Good day, and thank you for standing by. Welcome to the Parker-Hannifin Corporation's Fiscal 2023 Second Quarter Conference Call and Webcast. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. And I would now like to hand the conference over to your speaker today, Mr. Todd Leombruno, Chief Financial Officer. Sir, please go ahead.

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 detail 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.

Thank you, Todd. Good morning to everyone, and thank you for joining the call today. As Todd said, before we get into the quarter results, I'd like to remind everyone what drives Parker and give you some insight on where we'll be focusing. Moving to Slide 2. New CEO, same three drivers: living up to our purpose, continuing to be great generators and deployers of cash and achieving top-quartile performance versus our proxy peers. Slide 3, please. Safety, purpose, and engagement are the foundation of top quartile performance. As I mentioned to all of you in the December call, we are committed to delivering the Meggitt cost synergies of $300 million, and we're very pleased with the progress to date. We've said before, it's still early innings for Win Strategy 3.0, and we will continue to utilize it to accelerate our performance. Our culture is one of continuous improvement as evidenced by past performance, and results we will deliver well into the future. And we are fully committed to achieving our FY '27 targets that we rolled out at Investor Day last March. All of this will allow us to continue with the transformation and ensure a very promising future for Parker. Moving to Slide 4, please. You've seen this before, Parker has a proven strategy. The Win Strategy is and will remain our business system. It is a system focused on the fundamentals. We trust the process, and we'll continue to get results from it as we have in the past. Slide 5, please. So where will Win Strategy 3.0 accelerate our performance? Well, it always starts with our people. Safety is number one, and it always will be. Our goal is zero incidents, and we believe it is possible. We brought a lot of new people into the business over the last couple of years, and we have the opportunity to double down on the training and chartering of high-performance teams and leaders. This will further strengthen our culture of continuous improvement and our brand of Kaizen well into the future. Moving over to customer experience. We have an opportunity to do even better with the digital customer experience. Anywhere from how we interact with our customers on quotes and orders, to the availability of digital products and the use of artificial intelligence for demand forecasting with both our customers and our suppliers. It's early days for our zero defect initiative as well. This obviously drives better quality and overall customer satisfaction. This is the exact same approach that we took with zero safety incidents. Zero defects is possible. It starts with engaging our people around robust products and capable processes. Doing this right exposes the hidden factory, improves quality, reduces cost and thus expands margin. Best-in-class lead times have been part of our Win Strategy for many years. And coming out of the pandemic and subsequent increase in volume, we see even more opportunities to improve lead times and become supply chain leaders. Our customers deserve this level of service, and all of these are strong enablers of growth. Profitable growth is a combination of performance and portfolio changes, which we have demonstrated. Strategic positioning is a tool used by our general managers to segment their business and position them best in their markets and with their customers. This process and cadence will continue to drive the critical thinking about growth in the division and closest to the customer. We are obviously seeing the benefits of the transformed portfolio, and we will continue to seek out those opportunities that will enhance the transformation. The most significant CapEx spending in decades will bring growth to Parker with all the technologies we have supporting the secular trends today and for many years to come. And we have an annual cash incentive plan, which incentivizes the right behaviors and drives a real intensity around growth. Moving over to financial performance. We have a proven set of simplification tools, which will continue to help us reduce complexity and cost. House in this area