on productivity, cost controls. The team really expanded margins in a very, very tough environment. So just great, resilient performance across the segment there, very nice work. Order rates do continue to be choppy. They did decline to minus 8. Really, that is conditions driven really out of Europe and China. The standout for the quarter is our aerospace business, right? Just a stellar quarter from aerospace. Sales were $1.2 billion. That was an increase of 65% versus prior year. Organic growth, very robust at about 16%. And that was really broad-based, double-digit growth in all of the aerospace market platforms. So business is very strong there. Operating margins, unbelievable, a new record, increasing 610 basis points to 26%. Really, that was driven by healthy margins, rate increases at the airlines, strong aftermarket growth, really all those things contributing to great margin performance. I will note, we did benefit from a few small favorable onetime contractual settlements in the quarter. And we do not expect those to repeat throughout the rest of our fiscal year. Aerospace orders, I already mentioned this, but plus 24 are very robust. Great future for the aerospace business. If you move to Slide 14, just a quick look at cash flow. Our cash flow from operations increased 42% versus prior year. Cash flow from operations was $650 million. That's 13.4% of sales. Our free cash flow increased even more, 48% increase versus prior year, finished at $552 million for the quarter. That's 11.4% of sales, and free cash flow was 85%. For the full year, we are committed to our strong cash flow generation profile. We are forecasting mid-teens cash flow from operations. And of course, we will extend our record free cash flow conversion of over 100% [indiscernible]. So great start to the year on cash flow. Moving to Slide 15. I just want to touch real quick on our leverage reduction. I think everybody knows we are focused on our leverage reduction commitment. We reduced debt in the quarter by $370 million. And just since the Meggitt close, we've reduced that by over $1.8 billion and improved our leverage by 1.2 turns. Both of those numbers are ahead of what we originally scheduled. If you look at gross debt to EBITDA, it's now 2.6 and net debt to adjusted EBITDA is now 2.5. And of course, we are still committed to forecast over 10 -- over $2 billion of debt paydown in FY '24. So great work there that [indiscernible]. Looking forward on Slide 16, just some details on guidance. Basically, we are reaffirming our full year organic growth midpoint. We did incorporate September 30 currency rates. And we are increasing our margin and EPS expectations for the year. Reported sales growth for the year is now forecasted to be in the range of 2.5% to 5.5% or roughly 4% at the midpoint. That split will be just as it always is, 49% in the first half, 51% in the second half. We are raising our aerospace organic growth guidance 200 basis points from 8% in our prior guide, now 10%. So that's great to see that business performing so well. Full year organic growth is tweaked just a little bit. The company will remain at 1.5%. Currency is a small offset, which is now expected to be just a slight headwind to our prior guide. Margins, if you look at margins, we're raising our margin expectation to 23.6. At the midpoint, there's a range of 20 basis points on either side of that. And if you look at what we're forecasting on a year-over-year change, we're increasing that expectation to 70 basis points of margin expansion versus prior year. It was 30 basis points in our prior guide. Incremental margins really just based off of the strong Q1 performance, we expect those to be around 40% for the full year. And if you look at the other items, corporate G&A, interest and other are relatively unchanged to what we guided to last quarter. Tax rate for Q2 through Q4 we expect to be 23.5. So if you look at the full year, that will equate to about 23% on the tax line. And EPS on an as-reported basis is now $19.13 at the midpoint, and adjusted EPS is $23. And the range on both of those items is $0.40 plus or minus. Split remains the same, 48% first half, 52% second half. And specifically for Q2, adjusted EPS is now expected to be $5.17 at the midpoint. And as usual, if needed, we have more guidance specifics that are included in the appendix, and that's all I had. Jenny, I'll turn it back to you, Slide 17.

Lee Banks:

Thank you, Jenny. Thank you, Todd.

Lee Banks:

I've got a plan.

Todd Leombruno:

Diego, we're going to open the call for Q&A. So we'll take whoever's first in the queue. Thank you.

Andrew Obin:

Lee, congratulations. We'll definitely miss you. But these EPS numbers are staggering when you started where you are right now. Yes, just a question in terms of guidance. If I take the midpoint of your EPS guidance and you gave us the first half, second half split, and then just subtract what you've printed in the first quarter, there seems to be a sort of sequential decline in EPS that would be quite a bit more than what the history would suggest. And I'm just trying to understand, is that -- given that you do have Meggitt now, is that just a different seasonal pattern that Parker is going to have? Or are there onetime items in the second quarter versus the first quarter that's sort of this -- that the implied numbers are driving?

Andrew Obin:

No, that's a good answer. I'll take it. And the other question, just North American orders. Could you just provide a little bit more visibility by key verticals? I think they're holding in a bit better than I would have expected. What's coming in better than expected, what's weaker and maybe a lot of focus on orders this quarter. Maybe just talk a little bit about the cadence of orders throughout the quarter.

Operator:

Our next question comes from Joe Ritchie with Goldman Sachs.

Lee Banks:

Great.

Lee Banks:

I'll take a stab at this, and maybe I'll let Jenny and Todd pile on. But I think in North America, you've got things like automotive are somewhat flat; heavy-duty trucks, flat; agriculture is flat. Construction in North America is really kind of flat for the most part. Again, I think there's some dealer inventory that people are working through. But it's still good overall demand there. I think things that were tied to COVID production, life sciences, there's still some big overhang from the ramp-up we had during that period of time. So that's just tough comps, and the demand is down a little bit. Yes, I'll leave it -- material handling is still really strong.

Jennifer Parmentier:

Just to echo Lee's comments to Andrew's question and yours, I think with this backlog as strong as it is, although that we see this destocking continuing, we see a bit of supply chain normalizing, and that's helping things. And as that heals, we'll start to see, I think, a bit of a better environment. But just echo all Lee's comments.

Joseph Ritchie:

Okay. Great. That's helpful. And then look, big focus this quarter on mega projects, timing of orders. Just, Jenny, maybe just talk a little bit about how you see things kind of playing out with all the investment that's happening in the U.S. Do you think Parker is well positioned to see an inflection in orders when you start to see a lot more equipment and the stuff that's going inside of factory come through?

Operator:

Our next question comes from Mig Dobre with Baird.

Jennifer Parmentier:

Mig, this is Jenny. I think it's all the things you mentioned. But as Lee just stated, with the acquisitions that we've made, we're getting longer cycle business here. So we see a longer demand sense, a longer demand horizon than we've seen in the past. So the transformation of the portfolio is definitely impacting the backlog. And I do think that what we've been through the last couple of years, of course, you're going to see some people just kind of sharpening their pencils on how they order and making sure that they have the right lead times out there. So I think that's part of it. But more of it is really about the shift of our portfolio. I've said many times, we know from the past that backlog isn't bulletproof. But we've seen this now for the last several quarters in a declining order environment. In North America, orders have been negative for quarters, but this backlog has remained resilient. And we believe that while it might go down a little bit, our portfolio is going to drive us to have this kind of backlog going forward.

Todd Leombruno:

Mig, this is Todd. On the guidance raise, you obviously can see the orders. Activity across all of those platforms has been extremely strong. Aftermarket was a big standout in the quarter. That was a big driver of the growth, and it was a big driver of the margin performance. So we just feel a little bit more confident with another quarter in there that we feel that we're able to raise that. So we moved to 200 basis points from 8 to 10 for the full year, and we feel pretty confident about that. I don't want to make a big deal about those things. I said they were small and minor, those onetime items. I just wanted to call it out so that it would make a little bit more sense if you look at our margin guide going forward for the rest of the year. So it's little of that.

Operator:

And our next question comes from David Raso with Evercore ISI.

Jennifer Parmentier:

David, this is Jenny. I don't think any of us really have that good of a crystal ball. But I will restate that the backlog is strong. And as you said, orders were at negative 8, and they went to negative 4. So we feel good about that. There's some uncertainty out there. And all in all, if you look at North America, we have the first half slightly lower at about 1%, but full year, mostly unchanged, it's slightly positive. So I can't give you an exact answer on that, but we feel good about where we're at right now.

Todd Leombruno:

Yes, David, I agree with you. Europe did outperform in the first quarter. I think we called that derivative plus 2. The total company did plus 2. Obviously, aerospace was fantastic at 16. If you look at the cadence, it's really not that much different than what we guided to initially, is not second half-weighted. We expect comps to kind of moderate a little bit. But if you look at Europe specifically, they did 2 in Q1. We're expecting about 1 in Q2, and then it goes -- turns a little bit negative just again based on comps in the second half. I would say for the second half, it's probably about minus 3.

Scott Davis:

Also, congrats, Lee. Great run. It's been nothing but a pleasure indeed, but good luck in the future. I have a tough time picturing you retired, but...

Scott Davis:

Yes. I'm guessing we'll see you around on Boards and such even more so. But anyways, a lot of the questions about inventories and stuff have been asked. So I just wanted to go back to a big picture one on Slide 4. Jenny, you kind of showed the -- where you want to be in '27. Can you get there with -- I mean, is the plan kind of further tweaking around with the portfolio and a longer cycle M&A? Or do you get there just on the growth rates, the outsized growth rates and aero and some of your longer-cycle businesses?

Scott Davis:

Okay. Fair enough. And then the -- just looking through my notes here, the distribution levels and like Parker stores, you guys have great visibility. But are they -- is there a new normal above COVID levels? I know this has been asked in a different way, and I'm trying to really narrow down whether in this new world, everybody holds a little bit more inventory or whether supply chains are so healed up and people are so comfortable that they're back down to kind of what was more of the long-term averages pre-COVID. And obviously, the cost of carrying inventory has risen, too, with higher rates. We haven't had that in quite some time. So any comments there and how that plays into it would be interesting, too.

Operator:

Our next question comes from Jeffrey Sprague with Vertical Research.

Jennifer Parmentier:

So if you recall, we went out early and often with price. And we are now back to more of a what we would call a normal pricing environment where we are going out in July and January. So we don't disclose the specifics, obviously, but price/cost management is a core element of The Win Strategy. And what we did do is we expanded from just material inflation to total cost of inflation. So we feel good about what we have covered, and we're back to more of a normal environment.

Jennifer Parmentier:

Where we have some of those commodities index, which is very few, there's adjustments. And where we have agreements with customers, there's adjustments, but that's already built in.

Jennifer Parmentier:

So if you recall, in fiscal year '23, we increased the synergies from $60 million to $75 million. And then we committed to another $75 million in fiscal year '24. So as Todd mentioned, the synergies are in there. The team is doing a great job. We're committed to the $300 million, and we're just confident we're going to get there. A lot of -- as Todd mentioned, too, strong aftermarket, right? That is just a very favorable mix, really helped boost the margin in the quarter.

Todd Leombruno:

No, Jeff, it really is a combination of -- obviously, the volumes have helped on the efficiency side, but Jenny has mentioned supply chain has eased. I think that has taken a lot of noise out of a lot of our operations. It's not totally gone yet, but if you look back to a year or 1.5 years ago, it is a lot more efficiencies that we're seeing across all businesses.

Operator:

Our next question comes from Julian Mitchell with Barclays.

Jennifer Parmentier:

Well, Julian, orders, like you said, it's been choppy for a while. In international, Q1 organic growth was in line with our prior forecast at segment level. As Lee mentioned, in Europe, destocking continues, softness in some broad-based end markets. Low recovery in China is impacting that region. And there's Eurozone macroeconomic indicators that remain in contraction territory. So I would say, hard to tell there. But two, again, China, if you look at Asia Pacific, China recovery remains slow. There's continued softness in construction in semicon and automotive. As we mentioned earlier, there is a bit of a tough comp for last year Q1 because they were rebounding from the Q4 shutdown. So in the guide, no big change for the first half, and the full year is largely in line with previous guidance, so at about negative 3%. This is the best view we have today.

Jennifer Parmentier:

So as Lee mentioned, there's a certain amount of rebalancing going on there as well as dealers are starting to get some inventory. But it kind of goes in line with the constant analysis we do on the backlog to make sure that there are no pushouts, there are no cancellations. And in discussion with some of our big OE mobile customers, they are adamant that the orders, the backlog are real. And some have even commented that if they happen to get a cancellation from one customer, they have another customer who will take that slot right away. So we still feel pretty positive about that. But again, as -- if the supply chain is improving, it's helping us. So I think we're in a pretty good position there.

