Greetings, and welcome to the Parker Hannifin Fiscal 2024 First Quarter Earnings Conference Call and Webcast. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Todd Leombruno, Chief Financial Officer. Thank you. You may begin.

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 provides 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 one 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 can 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.

Thank you, Todd. Good morning to everyone, and thank you for joining our call today. Q1 was a standout quarter, driven by a strong portfolio and our teams executing The Win Strategy. Starting with safety, a 16% reduction in recordable incidents. Safety has been and will remain our top priority. Record sales of $4.8 billion in the quarter, a 15% increase over prior year with organic growth of 2.3%. Record adjusted segment operating margin of 24.9%, a 220 basis point increase over prior year with all segments coming in above 24% and 26% adjusted EPS growth along with 11.4% free cash flow margin. The combination of Parker and Meggitt delivered an outstanding quarter for aerospace and a strong start to the year. As a result of this performance, we are increasing our FY '24 guidance, and Todd will go over this later in the slide deck. Next slide, please. Many of you have seen this slide before. The transformation of our portfolio over the last eight years has doubled the size of aerospace, filtration and engineered materials. As a result, from FY '15 to FY '24 guidance, you can see the obvious shift to a longer cycle and secular revenue mix. We have high confidence that by fiscal year '27, we'll have approximately 85% of the company in long cycle end markets and industrial aftermarket. Next slide, please. The mix shift that I just spoke of is evident in our strong backlog. For total Parker, backlog remains resilient. Coverage has doubled from 27% in fiscal year '16 to 54% today, and this has been consistent for the last several quarters. Aerospace backlog is extremely robust. This coverage will support high single-digit growth well into the future. Industrial backlog coverage continues to be two times what it was in the past, from mid-teens to low thirties. We now have longer-term visibility from the portfolio changing acquisitions with secular and longer-cycle exposure. Next slide, please. We have transformed the portfolio, and we have strong backlog. Let me remind you of the future sales growth drivers. The Win Strategy is our business system that delivers growth and financial performance. It is a proven strategy, and every tool in this system expands margins. Macro CapEx reinvestment is addressing the last decade of underinvestment as well as investments to strengthen and develop the supply chain. This will result in increased equipment spend and higher levels of automation. Under innovation, our new product blueprinting tools and 'Simple by Design' principles have increased our product vitality index, that is the percent of sales from new products, enabling faster growth and support of the secular trends. And as mentioned on the previous slide, the acquisitions we have made are great companies with higher growth rates, aftermarket, and accretive margins. We continue to benefit from the growth related to the secular trends. As previously stated, we expect multiple years of solid growth in aerospace, driven by both commercial and defense. And no matter what the energy source is, from diesel to electric to hybrid, the primary Parker content that we have today increases 1.5 to 2 times with electrification. With two-thirds of our portfolio supporting clean technologies, we are well positioned today, even better for tomorrow, and we are truly energy-agnostic. Again, all of this is giving us high confidence to grow differently than we have in the past and achieve our 4% to 6% organic growth over the cycle. Next slide, please. Now 30% of our business, aerospace is a growth differentiator for Parker. And Parker and Meggitt are a powerful combination. This team has embraced The Win Strategy and is exceeding our expectations. We couldn't be happier with this acquisition. Next slide, please. From nose to tail, we have a comprehensive portfolio of products and services. Parker has a broad product offering for both airframe and engine applications. Meggitt brought new product and system areas, including braking, fire detection and suppression, thermal management, avionics and sensors, and electric power. This breadth of technologies is enabling a more strategic relationship and discussions with our customers, both OEM and aftermarket. Next slide, please. This slide highlights the favorable aerospace secular trend we are experiencing now and will into the future. Taking a look at the sales mix at the top of the page, we are now 45% aftermarket, an 800 basis point increase with the acquisition of Meggitt. And we have a balanced portfolio with strong growth drivers in each of these four areas. At the bottom of the page are the macro growth drivers. On the commercial side, we are expecting double-digit growth in aircraft deliveries and air traffic. On the military side, the Department of Defense budget increases, and our military aftermarket partnerships will drive mid- and long-term growth, a very promising future for aerospace. I'll now turn it over to Todd to go through the summary of our Q1 results.

