Good morning, and welcome to Parker-Hannifin Corporation's Fiscal 2026 First Quarter Earnings Conference Call and Webcast. Please be advised that today's conference is being recorded. I would now like to turn the call over to Todd Leombruno, Chief Financial Officer. Please go ahead.

Thank you, Chloe. Good morning, everyone, and welcome to Parker's fiscal year 2026 First Quarter Earnings Release webcast. This is Todd Leombruno, Chief Financial Officer, speaking. And with me today is Jenny Parmentier, our Chairman and Chief Executive Officer. We appreciate your interest in Parker, and thank you for joining us today. We address our disclosures on forward-looking projections and non-GAAP financial measures on Slide 2. Items listed here could cause actual results to vary from our forecast. Our press release was released this morning, along with this presentation and reconciliations for all non-GAAP financial measures. Those are available on our website under the Investors section on parker.com. The agenda for today has Jenny starting with an overview of our record FY '26 first quarter performance. She will share some highlights from our day 1 celebrations, welcoming the Curtis team members to Parker. Jenny will also reiterate the strengths of our interconnected portfolio and share an example from our energy market vertical. I will follow Jenny with more details on our strong first quarter results, and then we'll both provide some color on our increase to our FY '26 guidance. After that, we will move to the Q&A portion of the call and address as many questions as possible within the hour. I now call your attention to Slide 3. And Jenny, I will hand it over to you.

Thank you, Todd, and thank you to everyone for attending the call today. Q1 was a great start to the fiscal year. Operational excellence was on full display, powered by the Win Strategy. We achieved top quartile safety performance with a 20% reduction in our reportable incident rate. This performance is aligned with our goal to be the safest industrial company in the world. Our team delivered record Q1 sales of $5.1 billion, organic growth of 5%, and 170 basis points of margin expansion, resulting in a 27.4% adjusted segment operating margin. Adjusted earnings per share grew 16%, and cash flow from operations was $782 million. And we completed the acquisition of Curtis Instruments. A long-standing practice within Parker is for a Parker leader to personally welcome the new team at every location. This slide shows pictures from our day 1 events held around the world, welcoming the Curtis team to Parker. This was a great day for all of us, and we are thrilled to have Curtis in the Parker portfolio. Obviously, we are very proud of the Q1 results delivered by our team and equally excited about our future. So just a reminder on why we win. First, the Win Strategy is our business system. We have a decentralized operating structure, 85 divisions run by general managers with full P&L responsibility, acting like owners, close to their customers and executing the Win Strategy every day. Next, we have innovative products that solve customer problems, 85% covered by intellectual property. Our application engineers provide the expertise that allows us to have a competitive advantage with our interconnected technologies that provide efficient solutions for our customers. Finally, our distribution network is the envy of the competition and the best in the world. It took us over 60 years to build it, and it is truly an extension of our engineering teams, providing solutions to small to mid-sized OEMs that are participating in capital spending and investments. These partners are experts at applying our interconnected technology. We have the #1 position in the $145 billion motion and control industry, a growing space where we continue to gain share. These 6 market verticals represent greater than 90% of the company's revenue. Our interconnected technologies cut across these market verticals and give us a clear competitive advantage. Two-thirds of our revenue comes from customers who buy 4 or more technologies, and our growth is focused on faster-growing, longer-cycle markets and secular trends. This slide focuses on our presence in the energy market vertical. Parker is a significant supplier of products into heavy-duty gas turbines used for electrical power generation. We bring both proprietary designs and world-class manufacturing capabilities to offer a comprehensive suite of interconnected technologies. Parker supports multiple global industry-leading customers, and we are seeing significant growth in this space. This business is long life cycle with multi-year backlog and durable aftermarket. This is a great example of products and technology that are shared across aerospace and industrial markets. I'll hand it back to Todd to go through our first quarter highlights.