Jennifer Parmentier:

Longer cycle.

Joseph O’Dea:

First question is just related to field inventory. I think some of the corrections have been going on for several quarters now. And so what your views are, both at an OEM level and a distributor level and maybe even if you take it by region. But just how far along that process is? Are those headwinds actually starting to abate a bit?

Joseph O’Dea:

And then, Jenny, I wanted to ask on investment spend and just strategic focus as you think about opportunities over the next 1 to 2 years and really, in particular, on the industrial side of the business. But across the regions, across technologies, where you're trying to direct the most emphasis right now because of the biggest opportunities that you see for returns on some of that spend?

Operator:

Our next question comes from Brett Linzey with Mizuho.

Jennifer Parmentier:

Yes. So we always say that we're planning for the next recession, right? So what is evident with our Q1 performance is that executing The Win Strategy in a slower-growth environment works, right? So every tool, and I say this because I've used The Win Strategy to run Parker divisions and Parker groups. Every tool in that Win Strategy helps to expand margins. So it can be anywhere from adjusting your discretionary spending, changing the way you staff the operation to how you order material for your production. So there's a lot of levers that our general managers can pull. And they become very agile and flexible. And they have learned how to look around corners and see demand changes coming. So we're very proud of what they do on the downside as well as the upside to make sure that we get the best return.

Jennifer Parmentier:

We'll give you an update on that in February.

Operator:

Our next question comes from Nathan Jones with Stifel.

Jennifer Parmentier:

Well, I'll start off just by saying that I think as evidenced by past performance, we're able to handle these downturns, and we just weather them better each time, right? So with the transformation of the portfolio, again, I think we're going to continue to see a longer cycle view of the backlog, and we're going to be less susceptible to the dips. So I think we're just in a really good position going forward to be able to achieve our organic growth targets and really perform at a higher level. We're going to keep expanding margins in a slower-growth environment and be very well positioned for when some of this returns on the industrial side.

Nathan Jones:

Yes. I was just talking about the industrial businesses that understand that there [indiscernible] dynamic. And then just one on Meggitt. You guys have talked about that outperforming. I think it's clearly seeing better growth, the market seeing better growth likely leading to some [indiscernible] margins here. You had targeted year 5 high single-digit ROI. Is the double-digit ROI on this business with the outperformance now within reach in year 5?

Nathan Jones:

Okay. We'll wait till the upgrade of that target.

Operator:

Okay, and that question comes from Nigel Coe with Wolfe Research.

Todd Leombruno:

Nigel, you're saying specifically on aerospace?

Todd Leombruno:

Excuse me, industrial. I think you're about right on the number that you're talking about. And again, Jenny and Lee have talked about this. We think it's really just kind of more rebalancing, nothing overly concerning at this point in the cycle yet. I can't say that we're seeing anything more lumpiness from the industrial orders. There are some project-based things in there, but it's nothing significant in comparison to the total.

Todd Leombruno:

The only thing we did for FX was updated the currency rates to September 30. So there's a little bit of a headwind on the sales line. That translates throughout the P&L, but it's really just an update, [indiscernible] major.

Todd Leombruno:

No. No worries. No worries. Yes, and we can follow up with you more.

Todd Leombruno:

Lee, you're definitely going to see us around. Congratulations to you and Elizabeth and your whole family. I know they're going to enjoy more Lee time. And we are going to miss you. So congratulations again. Thank you to everyone for joining us today. This does conclude our FY '24 Q1 webcast. As usual, Jeff Miller, our VP of Investor Relations; and Yan Huo, our Director of Investor Relations, will be available if anyone needs any kind of follow-ups. Thank you all for joining, and everyone, have a great day. Thanks.

Todd Leombruno:

Thank you so much, Donna. And good morning, everyone, and thank you for joining Parker Hannifin’s fiscal year ‘23 fourth quarter and full year earnings release webcast. As Donna said, this is Todd Leombruno, Chief Financial Officer speaking. And with me today for the webcast is Jenny Parmentier, our Chief Executive Officer; and Lee Banks, our Vice Chairman and President. I think everyone knows we released our results and all of these slide materials this morning. Our comments today will address forward projections and non-GAAP financial measures. On slide 2 of this presentation, you will find specific details to the disclosures that we are making in respect to both, non-GAAP financial measures and forward projections. And just as a reminder, actual results could vary from what we speak about today in this presentation based on all of the items listed here in these disclosures. Our press release, this presentation and all reconciliations are available under the Investors section at parker.com, and those will remain available for one year. Today, we’re going to start with Jenny addressing some of the highlights of our strong fourth quarter and really what was a transformational fiscal year for Parker. She is also going to reiterate some reasons that show why Parker is so well positioned for the future. I’m going to follow up with just some color on how the quarter wrapped up and provide some details around our initial FY24 guidance that we released this morning. Jenny will wrap up the call with some key messages, and then we’re going to open up the lines for Q&A for Jenny, Lee or myself. So, now, I’ll ask you all to move to slide 3. And Jenny, I’ll hand it over to you.

Todd Leombruno:

Thank you, Jenny. If everyone’s following, I’m going to start on slide 10. And I’m really proud to say once again, every Q4 number highlighted in this gold box is a record for the Company. It was really just an unbelievably strong finish to the fiscal year. I’m going to try to move quickly because Jenny already spoke to the 22% sales growth and the 24% segment operating margin. But in respect to sales, organic growth was 6%. When you take a look at the Meggitt acquisitions and the divestitures that we did in FY23, the net addition for the quarter was 16%. And the good news here is on currency, the headwinds have moderated. It’s now was just a slight a headwind of 0.4% in the quarter. One thing I do want to note is adjusted EBITDA margins, 24.4%. That’s an increase of 130 basis points versus prior year. And if you continue down the page, both net income and adjusted earnings per share did increase by 18% versus the prior year. Our adjusted net income was $791 million or a 15.5% return on sales, and adjusted EPS was $6.08 in the quarter. That is an increase of $0.92 or 18% versus prior year. Internally, we always stress how important it is to finish strong. And really, these results are just really a testament to the resilience of our global team. So, thank you to everyone for a great Q4 and a great fiscal year ‘23. If you move to slide 11, this is just a bridge on how we generated that $6.08. This is a $0.92 walk. And I’m proud to say, again, you could see the biggest bar on this page is increased segment operating income. If you look at that, we increased segment operating dollars by $264 million. That’s nearly 28% increase year-over-year. That added $1.63 of EPS to our total for the quarter. There were a few headwinds below the segment that are really no surprise. Obviously, that interest is 100% related to Meggitt. That’s consistent with what we’ve seen in past quarters. And income tax was favorable this year in the quarter. Even though we did finish favorable, it was a headwind of $0.19 compared to what we did last quarter. And if you think about that, last quarter, we did have a few onetime items that were related with the acquisition that were favorable and some higher discretes last year. Those were obviously non-repeating issues this year. So the story on the walk is just really strong operating execution, and it’s really across the board. If you move to slide 12, just some details on the segment performance. Every segment delivered positive organic growth this quarter, but they also delivered positive margin expansion, you can see across the board here. Incrementals were very strong, and all of these margins are records. And I’m also proud to say, even with the challenging comparisons, orders did increase from last quarter to a plus-3% versus prior year. And our backlog did increase 1% sequentially and did reach a record, $11 billion. So this is really the result of robust aerospace activity but also the changes to the portfolio that we spoke to throughout the year. Just jumping into the North American businesses. Sales were very strong, $2.3 billion. That was 5% organic. That’s really right in line with our guide. Adjusted operating margins did increase 60 basis points to 23.5%, really just driven by excellent execution across those North American businesses. Incrementals also did improve sequentially, and that helped drive our margin expansion. One thing to note, orders did turn negative to 8%, but that really still is against tough comps. We still have strong backlog coverage that we believe will continue to support growth. And customer sentiment overall remains positive in North America. So, all-in-all, a great quarter and a great finish by our North American team members. If you look at the international businesses, sales were $1.5 billion; organic growth, nearly 4%. Organic growth did remain positive in all of our international regions, really led by Asia Pacific, 8.5%, almost 8.6%. Latin America was 2.5% positive. And even EMEA, which we’ve seen some softness, did post a 1% positive organic growth. Even with all that said, margins did increase 90 basis points, finished at 23.3% versus prior year and really still continue to reflect consistent performance, productivity improvement, good cost controls and that increase in distribution mix that we’ve talked about periodically. Orders in the international business did improve from last quarter. They are still negative 1, but it is a nice improvement from last quarter. And again, from our international team members, great consistent performance, and I’m glad to see these results. If you move to aerospace, this is really the story of the quarter, really a standout, just fantastic results all around. Sales are $1.3 billion, 16% organic. Total sales are a 90% increase versus prior year. That’s really obviously benefiting from the Meggitt acquisition. But if you look at the business, commercial OEM and MRO continue to be very strong. Both of those businesses are growing at plus 20% versus prior in the quarter. The military OEM business did return to growth this quarter with high single-digit organic performance. That was really nice to see. And operating margins, a new record high, really increasing an impressive 160 basis points to 25.8%. Those strong margins reflect that growth in the commercial aftermarket businesses and really notably a nice favorable mix of spares versus repairs. So, you can also see the addition of Meggitt has also increased our aftermarket exposure. That was one of the compelling aspects of that acquisition. We’re glad to see that materialize in the results. The aerospace team is really doing a phenomenal job, obviously, dealing with growth. The integration is ahead of schedule and on track, and these results are really fantastic to see. It’s really truth that Parker and Meggitt are really better together. If you look at aerospace order rates, plus 28%, continues to be robust and then obviously, it’s helping our backlog. Great performance across the segments. If I jump to slide 13, I just want to highlight our cash flow performance. We finished the year with extremely strong cash flow. It was a record in FY23. We increased cash flow from operations 22%. We reached a record $3 billion of cash flow from operations. That’s 15.6% of sales. Free cash flow, also very strong, $2.6 billion or 13.6% of sales. Our CapEx came in right where we were forecasting, 2%. And just as a note, because this was the closing of Meggitt, we did have some transaction-related expenses that were a drag to cash flow that was about 1% of sales. So those obviously aren’t going to repeat next year. And we have set ourselves up extremely well to be great generators of cash. If you look at conversion, free cash flow conversion for the year, 125%. And I just really want to thank our teams for the great work on working capital. We strive to be great generators, great deployers of cash, and reaching this $3 billion milestone is really the result of significant effort from our team across the globe. If you go to slide 14, you can see what we did with all that cash. We reduced debt by $850 million in the quarter. Since we closed Meggitt just this fiscal year in September, we have reduced our debt by $1.4 billion. Since announcing Meggitt, way back in August of 2021, we have already paid down approximately 35% of the total consideration of nearly $10 billion. So, very impressive work across the board by our team. If you look at leverage, gross debt to adjusted EBITDA finished the year at 2.8%, and net debt to adjusted EBITDA finished the year at 2.7 -- excuse me, 2.7 times. We’ve spoken about our great track record of how we are so dedicated to quickly deleveraging after the deals. And since closing the transaction in September, we have already reduced leverage by 1 full turn. So we’re proud of that. Looking forward to next year, we expect to generate significant cash flow. We think we can reduce debt by an additional $2 billion in FY24. And we are targeting leverage of 2 times in early FY25. Okay. So moving to guidance and putting FY23 to bed. You could see what we are looking at here is slide 15. And I’ll start with the top line. Reported sales growth for the year is forecasted to be in the range of 3% to 6% or 4.5% at the midpoint. That equates to approximately $19.9 billion in total sales. If you look at the split, the first half is 49% and the second half is 51%. Speaking specifically to organic growth, for the full year, we expect it to be 1.5% at the midpoint. In respect to aerospace, we’re expecting high single-digit growth in aerospace, a little over 8%. North America organic, we expect that to still be positive at plus 1%. And international, we are forecasting slightly negative at 2.5%. Those are all full year numbers. The backlog that I just spoke of earlier does support our growth, so we feel confident in these numbers. And if you look at the breakdown, the guidance does assume acquisition sales, roughly $500 million from Meggitt, offset by $400 million of the divestitures that we did complete in FY23. So, the net impact is $460 million or about 2.5% of our total sales. I mentioned currency earlier based on spot rates as of June 30th. We do expect currency to be a slight tailwind of 0.5% or roughly $100 million. So, that is based on currency rates as of June 30th. We still see margin expansion this year, 30 basis points is what we’re forecasting for FY24. That is all based on continuing to accelerate our performance across all of our businesses using the Win Strategy and, of course, delivering on Meggitt synergies that we have communicated. If you look at adjusted segment operating margin, our guidance is 23.2% at the midpoint, and there is a range of 20 basis points on either side of that midpoint. If you look at operating income dollars -- segment operating income dollars, the split is 47% first half, 53% second half. And for the full year, we are forecasting incremental margins of 30%. Few other items in respect to guidance. Corporate G&A is $240 million. That’s a full year number. Interest expense is $525 million. That is a $40 million reduction from where we finished in FY23, really just based on our strong debt pay-down. And other expense is $25 million. Full tax rate, we’re guiding at 23.5%. That is without any discrete items that is really a continuing rate from operations, 23.5%. And finally, we expect full year as reported EPS of $18.55 or on an adjusted basis, $22.40. The range -- those are both midpoint numbers. The range on either side of those is $0.50, plus or minus. And the split is 46% first half, 54% second half. And just specifically for Q1 of FY24, we are forecasting adjusted EPS to be $5.10 at the midpoint. Looking at cash flow. Full year free cash flow is expected to be between $2.6 billion and $3 billion. So, will be mid-teens free cash flow, and our conversion will be over 100%. Also included in the appendix is subsegment guidance details and some other specifics that you might find helpful. If I move to slide 16, this is just a bridge and really highlights as follow, again, very similar to what’s happened throughout this fiscal year. The organic growth, the acquisition sales, margin expansion and the $75 million of incremental Meggitt synergies for the year translate to an increase in segment operating income of $1.47. We will have less interest expense next year based on that debt reduction that we’ve done, but -- and that will add $0.23 to EPS. Our forecasted tax rate of 23.5% is a headwind of $0.26. But remember, we had a lot of favorable items in FY23. We’re not forecasting those to continue. We also had lower interest income. If you remember, we prefunded those -- the Meggitt transaction in June of last year. So, we had interest income in the first quarter of last year. That was about $35 million. Just to note, that is reported in the other expense/income line on the business segment statement. That was a one-off benefit that obviously will not repeat in FY23. That’s a $0.21 headwind. The rest is just a forecasted $0.20 unfavorable to EPS, and there’s just some really some non-repeating items in there. And obviously, share count is also a $0.10 headwind that we hope to make up. So, that’s a walk from FY23 to FY24. EPS at the midpoint is forecasted to be $22.40. So with that, Jenny, I’ll hand it back to you and ask everyone to move to slide 17.

