Welcome to the Parker-Hannifin Corporation Fiscal 2024 Fourth Quarter and Full Year Earnings Conference Call and Webcast. All participants are currently in listen-only mode. A question-and-answer session will follow the formal presentation. This conference is being recorded. It's now my pleasure to turn the conference over to Todd Leombruno, Chief Financial Officer. Please go ahead, Todd.

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 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. 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 a Q&A session, and 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.

Thank you, Todd. And thank you to everyone for joining the call today. Parker delivered an outstanding year in fiscal 2024 on the dedication of our people, the strength and balance of our portfolio, and the value of our business system, the win strategy. We met or exceeded many of our commitments for FY’24. We produced top quartile safety performance aligned with our goal to be the safest industrial company in the world. The strength of our portfolio was highlighted by a stellar year delivered by our Aerospace system segment. On low single-digit sales growth, the team delivered 200 basis points of margin expansion. Our earnings per share grew 18% on top of earnings growth of 15% in fiscal year 2023. And we generated record-free cash flow of $3 billion. Parker has a very promising future ahead, as you'll see from our strong fiscal year 25 guide and the targets we have set for fiscal year 2029. Next slide, please. It was a record year for Aerospace. Our first full year with Meggitt, achieving over $5 billion in sales, more than two times the sales of fiscal year ‘20. All market segments delivered double-digit sales growth, and the strength continues as we look ahead. We are positioned for growth with significant content on leading programs, and our extensive portfolio will continue to create value for our customers, while our large install base will drive continued aftermarket growth. Next slide, please. As illustrated on this slide, the transformation of our portfolio further expanded longer cycle and secular revenue mix in fiscal year ‘24. Although Aerospace is a big part of the transformation, it's not the whole story. The acquisitions of CLARCOR and Lord and our on-purpose strategy to expand distribution in Europe and Asia have greatly contributed to the longer cycle secular and industrial aftermarket mix. We see this transformation continuing and expect 85% of our portfolio to be longer cycle secular and aftermarket by fiscal year ‘29. Early last week, we announced that we signed an agreement to divest the North American composites business that came with the Meggitt acquisition. As mentioned during our investor day, we continue to optimize our portfolio. Our best owner playbook identifies businesses that find greater value with a different owner. Through this process, we determined that this business is not aligned with our core products and we are not the best owner. It's a great team, and we are confident that they will be successful in the future. Next slide, please. These are the four key messages we presented at our investor day in May. We are positioned for growth with our interconnected technologies and the secular trend. We have demonstrated the win strategy. Our business system is compounding our performance and driving us to top quartile. Operational excellence, years of driving a continuous improvement culture through our lean tools creates growth and expands margins. We have confidence in achieving the fiscal year ‘29 target launched at our investor day in May. Next slide, please. As a reminder of what drives Parker, safety, engagement, and ownership are the foundation of our culture. It's our people and living up to our purpose that drives top quartile performance, allowing us to be great generators and deployers of cash. I'll turn it back to Todd to review our outstanding fourth quarter results.