is our simple by design process, which you've heard us talk about a lot. This has become a business fundamental across the Corporation. We have a robust process around value pricing, and we'll continue to strive for margin neutrality in these inflationary times. We will also double down on training the principles of lean. This is the foundation of our continuous improvement culture and it drives safety and productivity in all of our operations. You've heard us say many times over the past few years that while not immune to the chaos of the supply chain, we fared better than others due to our dual sourcing initiatives and our local-for-local strategy. The pandemic and subsequent increase in volume exposed some areas that we can further improve upon to ensure that we become supply chain leaders. Our teams are looking to further enhance the visibility of the changing demand picture and utilize some new scheduling tools that will drive efficiency in the operations and those best-in-class lead times that I just mentioned. Focusing on these areas and Win Strategy 3.0 will help us to achieve top quartile performance. Slide 6, please. Our capital deployment priorities remain unchanged. We will maintain our record on dividend payouts and target a 5-year average payout of 30% to 35% net income. We will target 2% of sales on CapEx to fund organic growth and productivity. The 10b5-1 share repurchase program will remain in place and our near-term and top priority is to delever post the Meggitt acquisition. We will keep our acquisition pipeline healthy, and we'll continue to build relationships for future acquisitions. Slide 7, please. So Q2 was another quarter of excellent operating performance. We saw a 16% reduction in safety incidents versus prior year, further supporting our ability to reach zero incidents. Sales came in at $4.7 billion, a 22% increase to prior with organic growth coming in at 10%. Strong segment operating margin across all segments has led us to a full year guidance increase, and we are very happy with the progress of the Meggitt integration. All activities and synergies are on schedule. Moving to Slide 8. We'd like to share some recent highlights on the integration. Key leaders from both Parker and Meggitt are leading over 20 teams that are creating a lot of value in integrating the functions. Engagement with the team members and the customers that had widespread activity in all locations and wind strategy training and implementation is well underway. Just to note here, we have a proven track record of delivering synergy targets, and this acquisition will be the same. The teams are following the integration playbook that has been developed over the last several acquisitions, and I am sure they will add some new best practices to it as well. Slide #9. So we are on track to achieve the $60 million in synergies by the end of this fiscal year, and the graph on the left illustrates our path to $300 million in synergies and adjusted EBITDA margins of 30% by FY '26. Synergies are represented in blue, and the cumulative costs to achieve are in gold. On the right side of this page, this quadrant depicts the use of the overall Win Strategy to achieve the synergies and ensure operational excellence into the future. Starting with the top left, Safety, Lean, Kaizen, high-performance teams all make up our brand of Kaizen and will drive the engagement and continuous improvement well into the future. Simplification is a major area of focus for the integration teams. This is where we look at structure and organization design. We use our 80-20 complexity reduction tool, and we implement simple by design principles. All of this drives real ownership and decision-making at the division level, further empowering the team to drive results. Moving over to SG&A. We've had the realization that there's a lot of opportunity moving Meggitt from a centralized structure to Parker's decentralized structure, driving that overall decision-making to the local level and improving overall speed. With this acquisition, footprint optimization is very minor. Remember, we have complementary technologies with this acquisition and not a lot of overlap at the plant level. And with supply chain, we will optimize pricing, terms and conditions, direct and indirect material spend as well as logistics. Again, off to a great start, very pleased with the performance on quarter end. And now I'll turn it back to Todd for a summary of our Q2 results.