Operator:

[Operator Instructions] Today’s first question is coming from Julian Mitchell of Barclays.

Jenny Parmentier:

So first of all, your question on international, like I was talking about earlier, obviously, the backlog is still strong. It’s above 30%. But those customer shutdowns that I mentioned, that takes weeks out of the schedule that we hadn’t seen previously. So, a return to that is one of the reasons. And then obviously, since the last time we talked, we’ve seen a slowing in Europe. We’ve seen the demand not be as strong in certain regions. And then the China recovery is -- we haven’t seen the rebound from the stimulus that had been previously anticipated. So, that is all weighing in there as well.

Jenny Parmentier:

So, we did see destocking happen in Q4, and we just expect that to continue through the first half. I’ll let Lee comment a little bit on the specifics of some regions and markets.

Todd Leombruno:

Hey Julian, this is Todd. I would just add, we don’t have this really first half-, second half-weighted. We are forecasting international in total to be about 2.5% for the full year. And if I look across the year, there’s no real weighting there. It’s about an even split.

Joe Ritchie:

Thanks. Good morning, guys. And nice end to a year.

Jenny Parmentier:

Thanks, Joe.

Jenny Parmentier:

Yes. Thank you, Joe. So obviously, we’ve already talked a bit about what we expect to see, a continuing destocking and just kind of a softening in orders despite a very positive sentiment from the customer. So in the first half, in North America, we’re projecting 2% growth and overall for the year, 1%. So, we think that there’s some macroeconomic uncertainty in the second half. But in the first half, we fully believe that this strong backlog is going to support what we have in the guide. So, the backlog, again, above 30%, a little bit down, about 2% down, from last quarter but very strong. And in talking with our customers, we continue to constantly pressure test this and analyze it. And we’re not really seeing any major pushouts or cancellations, so we feel good about the guide we have out there.

Jenny Parmentier:

Sure, sure. So, the first half for aero is 12%. So obviously, we’re going to see some nice growth here in the first half. And in the second half, we have 5%. And the comps get pretty tough in the second half. So, we feel good about that 8% organic number right now. So obviously, we’re seeing really nice growth in commercial OEM. We see those narrow-body rates increasing. Wide-bodies are starting to recover, but really, it’s a story about narrow-body rate increases. And then MRO, as Todd mentioned earlier, the Meggitt acquisition has really increased our aftermarket exposure. And it’s been really strong with the air traffic recovery, especially with those narrow-bodies. And we’re pleased to see military OEM return. Obviously, the military budget increase is going to drive mid- and long-term growth. F-35 is nearing peak delivery. So all good news there. And then, same thing with military MRO. I mean, there’s a focus on retrofits and upgrades as the fleet ages. So really good outlook for all of aerospace going forward. So, you questioned about Meggitt integration. I mentioned in the slides, we couldn’t be happier with the progress of that integration. We’re forecasting another $75 million in synergies in FY24. Team did a great job in FY23 of pulling some actions ahead and allowing us to increase those synergies by $15 million. So really just a positive outlook for aerospace.

Operator:

The next question is coming from Andrew Obin of Bank of America.

Lee Banks:

So, we’ve -- you’ve covered us a long time. I mean, the one thing I think we’ve got a good handle on inside the Company is kind of price/cost and the ability to push cost in the price. Every one of our facilities is embedded in our Win Strategy. We look at costs constantly, and we look at price. I would say pricing has become much more normal now. We’re not in that rapid inflationary period. But our goal is always to keep things margin-neutral, and we’re working that. And we’re working the cost side on the supply chain side, too. So I’m comfortable that kind of the price/cost scenario we have is baked into our margin forecast.

Lee Banks:

Well, so first off, we’ve been reconfiguring our supply chains and our manufacturing footprint in Europe for the last 8 or 10 years. I mean, you remember when Tom and I took our roles, we had a big initiative…

Lee Banks:

So -- and I would just tell you that that is always ongoing. So, we never stopped with that. And we take every opportunity we can to just continue to be better, and we’re doing that today.

Todd Leombruno:

Andrew, this is Todd as well. I think Lee brings up a good point. We’ve been working that initiative for a long time. And if you look at the margins that I just ran through for Q4 and really what we’re guiding for FY24, you’ll see that those international margins are similar to every other piece of our business. So, that has been a great success.

Andrew Obin:

No, I appreciate you’ve certainly been doing something right. Thanks a lot.

Jenny Parmentier:

Thanks, Andrew.

Nathan Jones:

Question on the margin guidance in aerospace. Jenny, you just mentioned $75 million of additional synergies for Meggitt in 2024, which I think is about 150 basis points. And the margin guidance is up about 60 basis points. So maybe just some commentary on the core, I guess, margin decline in 2024. Is that really just a function of increasing commercial OEM as part of the mix or is something else in there?

Nathan Jones:

Okay. Fair enough. That’s helpful. And then, I guess, just on the M&A outlook now. I mean, you guys have obviously done a sensational job paying down debt post Meggitt back to towards 2 by the end of the fiscal year, early in ‘25. What are kind of your criteria for getting more materially back into the M&A market and the shape of the pipeline? I know you guys continue to cultivate that even when you’re out of the market. Just commentary on plans there?

Operator:

The next question is coming from Jeff Sprague of Vertical Research Partners.

Lee Banks:

Well, I think, Jeff, again, you followed us, we’ve always maintained some kind of positive spread. We’re always looking at the portfolio. We’re sunsetting products. We’ve got different strategic pricing initiatives. But I would tell you, we deal with a lot of core tough customers, and pricing is very competitive. It’s really what we do with the balance of the portfolio that helps us out. And as we’ve talked about in the past, one of the great strengths of this company is the distribution base we have, which gives us a great opportunity to kind of price into that market.

Jenny Parmentier:

I guess, I would say, first of all, that it is very similar. But obviously, the Meggitt acquisition, as we’ve mentioned, has meaningfully increased our aftermarket exposure. So it’s mid-teens is what we’re projecting right now. And again, that air traffic recovery, especially with the narrow-bodies with this high domestic traffic, is that really what’s going to help that into the fiscal year.

David Raso:

On the margins industrially that you had them up despite in aggregate, your industrial organic sales are down. Just want to make sure I understand, the destocking that you’re referring to, I think that probably is distribution, which would be a challenging mix if that’s your destock. Are you also referencing, though, maybe a more balanced destock? It’s at OEs as well? I’m just trying to get a sense of the ability to have margins up when you’re destocking distributions, a heavy lift. So, I’m just curious if you could color on that. And maybe the -- what’s in the backlog? It sounds like the backlog will help carry the first part of the fiscal year. Although margins particularly positive, what will be coming out of the backlog? Just trying to get a sense of the margin progression and how to have margins up if organic is down industrially for top line.

Todd Leombruno:

Hey David, this is Todd. I would just add to that. Jenny is absolutely right. We do believe that we can expand margins both in the North American businesses and the international businesses. It really is a testament to the power of the Win Strategy. But if I’m looking at the numbers here, it really is a smooth glide path, very similar to what we’ve done historically with our normal seasonality. So, it’s not weighted in any -- one way or the other. I gave a little color on the splits of segment operating income, but the margin expansion is a nice glide throughout the year.

Todd Leombruno:

No, we see margin expansion in every quarter this fiscal year.

Josh Pokrzywinski:

Jenny, you referenced the backlog here a few times. I think for most folks, they don’t really think about backlog when they think about the industrial pieces of Parker. Clearly, that’s changing, but maybe some more kind of breakdown of how long does that backlog extend out? Is there a particular set of end markets or channel mix? Like I would assume more OEM, maybe more project activity. Just any kind of color you can give us on the nature of that backlog and really the duration over which it ships. Is it kind of one to two quarters, three, four or something like that?

Josh Pokrzywinski:

Got it. That’s helpful. And then -- oh, yes, please go ahead.

Josh Pokrzywinski:

Understood. That’s helpful. And then just pivoting to something I’ve heard a lot of your peers talk about, particularly this quarter, on U.S. mega projects or, I guess, North American mega projects and near-shoring. Obviously, you folks play in all stages of that, I guess, new products that are being developed here as well as the construction of maybe some of these facilities themselves. Open-ended question, but is that something that in Parker’s, I guess, more kind of component- and subsystem-type business that you’re actually seeing yet, or is it just a little too early and maybe we see that more kind of later in ‘24?

Operator:

The next question is coming from Joe O’Dea of Wells Fargo.

Todd Leombruno:

Yes. I would say it’s slightly above that $0.80 that we really forecasted for the first full 12 months. So, we’ve only owned them 9.5 months, but it’s been a fantastic 9.5 months. We’ve talked about the synergies being ahead of schedule, but the other thing is they are benefiting from the secular trend in aerospace. So, their growth has exceeded expectations every quarter since the close. So, we feel really good about that. I’m really happy we got the deal done.

Jenny Parmentier:

Well, I don’t know that I can rank them right now, but I would tell you that I see activity in obviously, all three of them. If you start off just thinking about the CapEx, investment because of the reinvestment over the last 10 years, we’re seeing some -- just some upgrading of factories, a lot of work being done to really develop the supply chain and increase capacity. So, that ties into the investment, a lot of machinery and a lot to help really that supply chain development. A lot of folks that got burned during the pandemic are going to dual source this. So that drives a lot of investment. And as I mentioned just a few minutes ago, the mega projects, we’re starting to see some of that. We’re hearing about involvement in that from some of our distribution partners. And it’s still early days, but there’s a lot out there for us to go win.

Jamie Cook:

Congrats on a nice quarter. I guess most of my questions have been asked, but I guess just to -- you wouldn’t know this from looking at your results. But in 2023 or 2022, is there any way you can handicap the inefficiencies running to your earnings, whether it was related to supply chain, employees not being back, et cetera? And I’m just wondering, for if any of this is an opportunity for 2024 potential tailwind that’s not implied in your guide. And then my second question, Lee, I don’t think you said this yet. I know you walked through some end-market color. But last quarter, you told us like the percent of the portfolio that was growing versus not growing. I think last quarter, 90% of the portfolio was still in growth mode. Can you give us an update just on your portfolio percent, flat versus growing versus negative?