Thank you, Jenny. It really was a fantastic year for the company. On Slide 9, I 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 the 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 had just a 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 the prior year. For the first time in the history of the company, we generated 25.3% segment operating margins for our quarter. The same story with EBITDA margins. The increase was a little bit greater, 190 basis points. For the quarter, we achieved 26.3% adjusted EBITDA margins. For adjusted net income, we reported $884 million, which is up 12% from the prior year, and this translates to a 17% return on sales. Earnings per share reached $6.77, which was up $0.69 or $0.11 from the prior year. It was just really an exceptionally strong quarter. It was a great way to finish the fiscal year, driven universally across the globe by our engaged team members, and it was just a nice way to finish the year. 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 in adjusted earnings per share. Again, the story is very similar to what we saw all year, strong operating execution continues to drive growth in earnings per share. If you look at segment operating income dollars, we increased by $90 million, or 7%. That's essentially $0.54 or 80% of the EPS growth quarter-over-quarter. We've talked a lot about this already. 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 was again a result of some favorable items from the prior year just not repeating. Interest expense favorable, again, $0.17 versus the prior year. That really stems from 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 a slightly higher operating tax rate and, of course, the higher EBIT. Other expenses and share count were just both a bit higher than last year, but the story here has been consistent throughout the whole year; strong operating execution driving margin expansion, 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 positively. It increased by 1%, and we're really happy to see that. Our backlog remained at near-record levels. We have $10.9 billion in shippable backlogs, which was a nice way to finish the year. Looking at the diversified industrial segment, specifically in North America, the U.S. sales volume really remained strong at $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. Despite those lower volumes, we were able to increase adjusted segment operating margins by 150 basis points, and the North American businesses achieved a record of 25%. 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 improved to flat, ending our negative string of year-over-year order declines, and we were really happy to see that. Looking at the International businesses, sales were slightly over $1.4 billion. Organic growth was down 2.5% from the prior year, but that was also better than our forecast. Off-highway markets continue to be soft. Across the regions: Europe was negative 5%, Asia-Pac negative 1%, which did slightly improve from Q3, and Latin America just continues to be robust at 19% organic growth. The same story applies to the margins. Margins increased by 60 basis points in the quarter, with our International businesses generating 23.9% segment operating margins, and we continue to be focused on simplification and productivity improvements, which I am really happy to see in the continued margin expansion from the International businesses. Order rates in International finished at negative 1%, with positive order rates in Asia driving the majority of the improvement. If we look at Aerospace systems, that business continues to shine. Sales reached a record $1.5 billion in Aerospace, the first time we've had that amount in our Aerospace business. Organic growth hit 19%, with double-digit growth across all the platforms within Aerospace. Operating margins set a brand-new record, increasing by 130 basis points to 27.1%, driven by great volumes and incredible strength within it. Aerospace orders remain strong, achieving the highest dollar level of orders for the year, and order rates continue to grow at plus 7%, so all things are looking positive in Aerospace. If we go to Slide 12, I 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, representing 17% of sales. Free cash flow reached nearly $3 billion, also a record, which is 15% of sales. That's also a 15% increase from the prior year, and we achieved a conversion rate of 105%. I want to thank our team, as this has been a significant effort by many across the company, resulting in nice improvements in working capital, and we successfully reduced inventory by over $120 million, showcasing our focus on supply chain excellence. Globally, we continue to concentrate on being outstanding generators and deployers of cash. Jumping to Slide 13, you can see what we accomplished with all that cash. We reduced debt by over $800 million in the quarter alone, and since closing Meggitt, we've reduced debt by over $3.4 billion. We targeted to reduce debt by $2 billion in the fiscal year, and we hit that target. Our leverage ratios indicate gross debt to adjusted EBITDA is now 2.1 times, and net debt to adjusted EBITDA is now 2, exactly as we had forecasted. That wraps up just a solid Q4 and a great fiscal year. I'm going to hand it back to Jenny, and we'll get to what I know everyone is focused on, which is our outlook for FY’25.

Thank you, Todd. At our Investor Day in May, we introduced the six key market verticals of our business that you see on this slide. This slide represents our FY’25 sales growth forecast for each market vertical, resulting in organic growth of 2% to 5%. We are providing a realistic guide for fiscal year ‘25. At the midpoint of this guide, we have Aerospace at 8.5%, industrial North America at 2%, and industrial International at 1.5%. We are confident in growing EPS, achieving mega synergies, and continuing our track record of expanding margins. I'll get it back to Todd to review the guide in a little more detail.