Thank you, Jenny. I'll start on Slide 11 and discuss some of the financial results. Our fiscal year '24 has begun exceptionally well, reflecting strong alignment within our global team. This quarter, we set multiple records for sales and, on an adjusted basis, segment operating margin, EBITDA margin, net income, and earnings per share. Sales growth increased by 15% compared to the previous year, significantly influenced by acquisitions and divestitures, which contributed over 11% to our growth. Organic growth was positive at 2.3%, with a slight favorable currency impact of 1%. The adjusted segment operating margin was 24.9%, up by 220 basis points from last year. The adjusted EBITDA margin was 24.8%, marking an increase of 150 basis points from the prior year. We reported adjusted net income of $776 million, and our adjusted EPS reached a record $5.96, reflecting a 26% improvement compared to last year. This success is due to our portfolio transformation and consistent execution from our global team, which performed exceptionally well this quarter. I'm pleased to note these results are uniform across all our businesses. Moving to Slide 12, it shows the 26% increase in earnings per share, representing an improvement of $1.22. The primary driver remains strong operating performance, with segment operating margin dollars increasing by nearly $250 million, contributing $1.46 to our EPS growth. While all segments contributed to the growth, our aerospace business was a significant contributor this quarter. Additionally, we saw a favorable $0.17 impact from income tax, primarily due to certain discrete items that settled during the quarter. We did face some headwinds from other expenses, which negatively impacted $0.27, and interest expense, which reduced $0.10, but these were simply timing issues related to last year's Meggitt transaction and are not expected to recur. Corporate G&A and share count had minor impacts of $0.02 each, aligning with our guidance, so there’s nothing concerning there. This explains the record EPS of $5.96, driven by widespread improvements across our offerings, including the positive contributions from Meggitt and the synergies achieved. Strong margins were reported across all businesses, reflecting excellent teamwork. On Slide 13, regarding segment performance, every segment achieved adjusted operating margins above 24%, the first time this has occurred in our company’s history, thanks to solid performance and good volume. The Meggitt synergies played a considerable role, and the global team worked very collaboratively. We reported 40% incrementals compared to the prior year, which is commendable. Orders were positive, with a 2% increase year-over-year, and backlog coverage, as Jenny highlighted, remains strong, particularly in aerospace, where activity is especially vigorous. On our one-year anniversary with Meggitt, we are pleased to see these businesses continue to outperform, a great addition to our company. In North America, sales volume increased by 4.5%, amounting to $2.2 billion. Organic growth was slightly up by 0.5%, impacted by destocking and channel rebalancing. Adjusted operating margins improved by 150 basis points to 24.9%, supported by effective execution and cost controls. Orders in North America improved from the last quarter, now at minus 4, improving from minus 8, and backlog coverage remains strong. In international markets, sales were $1.4 billion, representing a 2.5% increase year-over-year. Organic growth within the segment was slightly negative at about 2%, primarily due to a challenging environment in Asia Pacific and softness in China, but operating margins expanded by 100 basis points to 24.1%. The team did well to enhance margins under difficult conditions. Order rates are variable and fell to minus 8, driven by factors from Europe and China. Our aerospace business excelled this quarter, with sales hitting $1.2 billion, marking a 65% increase from the previous year. Organic growth was strong at around 16%, supported by broad-based performance across our aerospace market platforms. Operating margins achieved a new record, increasing 610 basis points to 26%, driven by strong margins, airline rate increases, and significant aftermarket growth. We did see some benefit from favorable one-time contractual settlements this quarter, which we do not anticipate repeating in the future. Aerospace orders increased by 24, indicating robust performance. Moving to Slide 14, our cash flow from operations rose 42% year-over-year to $650 million, constituting 13.4% of sales. Free cash flow saw an even greater increase, up 48% compared to the previous year, ending at $552 million, or 11.4% of sales, with an 85% free cash flow conversion rate. We remain committed to strong cash flow generation and are forecasting mid-teens cash flow from operations for the year, aiming for over 100% free cash flow conversion. On Slide 15, regarding our leverage reduction, we are focused on our commitment to reducing leverage. This quarter, we reduced debt by $370 million. Since closing Meggitt, we have cut debt by over $1.8 billion and improved our leverage by 1.2 turns, exceeding our original schedule. Gross debt to EBITDA now stands at 2.6, while net debt to adjusted EBITDA is 2.5. We remain committed to a target of over $2 billion in debt paydown in fiscal year '24. Looking ahead on Slide 16, we are reaffirming our full-year organic growth midpoint, having adjusted for September 30 currency rates, and we are raising our margin and EPS expectations for the year. We now forecast reported sales growth to be between 2.5% and 5.5%, averaging around 4% at the midpoint, with 49% expected in the first half and 51% in the second half. We have raised our aerospace organic growth guidance by 200 basis points from the previous 8% to 10%, reflecting the strong performance in that sector. Our full year organic growth outlook has been slightly revised to remain at 1.5%, with currency expected to present a minor headwind. Our margin expectation has been elevated to 23.6%, with a range of 20 basis points above and below that figure. We also forecast a year-over-year change of 70 basis points of margin expansion, up from 30 basis points in our previous guidance. Incremental margins for the full year are expected to approach 40%, driven by strong Q1 performance. Corporate G&A, interest, and other items remain mostly unchanged from last quarter's guidance. The tax rate for Q2 through Q4 is projected at 23.5%, which translates to about 23% for the full year. Adjusted EPS on an as-reported basis is now anticipated to be $19.13 at the midpoint, with adjusted EPS at $23, each with a range of $0.40 either way. The split remains at 48% for the first half and 52% for the second half. Specifically, for Q2, we expect adjusted EPS to be $5.17 at the midpoint. As always, additional guidance specifics can be found in the appendix. That concludes my comments. Jenny, I’ll hand it back to you.