Thanks, Jenny. That was great. I'll start on Slide 12 with the financial results. The team is really excited as this marks the first full quarter with Meggitt included in our results and the first full quarter without Aircraft Wheel and Brake. This makes year-over-year comparisons a bit more complex than usual. However, top line sales increased by 22% compared to last year, reaching a record $4.7 billion. Organic growth remains robust at just over 10% for the quarter, extending our streak of double-digit organic growth quarters. Although better than expected, currency headwinds persist, impacting sales unfavorably by 4% compared to last year. The combination of the Meggitt acquisition and the Aircraft Wheel and Brake divestiture resulted in a positive 16% contribution to our sales for the quarter. Our adjusted segment operating margin surpassed our forecast, finishing at 21.5%, while adjusted EBITDA margins were even stronger at 22.4%. As we had mentioned last quarter, we anticipate that Meggitt will slightly dilute overall margins in its first few years as we realize the synergies Jenny referred to. Our adjusted net income stood at $619 million, which reflects a 13.2% return on sales, and shows a 6% improvement year-over-year. Adjusted earnings per share were $4.76, setting a Q2 record and marking an increase of $0.30 or 7% compared to the previous year. We're extremely pleased to have completed our first quarter with Meggitt, witness the 22% sales increase, and achieve positive net income and EPS growth. Moving to Slide 13, this visualizes the $0.30 EPS improvement. The key driver behind this was additional segment operating income, which rose by $180 million or 22% year-over-year, contributing $1.8 to EPS. Interest expense acted as a headwind of $0.51, slightly higher due to rate movements; this entire amount is tied to the Meggitt transaction and the current rate environment. Other expenses negatively impacted us by $0.12, mainly due to fluctuations in currency rates, while income tax was a drag of $0.14, as last year's results benefitted from certain favorable discrete items, and this year included some non-deductible transaction costs. Overall, these elements combined result in the $0.30 increase to the record $4.76 earnings per share, which we are very pleased with. On Slide 14, looking at our segments, every segment experienced positive organic growth this quarter and surpassed margin expectations. Orders remained robust despite challenging comparisons from the prior year, with the total company finishing at plus 3. Demand continues to be strong across all markets. Our team is diligently working to meet customer needs, which has led to the record sales generated in the second quarter. Specifically, in North America, sales reached an impressive $2.1 billion with organic growth at 13.5%. Adjusted operating margins increased by 50 basis points to 21.8%, establishing a new record supported by strong volume and a gradually improving supply chain. Order rates were positive at plus 2, reflecting our strong backlog and consistent demand across North America. A special thanks to our North American team for their outstanding performance. In the international segment, sales were $1.4 billion with nearly 9% organic growth compared to last year. All regions within this segment positively contributed to organic growth. Margins remained elevated at 21.9%, slightly lower than last year due to currency effects, product mix, and specific challenges related to COVID in China. Order rates were down 4, having rebounded last quarter from COVID-related shutdowns. In Aerospace Systems, we saw huge sales growth of 84%, exceeding $1 billion for the first time, largely attributed to the inclusion of Meggitt businesses. Organic growth in this segment was almost 5%, driven by strong commercial activity in both OEM and MRO sectors, with military OEM still facing challenges as anticipated. Operating margins improved to 20.6%, up 70 basis points from last quarter and exceeded our expectations. The integration of Meggitt and the performance of the businesses are progressing well. Aerospace orders increased by 22%, having moved past previous tough comparisons in military orders. It was a strong quarter across all of our businesses. Moving on to Slide 15, here is our year-to-date cash flow performance. The Meggitt transaction introduced some challenges to cash flow from transaction-related costs, affecting cash flow from operations and free cash flow by roughly 2%. However, excluding those factors, cash flow from operations stands at 12.1% of sales. We've surpassed $1 billion in year-to-date cash flow from operations, with free cash flow at 10% of sales. Our CapEx remains just above 2% for the year, and free cash flow conversion reached 114%. We are known for our cash flow being weighted towards the second half of the year, and we continue to project mid-teens for cash flow from operations, with free cash flow conversion exceeding 100% for the full year. On Slide 16, regarding capital deployment, our Board recently approved a quarterly dividend payout of $1.33 per share, marking our 291st consecutive quarterly dividend, aligning with our existing targets. We have made progress in reducing leverage, with gross debt to adjusted EBITDA at 3.6 and net debt to adjusted EBITDA at 3.4, both improving by 0.2 turns from Q1. These EBITDA figures reflect only 3.5 months of Meggitt’s contribution, and we have applied over $2.2 billion of cash toward the Meggitt transaction, demonstrating our commitment to our deleveraging plan, which remains on track. Moving to guidance on Slide 17, we have raised our guidance today, available both on an as-reported and adjusted basis. We are increasing the sales range to 14.5 to 16.5, or 15.5% at the midpoint. More significantly, we expect organic growth for the full year to be 7%, up from 6% previously. The impact of acquisitions and divestitures is now forecasted at 11.5%, an increase from 11% last quarter. Although currency remains a headwind, it is expected to be less severe, now projected at a 3% negative impact to sales, down from 4.5%. For adjusted segment operating margins, our full-year guidance is also raised by 20 basis points to 22.1% at the midpoint, with a range of 20 basis points either way. Other noteworthy items include interest expense increasing to $555 million, up from $510 million last quarter, reflecting recent rate changes and forecasts. Corporate G&A is set at $204 million, with other income at $18 million, remaining largely unchanged from prior guidance. We estimate the tax rate for the full year to be 23.5%. Adjusted EPS has been raised to $19.45, a $0.50 increase from our previous forecast, with a range of plus or minus $0.25. Specifically for Q3, we anticipate organic growth near 4%, an increase from prior guidance, with adjusted EPS expected to be $4.76 at the midpoint. Additionally, adjustments to the forecast at the pre-tax level are detailed in the table for the remainder of the year, including acquisition-related expenses incurred to date. This covers the details on guidance. On Slide 18, there's a bridge illustrating the changes where we started with a prior guide of $18.95 and accounted for strong Q2 performance, including a $0.45 beat. We're also increasing segment operating income by $0.35 for the second half. A portion of this reflects improved currency rates; we had previously adjusted expectations down last quarter due to currency fluctuations but now have moved back slightly. Overall, interest and tax continue to present challenges, with interest expense being a $0.20 headwind, and income tax contributing $0.10 for the second half. Adding everything together leads us to $19.45 at the midpoint, reflecting the updates to our guidance. Now, I’ll pass it back to Jenny for summary comments before we move to the Q&A session.