Okay. Thank you, Jenny. I'm now on Slide 16, and let me share some of the details of the FY’25 guide. Reported sales are 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, 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, right in line with what we've historically done on sales splits. For organic growth, we are forecasting organic growth in the range of 2% to 5%, or 3.5% at the midpoint. 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're 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. The mix on organic growth is estimated at 2.5% first half and 4.5% growth in the second half. This guidance also includes sales from the recently announced divestiture that Jenny mentioned. We're expecting that to close sometime in the second quarter, and we will provide an update once that closes regarding its impact on the company. Our estimates are based on June 30 currency spot rates, and we're forecasting a slight headwind of about 0.5% or $100 million on currency versus the prior year. Jenny mentioned margin expansion, and we plan for 50 basis points of margin expansion. In FY’25, we will achieve that by continuing to 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 at 47% for the first half and 53% for the second half. If you do the math on incrementals, we expect it slightly at 40% incremental margins, which is a little bit higher than what we've normally had, based on the growth in Aerospace and, of course, the continued mega synergies. A few additional items on the guide: Corporate G&A is expected to be approximately $230 million. Interest expense is $450 million, a reduction of approximately $50 million from FY’24, and other expenses are expected to be about $5 million. Tax rate is modeled at 23%, leading to full year as-reported EPS of $23, or adjusted EPS of $26.65. Both of those figures are at the midpoint, with a range of $0.35 on the high end and the low end. If you look at adjusted EPS, it is split at 47% first half and 53% second half. For cash flow for the full year, we are giving a range of $3 billion to $3.3 billion, which is $3.15 billion at the midpoint. This will be approximately 15.3% of sales and we expect free cash flow conversion to be greater than 100%. The far right column on this page shows specifics for Q1. For reported sales, we are forecasting to be plus 1%. Organic growth is projected to be 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 very similar to what we just did in FY’24. Segment operating income will be the main driver of our EPS growth, accounting for $1.51 of EPS growth. We will continue to have lower interest expense resulting from our great cash flow generation and our deleveraging efforts, adding $0.34 to EPS. The tax rate will be unfavorable, with a headwind of $0.41, compared to a favorable rate we had in the full year of FY’24. Our corporate G&A is slightly unfavorable, just $0.06. Other expenses are $0.10 unfavorable, and share count is another headwind of $0.07. At the end of it all, that leads to our $26.65 midpoint, marking a 5% increase year-over-year. With that, Jenny, I'm going to hand it back to you and ask everyone to reference Slide 18.

Thanks, Todd. As mentioned at our investor day and demonstrated in our results, this is a different Parker. We will add more than $10 to EPS and generate an additional 50% free cash flow by fiscal year ‘29. Our performance will continue to be accelerated from the win strategy. We have a longer cycle and more resilient portfolio. We will experience growth from secular trends, and we will continue to be great generators and deployers of cash. Next slide, please. We are very proud to be celebrating 60 years on the New York Stock Exchange, and we'll ring the closing bell next week on Wednesday, August 14. I'll turn it back to Todd to get us started with Q&A.

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

Our first question is coming from Julian Mitchell from Barclays, your line is now live.

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 movements 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?

Yeah, Julian, this is Todd, I can take that. There is some seasonality just going from Q4 to Q1 if you look at our historical sales splits and our historical earnings split. What we're modeling here is in line with what we've historically done. Our organic growth guide for the total company is plus 1% for the quarter. That is driven by Aerospace, which continues to be low double-digit organic growth is what we're expecting in Aerospace. But in the industrial businesses, both in North America and International, we are still expecting that to be down from the prior year. So it's low single digits, but it's still down. We expect that to improve throughout the fiscal year, and this is just our best look at a roll-up. You're right, it's a little bit of a soft industrial environment, but really offset by strength in Aerospace. If you look at margins, what we just did in Q4 was the all-time record for the quarter. We are guiding the 25.2%. That would be a Q1 record for the company. It's not an easy number there; it would be a record. To do that in light of some softness on the industrial side of the business, we are pretty proud of that. There's some below-the-line stuff that is a first-quarter phenomenon, but nothing abnormal. We are experiencing growth in earnings per share and net income in Q4, which really supports what we see throughout the balance of the year.

That's helpful, thank you. And then maybe just my follow-up would be around Slide 15. You have that very helpful color on the end-market verticals outlook for the year. Maybe just any context you could give around 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 the plant and industrial piece, please.