Thank you, Todd. And now I would like to recognize our colleague and friend, Lee Banks, during his last quarter earnings call. Lee will be retiring as Vice Chairman and President effective December 31, 2023. He joined Parker in 1991, and has been an officer of the company since 2006 and a director since 2015. During Lee's tenure, sales grew at a 7% CAGR to nearly $20 billion. EPS grew from $0.36 per share in fiscal year '91 to $21.55 adjusted per share in fiscal year '23. Since 2015, total shareholder return was 292% versus the S&P 500 industrial sector of 80%. As if all of this isn't enough, I'd like to repeat a few of my comments from last week's shareholder meeting when we announced Lee's retirement. It's obviously not possible to overstate the tremendous positive impact Lee has had on our company, our businesses and our team members around the world. His legacy and track record is nothing short of extraordinary. From leading our largest businesses to growing our global distribution network to championing and driving operational excellence to co-creating the recent versions of The Win Strategy, and probably most importantly, and what he's proud of is recruiting, leading, and developing many of our most talented leaders and beyond. Lee has set the bar for us for what good looks like and was a key leader in the transformation of Parker's performance and portfolio. Lee, on behalf of all of us, we can't thank you enough. We will miss you. And we wish you and your family nothing but great health and happiness in your retirement.

Thank you, Jenny. Thank you, Todd.

Lee, we know you're going to crush retirement just like you crushed your career here.

I've got a plan.

All right. Next slide, please. A few key messages to close this out before Q&A. Q1 was a great start to fiscal year '24. Our focus on safety and engagement will continue to drive positive results in our business. We have a proven track record, and we're going to continue to accelerate our performance with The Win Strategy 3.0. It's been a successful first year with Meggitt, and the transformation of the portfolio is delivering a longer cycle and more resilient revenue mix, allowing us to achieve our FY '27 goals and continue to be great generators and deployers of cash. We have a very promising future ahead of us. Back to you, Todd.

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

And our first question is from Andrew Obin at Bank of America.

Lee, congratulations. We'll certainly miss you. The EPS numbers are impressive considering where you started compared to your current position. I have a question about guidance. If I take the midpoint of your EPS guidance, along with the first half and second half split you provided, and subtract what you reported in the first quarter, it seems there is a significant sequential decline in EPS that exceeds historical trends. I'm trying to understand if this is due to a different seasonal pattern with the addition of Meggitt, or if there are one-time items in the second quarter compared to the first quarter that are influencing these implied numbers.