Thank you, Todd. So we have a very promising future. We have a highly engaged team that's living up to its purpose. We'll continue to accelerate our performance with Win Strategy 3.0. We are seeing the benefit of our strategic portfolio transformation, and we will continue to be great generators and deployers of cash. And with that, Chris, I think we're ready for questions.

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

It was a strong quarter. I have two questions. First, could you provide more details regarding the negative order growth in international markets and the increase in orders within the Aerospace segment? That would be helpful. Secondly, Jenny, I have a broader question for you. Parker has been focusing on enhancing its portfolio through acquisitions to include higher value-add services and businesses with stronger organic growth. However, this strategy has leaned more towards acquisitions rather than divestitures. Looking at the current portfolio, do you foresee Parker continuing to pursue acquisitions, or is there a chance to consider divesting businesses that may not align with Parker's long-term goals?

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, it's Lee. I want to discuss international orders, particularly in the Asia Pacific region, with a focus on China. We have faced ongoing COVID lockdowns and stringent government measures aimed at stabilizing the real estate market, which have significantly impacted our operations, especially toward the end of the quarter. Also, this year marks the first fully open Chinese New Year in nearly three years, resulting in a notable increase in travel compared to previous years. Despite these challenges, I remain cautiously optimistic about the second half of the year, expecting flat to low single-digit positive growth in the Asia Pacific region, primarily driven by China. However, I do anticipate ongoing difficulties in China as they work on re-establishing their supply chains. Nonetheless, I believe that the stimulus measures being introduced will help foster some positive momentum.

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

Yes. The big thing, aerospace was really the military OEM orders lapping. So we had some big pull-forwards orders and then we've lapped that on that 12, 12 basis. So you're seeing the positive order entry rate in commercial OEM and commercial MRO right now.

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

Yes. No, it's a pleasure not to be restricted. Yes, just more of a longer-term question. So a couple of companies are sort of talking about managing the operations, managing the backlog differently in this environment, maybe sort of accepting that lead times are going to be extended for a while, right, given that at the tail, there's still a lot of disruption in the supply chain. Are you guys thinking about sort of structurally adjusting your view on lead times? How much backlog Parker carries into the future? Just any insight would be super helpful.

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.

Got you. And just a follow-up question on CapEx when you talk about your capital deployment priority. You sort of said CapEx target 2%. I may be wrong, but I recall sort of having conversations where you sort of thought maybe you needed on the margin to have capacity in places like Mexico, et cetera, and maybe take it off a bit to deal with what's coming in terms of the cycle. A, have you changed your view? Is that a function of Meggitt? And just generally, maybe how do you think about capacity additions, given what you're seeing over the next couple of years in terms of broader CapEx cycle trends?

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.

Andrew, I would just add, if you look at historically over the last couple of years, our CapEx has been about 1.4% of sales. So you look at it today, it's a 2.1%. That's a pretty significant increase for us. And of course, as the sales of the company increased, that's more CapEx dollars that we've got to spend there. So we think that 2% number is right, including Meggitt, including all the supply chain initiatives that we're looking for as well. And it might be a little bit bumpy, but you're not going to see it too far above that too.

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

I wanted to discuss supply chain, focusing not just on this quarter but on long-term solutions and priorities. When considering supply chains, there's the idea of localization and dual sourcing, which can feel inflationary. On the other hand, streamlining supply chains can enhance productivity and serve as a cost advantage. With COVID becoming less of an issue globally, how do you view the priorities you're setting, especially with the trade-offs of potentially higher costs that could lead to greater savings? I'll leave the floor open for your thoughts.

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.