Todd Leombruno:

Hey Jamie, this is Todd. I would just add to that, on your 90% question, if you look at our total orders last quarter, they were plus 2. They did move to plus 3. So there really hasn’t been a material change in that percentage of end markets that continue to grow.

Todd Leombruno:

Hey Donna, this is -- sorry to interrupt you. This is Todd. I think we have time for one more question. So, whoever you have next in the queue, that will be our last call.

Jeffrey Hammond:

Just a couple of quick questions. Supply chain in aero has kind of been a problem point. Just wondering what you’re seeing there and how that kind of informs kind of the growth rate and how much it’s may be holding the growth back.

Jeffrey Hammond:

Okay, great. And then, I think as was the case with LORD, Exotic, the deleveraging process is pretty swift here and seems maybe a little bit ahead. Just level set us on when we start to shift away from debt pay down.

Todd Leombruno:

Okay. This concludes our FY23 Q4 webcast. As always, we fully appreciate everyone’s interest in Parker, Jeff Miller, our VP of Investor Relations; and Yan Huo, our Director of Investor Relations, are available if anyone needs any further clarifications or has any questions on any of the materials we covered this morning. I want to really thank everyone for joining. We appreciate your support. Thanks.

Todd Leombruno:

Thank you, Chris. And good morning, everyone, and thank you for joining Parker’s fiscal year 2023 Q3 earnings release webcast. As Chris said, this is Todd Leombruno, Chief Financial Officer, speaking. And joining me today is Jennifer Parmentier, our Chief Executive Officer; and Lee Banks, our Vice Chairman and President. Our third quarter results were released this morning. And just a reminder, today we will be addressing forward projections and non-GAAP financial measures. On Slide 2 of this presentation you will find further details to our disclosure in these areas. Actual results may vary from our projections based on some of the details that are listed on this slide. Our press release, this presentation and all reconciliations of non-GAAP financial measures are available under our Investors section at parker.com, and they will remain available for one year. We're going to begin the call today with Jenny addressing highlights of the third quarter and really touching on how Parker is so well positioned for the future. I will follow with a brief financial summary and then review the increase to our guidance that we released this morning. Jenny will then wrap up with summary comments, and then Jenny, Lee and myself will address any questions from the queue. I will all ask you now to address yourself to Slide 3. And Jenny, I'll hand over to you.

Todd Leombruno:

Thank you, Jenny. Just for reference, everyone, I'm going to start on slide 12 with just the Q3 financial summary. It was a stellar quarter for the company. Every number on this page highlighted in the gold box is a record for Q3, every single number. And Jenny did mention this, but we did surpass $5 billion in sales for the first time for a quarter in the history of the company. Reported sales were up 24% versus prior year. Organic sales were very robust at approximately 12% in the quarter, and that did extend our string of double-digit organic growth quarters. The net of acquisitions and divestitures did have a favorable impact on sales. That was approximately 15%. And currency still remains negative, but it's basically exactly as we forecast. It's minus 2.4% impact for the quarter and that is obviously unfavorable to prior year. When you look at adjusted segment operating margins, we did exceed our forecast. We finished at 23.2% for the quarter. That's an increase of 50 basis points versus prior year. It's the first time in history of the company that we surpassed 23% for a full quarter. So impressive results really across the board. When you look at dollars on segment operating margin, we generated nearly $1.2 billion in segment operating margin dollars. That itself is a 27% increase from prior year. And it happens to be the second quarter in a row that the company has generated over $1 billion in adjusted segment operating dollars. When you look at EBITDA, another record here, we surpassed 24% for the first time. In the history of the company, we finished at 24.2% and adjusted net income of $772 or 15.2% ROS, was an improvement of 22% versus prior year. And finally, when you look at EPS, adjusted EPS nearly $6, $5.93 for the quarter. That was an increase of $1.10 or 23% compared to prior year, just outstanding execution for the company for the quarter. When you look at sales, segment operating margin dollars, net income and earnings per share, every single one of those was an increase of greater than 20%. I can tell you, I'm just immensely proud of our team for the record performance. Meggitt is really truly adding value to the company, and the company is just executing soundly across the board. If you go to slide 13, this is just a walk on that $1.10 improvement of EPS year-over-year. And I mentioned on the last slide, the biggest driver of that is our increase in segment operating income dollars. We did basically an additional $250 million in segment operating income. That 27% increase. That added $1.50 to EPS year-over-year. When you look at the corporate G&A and other that was a $0.23 favorable EPS impact that was primarily driven by lower salary and other benefit costs. Interest, as you all know, is a headwind. That was a $0.54 headwind, but 100% of that is attributed to the Meggitt acquisition and of course, what's going on in our rates. You look at income tax that was $0.09 unfavorable. Really, it's driven by some prior year favorable items that were discrete that aren't repeating this year. And really, that's the walk to the $5.93. It's really a stellar number, record 23% increase. If you go to slide 14 across the segments, you can see, as I mentioned, it's really just across the board solid performance. Organic growth was a double-digit positive in every segment. We exceeded our margin expectations across the board and our legacy businesses really perform soundly with incremental margins above 30% in every single segment. Beginning this quarter on orders, we finalized the Meggitt structure. We felt good about that. And going forward, we are including Meggitt orders in both the prior and current period for comparison purposes. And we really feel that, that better reflects the transformed portfolio that Jenny mentioned earlier. So all in, orders remain positive despite really some tough comps versus prior year and finished at plus 2%. Demand remains really broad-based across most of our markets. And Jenny also mentioned this, but I just want to reiterate, the dollar value of orders in the quarter was certainly the highest that we've had in FY 2023, and it did grow 9% sequentially from Q2. And of course, the backlog obviously is up 3% sequentially as well. So our team members are really just executing well to meet our customer expectations and really focus on delivering top quartile results. If you look at the North American businesses, sales really strong at $2.3 billion. Organic growth was just under 12%. Adjusted segment operating margins nearly 23%. And if you remember, there is a dilutive impact on some of the Meggitt businesses that are in the Industrial North American businesses, but like I said before, the legacy business has really outperformed and strong sales growth in supply chains, improving gradually and really just great incrementals across those base businesses and really strong backlog and that demand is very solid across all of our North American businesses. International really outperformed in the quarter. Sales were $1.5 billion. Organic growth exceeded our expectations and finished at just about 10% organic growth versus prior year. Organic growth in the International segment was positive in all regions. EMEA was plus 11%, Asia Pac 8.5%, Latin America 8%. So all positive in every single region in the International segment. Adjusted operating margins were up 70 basis points, finished at 23.4%, really benefiting from that volume, that strong organic growth, but really some focus on cost control and productivity improvements really helped leverage result in the International segment this quarter. Overall, this really strong performance across every region. And then finally, aerospace, secular trend we've talked a lot about. Sales were $1.2 billion. That's almost 90% increase from prior year. That is obviously clearly driven by the Meggitt acquisition. But organic growth led the company in aerospace at 14.5% versus prior year. And really just strong across the board, OEM and MRO commercial businesses, sales and orders are very strong, both being mid-20s positive. And interesting, this quarter, military OEM returned to flat versus down from prior quarter. Operating margin is extremely sound, 23.5%. That's 160 basis point improvement year-over-year. Jenny mentioned it, that the Meggitt integration is going extremely well. Synergies are ahead of schedule. We did raise our synergy estimate for the quarter, $15 million and performance in those businesses continue to impress. Order rates in aerospace, obviously very strong. You look at that order number of plus 25%, but both strong in commercial and military end markets. Just really sound operational performance across the company, no weak spots at all. Moving to slide 15, just talking about our year-to-date cash flow performance. Cash flow from operations was 12.8% of sales. $1.8 billion of cash generated so far this fiscal year, that's 16% over what we did last year. Free cash flow is 10.9%. Our CapEx remains right at 2% like we have been forecasting. There are some one-time transactions that were the result of the Meggitt transaction. That impacts our cash flow by 1.5 points. So without those transactions, those numbers I just gave you would be 1.5% better. And free cash flow continues to be greater than 100%. We're at 111% year-to-date. And just I want to reiterate, for the full year, we continue to forecast cash flow from operations and free cash flow conversion of over $100 million and that free cash flow would be mid-teens for the year. If we go to the next slide, just touching on capital deployment and some leverage. We did increase our quarterly dividend. Our Board approved this last week to an 11% increase. The dividend payout is now $1.48. That is in line with our stated target of being in the range of 30% to 35% of our trailing five-year net income. And the increase this quarter does increase our annual record of increasing annual dividend paid from 66 years to 67 years. So long-standing record that we intend to keep. On leverage, we did make some significant progress reducing leverage this quarter. We paid down approximately $650 million in debt in the quarter. If you look at our gross debt to adjusted EBITDA, it was 3.2, that's down from 3.6 last quarter, so 0.4 turns from Q2. And if you look at the net debt to adjusted EBITDA, finished the quarter at 3.1, that's down 0.3 turns from Q2. So we are pleased with the deleveraging progress. We are on track and we continue to target our leverage commitment of 2.0 times, and we are committed to delivering on our commitments there. Looking at slide 17 and guidance. Obviously, we increased our guidance this morning. We have incorporated obviously the strong performance from Q3, but we've also increased our expectations for Q4. Full year sales growth at the mid point increases to 19% versus prior year, with organic moving up to 10%. That's up from 7% last quarter. When you look at the net impact of acquisitions and divestitures, we expect that to be about 12%. That's just up slightly from 11.5% last quarter and currency remains a headwind, no change to our prior guidance, but the full year, we expect it to be a minus 3. When you look at adjusted segment operating margins, we've increased our full year guide by 40 basis points. We now are forecasting 22.5% for the full year. And the midpoint of adjusted EPS is raised to $20.75 for the full year with a range of plus or minus $0.15. Just some specific details for Q4. We expect organic growth to be approximately 4% in the quarter and segment operating margins to be approximately 22.6%. And finally, EPS for the quarter, we are forecasting $5.32 and at the midpoint, same range wrapped around that. And we've also included guidance by segment and several other details that could be useful for your models in the appendix. So with that, just a really solid quarter. Glad to increase our guide. And with that, Jenny, I'll hand it back to you and ask everyone to reference Slide 18.

Operator:

Thank you. At this time we will conduct a question-and-answer session. [Operator Instructions] Our first question comes from Joe Ritchie of Goldman Sachs. Your line is open.

Todd Leombruno:

Good morning.

Jennifer Parmentier:

Well, you're right. We'll come back to you in August with the full year guidance. So we really believe that this backlog as we've shown the consistent increase over time will remain. I always use the term demand sense. And I think that with the transformation of the portfolio, we're going to have more backlog because we have a longer cycle business. So we'll look at it for the new fiscal year, the same way in which we've been looking at it most recently. So that will help us with the future year guidance.

Jennifer Parmentier:

So I'll start off and give you a little bit of color on industrial, and then I'll let Lee chime in on distribution. So in North America, orders to go negative, as Todd mentioned, a negative 4%. Just a reminder, real tough comp as North America last Q3 was plus 23%. So, customer demand remains strong. We have seen some destocking happening, and we believe that's very steady overall, positive outlook, and we continue to believe there will be broad-based growth. International also at minus 4%. That decrease was mainly driven by Asia-Pacific, which was down the mid-teens. China Mobile construction remaining very soft. A lot of, I think, automotive awaiting for the government stimulus. Semicon soft, but that's pretty much what drove the international negative. And EMEA, there's really no signs right now of the market weakening, strong mobile construction and automotive. still some tough comps related to COVID vaccine business last year and some supply chain challenges. But that's primarily around electronics chips and sensors. So, it looks to be good in EMEA.

Joe Ritchie:

Got it. Thank you both.

Andrew Obin:

Good morning.

Jennifer Parmentier:

Good morning Andrew.