Sure, Julian, I would be happy to do that. If you look at the in-plant and industrial equipment, it improved from negative low single-digit in Q3 to neutral in Q4. As you can see on the slide that you're referencing, our FY’25 guide is forecasting neutral in the first half, low single digit in the second half, resulting in low single digit for the full year. Transportation was mid-single digit negative in Q4, primarily driven by automotive cars and light trucks. We are forecasting low single digit negative growth for transportation in the first half, with mid single digit growth in the second half because we expect automotive to return to growth then. Work truck strength continues, and heavy-duty truck is positive now. So the full year is at that low single-digit growth. In off-highway, it was high single-digit negative in Q4, and we are forecasting the same for the first half, neutral for the second half, and mid single-digit negative for the full year. Inside of there, we expect Ag to be double digit negative this year, offset by construction, which is low single-digit positive. So that's some color there. Energy is forecasted to be low single digit for fiscal year ‘25, neutral in the first half, mid single-digit in the second half. HVAC was low single-digit negative for Q4, but it is improving. We are forecasting mid-single-digit growth for the first half. This is driven by a recent regulation change on refrigerants. The second half growth forecast is at low single-digit growth, but that's dependent on how fast some of these manufacturers get through their inventory and ramp up production under the new regulation.

That's great, thank you.

Thanks, Julian.

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

Hi, thank you. My questions are on your comfort with the organic sales guide, right? We have 1.5% in the first quarter. We can back into 2Q, right? It's 3.5%. So that 2% faster growth in 2Q from 1Q, I'm under the impression that maybe that growth is coming from industrial, going from, say, down 1.5%-2% in the first quarter to going slightly positive. I just wanted to get some color on why we see that turning flat to positive in 2Q? The comps get a little easier in North America, but just any color around that, particularly in the mix of orders. Are you seeing it more from distributors? Is it the lack of de-stocking that we've seen from a year ago at the manufacturers? Just trying to get more comfortable with that delta on year-over-year growth for industrial in 1Q and then getting slightly positive for 2Q. Thank you.

Yeah, so I'll take that, David. Some of the things that Todd mentioned earlier: Total company order rates did go positive at 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 ended five quarters of negative order entry. International orders improved to negative 1% from negative 8%, and that was driven by Asia-Pacific. Regarding the channel, 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 it's not a step change yet. We aren't actually seeing them add inventory. All of these factors are integrated into our guide, and they are the reasons we feel confident about our organic growth numbers in the first half.

The reason I asked is that it doesn't seem like there's much new pricing for July 1. So I'm just trying to understand what the incremental bump is. Maybe there's a little bit of comparison and, obviously, maybe some pickup.

We're back to a normal pricing environment. So it's more about those comps getting easier. If you look at North America, Todd mentioned that we expect Q1 to be flat to Q4. But that gradual industrial recovery is what we have really baked into the guide. The growth uptick, mainly in the second half, is on easier comps.

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 five verticals, could you give us a sense of force rank highest to lowest the margins between those five, just so we can get a sense of the mix looking at it in this format?

No, we're not going to disclose that, David.

I would tell you to look at the Diversified Industrial segment. Those margins are at record levels. The International businesses are not that far off from the North American businesses. It's really just a factor of some softness in Europe and Asia going through a recovery mode. But the margins are strong across all of those verticals, David.

All the businesses are performing really well in margin expansion.

Thank you. Next question is coming from Scott Davis from Melius Research. Your line is now live.

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

Thanks, Scott. Thank you.

I know the answer likely hasn't changed much since the Analyst Day, but could you provide an update on M&A and what you're observing? It seems you have the balance sheet capacity to potentially become more aggressive. A brief update would be appreciated. Thank you.

You're right. Not a lot different, but obviously, we still have some debt to pay down, which is still our focus. When we look to acquisitions, we're always working the pipeline. Maintaining and building those relationships is essential to us, and we've been doing quite a bit of that. We're looking for opportunities where we are the clear best owner, utilizing our interconnected technologies and building on the secular trends. What I want to stress is that we are seeking deals that are accretive to growth, resiliency, margins, cash flow, and EPS; it really must tick all of those boxes. Timing also plays a role. We like all of the eight core technologies and see opportunities to build on the entire portfolio. A common question I get is whether the next deal will be bigger than Meggitt, and that's not something we focus on. Our focus is on executing the right deal with those criteria in mind.