Andrew, I'll take a stab at that, and then if Jenny or Lee's got some color, I'll let them add. Q2 for us has obviously got some seasonality in it. It is our lowest volume quarter of the year. But really, I would call out just a stellar performance in Q1. Every number that we talked about was a record. It's kind of hard to keep that going into your lowest volume quarter. You're right; we do anniversary Meggitt. So that from a year-over-year standpoint, it's now in the base or will be in the base for Q2. So that is it. But there's no other one-time items that are abnormal that we would expect to see in Q2. It's really just volume and seasonality around the business.

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? Could you just talk a little bit about the cadence of orders throughout the quarter?

Andrew, it's Lee. I'll take this. To give you an overview, I believe the narrative presented in the reports is accurate. Looking globally, the underlying demand in North America remains quite positive. There is some inventory balancing occurring, not just within the distribution channel, but also at the original equipment manufacturer (OEM) level, including dealerships and customers. I expect this trend to continue through the latter half of the year and into 2024. There is significant infrastructure spending happening, and a lot of money has been injected into the North American economy, which I still consider a positive sign. Regarding the global situation, the focus is primarily on China. China is facing challenging comparisons, and its recovery has not met expectations from a few quarters ago. This situation is likely contributing to the current circumstances in Europe, particularly in Germany, which is an important market and is showing signs of weakness. In the rest of Asia, including Southeast Asia and India, the markets remain robust, but Japan and Korea appear to be underperforming, likely due to their ties to China. When examining the North American markets, including aerospace, I see no indications of weakness. The aerospace sector, covering commercial, military, OEM, and maintenance, repair, and operations (MRO), is experiencing strong performance, and I anticipate this momentum will continue for a while. Looking at the three indicators Jenny mentioned—available seat kilometers, Department of Defense (DoD) spending, and new aircraft entering service—it's rare to see these align so well historically. Moreover, the land-based oil and gas sector in North America remains strong. While the rig count is down, MRO activities are soaring, keeping personnel engaged. Overall, while there is inventory balancing occurring across our distribution and end markets, we are not experiencing a significant decline. I maintain a positive outlook regarding the North American end markets, with just some balancing taking place at the moment.

Our next question comes from Joe Ritchie with Goldman Sachs.

Congratulations on a strong start to the year. Lee, your trips to Cleveland won't be as enjoyable, and we'll miss you. Regarding Andrew's question, could you share your thoughts on the current state of your industrial end markets? Specifically, what percentage do you believe are still experiencing a slowdown? Additionally, in relation to the commentary about destocking, how long do you anticipate certain end markets will continue to destock?

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 that 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, still have 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 at that. Material handling is still really strong.

Got it. Go ahead, Jenny.

Just to echo Lee's comments to Andrew's question and yours, I think with this backlog as strong as it is, although 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 of Lee's comments.

One other thing I wanted to mention, Joe, is that while everyone's focused on aerospace and Meggitt, which have been significant positives, we shouldn't overlook our acquisitions of LORD and CLARCOR. We made those purchases knowing they wouldn’t be as cyclical as our core legacy Parker business, and the numbers are reflecting that. It seems to be turning out as we anticipated.

Okay. Great. That's helpful. And then look, big focus this quarter on mega projects and timing of orders. Just, Jenny, maybe just talk a little bit about how you see things 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 factories come through?

Absolutely. I mean, when you think about, as I mentioned earlier, the underinvestment that's happened in the last decade and what will happen a decade, I mean, we are in a great position to participate. We've said a couple of times, it's still early days. But in speaking with some of our channel partners, where there's some factories going in for semiconductors and some of these other big projects, they're starting to participate in that. We've said we're there when the land is prepped, when the walls go up and when the equipment goes inside the factory. Some of our distributors have been able to talk to us about how they're already enjoying that business. So we're in a really good position with those as well as the secular trends that I mentioned earlier.

Our next question comes from Mig Dobre with Baird.