Lee Banks:

Yes. That's a great question, Andrew. So, I think I could probably spend a half hour on this conversation. But the sales organizations continue to morph around the globe. I would say at a high level, we've got very focused teams that deal in the aerospace sector, deal with the big OEMs and in a separate organization on the MRO side. And then with key market segments, if I could take electrification initiatives around automotive, we've got whole sales organizations and application engineers that deal specifically with that. So, we are constantly adapting. We've got a team right now that's dealing nothing, but hydrogen generation, even though it's early days. So, we kind of organized based on some of these secular trends and based on what we see the opportunity in the field.

Jennifer Parmentier:

So yes, obviously, very, very fond of the Portland division and a lot of history there. It is one of our markets that is single-digit negative right now. But I would tell you this is a very strong business and historically has done very well. So we don't expect that this is going to be any time -- any long-term impact to the division. And I think they're in a good position, Andrew. .

Operator:

Thank you. One moment for the next question. This question comes from Scott Davis of Melius Research. Your line is open.

Jennifer Parmentier:

Yes. Thanks for asking, Scott. So we used to be on a plan that was driven off of return on net assets. And it was very difficult for all of our team members from -- inside of our factories even up into our offices to understand exactly where all those numbers came from and how they fit into that calculation. And now with our annual incentive plan, the operators on the shop floor, all of the people who support the manufacturing environment, everyone can clearly see because it is based off of sales and profit and cash. So they know exactly how they fit into it at the division level. So if you can kind of imagine a production planner, thinking about the inventory they need to bring in and the scheduling of the shop floor, they are in tune to that fact that, that is cash, and that is a metric that drives their incentive plans. So that's just one example of how we've been able to take that plan and the metrics that support it and deploy it to where everyone can understand it and buy into it. First full year this year, all groups, and like I said, nearly all of our team members are on this and has been very positive thus far.

Jennifer Parmentier:

Yes. Great question. So we think about it a little bit higher than that. We're very challenging when it comes to continuous improvement. It's why the Win Strategy has been so successful. Our lean tools and Kaizen constantly drive cost out of the business and make that productivity possible. That goes again to every member of the business being part of using those lean tools being part of Kaizen. So it's ingrained in our culture to consistently be more productive quarter-over-quarter, year-over-year. And in many cases, that's part of people's annual goals, depending on the role they're in. So we pride ourselves. We we're the hardest on ourselves. We still think we have plenty of room to improve, but we do pride ourselves on constantly looking for ways to increase efficiency and drive output.

JenniferParmentier:

In some cases, targets that divisions will be there, yes.

JenniferParmentier:

Thank you.

Mig Dobre:

Thank you and good morning, everyone. I wanted to go back to backlog as well. I'm curious how much of this backlog is deliverable in the next 12 months? Do you have multiyear orders that are in here? And as you look at the backlog build here, is there a sense from you as to how much of this build is just a function of supply chains and lead times and folks securing production slots as opposed to just a pure structural change in your business model?

Mig Dobre:

And how much of this is deliverable in the next 12 months? Is it all of it or just portions?

Mig Dobre:

Okay. Then my follow-up on industrial and international, and maybe this kind of relates to the backlog discussion, too. If we're looking at the last couple of quarters, we've seen order intake declines. Your organic growth has stayed positive. You're guiding for the fourth quarter, implying still positive organic growth. So there is this disconnect, I guess, between orders and organic growth. And I'm wondering how you would frame it for us to think on a go-forward basis? Thank you.

Mig Dobre:

Thank you.

Julian Mitchell:

Hi. Good morning. Just wanted to switch back maybe to the aerospace business. Some of your peers have been very, very upbeat as they're thinking about the defense or military exposure into next year. I think your orders are starting to reflect that the last couple of quarters after some tough comp's prior to that. So maybe help us understand kind of how you're thinking about that military piece within aerospace over the next kind of 12, 18 months. Any update around Meggitt's organic performance?

Julian Mitchell:

It was really around the sort of the growth outlook into fiscal 2024. Aero is a particularly sort of backlog-centric business, especially the OE side. So is it realistic that we could see kind of high single-digit growth again for the segment overall next year just because you've got very good commercial growth and now sort of military helping.

Todd Leombruno:

Yeah, Julian, I would just add. If you look at our organic growth in our aerospace business, nearly 15%. The Meggitt business is performing better than that. If you remember, they dipped down lower than we did in the airline COVID times, but orders are strong. And if you see the total orders that we reported, it's a plus 25%. So we feel really good going forward about aerospace.

Todd Leombruno:

Yeah. I mean I would just say, Julian, Q3 was fantastic. I mean, stellar far exceeded our expectations. We were forecasting a slight decline in margin for Q3. We outperformed, and we did better than that. We did increase our Q4 margin expectations. You're right though, it is slightly below prior year. It's just a combination of mix and of course, Meggitt being in there, and obviously, organic growth moderating. So we're going to try to do the best we can there, but we are forecasting just a slight dilutive year-over-year just for Q4.

Operator:

Thank you. One moment for the next question. This question comes from the line of Jamie Cook with Credit Suisse. Your line is open.

Todd Leombruno:

Yeah. Hey, Jamie, this is Todd. Thanks for the good comments there. I'll start with the international margins, and then maybe I'll hand it over to Jenny to talk about how we're going to manage through whatever the future holds for the macroeconomic trends. You're absolutely right. International margins, international volumes far surpassed our forecast. And it really was across the board. It was -- Europe is way better than feared. Asia has been extremely resilient with the start-ups and shutdowns and the back and forth with certain end markets. And Latin America has really been very solid for us. So across the board, it was a combination this specifically this quarter. Lots of volume leverage, great cost control, really integrating the Meggitt businesses that are in the international area. And it was just solid execution across the board, so easiest that. I wouldn't call out price cost as any different than any other region. They're doing exactly the same thing that we're doing everywhere across the board, it was really just really solid execution. Jenny, you want to take that?

Jamie Cook:

Thank you. Great job.

Jennifer Parmentier:

Thank you.

Nathan Jones:

Good morning, everyone.

Jennifer Parmentier:

Good morning, Nathan.

Todd Leombruno:

Nathan, yes, that was me. It's really true. So lower salary costs across the board. I did mention other benefit costs, a little bit of that is pension. Other things is just a market-based benefit. So it's really a combination of really just minding our SG&A, like we always do and then some favorable headwinds from pension and other market-based benefits.

Todd Leombruno:

Yes, it would be the number of people.

Todd Leombruno:

Yes, for sure. Obviously, working capital with what's been going on in supply chain and obviously dealing with the growth and making sure we've got continuity for our customers. It has been a headwind to cash flow. I think we've turned the corner on that. Our teams are really focused on reducing inventory. We are tightly managing CapEx, right? Our plan has been 2%. We've kind of stated that throughout the year. There is opportunities certainly across the Meggitt businesses as we continue to integrate those. So we feel positive about that being a tailwind for next year. And I would tell you across a number of the legacy businesses, we think there's opportunity as well. So I expect that to be a plus for us going forward, Nathan.

Operator:

Thank you. One moment for the next question. The next question comes from the line of Nigel Coe with Wolfe Research. Your line is open.

Todd Leombruno:

Yes. Nigel, this is Todd. I think your number might be a little bit high. I think if you look at it, we might be close to 2%, down from Q3. And when you look at this, Q4 really starts to kind of anniversary some of these growth periods that we had prior year. If you remember, Jenny said last year, I think North America was plus 23%. We significantly increased our guide. If you look at organic growth for the quarter. I think we were almost flat with our forecast coming into Q4, we're now roughly 4%, 4.5% organic growth. There's still some uncertainty out there. We are monitoring it closely. And like I said, we're just giving you the best look that we have right now. We feel really good about aerospace, and we're watching North America and international. You've seen the orders, the orders did turn negative, still robust. We're just giving you the best look we got at this point.

Todd Leombruno:

No. Yes, we did. You're absolutely right. What we started to do this quarter, we finalized the formal structure of where those Meggitt businesses now sit within legacy Parker-Hannifin. And we felt good about that. As we've talked about the change in our portfolio and when we looked at what we were guiding going forward, we felt at this point in time, it was prudent enough to include those both in the prior and in the current year period. So that is -- those comparison rates that you're seeing, those are apples-to-apples comparison rates. And if you remember…

Todd Leombruno:

Yes. 80% of Meggitt sits in the Aerospace Systems segment, roughly 20% of that does sit in the International segment, roughly 15% of that is North America, 5% of that is in international. And I would tell you, just got to keep in mind, obviously, Aerospace segments got the biggest chunk of that. You can see the plus 25% on the orders in the aerospace segment. It is a smaller slice of Meggitt that is in the North American and International Industrial segments. And when you look at the size of those businesses, it really is a small impact to what it was historically reported.

Todd Leombruno:

Yes.

Jeffrey Sprague:

Thank you. Good morning, everyone. I was on late, so I'm just going to ask one, and I apologize if it's been addressed. But just, again, looking at kind of the backlog. It is interesting, right, the backlog of forward sales has moved up pretty nicely. Certainly, Aero plays a big role in it. But looking at even industrial backlog to forward sales by my math is sort of double what it used to be, high teens to maybe into the 30s now sort of thing. I just wonder if you could maybe address how much of that is reflective of the longer-cycle business mix shift that's going on within Industrial, versus just kind of legacy supply chain and other issues and just kind of the raw ability that gets to out the door as you deal with supply chain, both on the back end of the process through your plants and then out to the customer level. Thanks.

Jeff Sprague:

And maybe then just a second part of that. So the margins obviously look very solid. Are there any residual just inefficiencies that you're dealing with in the system because of supply chain or other dynamics, or is that pretty much ironed itself out at this point? Thank you.

Jeff Sprague:

Great. Thanks for the color.

Jeff Hammond:

Hey good morning everyone.

Jeff Hammond:

Hey just a follow-on on supply chain. I guess, one, if you look in the industrial business, as supply chains kind of heal, are you seeing changes in order patterns, less blanket orders and maybe how does that impact the order rate? And then also, just as the supply chain friction comes out, how do you see that playing out in the margins going ahead?

Jeff Hammond:

Okay. And then just on Meggitt, do you have an accretion number for the quarter to give us? And then just on the up-synergy should we think of that as more of a pull ahead, getting things done faster or some upside to that $300 million number?

Jeff Hammond:

Okay. Thanks.

Operator:

Thank you. One moment for next question. This question comes from Josh Pokrzywinski with Morgan Stanley. Your line is open.

Jennifer Parmentier:

Yes. So it's -- it's difficult to directly tie it to a specific project, but we are definitely benefiting from some of these projects in the secular trends. So if you think about a lot of the new battery plants that are being built to support electrification, we're there when they're prepping the land, we're there when they're building the factory and we're there when they're putting all the equipment in the factory. So definite benefits there. Also although it's a little bit longer-term for these to be online, but we'll directly benefit from a lot of the chip and sensor production that is coming to the U.S. And today, if you look at the secular trends, obviously, aerospace, we've been talking about that a lot definitely benefiting from that secular trend in that market recovery. And beyond the battery production, we currently have a lot of content on electric vehicles. And when we transition from an internal combustion to an electric, it's 1.5 times to two times the bill of material for us. In addition, we're starting to see from an electrification standpoint, a big pull on our mobile business. So between mega CapEx projects and secular trends, again, it's the reason we feel so confident about those targets in the future, 4% to 6% organically and really why we believe we're going to grow differently with this portfolio.

Todd Leombruno:

Hey, Chris, this is Todd. I think we've got time to maybe squeeze in one more question. Let's take one more and then we'll wrap up after that.

Joe O'Dea:

Hi. Thanks for taking my question. One, just on the quarter in the North America margins flat year-over-year on 12% organic growth. And so can you elaborate a little bit on mix? I also just anything else that you could be ramping up on the investment spend side where you could see opportunities there?

Joe O'Dea:

That's helpful. And then just in terms of -- I mean, what's kind of changed over the past three months? I think, Jenny, three months ago, you were talking about maybe seeing a little bit of pushouts. I'm sure a little bit of destock as supply chain improves here. But given the strength of the revenue in the quarter, real evidence of much in terms of pushouts. And so I'm just curious with credit conditions out there, obviously, the macro uncertainty, but sort of day-to-day, what you're seeing anything notable in terms of shifts, either more constructive or more cautious?

Joe O'Dea:

Appreciate it. Thank you.

Operator:

And thank you for your participation in today's conference. Sorry, please go ahead.

Operator:

That does conclude our program. You may now disconnect.