Thank you, Jenny. This was a great start to the fiscal year. I'm on Slide 9, and I will start with a summary of our Q1 results. Once again, and I love saying this, every number in the gold column on this slide is a record. It was just a fantastic quarter where mid-single-digit sales growth, combined with strong margin expansion, resulted in mid-teens EPS growth. Sales were up 4% versus prior. Organic growth was positive at plus 5%. Currency was favorable at 1%. And divestitures were 2% unfavorable. Those are the divestitures that we've previously completed. And I would just note, this is the last full quarter that we will have a full quarter of a divestiture impact. Moving to adjusted segment operating margins. As Jenny said, we did 27.4%, that's an increase of 170 basis points versus prior year. Adjusted EBITDA margin was 27.3%, that was up 240 basis points. And adjusted net income was $927 million or an 18.2% return on sales. All of this drove adjusted earnings per share up 16% to reach a record $7.22 per share. It was a really nice start to the fiscal year with a strong quarter across the board, and it gives us confidence for the remainder of the fiscal year. Our global team members really continue to drive results enabled by the power of the Win Strategy. If we could jump to Slide 10, you'll see a bridge on the year-over-year improvement in adjusted EPS. The majority of our EPS growth came from continued strength across our operations as segment operating income dollars increased by $132 million or 10%. That contributed $0.80 to our EPS growth this quarter. Corporate G&A and other were favorable $0.18. That was primarily due to foreign currency exchange in the prior period quarter last year that was unfavorable, which created a favorable situation for this year. Interest expense was also favorable by $0.07, and that's driven by lower average debt balances across the quarter and lower interest rates across the quarter. Share count was $0.13 favorable, driven by discretionary share repurchases that we completed over the last 3 quarters. Income tax was unfavorable by $0.16, and that was really simply due to a few favorable discrete items in the prior period that did not repeat. And that is basically it, a really clean bridge to the 16% increase in adjusted EPS. This record was really achieved by strong sales growth across the board, margin expansion, and great adherence to cost controls across the company. If we move to Slide 11, we'll just talk about the segment performance. Orders were strong at plus 8% versus prior year, with order rates increasing across all reported segments. Organic growth came in at plus 5%. This was the first time in 2 years we've had positive organic growth across all of our businesses as diversified industrial organic growth turned positive. Every business delivered record adjusted segment operating margins, resulting in great incrementals and that 170 basis points of margin expansion. Looking specifically at the Diversified Industrial North America businesses. Sales were over $2 billion with organic growth positive at 2%. That's the first time in 7 quarters North America posted a positive organic growth number, better than our expectations going into the quarter. We continue to see gradual improvement across market verticals with positive growth driven by the aerospace and defense businesses in Industrial North America, in the implant and industrial equipment vertical, and also improvement in off-highway that exceeded expectations. If you look at North America, they also had 170 basis points of margin expansion and reached a record 27.0% segment operating margin. That was really driven by higher productivity, some new business wins at great margins, and margin mix with strong aftermarket across all those businesses in North America. And North American orders increased sequentially to plus 3% versus prior year. Looking at Diversified Industrial International businesses, sales were up. They were a record at $1.4 billion, up 3% versus prior. Organic growth remained positive at plus 1%. Looking at Asia Pacific, that was our strongest region with a plus 6%. EMEA remained down at minus 3%, and Latin America was flat versus the prior year. So Asia Pacific really drove the outperformance of growth in the international businesses. Adjusted segment operating margins were also a record at 25.0%, that is a 90 basis point improvement from prior year. Our international teams continue to show great resilience, driving margin expansion through great cost controls, and they're really executing the Win Strategy to great success. International orders rebounded, improving to plus 6% after a flat Q4. Both EMEA and Asia Pacific had positive orders this quarter. Lastly, Aerospace Systems had another exceptional quarter. Sales were a record $1.6 billion, an increase of 13% versus prior. Organic growth of 13%, marking the 11th quarter in a row with a double-digit organic growth rate in Aerospace. Commercial OEM was the strongest market segment, growing 24% versus prior year. Adjusted segment operating margins increased by 210 basis points and, I'm proud to say, reached 30% for the first time ever. Record top line, productivity, and continued aftermarket strength all drove the margin expansion. Aerospace orders continued to impress, increasing by plus 15%, with the backlog reaching a new record level for Aerospace, indicating robust demand across all of our aero and defense markets. It's great to be in the Aerospace business right now. Moving to Slide 12, let's look at our cash flow performance. Cash flow from operations reached a record $782 million, that's 15.4% of sales. That's up 5% versus prior year. Free cash flow is $693 million, which is 13.6% of sales. That is up 7% versus prior year. Cash flow conversion for the quarter is at 86%. I want to remind everyone that cash flow is historically second-half weighted. We remain committed to free cash flow conversion of greater than 100% for the year. Lastly, within this slide, we repurchased $475 million of shares on a discretionary basis during the quarter. That concludes Q1. I’ll turn it back to you, Jenny, on Slide 14 for the updated fiscal year guidance.