Okay. Jenny, are you looking at the portfolio optimization and the small divestiture through the lens of key market verticals outside of that vertical, or is it more about margin growth potential and traditional metrics?

It's the latter. We have to see that it's part of our core technologies and core product offerings. Obviously, this business was in Aerospace, a market that we're very fond of. But it's the future profile of the business, both margin expansion and growth.

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

Thanks, Scott.

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

Thank you. Good morning. I guess one of the things that stood out to me over the past couple of quarters within your industrial technology platforms is that motion systems and low-end process control kind of behave the way we would sort of expect them to in the kind of industrial downturn we're experiencing, this whole downward high single-digit revenue type. However, your filtration and engineered materials platform has been pretty remarkably stable. So I guess my question is, looking back, why has that been the case? Is this sort of different than what you've seen in prior downturns? And is there an impact on margin from a mix standpoint within your industrial business from this filtration business hanging in there a little bit better?

Thanks for the question, Mig. If you think back to the on-purpose strategy that we had with our acquisitions to double the size of filtration, engineered materials, and Aerospace, we've done that with the last four acquisitions. For filtration, with the acquisition of CLARCOR, we greatly increased our aftermarket exposure in filtration. That business has now become more resilient than it was in the past. When you look at Lord, in engineered materials, that's where we pick up a lot of that longer cycle business. So you see those two groups behaving a little bit differently than the others you mentioned. That is definitely the main reason.

And the margin impact?

The margin impact is accretive, just like the criteria that we give to the acquisitions that we would do in the future. Both of these have been very successful deals where synergies were achieved, and they continue to utilize the Win Strategy to improve margins.

Let me give you a little color on this. If you're worried, we agree with you. The top line has acted exactly as we expected. The margin expansion has been equally generated by all of these businesses. Looking at that record we put up for the quarter, 25.4%, the motion systems platform and the flow and process control areas have both contributed to those margin increases.

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

Thanks for the color. I’ll pass it on.

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

Hi, good morning. And congratulations on a nice quarter and guide. I guess my first question, Todd or Jenny, just looking at the implied incrementals for the year, the 40%-ish incrementals, it's a very good incremental margin above your targeted range on lower organic growth relative to your longer-term guide. Is there anything unusual in your mix this year that would allow you to have above-average incrementals on low organic growth versus your targeted range? And then I guess the follow-up question is, once you get to the 4% to 6% organic growth, why should your incremental margins be better than that, just given what we're seeing already today? And then, Jenny, you're probably not going to want to answer this, but I'm going to ask it anyway. The order surprised me both on Industrial North America and International. Anything you can do to talk to the cadence of what you saw since April? Did the orders outperform your expectations as well? Thank you.

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. The 30% is really kind of over the cycle, so while at times it could be better, it might be a challenge on the top line. The math works a little funny: Aerospace, with its strong growth and a favorable margin profile, is driving our incrementals higher than normal. We are committed to the $300 million in synergies from Meggitt and expect $50 million of incremental synergies in FY '25 versus FY '24, which places Aerospace higher than historically where we've been. When you look at the Industrial businesses, we still see margin expansion, even in a low-growth top line environment. That's how we came up with the numbers, so we feel good about that. The team is energized and focused on ensuring we deliver that.

From an order standpoint, Jamie, on the May call, I mentioned something that I normally don't do, but I was encouraged at the start of the quarter with what we had been observing in orders. Obviously, that continued, and we reached the order conditions referred to today at the end of Q4. So that played out well for us. The guide today is supported by the comments made about those Q4 orders. So no additional color on orders.

Okay, thank you. Nice job.

Thanks, Jamie.

Thank you. Next question today is coming from Joe Ritchie from Goldman Sachs. Your line is now live.

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

Thank you.

I'm going to tackle the margin question maybe slightly differently. The exit rate for the industrial businesses was 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. 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.