Todd Leombruno:

Thank you, Chris. Good morning, everyone, and thank you for joining Parker's fiscal year 2023 Q2 earnings release webcast. As Chris said, this is Todd Leombruno, Chief Financial Officer speaking. And joining me today is Jenny Parmentier, our Chief Executive Officer; and Lee Banks, our Vice Chairman and President. Our second quarter results were released this morning and before we get started, I just want to remind everyone, we will be addressing forward projections and non-GAAP financial measures. Slide 2 of this presentation details our disclosures our disclosure statement to issues in these areas. These forward-looking statements detailed issues that could make actual results vary from our projections. Our press release, this presentation and all reconciliations for non-GAAP measures are now available under the Investors section at parker.com and will remain available for 1 year. We're going to start the call today with Jenny addressing some focus areas for the company as she takes on the role of CEO. She will then address some highlights for the quarter, which we just released this morning, and then I'll follow up with a brief financial summary and then review the increase to our FY '23 guidance that we issued this morning. Jenny is going to wrap up with a few summary comments. And then Jenny, Lee and I will take as many of your questions as possible. I now ask you to reference Slide 3. And Jenny, I will hand it over to you.

Todd Leombruno:

Thanks, Jenny. That was great. Okay. So I'm going to begin on Slide 12 with the financial results. I can't tell you how excited the team is. This is the first full quarter that includes Meggitt in our results. It also is the first full quarter that we do not have Aircraft Wheel and Brake in our results. So the year-over-year comparisons are a little bit more complicated than usual. But you see the top line sales increased 22% versus prior year. That clearly is a record for us at $4.7 billion. Organic growth continues to be extremely healthy and was just over 10% in the quarter. That does extend our string of double-digit organic growth quarters. Although better than forecasted, the currency headwinds do continue. The currency impact to sales was unfavorable by 4% in the quarter versus prior year. And when you look at the net of the Meggitt acquisition and the Aircraft Wheel and Brake divestiture, that was a positive 16% to our sales in the quarter. Looking at adjusted segment operating margin, we exceeded our forecast, and we finished at 21.5%. And if you look at adjusted EBITDA margins, that was even stronger at 22.4%. And just as a reminder, we mentioned this last quarter, we do expect Meggitt to be just slightly dilutive to overall margins in this first sub-years as we generate those synergies that Jenny just spoke to. Looking at adjusted net income, we did $619 million or 13.2% ROS. That is an improvement of 6% versus prior year, and adjusted earnings per share were $4.76. That's a Q2 record and an increase of $0.30 or 7% compared to the prior year. Overall for Q3, we are extremely happy to have that first quarter of Meggitt in the books to see that sales increase by 22% and obviously, see the positive net income and EPS growth. So just really happy with the results of the quarter. If we jump to Slide 13. This is just going to be the visual elements of that $0.30 EPS improvement. And again, I'm really happy to say the driver of this is the additional segment operating income. We generated $180 million or 22% additional segment operating income versus the prior year. If you look at that, that added $1.8 to EPS for the quarter. Interest expense, as expected, is a headwind. It's a $0.51 headwind. That was a little bit higher than we were expecting just with the movement in rates, 100% of that entire $0.51 is related to the Meggitt transaction and what's going on in the rate environment. Other expense was $0.12 unfavorable. That was primarily driven by year-over-year changes in currency rates and income tax is a drag of $0.14, really because last year benefited from a number of discrete items that were favorable. And of course, this year, we have some of these transaction costs in the quarter that are not deductible. Everything else nets to just $0.01. And if you look at all those items, that makes up our $0.30 increase to that record $4.76 earnings per share, and we're really happy with that. If you jump to Slide 14 and just looking at the segments, once again, every segment was positive organic growth in the quarter. We exceeded our margins across the board. Every segment exceeded our expectations on margins. Orders remain positive despite some pretty tough comps in the prior year and for the total company finished at plus 3. And really, demand does remain robust across all the markets we serve. Our team members really are working hard to meet customer expectations. And the result is that record sales that we just generated in the second quarter. If you look specifically at the North American businesses, Sales are extremely strong at $2.1 billion. Organic growth in that segment is 13.5%. Adjusted operating margins did increase 50 basis points in North America. They finished at 21.8%, that is a record and just really healthy volumes and a gradually improving supply chain really helped drive performance in those North American businesses. Order rates are positive at plus 2 and that really matches our strong backlog and really that broad-based demand that is consistent across North America. So special thanks to our team members in North America for their record performance. Looking at the international businesses, sales were $1.4 billion. Organic growth there, almost 9% from prior year. And across all of our regions in the International segment, we were positive from an organic growth standpoint. Margins remained high at 21.9%. This is slightly down from prior year, really due to currency, a little bit of product mix and some China COVID-related headwinds, just specifically in China. Order rates are minus 4. They were positive last quarter, but that did have a bit of a rebound, if you remember, from the COVID-related shutdowns in China. So we're watching that very closely. Aerospace Systems, obviously, huge sales, up 84%. They did exceed $1 billion for the first time, and that obviously is clearly driven by the addition of the Meggitt businesses in our Aerospace Systems segment. Organic growth in aerospace was almost 5%. Really strong OEM and MRO commercial activity in that segment, both from sales and orders being mid-teen positive on the OEM side of it and military OEM remains negative as we expected. Operating margins were 20.6% in that segment. That is up 70 basis points from last quarter and better than we forecasted. And really, the Meggitt integration, the performance of the businesses, the synergies, like Jenny had mentioned, totally on track, and we're really happy with that. When you look at aerospace orders, they are plus 22. We talked for the last couple of quarters about that bad comp we had with the military orders we've now -- we've passed that comp. So you can see the orders are 22%. We're really happy with that. Great performance across all of the businesses this quarter. Great job, everyone. If we go to Slide 15, this is just cash flow. This is our performance on a year-to-date basis. The Meggitt transaction, we've talked about this last quarter, there's a drag to cash flow just based on some of those transactions costs. They did impact CFOA and free cash flow by roughly 2%. But even excluding that, if you look at the numbers as reported, cash flow from operations is 12.1% of sales. We did surpass $1 billion in cash flow from operations on a year-to-date basis and our free cash flow is 10% of sales. Our CapEx, as we have communicated, just slightly over 2% for the year, and free cash flow conversion is 114%. I think everyone knows us pretty well. Our cash flow is always second half weighted and we continue to forecast mid-teens cash flow from operations, and certainly, free cash flow conversion over 100% for the full year. If we jump to Slide 16, just a few comments on capital deployment. I think everyone saw that last week, our Board approved a quarterly dividend payout of $1.33 per share. That is our 291st consecutive quarterly dividend, and it is certainly in line with those targets that Jenny mentioned earlier. On leverage, we did make progress on reducing our leverage. If you look at gross debt to adjusted EBITDA, that was 3.6. Net debt to adjusted EBITDA was 3.4. Both of those metrics improved 0.2 turns from Q1. So that EBITDA is on a trailing 12-month basis. And just a reminder, that only includes Meggitt EBITDA from the date of close, so roughly 3.5 months of Meggitt EBITDA. And I'm proud to say we've now applied over $2.2 billion of cash towards that Meggitt transaction. And we're really fully committed to our deleveraging plan, and that plan remains on track. So good progress there. Okay. So moving to guidance on Slide 17. You saw we did increase our guidance this morning. We are providing this as usual, on an as reported and on an adjusted basis. And if you look at the sales range, we are increasing that. We're increasing the range from 14.5 to 16.5 or from, excuse me, 14.5 to 16.5 or 15.5% at the midpoint. More importantly, organic growth, if you look at our organic growth for the full year, we are increasing that to 7%. That is up 1% from 6% last quarter. The impact of acquisitions and divestitures. We're moving that up just slightly to 11.5%. That was 11% last quarter. And while currency is still a headwind, we expect that to be less bad. We now forecast that to be a 3% impact to sales, negative. And that's down from what we were forecasting last quarter at negative 4.5 and that is using spot rates as of December 31 like we normally do. When you look at adjusted segment operating margins for the full year, we are increasing that full year guide by 20 basis points to 22.1%, and that is at the midpoint, there's a range of 20 basis points on either side of that. And just a few additional items to note. If you look at interest expense, that is now up to $555 million. That was $510 million last quarter. That does include the changes in the interest rates that just were announced yesterday and really what we forecast them to do in the upcoming months. Corporate G&A is $204 million and other income is really an income of $18 million. Both of those numbers are virtually unchanged from our prior guide. If you look at our tax rate, just based on where we're at now, halfway through the year, we believe that will be 23.5% for the full year. And adjusted EPS is now raised to $19.45, that's a $0.50 increase from our prior guide and there is a range around that or plus or minus $0.25. Specifically, for Q3, organic growth is expected to be nearly 4%. We raised that from our prior guide and adjusted EPS is expected to be [$4.76] at the midpoint. And finally, adjustments in the forecast at a pre-tax level are listed here on this table for the remainder of the year, together with acquisition-related expenses incurred to date. So that's the details on guidance. If you go to Slide 18, this is again just a little bridge on that. You can see where we start. Our prior guide was $18.95, that strong performance in Q2. We're rolling in that $0.45 beat. We are increasing segment operating income by $0.35 for the remainder of the second half. And I just wanted to note that $0.25 of that is due to the less bad currency rates. If you remember last quarter, we knocked that down a little bit based on where rates were at the end of September. We've now moved that back a little bit, and there's a little bit more based on the organic growth increases, and that is $0.35. Interest and tax still continue to be a bit of a headwind. You can see the interest expense is a $0.20 headwind and income tax for the second half of the year is just $0.10. Add it all together, we get to $19.45 at the midpoint, and that is the changes to our guidance. So with that slide, I will ask you to focus on Slide 19. And Jenny, I will hand it back over to you for summary comments before we go to Q&A.

Operator:

[Operator Instructions] And one moment for our first question. Our first question will come from Jamie Cook of Credit Suisse.

Jennifer Parmentier:

Thanks, Jamie. I'll try to answer your second question, and then I'm going to let Lee give some color on your first question. So we always want to be the best owner of any business, right? So we have a regular process where we look at that every year. So that's something that's well in place, and we'll continue to do that. As we look to future acquisitions, again, we're going to be looking for the type of acquisition that is margin accretive. It has that resilience of a longer-cycle business and something that fits well with Parker. So obviously, short term, we need to pay down some debt for Meggitt, but that's why it's important for us to keep those relationships strong for the future.

Jamie Cook:

Okay. And then color on aerospace, is it just all commercial, I presume?

Operator:

Thank you. One moment please for our next question. Next question will come from Andrew Obin of Bank of America.

Jennifer Parmentier:

Yes. Thanks for the question, Andrew. So the beauty of the Win Strategy and the lean tools that are inside of the Win Strategy is really all about constantly looking at optimizing our lead times. So as far as restructuring the way we look at it, I wouldn't say we're going to do that, but I would say we're going to continue to look to have those best-in-class lead times. The supply chain, I would characterize it as it's healing. We are seeing some improvement. The one thing that we will really continue to do is increase our dual sourcing and our local-for-local model that has really helped us out. It also helps us that our teams are in a decentralized structure, and they're able to work closely with the customers. So I think that those are some of the keys that help us work closer with our suppliers and really help us have a good look into the future so we can best utilize our resources and our capacity.

Jennifer Parmentier:

No, we have not changed our position. We're doing exactly what we said we were going to do. We have a need to increase capacity in a couple of our operating groups. And obviously, we'll invest in Meggitt in the future as well. So that position remains the same.

Operator:

And one moment for our next question. Our next question will come from Scott Davis of Melius Research.

Jennifer Parmentier:

Yes. No, thanks for the question, Scott. Listen, it really is all about driving efficiency in the operations. And we've had a long-term strategy of being local for local, right, being close to our customers, having our suppliers close and being able to give that good lead time and really provide a good customer experience. So we'll continue with that. And then with dual sourcing, I mean, I think some of it in the past has had to do with different things going on in whatever environment we're in. But it really is a good practice through different cycles in the business. So it's really something that we want to increase in all regions and make sure that we can be flexible and agile as demand goes up and down. That's the big key is being able to go to one source or the other and really respond to your customers' demand. So that is really the way that we look at it. I think going forward, we've learned a lot through the pandemic. That's the beauty of having a continuous improvement culture. Our teams are trying to recognize where there's opportunities. And we think we have opportunities to make sure we're more efficient and that comes through visibility and analysis of demand as well as really optimizing the schedule that goes to the production floor. So that's where we're focused.