Thank you, Todd. This slide shows our updated fiscal year '26 organic sales growth forecast by key market verticals. In Aerospace, we are increasing our forecast from 8% to 9.5% organic growth. We continue to see strength in commercial OEM and aftermarket. Implant and Industrial remains unchanged at positive low single-digit organic growth. The sentiment does remain positive with continued quoting activity, while customer CapEx spending remains selective. Transportation is our most challenged market this year, with the forecast staying the same at mid-single-digit organic decline. We are increasing the off-highway forecast from negative low single digits to neutral. We see gradual recovery progress in construction, while the ag challenges do persist. We are maintaining energy at positive low single-digit growth, with robust power generation activity offset by oil and gas. Finally, we are increasing HVAC/refrigeration from positive low single digits to positive mid-single digits, seeing strength in commercial refrigeration and filtration with some nice new business wins with our filtration technology. As a result of these changes, we are increasing our organic sales growth guidance from 3% to 4% at the midpoint. I'll hand it back to Todd for more details.

Thanks, Jenny. I'm on Slide 15, with just some of those details. Regarding reported sales, we are increasing the range to 4% to 7% or 5.5% at the midpoint. Currency is expected to be a favorable 1.5 points, which is based on September 30 spot rates. Now that we have the acquisition of Curtis closed, we are including sales and segment operating income from Curtis in our guidance. We have added $235 million to our guidance for the remainder of the year, which is approximately 1% of sales. Additionally, divestitures that we've already previously completed are 1% unfavorable. Regarding organic growth, the forecast has now increased to a range of 2.5% to 5.5% or 4% at the midpoint. We have upped Aerospace organic growth to 9.5% at the midpoint. For the Diversified Industrial segment, we have increased North America organic growth for the year to plus 2%. And for international, we still expect organic growth to be 1% at the midpoint. We are raising adjusted segment operating margins by 50 basis points to 27.0% for the year, which is now a forecasted increase of 90 basis points versus the prior year. Incrementals are now forecasted to be approximately 40% for the full year. A few additional items: Corporate G&A is unchanged at $200 million. Interest expense has been increased by $30 million; we now expect $420 million for the full year, driven solely by the funding of the Curtis acquisition. Other expenses are slightly up to $90 million from $80 million last quarter. Our full-year tax rate is expected at 22.5%. We are raising adjusted earnings per share to an even $30 at the midpoint, representing a 10% increase versus prior year. The range on that EPS is plus or minus $0.40 on either side, split 48-52 between the first half and second half. In terms of full-year free cash flow, we are also raising our guidance there to a range of $3.1 billion to $3.5 billion, with conversion, as I mentioned, greater than 100%. Finally, for Q2 FY '26, we expect reported sales to be 6.5%. Organic growth is expected to be 4%. Adjusted segment operating margins are forecasted at 26.6%, and EPS for the second quarter on an adjusted basis is set at $7.10. As always, we have additional details in the appendix. In summary, FY '26 is off to a great start, which gives us confidence to raise full-year guidance for sales, margin, EPS, and free cash flow. With that, I'll turn it back to you, Jenny.