Okay. Makes sense. And then to back up a little bit, when you have a big CEO change, oftentimes any issues or problems or complaints or gripes kind of come up or kind of rise to the top of your desk file, but what are the big internal complaints or fixes or gripes that perhaps we don't see as investors, but things that you want to tackle and fix internally that maybe perhaps wasn't really something that Parker was good at in the past?

Well, first of all, 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 I'm 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, it's Lee. I would say the only gripe is the one I have. She's working me harder than ever.

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

One moment, please, for our next question. And our next question will come from Julian Mitchell of Barclays.

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, it's Lee. I'd like to take a moment to address your question, while also providing some commercial context for the company. I have a global heat map in front of me displaying the PMIs, and it's predominantly red, showing a significant decline since August or September. Our current success is largely a result of the changes we've made to our portfolio and our focus on key secular trends, which has been crucial as we navigate global forecasts indicating a slowdown in various regions. Regarding inventory, if I break it down by region, I've been speaking with some of our major distributors in North America, and I've noticed that there is a considerable inventory adjustment happening. After a hectic pace over the past 18 months, probably due to the aftermath of COVID, many are now balancing their inventories. However, I want to emphasize that their order books remain strong, and there's a positive outlook regarding current market conditions. Additionally, I find it important to assess what kinds of capital expenditure projects our distribution partners have with their customers. I'm pleased to note that capital expenditures from end customers are still active. On the original equipment manufacturer side, the situation is quite similar; overall, the order books look good, especially in the mobile sector, and they are working diligently to adjust inventory levels. There are some minor disruptions with microprocessors, but overall, the outlook remains positive. I’ll pause here and hope I’ve addressed your question adequately.

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?

I'll start with your last comment first. We don't see that as a big pressure point for us. I mean, we're pleased with the performance. We expect their full year sales to be $1.9 billion at about approximately 17% adjusted segment operating margin. As I mentioned earlier, we're on track to achieve the $60 million in synergies by the end of this fiscal year. We expect this to grow at or a bit faster than legacy aerospace. So we're really positive on this.

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

Thank you. Good day, everyone. Jenny, returning to your comments on Meggitt and synergies, it may be too early to talk about altering those forecasts. I am actually more interested in the costs to achieve and the opportunities to exceed expectations in that area. Given that the adjustments to factories aren't significant and there are some personnel-related costs involved in getting this right, could this be a potential opportunity as you move forward and streamline the company to operate more cost-effectively than initially anticipated?

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.

Jeff, this is Todd. I would just add, this is a big complex acquisition. The biggest one we've done to date. We've talked about the integration team. It's the largest team that we've had to date. Jenny had a comment. There's over 20 teams, both Parker and Meggitt team members working together across the board. A big chunk of this is SG&A cost, right? There's clearly associated with that. So I would say in the near term here, I'm pretty confident on those costs to achieve numbers. If there is maybe some upside, I think it's too early to tell, but maybe in the out years, '25, '26 maybe there might be some upside there. But again, I think we're going to have to talk about that when we get further into the process.

Yes. I believe that for the remainder of the year, our guidance suggests we will experience flat to very low single-digit negative growth. We certainly noticed a significant slowdown in December, influenced by rate hikes across the board and the ongoing war, which is impacting the industrial sector. That's how I perceive the situation. Distribution remains stable, although we are seeing some adjustments in inventory levels. Additionally, we are facing very challenging comparisons to last year's performance, particularly in Europe, where we benefited from substantial COVID-related production that has since declined and is not expected to return. In summary, I would describe the outlook as flat to slightly negative.

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

Lee, I’d like to follow up on the order trends you mentioned by geography. Can you provide any commentary on the different end markets within your industrial business? Are there any variations we should be aware of?

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.

I appreciate that. Then I guess my follow-up would be, you talked about the fact that there is a divergence between the demand that you're seeing and PMIs in the industrial business, that's obviously obvious to everyone at this point. But I'm curious, as you're kind of analyzing your order intake, how much of that do you think can be attributed specifically to these higher-growth verticals rather than customers that have significant backlogs that are just now trying to increase production after normalizing the supply chain?

I can't provide an answer to that right now. However, I can share that some of the customers we're currently working with are at a higher level than before, which is a result of the portfolio changes. But I can't address that specifically at this moment.