Congratulations, Lee, and all the best to you going forward. My question, going back to the industrial backlog discussion, I'm sort of curious as to how you think about this elevated level of backlog. Is this sort of a function of a change in the way your customers are ordering? Or is this more a function of really what we've been going through over the past couple of years with supply chains and so on and so forth and safety stock being built up?

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 and 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. 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.

Right. Understood. My follow-up is on aero. Can you be a little more specific on that contractual settlement and the benefit in the quarter? And then in terms of the guidance raise, talk a little bit maybe about that as well, the organic and the market. I mean, is this a function of aftermarket really driving that guidance raise? Or is there something else in there?

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 major driver of the margin performance. So we just feel a little bit more confident with another quarter in there that we can 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 one-time 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 just a little of that.

And just a little more color on aerospace. Like Todd said, very strong aftermarket, commercial and military. If we look forward in this guidance, we've said it a couple of times already, but just to look at these four areas, commercial OEM is in the mid-teens. Those narrow-body rate increases have happened, and we see that they're going to continue to do so. Commercial MRO is in the mid-teens, and the narrow-body aircraft are almost at pre-pandemic levels. There's a lot of engine repair and component restocking going on. So very positive there. And then military OEM, mid-single-digit as demand for legacy programs continues. Military MRO is mid- to high single-digit. Near term, we have tailwinds with some of our Department of Defense repair depots. We continue to really enjoy public-private partnerships. They're growing. And there's fleet sustainment and service extension. So all in all, just a great environment across all four of these areas.

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

Obviously, congratulations, Lee. Best of luck. When it comes to the North American orders, just given two quarters ago, down 8, now some second derivative improvement we just saw. Given the comps are starting to ease, I'm just curious if you'd be willing to say, do you think we've seen the bottom in the year-over-year orders in North America? And then I have a question about the organic sales cadence. Can you just update us on how we get from here to the full year 1.5? And I'm particularly interested also in what you have for organic in Europe in the guide.

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. 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. All in all, if you look at North America, we have the first half slightly lower at about 1%, but full year, mostly unchanged, slightly positive. So I can't give you an exact answer on that, but we feel good about where we're at right now.

Can you help with the organic cadence a little bit though maybe for the whole company just to get a sense of the 1.5? And again, maybe a little color on Europe, in particular, what's in the guide. I thought the first quarter was a little stronger than expected. So just trying to get a sense.

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; it's not second half-weighted. We expect comps to 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 turns slightly negative again based on comps in the second half. I would say for the second half, it's probably about minus 3.

Our next question comes from Scott Davis with Melius Research.

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, you've got a plan. He's got a plan.

Yes. I anticipate we will see more of you on boards and similar venues. Many questions regarding inventories have already been addressed, so I want to revisit the broader perspective on Slide 4. Jenny, you outlined the target for 2027. Will you achieve that through adjustments to the portfolio and a longer M&A cycle, or will it primarily come from strong growth rates in aerospace and some of your longer-cycle businesses?

Yes, it's the latter. These illustrations are with the portfolio that we have today and the tailwind that we see not just from aerospace but from the macro CapEx investment and the secular trends.

Okay. Fair enough. Just looking through my notes here, the distribution levels at Parker stores show great visibility. Is there a new normal above COVID levels? I know this has been asked in a different way, and I'm trying to narrow down whether in this new world, everybody holds a little more inventory or whether supply chains are so healed and people are so comfortable that they’re back down to what were the long-term averages before COVID. The cost of carrying inventory has also risen with higher rates, something we haven't seen in quite some time. Any comments on that and how it plays into the situation would be interesting, too.

Yes, Scott, it's Lee. I would think it's the latter. The cost of carrying inventory is way up from what it's been. I think the insanity of supply chains has started to quiet down. So I don't expect there to be a huge difference as we go forward about how some of those core industrial products are inventory versus what they were before pre-COVID.

Our next question comes from Jeffrey Sprague with Vertical Research.

Lee, congrats, and thanks for all the help over the years. Could we just maybe kind of come back to the margins, which really stood out here? I think it's probably pretty clear from just other companies we follow that price/cost spreads were pretty favorable this quarter. I know you don't want to talk about price in isolation, but can you give us some sense of kind of where you're tracking on a price/cost basis, how that might differ from what you saw in fiscal '23 and how it's progressing through the year embedded in your guidance?