Thank you, Todd. A reminder on what drives Parker: Safety, engagement, and ownership are the foundation of our culture. Our people and living up to our purpose drive top-quartile performance, which allows us to be great generators and deployers of cash. Thank you.

All right. Chloe, we are ready to begin the Q&A session. So we'll take the first question.

We'll take our first question from Julian Mitchell with Barclays.

Just wanted to start off perhaps with the organic sales picture in the Diversified Industrial North America business. Maybe help us understand a little bit better the cadence of demand. It did seem to surprise you positively, I think, in the quarter. How has demand moved there in recent months? And when we're looking at the full-year guide, I think your midpoint for Diversified Industrial North America doesn't embed any acceleration from the September quarter growth rate. Just wondered the thinking there.

Okay. Julian, so yes, we're very pleased with the performance. We had guided to a negative 1.5% and came in at a positive 2%. So North America performed better than expected with the Aerospace and Defense business it sits inside of our Industrial businesses, distribution, HVAC and electronics. Construction continued to outperform versus our expectations. Margin expansion from higher productivity on slightly stronger volume really helped us. We had some project wins at attractive margins, and we're getting a margin mix benefit with the lower industrial OE and a very resilient aftermarket. So you are right, we do expect Q2 to be much like Q1 coming in at 2%. Earlier, as Todd stated, for the year we were looking at a total of 1%. As I was just talking about, what we saw in Q1, we do believe that industrial aerospace and defense world remains strong. We're still talking about a gradual Implant Industrial recovery. Certainly, we're seeing positive sentiment from our distribution channel, with continued quoting activity. However, customers are being very selective on their projects and CapEx spending. We still see transportation challenges in the automotive and trucks. So we don't expect a truck recovery this fiscal year, but we will see some benefit from the aftermarket. In off-highway, gradual recovery progress in construction, but ag challenges still persist. Energy, power gen, robust, but oil and gas upstream remains weak. HVAC and refrigeration are coming off a very strong fiscal year, and we have increased that outlook for the remainder of the year. So while some markets are increasing, not all are, which is why we see Q2 pretty much the same as Q1, but an increase for the total year.

Julian, I would just add, Jenny covered the organic growth piece perfectly, but I would just add on a margin standpoint, we did increase Diversified Industrial North America margins by 70 basis points for the full year versus our previous guide. So the teams are converting on that, and I have great confidence that we'll be able to do that.

Yes. Q2 margin is 150 basis points higher than the prior year.

That's helpful. Just following up on that last point perhaps, I understand that you've had higher margin performance year-on-year for the total company than is guided for the full year. I assume that's just sort of natural conservatism given we're early in the year. I wonder if there were any other factors to think about. Alongside that, your Q2 EPS guide shows a decline sequentially, which is quite unusual in Q2. Any color on that, please?

So I think we left the second half pretty much alone. Based on what we see today, we feel really good about Q2. I think we'll have a better line of sight here after the first of the year.

Yes, Julian, Q2 usually is our softest for top line. I think the EPS is just pulling off of that. Nothing out of the ordinary that we see.

We'll move next to Mig Dobre with Baird.

I would like to talk a little bit about Industrial International. The orders there were quite good and, frankly, better than I would have guessed. A little bit of update in terms of what you're seeing in various geographies. Related to this, if I look at the past 4 quarters, I think your order intake averaged about 5%, which is quite a bit better than what you have embedded in your forward outlook for organic growth. So I’m curious at what point do you start to see these higher orders really flow through organic growth in the segment?