And one moment for the next question. The next question will come from Stephen Volkmann of Jefferies.

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?

Steve, this is Todd. I'll let Lee take a moment. There are a lot of positive aspects. We see broad demand across the business. We've discussed North America, where we significantly increased our organic guidance for the third quarter from 2.5 to almost 5. For the third quarter, I clarified our expectation of about 4% organic growth. In Q4, some comparisons will impact results, and a rough estimate suggests around 1% organic growth in Q4, which means the second half will average about 2.5%. There are some challenges present, prompting us to adopt a cautious perspective. Currently, this is our best assessment. As for international concerns, we provided some insights; while currency effects aren't as severe as before, they're still impactful. In the second half, we estimate about a 1.5% negative impact on the total company and over 4% for the International segment. That summarizes our current position.

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?

Well, we don't give a lot of color on pricing there, but you could tell it's in the organic number. So that's totally in the guide that we just laid out.

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

We've covered supply chain and some of this like inventory phenomenon for a while now in orders. But maybe just to put a bow on it a little bit. As your own lead times have improved, have you seen customers adjust the way they order to match that? So I'm assuming there was a point in time in which everyone was sort of scrambling a little bit more to get everything that they can and maybe it's a little bit more normalcy, that's changed. Anything that you guys have seen on that end?

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 heals, but really nothing that has drastically changed any order patterns yet.

Got it. That's helpful. And then just as a follow-up in terms of what lessons, I guess, the last two or three years have taught you guys. How are you thinking about different ways you would pull levers in a downturn knowing the types of scarcity and tightness that might have waived on the other side as well as what you guys are doing today even without a downturn?

Yes. I believe we are well prepared for changes. We have a strategy for dealing with recessions and we start implementing it as soon as we see the first signs. We execute this effectively. Looking ahead, our focus remains on increasing dual sourcing and local production, which helps us shorten lead times and meet our customers' delivery expectations. That's why this is a key area for us moving forward.

Josh, I would like to add that we have a very strong operating rhythm here. We are monitoring orders and businesses on a weekly basis, both at the division level and at the higher management level with myself and Andy Ross. Our team meets monthly to review trends and ensure we stay ahead of any developments. This approach has been consistent in the past and is what allows us to respond quickly.

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

Lee, I just wanted to clarify your earlier comment about fees. You seem to be suggesting that while the outlook for your end markets is slowing down, it isn't necessarily negative since it sounds like you still view most of your end markets positively. Is that right?

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 than it was when I started 32 years ago.

Yes, that makes a lot of sense. I also wanted to ask about cash flow. Todd, I noticed that you reduced your debt by a couple of hundred million this quarter. There's a lot more cash flow expected in the second half of the year. What can we expect regarding net leverage or debt reduction as the year progresses?

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.

Thank you. One moment for the next question. Our last question will come from Nathan Jones of Stifel.

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.

Okay. Nathan, this is Jenny. Just to kind of talk a little bit about the backlog. So right now, our backlog without Meggitt is 12% over prior year. It's roughly coming in at the same dollars as last quarter. When we answered this question, it's around $8 billion. If you put Meggitt on top of that, it's another $2 billion plus, so it's a little bit over $10 billion total. So when we look at the backlog and at the orders, I think the first thing to point out is that with the portfolio changes, it's different than it used to be. So we have longer cycle business. We're going to see what I'd like to call a demand sense, a longer demand sense, and we're going to see more orders out there. There’s been a lot of noise the last couple of years because of the supply chain. But we have seen with the transformation of the portfolio that this has gradually increased. So even with supply chain normalizing in the future order patterns changing. I don't think we're going to get this down to where it used to be pre-portfolio transformation. I think we're going to see a higher backlog going forward.

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 to some of that pricing and have that be a tailwind to mine?

Well, Nathan, it's Lee. The first thing to note is that a lot of our pricing isn't always neutral to costs. We are introducing many new products each year that provide value to our customers, and these products are beneficial to our margins. There's a significant variation in what is occurring. We have experienced moderate deflationary periods in the past and managed them well. When I mention our operating practices related to pricing and costs, it's something we are all accustomed to here and I believe we will be fine regarding our margins.

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.

This concludes today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day.