Well, Joe, I'll start. I'm looking at Jenny; she's smiling. We just a few months ago gave you the FY '29 targets. If you look at that, this is right on track with those FY '29 targets. We're going to expand Aerospace by 100 basis points off an all-time record for that business. Regarding the Industrial businesses, we're showing margin expansion there as well, even with an unbelievably low growth top line number. We feel good about that. Every single one of these quarters would be a record margin number for us, increasing, aside from Q2, which is a little seasonally volatile—these are aggressive numbers. That's what we feel today, and that's what we have confidence in, and that was part of what went into our guide.

I would just back that up by saying, obviously, it was a fantastic year and a fantastic exit rate. This guide, however, is realistic. This isn't straightforward for our teams. We believe in The Win Strategy; we believe in our ability to continue to expand margins, but this isn't easy.

Okay, got it. I'm sure you'll make it look easy. But the follow-up question is.

We'll try.

Yeah. You mentioned still planning to continue to pay down debt. You got your leverage ratio down to two turns, which is impressive, so congrats on that. I know there was a question earlier about M&A. Talk to us about the right leverage ratio that you want to get to before you get a little more proactive with capital deployment on the M&A side. Is there an opportunity to continue to buy back shares as well? How do you think about those priorities going forward?

Yeah, Joe, it's a great question. We've been very clear; our target was to get to and operate around a 2 net debt to adjusted EBITDA leverage. We hit that and are very proud of it, which was not easy, but the team worked hard. The way our debt is structured, we have a service debt that goes all the way out into 2026. We feel good that we will not miss an opportunity to put our cash to work as we continue to pay down that debt. However, our preference continues to be to deploy our capital towards deals, as Jenny mentioned earlier. It's got to be the right deal; it must be able to grow the top line differently, and it has to be accretive to our margins and EPS while generating cash in a way that differs from what the company has been able to produce. If we can't get those done, we are fine deploying our cash elsewhere. We're looking to continue our dividend record and maintain our share buyback at $200 million a year.

If the timing and the deal don't line up as we desire in the future, we will always buy back shares, as Todd said. We believe in Parker.

Thank you. Next question is coming from Stephen Volkmann from Jefferies. Your line is now live.

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

Yeah. We increased those Meggitt synergies in the second or third quarter to $200 million by the end of FY '24. We are committed to a total of $300 million in synergies. That would include $50 million in FY '25 and an additional $50 million in FY '26.

Got it. Thank you. 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?

Everything in Aerospace is really booming right now. Aftermarket is especially strong; you know the profile of that business. It is our highest-margin business, and it's been very robust. If you look at what they did for the quarter, I think it was 27% margins. If you look at FY '25, we forecast another 100 basis points of margin expansion in Aerospace. That gets us around 27.5%. So we are seeing strong margins in Aerospace.

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 concerned about potential margin headwinds in that scenario?

No. When you look at our team, our forecast tools have improved across the company, and our best tools remain in the Aerospace verticals. We’ve had multiple discussions with the team and feel really good about that. I don't want to speak outside of FY '25, but we feel very positive about what '25 has in store.

We're very optimistic about the growth in air traffic, so we're not worried about that.

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

Good morning, everyone.

Good morning, Nathan.

I'm going to return to the revenue guidance. For as long as I can remember, Parker has indicated a revenue split of 58% in the first half and 42% in the second half. Given your significantly larger backlog compared to the past, I would like to know what your visibility is regarding the revenue guidance for the second half, based on the current backlog and any macroeconomic assumptions you've taken into account. Many of your peers and competitors have mentioned a decrease in CapEx spending moving forward, but since you might have been hit by the downturn earlier, perhaps you're also recovering sooner. Any insights you can share on this would be appreciated.