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 expand from just material inflation to total cost of inflation. So we feel good about what we have covered, and we're back to a more normal environment.

But you are getting some cost relief. Is that fair or not so much? You've got some metals relief, but other inflation, maybe just a little perspective on the cost side of the equation.

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

And then just back to Meggitt and aero. When I saw the margins this morning, I thought, okay, you're going to be talking up the synergies or you've accelerated them into 2024. Really, no comment about that. I'm sure you're capturing synergies, but it sounds like the margins are little one-offs that Todd mentioned but mostly aftermarket mix. But maybe just a little bit of color on the synergy pace, and is there scope for that to go up? And is any of that actually embedded in these results here in the quarter?

So if you recall, in fiscal year '23, we increased the synergies from $60 million to $75 million. 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 strong aftermarket performance helped boost the margin in the quarter.

No, Jeff, it really is a combination of the increased volumes contributing to efficiency, but Jenny has noted that the supply chain has improved. This has significantly reduced the disruptions in many of our operations. While it's not completely resolved yet, if you compare it to a year or a year and a half ago, our operations are much more efficient across all businesses.

Our next question comes from Julian Mitchell with Barclays.

I wish Lee all the best. Just wanted to circle back to my first question on the international sort of demand picture. So I guess, if you look at the last six quarters, you've had orders down in five of those six. When you think about inventory levels, and it's an extremely disparate set of countries and markets, that down 8 on orders you saw in the most recent quarter, and when you think about the duration of these orders downturn, I just wondered any perspectives on when you think we start to sort of pull out of that order slump. And if you think that down 8 marks the kind of low point of what we should see this down cycle in international orders.

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 the segment level. As Lee mentioned, in Europe, destocking continues, with softness in some broad-based end markets. Low recovery in China is impacting that region. I would say it's hard to tell there. But two, again, China, if you look at Asia Pacific, the China recovery remains slow. There's continued softness in construction, semiconductor 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 guidance, 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.

And then on the North America business, I think a lot of investors still get concerned when they see some of those big sort of mobile OEM customers talk about backlog down. What does that mean for their inventories for suppliers such as yourselves and others? So maybe just remind us of the scale of that kind of mobile piece within North America. And how do you gauge or what's your assessment of that inventory level at some of those big machine or mobile customers?

As Lee mentioned, there is some rebalancing occurring, and dealers are beginning to acquire inventory. This aligns with our ongoing analysis of the backlog to ensure there are no delays or cancellations. In talks with our major original equipment manufacturer mobile customers, they are firm that the orders and backlog are genuine. Some have indicated that if one customer cancels, another client will immediately fill that gap. We remain quite optimistic about this situation. Additionally, as the supply chain improves, it benefits us, and we believe we are in a strong position.

Yes, Julian, I would just add. Lee brought this up earlier, but you think about the North American portfolio, that includes LORD. That includes the CLARCOR businesses. There's a significant amount of aftermarket that we benefit from in the North American business, and I think that's helped offset some of these larger OEM callouts.

Our next question comes from Joe O'Dea with Wells Fargo.

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 are your views, 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?

Yes. Well, I think as we've gone through the regions, what we've talked about here is that first, again, backlog coverage remains strong. Destocking is continuing. We probably saw a little more of that in North America in Q1 than we had anticipated, and it's continuing. But as Lee pointed out, the overall channel sentiment is very positive. As I was just mentioning before, international is really a story about the China recovery remaining slow and its impact on Europe. So there’s continued softness there in industrial markets, and destocking is continuing.

And then, Jenny, I wanted to ask about investment spend and just strategic focus as you think about opportunities over the next one to two 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?

Our capital expenditure goal has increased from 1.5% to 2%. We were slightly above 2% in fiscal year '23, and we are forecasting 2% for fiscal year '24. This marks a significant rise from our 10-year average. Our emphasis is on safety, automation, robotics, and AI-driven inspection tools, all of which are aimed at enhancing our efficiency and productivity. We are investing in the supply chain, along with specific divisions that require support for sustainable growth, such as electrification projects with our customers. We believe that our investments in the supply chain will benefit us in the long term, as they will reinforce our local strategies and enable dual sourcing approaches. We anticipate that these investments will yield positive results for years to come.