Jennifer Parmentier:

Well, first of all, I just -- I'd like to say that I've had no big complaints or gripes or no surprises. Somebody asked me last week if I had any surprises. I know there's been none of those. I've been on this team for several years now and very aware of how we run the business. And what I talked about with my slide, that's where the focus is. I mean there's an opportunity to become supply chain leaders here. There's an opportunity to really make sure that we capitalize on the portfolio transformation and we continue to expand margins. So what you saw in those slides is exactly what we're going to work on.

Scott Davis:

Well, my gripe is I don't own enough of your stock, but otherwise. I'll pass it on.

Julian Mitchell:

Maybe just a first question on the industrial businesses. So I guess several other industrial companies who are more sort of short cycle in nature, have talked about maybe some destocking early in the year in the U.S. and also Europe. Doesn't sound like you're seeing any of that yourself. But maybe just talk a little bit about how you see customer behavior or distributor behavior if it's different on that front? And what do you assume Europe does in terms of organic sales in the international business, the balance of the fiscal year?

Julian Mitchell:

No, that's good color, Lee. And maybe just a follow-up on aerospace, give us some insights as to how the Meggitt top line is trending at present? And I guess when you think of overall Parker Aerospace, a couple of large sort of aero peers, GE and Honeywell, for example, have talked about the headwinds, whether it's cash or P&L margin from the OE ramp at the airframers. Maybe help us understand if that's a big pressure point for Parker Aero on margins or cash in the next year or two?

Operator:

Thank you. One moment please for our next question. Our next question will come from Jeffrey Sprague of Vertical Research.

Jennifer Parmentier:

So Jeff, you're right, it is too early to say that there's some upside to that number. We feel good about this year's synergies at $60 million. We feel good about the path to $300 million. But obviously, as I spoke about with the synergies and the operational excellence driven by the Win Strategy implementation, we expect to get this to a higher level of performance, and we'll update you along the way.

Jeffrey Sprague:

And then maybe a follow-up for Lee. Lee, when you were addressing the international question, you mostly talked about what's going on in China, which is understandable. But can you give us a little bit of an update on what you're seeing in Europe and how you're expecting the balance of the year to play out there?

Operator:

One moment for our next question. And our next question will come from Mig Dobre of Baird.

Lee Banks:

Yes. I'll give you kind of what our outlook is. That's implicit in our guide. And I think the key thing to think about is really 90% of our markets are still positive as we look forward. But I kind of look at the greater than 10% positive. Commercial aerospace is still really strong. Commercial military MRO is really strong. Electric vehicle passenger cars. That's one of those secular trends where we've applied product through our portfolio change that we're participating in. And then oil and gas, especially here in the U.S., land base and even some offshore now, it's really come back with a vengeance. I would call high single-digit positives, agriculture, heavy-duty trucks, passenger cars, and telecommunications. And then mid-single digits, the neutral construction markets, distribution, forestry, marine, material handling, mining, power gen, rail, et cetera, and semiconductor is still strong. There's a lot of infrastructure build on the semiconductor side that's still taking place. The big negative markets that kind of stand out a little bit of what we would categorize as life science, and that's really comps around coded equipment and drug dispensing stuff that we were supplying and then really military OEM that's really a timing thing, I think, long term, but that would be negative for the outlook. So at a kind of high level, not breaking it down by region, that's kind of how we see it.

Lee Banks:

I would be -- that's not something I can answer here on the call. I would just tell you anecdotally, some of the customers that we're participating with today are at a different level than we participated with them before, and that's due to the portfolio changes. But I can't answer that right off the cuff.

Stephen Volkmann :

Maybe I'll stick with you, Lee, here because as I hear you lay all that out, it sounds like the maybe even said, I mean, it was quite tilted to the positive. And yet I look at kind of what's embedded in your organic guide for the second half. And I guess it looks like the exit rate is going to be sort of close to zero on organic growth. Maybe you disagree with that, but I'm just curious, would you sort of characterize this as a little bit conservative or careful given the economic outlook? Or is this really kind of a bottoms-up kind of forecast that you have for the second half?

Stephen Volkmann:

Okay. Fair enough. Just to follow on to that, though. I mean, it would seem, Todd, that you could get that level organic just from kind of pricing rolling its way through. And any comment on that?

Operator:

And one moment for our next question. And our next question will come from Josh Pokrzywinski of Morgan Stanley.

Jennifer Parmentier:

Yes. I think that's a really good question. We really haven't seen that yet, but we know that that's what happens, right? We know that when the lead times either reduced or just effect to normal, the order patterns usually follow that. We have really close relationships from the divisions to the customers. So we really work closely with the customers and looking at the backlog and making sure that it's healthy but I would also say, at the same time, we've seen a few pushouts. Nothing that I would characterize as being significant, but I do think it's a little bit of a leveling of demand as the supply chain heels, but really nothing that has drastically changed any order patterns yet.

Jennifer Parmentier:

Yes. I think we -- as we've talked about before, we're well positioned for changes. We have a recession playbook, right? We start pulling those levers way in advance at the first signal. So I think we do a really good job of that. Thinking about levers into the future, it really goes back to that increasing the dual sourcing and the local for local. What helps us reduce those lead times and ensure that we can give our customers the delivery that they're looking for. So that's why that's an area of focus for us going into the future.

Operator:

And one moment for our next question. Our next question will come from Joe Ritchie of Goldman Sachs.

Lee Banks:

Yes, I think that's exactly what I'm trying to tell you. When I'm looking at this heat map, we've been in a contraction from a PMI standpoint almost around the world since August. And I think what's really holding us well are the portfolio changes that we've done inside the business, and the secular trends that are taking place that we're able to tap into inside our business today. So we're not immune from what's happening around the world. None of us are, but it's a different portfolio today when I started 32 years ago.

Todd Leombruno:

Yes. We're really focused on that, Joe. It's a great question. I kind of mentioned it earlier, our cash flow is certainly more weighted to the second half. We just made the dividend increase. Jenny talked about the CapEx 100% of the cash flow that we generate in that second half will be dedicated to that debt pay down. And like I said, we've got a nice plan for it. We're on track, and the team is already focused on that. So we're pretty positive on that. Chris, this is Todd. I think we have time for one more question. So thank you whoever is next on the list.

Nathan Jones:

I've got a bit of a follow-up on the kind of orders backlog cadence as we see supply chains normalize here. Can you give us maybe a little bit more color on how elevated your backlog is relative to where it normally was, I guess, we haven't had normal for three or four years now? And as supply chains improve and lead times shortened, if you would expect to see backlog get worked down, the order cadence dropped down a bit. And we could get into a scenario where we see lower orders with that, that actually signaling any lower demand as we normalize order cadence in backlog.

Nathan Jones:

And I have one on price cost. Parker has a tremendous long-term record for being mutual loan price cost at the margin level and did a tremendous job through the inflationary period we've seen over the last couple of years. Do you expect that if we get to a deflationary period to remain price cost neutral? Or do you think that you could actually hold on some of that pricing and have that be a tailwind to mine?

Todd Leombruno:

All right, everyone. This concludes our FY '23 Q2 webcast. We do appreciate your time, your questions and of course, your interest in Parker. If anyone needs any clarifications or follow-ups on anything we cover today, Jeff Miller, our Vice President of Investor Relations; and Yan Huo, our Director of Investor Relations, will be available today. So that's all we have today. Thank you for joining, and have a great day. Thank you.

Todd Leombruno:

Thank you, Jonathan. Good morning, everyone, and thank you for joining Parker's fiscal year 2023 Q1 earnings release webcast. As Jonathan said, this is Todd Leombruno, Chief Financial Officer speaking. And joining me today is our Chairman and Chief Executive Officer, Tom Williams; our Vice Chairman and President, Lee Banks; and our current Chief Operating Officer and Chief Executive Officer elect, Jenny Parmentier. We will be addressing forward projections and non-GAAP financial measures today. Slide 2 provides details to our disclosure statement in these areas. Actual results could vary from our projections for the items listed in these forward-looking statements and also detailed in our SEC filings. The presentation today will address non-GAAP measures, and reconciliations for those non-GAAP measures are available in this presentation and all of this is available on the Investors section at parker.com and will remain available for 1 year. Tom is going to begin the call today with a couple of highlights on the quarter and also provide an update to the Meggitt integration. I'll follow with a brief summary on the financials and review the increase to our guidance that we issued this morning. And then we'll touch on the leadership transition that we announced last week, and we'll finish the call with Q&A. So if I could ask you to reference Slide 3, and I'll hand it over to Tom to begin.

Todd Leombruno:

Thanks, Tom. I'm going to start on Slide 9. Obviously, it was an impressive quarter. Tom mentioned that. It's a really strong start to our fiscal year. And our team members just really globally continue to execute and deploy The Win Strategy, and we're very proud of the results that they were able to put up. Tom mentioned this, but sales are up 12.5% versus the prior year. That was a record of $4.2 billion. The organic growth in Q1 was extremely strong, 14%. Everyone is seeing the strengthening of the dollar, and that has created a currency headwind for us. That's about 5.5% of sales. And we're very happy that we closed Meggitt. We also close the Aircraft Wheel and Brake divestiture. All in, net of that, it added 4% to our sales for the quarter. Adjusted segment operating margins, 22.7%. That's an increase of 70 basis points from prior year. Adjusted EBITDA margins came in at 23.3%. That's an even bigger increase. That's 120 basis points up from prior year. And really, this year-over-year margin, both the adjusted segment operating margins and the EBITDA margin improvements, really just demonstrate the power of Win Strategy 3.0. When you look at adjusted net income, the number is $616 million, that's a 14.5% ROS. Adjusted earnings per share is $4.74. That is a Q1 record. It's up $0.48 from prior year, and that's really despite some currency headwinds that we saw in the quarter. Both adjusted net income and earnings per share have increased 11% versus prior year. I would say I just want to make a couple of notes. There were a number of several onetime items incurred this quarter as a result of the Meggitt acquisition and the Wheel and Brake divestiture. We've included a reconciliation to all those items in the appendix. Those are mostly over but some large onetime items. And I really want to thank our global finance and accounting teams for getting all this done with just 2 weeks of ownership and closing the quarter really well. So all in, this is a really a fantastic start to our fiscal year. If you go to Slide 10, this is just a bridge on the year-over-year EPS improvement. I've already mentioned it, but the strong Q1 operating performance, obviously, the main driver there. We generated $133 million or 16% additional segment operating income Q1 versus Q1 last year. That equated to $0.80 of the earnings per share improvement. Incrementals were extremely strong, excluding acquisitions and divestitures. Total company did about 36% incrementals. When you look at everything else, the net of corporate G&A, other tax and shares outstanding, all of that nets to $0.03. And you can see the big line there, interest expense is $0.35 headwind. But 100% of that is related to the Meggitt acquisition, and we knew that, that was going to be a headwind. So all in, that's $4.34, that's 11% increase from prior year. If we go to Slide 11, just looking at the segments, you can see organic growth, again, very strong in the quarter. Orders remained positive in every segment, despite some notably tough comps versus prior year. Total company orders are up 5%, and we continue to see broad-based demand across all the end markets that we serve. Strong incrementals drove that margin expansion, that 70 basis point margin expansion versus prior year. And again, our team members just really continue to be agile in the current environment, and I'm very proud that they were able to generate record sales and operating margins. Looking at North America, the organic growth was extremely strong in North America. Nearly 18% sales came in at $2.1 billion, significant margin expansion, 200 basis points over prior year, that reached 23.74%. Volumes obviously were a big driver here. But again, we've talked over the last couple of quarters about the specific regional supply chain challenges. Our team has just been very resilient, working on our operational efficiencies, and that really is the main driver on driving this strong margin performance. Incrementals in North America, ex acquisitions, was 38%. Orders are positive at plus 3. And again, just operating in all cylinders in North America broad-based demand. Looking at the international businesses. Organic growth, again, strong there at 12% organic growth. Sales reached $1.4 billion. Organic growth was positive low to mid-teens in every region in our international businesses. And adjusted operating margins expanded 30 basis points from prior year and reached 23.1%. And again, that's all in light of some currency headwinds that obviously more heavily impact this segment. Our Asia Pacific team continues to outperform. We've talked about that. They have done a great job recovering from those shipment delays that were a result of COVID shutdowns, and we feel that, that is kind of mostly played out in Q1 here. Orders are positive in the international business to plus 6. And that clearly reflects a rebound, obviously, from China as well. Looking at Aerospace Systems. Sales are $746 million now. That's obviously up 26%. If you remember, about 82% of the Meggitt transaction does get reported in this segment. There's about $150 million of sales for Meggitt in Q1 in our Aerospace Systems segment. That makes up 19.5% of the sales increase. But if you look at organic growth, very strong there as well, 7.4%. We just continue to see a strong OEM and MRO commercial volumes continuing throughout the year. When you look at operating margins, that was impacted really by Meggitt coming in, Wheel and Brake coming out and then there were some nonrecurring program timing charges that were in respect to our OEM business. So all in, that's a onetime issue, and we don't see that continuing going forward. If you look at Aerospace orders on a 12-month rolling basis, it's plus 5. But you remember, we've talked about these multiyear military orders. That will anniversary next quarter if we adjust for that, orders were positive 29% in Aerospace. And Aerospace dollars continue to remain at extremely high levels. So all in, great performance across all of our segments. We're really happy with the way the team has outperformed there. Looking at cash, another good story here. If you look at our cash flow from operations, that was 10.8% of sales. Free cash flow was 8.8% of sales. Our CapEx did hit 2% as we have been signaling and free cash flow conversion was 96%. The transaction costs that we've talked about did impact CFOA and free cash flow pretty significantly in the quarter, it's about 450 basis points of impact. Those will minimize as we go on throughout the year, but I just wanted to call it out that, that was a drag in our Q1 cash flow. We do still expect free cash flow for the year to be in the mid-teens, so no worries on that. On Slide 13, I just want to give you a couple of updates on the capital deployment. I'm sure everyone has seen this. Last week, our Board approved a quarterly dividend payout of $1.33 per share. That is our 290th consecutive quarterly dividend payment and our record of continuing to increase the dividends paid is now at 66 years. And I want to address leverage because I know that's a number that's been on people's mind. At the end of Q1, leverage now reflects all Meggitt-related debt for the transaction. If you look at our gross debt to adjusted EBITDA at 3.8%, net debt is 3.6%. And those numbers are presented on a trailing 12-month basis, and they do not include any Meggitt pre-closed EBITDA. So that is basically base Parker adjusted EBITDA, doesn't really include any Meggitt EBITDA, and we fully expect that to improve as we go throughout the year and we start to include that Meggitt EBITDA. We are fully committed to our delevering plan, and I'm really proud to say since we made this announcement last August or really August of 2021, we've applied over $2 billion of cash towards the purchase price of Meggitt. So great work on that. Okay. Looking at guidance, you saw this. We are now including the Meggitt acquisition, and we are excluding the Wheel and Brake divestiture in our guidance. We're providing this on an as-reported and an adjustment basis. And Tom mentioned this, we're increasing the sales growth range now to a range of 11% to 14% or 12.5% at the midpoint. Organic growth forecast has been increased to 6% at the midpoint. Acquisitions net of that divestiture is going to be plus 11. And we do see currency being a larger headwind now. We are now increasing that unfavorable impact of currency of 4.5% and that is using spot rates as of September 30. When you look at adjusted segment operating margins, the range is now 21.7 to 22.1 or 21.9% at the midpoint. So that is all-in, includes Meggitt and excludes Wheel and Brake obviously, our strong Q1 performance. Just a few other items to note. On an adjusted basis, corporate G&A is expected to be $207 million. Interest expense, that's all in, including everything from Meggitt 5 10. And the other income expense line is actually going to be income of $23 million for us. Really no change to the tax rate. We expect that to be 23%. And you can see the full year as reported EPS is now $13.20 at the midpoint or $18.95 adjusted and there's a range of $0.35 on either side of that. And just looking a little bit more forward into Q2, we see adjusted EPS to be $4.46 at the midpoint for our second quarter. Lastly, all the adjustments that we've been talking about on a pretax level are listed in this table, which now includes at least the current estimate we have for the Meggitt-related intangible amortization of 220. So you can see the total is now 520. And it also includes integration costs to achieve, specifically for Meggitt of $70 million for the remainder of the year. Especially with the acquisition expense to date, we've adjusted for all of those. The majority of those are over, but we will adjust those as they come through. Okay. Last, on the guidance bridge, let me just give you some details to that. Obviously, we started the year with our initial guidance of $18.50. We had the call at the end of September, which included Meggitt and excluded Wheel and Brakes. So that was another $0.33 of additional EPS that we saw for the year that got us to the $18.83. Really our strong Q1, there's a little bit of moving pieces here because of Meggitt coming in and Wheel and Brake coming out. We calculate that to be about a $0.54 beat to our original guide. And for the remainder of the year, we've really increased the Q2 organic growth just slightly, and we've held the second half to exactly what we said in our original guidance. We have incorporated the recent currency rates and their estimated impact on the segment operating income. Right now, we feel like that's a $0.42 headwind. Really, there's nothing else notably changed to our guide for the full year. And all in, we increased our full year adjusted EPS guide to $18.95 at the midpoint. So with that, I'll hand it back to you, Tom and it's all yours.

Jennifer Parmentier:

Thank you, Tom. I am honored and proud to be appointed the next CEO of Parker Hannifin and very excited about our future. I'm grateful to both Tom and Lee for the support and mentorship over the last several years and to our Board of Directors for their confidence in my leadership. Moving to Slide 18. Effective January 1, this is the office of the Chief Executive. Lee, Todd and I have been part of this team for some time, and we welcome Andy to the role of Chief Operating Officer. Andy will report to Lee as I do now in my current role. This is a seasoned leadership team that has been part of the company's transformation and an integral part of developing and implementing Win Strategy 3.0. This team will continue to deliver record results well into the future. Moving to Slide 19. As I look to the new calendar year and the second half of our fiscal year, my priority is to build upon the success of Parker's transformation. We are focused on integrating Meggitt into the Parker family, achieving the synergies we've committed to and delivering a record FY '23. Win Strategy 3.0 will continue to accelerate our performance across the company. and our portfolio transformation, coupled with the secular growth trends, makes us more than confident in achieving our FY '27 goal. Before we go back to Todd for Q&A, Lee has a few comments.

Thomas Williams:

Thank you.

Thomas Williams:

Should I have retired sooner?

Operator:

[Operator Instructions]. And our first question comes from the line of Scott Davis from Melius Research.

Thomas Williams:

Thank you. Excellent.

Jennifer Parmentier:

Thank you, Scott. Well, my priority, as I said, is to build upon the success of the Parker transformation that is well underway. Our focus is -- our key focus is integrating Meggitt, bringing them into the family and achieving the synergies that we've committed to. And we're obviously, we're going to continue on our journey to top quartile performance and delivering long-term value for the shareholders. So I don't expect that we're going to see big changes in the day-to-day run of the operations and Tom and I are both committed to a very smooth transition.

Jennifer Parmentier:

Well, I think that we have a lot of the same leadership style. And I don't know that I want to get into my weaknesses just yet, but I've had 2 good mentors here who have helped me develop some strength over time. But from a leadership perspective, very passionate about safety and our team members, just the same as Tom is. I'm very passionate about providing a customer experience that stands out amongst our competition and very focused on organic growth in the future and delivering the performance that we delivered in that recent past and even more so in the future.

Scott Davis:

Okay. Well, I'll pass it on. Best of luck to all of you folks and best of luck to in your next chapter.

Andrew Obin:

And once again, I want to extend my thanks to Tom and congratulations to Jenny.

Jennifer Parmentier:

Thank you, Andrew.

Thomas Williams:

Andrew, it's Tom. So inventory in the channel went up a little bit, I'm referring to our distributor channel, but nothing really sequentially all that material. I think a lot of our distributors are going to probably wait to see how their fiscal year ends and how the new year begins. But maybe what you're getting in and so many words is kind of what's our thinking about the rest of the guidance period, what gives us confidence, et cetera. We were pleased that the order entry was positive against some very tough comps in the prior year. The dollar volume that we saw through the quarter was pretty consistent across all the regions and segments. We were also really happy that international saw a mid-single-digit order growth. And we saw that in EMEA and in Asia, we have mid-teens in Latin America. So we've got Aerospace in there at around plus 7 as we think about the full year. And the industrial markets are very positive. We had over 90% of our end markets were in a growth phase. So our guidance really utilizes that input, our backlog, the AI model, feedback from obviously customers and distributors. And we still see broad-based growth. However, to the point you're getting at, it's going to moderate as the fiscal year progresses. Yes, supply chain is healing, but I would say it's healing slowly, and it's not really making, I would say, that big a difference on lead times, at least not yet. So as a result, we did bump up our guidance -- I'm referring to organic sales guidance. We took our first half, if I compare to prior guide to now, was 5.5%. We bumped it up to 10.5%. We left the same was the second half, and that the second half basically around 2% organic growth. I think for us, even though we've got the backlog and we've got this broad-based strength, we're cautiously optimistic. And the reason I say that is that we'd like to see how the year-end -- I'm talking about the calendar year ends for our OEMs and how do they start with their order patterns, particularly their demand signals to us in January. Everybody's -- most of our OEMs are fiscal year calendar year type of companies. And so we want to see how they're all running hard to finish. So I think the start of the new year will be a good indicator, which is why we didn't change this. But in general, we're still very positive. And we have a lot of things going for us when we think about the secular trends, the changes we've done from acquisitions. In general, I think there's a decade of better CapEx investments for Industrial. So I feel very bullish in the long term. I think we're just being a little careful in the near term given some of the macro unsurge out there.

Todd Leombruno:

Yes, Andrew, I'll take that. This is Todd. Obviously, the cash flow generation profile of the company is something that we all work extremely hard on virtually every day. We feel like we can do better on inventory. We've been vocal about that. We have -- whether the supply chain challenges globally extremely well. But we have tools in place to further reduce that inventory as we go forward. As we bring Meggitt into the company, we see opportunities there on payment terms and receivables terms. So we see activity on that as well. And the other thing that I would note is, we've talked about the ACIP conversion, right, our annual variable incentive plan. the company is now 100% on that plan. So all of our team members across the globe are all incentivized on achieving their cash flow plans for their respective business. So I think you'll see us continue that. I feel confident in telling you that we see free cash flow in the mid-teens number, and that is all part of our commitment to that delevering plan that we spoke about. So I feel really strong about our ability to deliver on that.

Operator:

And our next question comes from the line of Jeff Sprague from Vertical Research.

Thomas Williams:

Jeff, Jeff. If you don't mind, [indiscernible] thick, it's okay.

Lee Banks:

Jeff, it's Lee. I'll take a stab at that. Look, the slope of the curve price/cost has moderated, but cost is still a real issue. There are some commodities that have come down off their peaks. They're still high if you look on a historical level. There's still a lot of friction in the supply chain where even though raw commodities may have peaked, the finishing of those raw commodities before they get to us sometimes a real supply chain issues. And there's still lots of inflation up and down, you name it. You can see it just tier MRO supplies coming into our facilities to food to wages, et cetera. So we're on top of it. As you know, I mean, we measure this like crazy, not only just raw commodity costs but also total inflation costs. And we've got great visibility on how we're doing on pricing to make sure that we stay margin-neutral. I would say in the factories, again, the slope of the complexity has gotten better. But for me to tell you that labor availability is still a non-issue, I would be kidding you. It's still a little bit a deal. I think the thing that helps us through a lot of this is we just use our Parker lean system, and we go in and we just figure out how we're going to reconstruct the value stream and bring out the efficiencies and get better throughput, et cetera. So we're addressing it. I can't put a number on what the difference is going to be, but we're on top of it, and we're making -- you see it in the margins in the company. We're still doing better on a year-over-year basis.

Thomas Williams:

Yes, Jeff, it's Tom. The backlog went up 16% year-over-year. So we're at almost $8 billion on the legacy portion of the company, had another $2 billion plus for Meggitt so it would be a little over $10 billion of backlog. So obviously, we have well more than a quarter for the backlog. I think the thing that we want to watch, we feel very good about Aerospace's backlog. And we feel good about the industrials. My comment I was making to Andrew just want to watch the demand signals to see if anything changes once we get to the new calendar year. But the backlog obviously gives you a lot of confidence that you'll be fine.