Well, just to run through it, obviously, for Aerospace, we are forecasting high single-digit organic growth, which is about 8.5%. In the first half, we expect 11% and second half at about 6%, as the comps get quite challenging when we enter that second half. We feel good about Aerospace and have good visibility due to our high backlog there. Regarding North America, as Todd mentioned, we're guiding to 2% organic growth, negative 1% in the first half. That's based on what we see today regarding orders and information from our customers. Again, we expect continued softness in off-highway all year and transportation in the first half. Gradual industrial recovery is what we've baked in. In International, we are seeing 1.5% organic growth, again, negative 1% in the first half and 3.5% in the second half. As we mentioned, order rates have improved but remain negative. Our guidance assumes that Asia-Pacific turns positive, offsetting continued weakness in Europe.

Do you need things like interest rate cuts to spur some of that recovery you're looking for in the second half in various parts of the industrial economy? What are the underlying assumptions you've incorporated into your expectations?

Yes, Nathan, this is Todd. Those factors would certainly help, but what we've incorporated into the numbers is primarily based on our AI forecast. We are using various macroeconomic forecasts. Everything is aligned with what you are likely observing as well. The main drivers are strong Aerospace performance and a gradual recovery in the Industrial markets, particularly in the second half of the fiscal year. This is informed by orders we have seen over several years. We were pleased to see North American orders turn positive and Industrial orders improve to a negative 1%. All of this informs our forecast.

Awesome. Thank you for taking my questions.

Thank you.

Thank you. The next question is coming from Jeffrey Sprague from Vertical Research Partners. Your line is now live.

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 of your normal process of reviewing the portfolio and assets. But should we view this as largely a one-off? It just came with something you recently acquired? Or are there other pieces here and there that could be methodically coming out as your margin structure has improved, right, and your threshold for what's good enough rises, does that cause some additional things to shake out of the portfolio?

At Investor Day, we mentioned that we would continue to trim around the portfolio, but not anything significant. Every year we go through an analysis of our businesses, so a best owner analysis, but again, nothing significant, Jeff. It would be just some trimming around the portfolio.

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?

Absolutely. On commercial OE, we are forecasting high single digit based off of narrow-body rates and wide-body ramp-up. Commercial aftermarket is low double digits, benefiting from air traffic recovery and broad-based growth. For defense OE, we're seeing a mid-single-digit increase related to the increasing defense budget and demand for legacy fighters. Defense aftermarket is projected to be high single-digit, also influenced by public-private partnerships we have with the depots for retrofits, repairs, and upgrades. It's going to be a strong year for Aerospace at 8.5% growth.

I’ll leave it there. Thanks a lot.

Thank you.

Kevin, I think just in light of time, we may have time for just one last question.

Final question today is coming from Nicole DeBlase from Deutsche Bank. Your line is now live.

Yeah, thanks. Good morning, guys.

Good morning, Nicole.

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

Yeah, Nicole, this is Todd. It will all come out of the Industrial North America segment businesses. We do expect that to close sometime in Q2. It will be margin accretive, there's no doubt about it. I'd prefer to wait until we get the actual close date to give you exact color on that. Jenny mentioned it's a great business, but maybe not perfectly aligned with our core products. If you look at the enterprise value we received for that business, it's $560 million. There will be a gain on that, and we’ll share more once it finally closes.

Got it. That's really helpful. What is your outlook for International? It sounds like you're expecting Europe to be down again. If you could confirm your thoughts there. I know it's small for you, but any color on what you're seeing in China?

Yeah. The guide does assume that Asia Pacific turns positive, offset by continued weakness in Europe. So for Europe, we're looking at neutral growth relative to fiscal year '24. There's continued softness there. As for China, growth improved to negative low single digits in Q4, with Q4 orders increasing due to some project orders, so we're seeing some positive there.

Thank you. I’ll pass it on.

Thanks, Nicole.

Thank you.

Kevin, I think we've reached the end of our question-and-answer session. I'd like to turn the floor back over for any further closing comments. Okay, Kevin, thank you. This concludes our earnings webcast. Thanks to everyone for joining us today. We appreciate your attention, interest, and support of Parker. If anyone has more follow-up questions, Jeff Miller, our VP of Investor Relations; and Yan Huo, our Director of Investor Relations will be available throughout the day, and even tomorrow if needed. I hope everyone has a great day. We appreciate it.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.