Our next question comes from Brett Linzey with Mizuho.

Congrats to Lee. Appreciate all the insight over the years. I wanted to come back to some of the market choppiness and the destock. I guess what is Parker doing from a cost-containment standpoint? In the quarter, international volumes down, margins up. Is this just simply throttling back on discretionary? Are you taking more structural simplification actions, and how does that position you?

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? 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 are a lot of levers that our general managers can pull. 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 in downturns as well as in upturns to ensure that we get the best return.

Yes, that's great. And then just one more on orders. Just curious how the sequential evolution of orders played out through the quarter into October. Any discernible pattern that might give you confidence that we could see some positive trends into the bottom here?

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

Brett, I wanted to just touch on that restructuring comment. There's been no change to our restructuring plans for the fiscal year. We do this all the time; this is not something that we wait for. I think we have $70 million of restructuring costs in the guide for the year. And that's the beauty of the decentralization of all the markets. Our businesses are doing what they need to do, depending on what's happening in their businesses all around the world. So we're not waiting for any kind of high sign to do restructuring. We constantly do that. To Jenny's point, it's part of The Win Strategy, and it's part of what we do every day.

Our next question comes from Nathan Jones with Stifel.

I add my congratulations to Lee and good luck going forward. I'm going to ask David and Julian's question a little bit of a different way. Parker has been through many order downturns over the years. While every downturn is different, the math always tends to be the same. You see three to five, maybe six quarters of negative order rates. The magnitude of those declines is either a mid-cycle pause or a recession. We've gotten to the point where we're now three to five quarters of negative order rates. Is this starting to feel more like a mid-cycle pause in the recession we've been trying to talk ourselves into for the last 18 months? And maybe just any comments around your feelings about this downturn relative to the downturns you’ve seen previously.

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, too, we've said this a couple of times, but we've never had as high a percentage of aerospace exposure across the whole portfolio. So it's over 30% of the portfolio, and that part of the business is extremely strong right now. So we're benefiting from that as well.

Yes. I was just talking about the industrial businesses; I understand that there is that dynamic. And then just one on Meggitt. You guys have talked about that outperforming. I think it's clearly seeing better growth; the market is seeing better growth likely leading to some expansion in 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, we couldn't be happier with the way that business is performing. It still is early days. We just had the one-year anniversary. Growth is robust. The margin performance has been good. If you remember, we had a three-year plan here on synergies, and our focus is executing that. It's performing better than our expectations. So we're happy with it.

Okay, we've got time for one more question.

Lee, you've had a lot of callouts, but we would like to dream of walking off on a high, and that's certainly what you're doing. So congrats and enjoy the rest of the year before you retire. So backlog, I've got to say I'm surprised you didn't consume more backlogs based on what we're hearing elsewhere. Maybe you could confirm, Todd. I’m calculating maybe $100 million of sequential backlog consumption in industrial, in that kind of range. I was wondering, are you seeing more like longer cycle, lumpier orders coming through the backlog here? I mean, just any color there would be helpful.

Nigel, you're saying specifically on aerospace?

Industrial, industrial.

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.

Okay. Great. As the last question, I believe this is a cleanup question. When I compare the current guidance to the previous guidance for FY '24, I'm seeing $0.40 from the margin uplift and about $0.10 in taxes. Is that correct? That brings me to $0.60 or so, which is the increase. And there's nothing for foreign exchange. Is that correct?

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, nothing major.

Okay, great. Well, sorry for the low-level questions there.

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

I think we're almost at the end. I'm going to pass it back to Todd. This is Lee. I just want to say thank you for all the nice callouts from everybody. It's 32 years. It's been a long run. During that 32 years, I've worked for four CEOs, three of them directly. Every CEO has taken the baton from their predecessor and run the race faster. I've got no doubt in my mind that Jenny and this team are going to do the same thing. So thank you, and hopefully, we'll see you around.

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.

Thank you, and that concludes today's call. All parties may disconnect. Have a good day.