With Industrial International orders, they've been really choppy as we often say. If you go back to our Q3, we had a plus 11%, and then Q4 we went flat. That was because we had some one-time long-cycle orders that didn't repeat in Q4, so it's really not an average of about 5%. In terms of the region, if we look at EMEA, we're showing flat to slightly positive organic growth for the fiscal year. There's some uncertainty remaining, and we expect a slow in-plant industrial recovery. We expect to see some growth in energy; we're seeing some mining recovery underway. However, we don't think we'll benefit from future defense spending this year. EMEA is expected to remain flat to slightly positive based on what we see on the orders right now. In Asia Pacific, we have positive low single-digit organic growth for the fiscal year. We're continuing to see strong electronics and semiconductor demand. The Implant market is mixed as delays continue in China, but we do see slight growth in India and Japan. There are some mining and transportation improvements in China, but I think there's still a swathe of continued uncertainty from tariffs across this market.

Understood. My follow-up, and I don't know if you can answer this question, Jenny; it's kind of in the weeds. You talked about the ag market where challenges persist. However, I do wonder, in terms of your exposure, if you could segregate large ag equipment, such as high-horsepower tractors and combines, versus midsize and lower horsepower; I'm just wondering what your exposure looks like there because I am starting to see a bit of a divergence forming where large ag, as you say, is challenged, but some of these smaller tractors are starting to grow in volumes.

When we talked about last quarter, I mentioned that we thought that market had kind of hit its trough. I would say it's broad-based when we look at ag equipment. You can follow up with Jeff for more details in one of the follow-up calls.

Mig, I would just add that when we look at ag, it's 4% of total company sales, so it's just become a smaller piece of the total pie. It's broad-based with aftermarket and the OEM side of things, but I don't think we should read too much into movements there.

We'll take our next question from David Raso with Evercore ISI.

Of the organic guide raise, how much was volume versus a change in price? And regarding the 50 basis points margin improvement, can you give us a sense of how much of that may be related to the answer to the first question, volume improvement versus maybe price/cost different than you originally expected for the year?

David, as you know, we don't disclose pricing figures. Regardless of pricing or volume, I think we've shown that we can expand margins pretty much in any climate. We have had 2 years of negative industrial growth, and we're seeing gradual industrial recovery playing out with industrial organic growth now positive in Q1, so we're definitely seeing the impact of slightly stronger volume.

We'll move next to Scott Davis with Melius Research.

I've got to ask about M&A. I probably do a lot of quarters, but I'm going to lead with it anyway because it's been a few years since you closed Meggitt, and obviously, that's such a great deal for you guys. However, Curtis seems like an interesting deal too; it's just not as big as maybe some of those others. Can you update us on your pipeline?

You bet. We're committed to actively deploying our capital. As you mentioned, we closed Curtis Instruments in September, and we're really excited about it. Moving forward, the strategy remains the same with plenty of options. When it comes to capital deployment, we prefer acquisitions, but it has to be strategic and disciplined; you've heard me talk about this criteria before. I can tell you that the pipeline, relationships, and analysis continue to be very active. While sometimes timing is hard to predict, we're working on it. We want to continue to acquire companies where we're the clear best owner, and we feel we have a strong competitive advantage with our interconnected technologies, which we want to add to the portfolio. We're still looking for deals that are accretive to growth, resiliency, margins, cash flow, and EPS. The pipeline has deals of all sizes.

We'll take our next question from Amit Mehrotra with UBS.

Obviously, it was nice to see the order improvement. Jenny, a quick question about just the broad basis of that. Are we seeing broader activity pickup? You also won a large contract to supply components for aero-derivative gas turbines. I'm trying to get a sense of whether we are seeing broad-based green shoots here, or is it mostly explained by the longer cycle pockets that have been working for a while?

We have the longer-cycle pockets, but we're also seeing some improvement in some of our other key verticals. Looking at the changes that we had in the guide this month, we took aerospace and defense up. We also moved the off-highway from negative low single digits to neutral, and increased HVAC and refrigeration from low single digits to positive mid-single digits. We are seeing pockets of growth within those industrial businesses.

The other question I have is on Aerospace margins. Obviously, just really good. One aspect I noticed is the incremental margins being high despite OE revenue up 20%, which would probably be a little mix-dilutive. As the OE build cycles improve, can we discuss what the mix impact is on aerospace margins going forward?

We had 51% OEM and 49% aftermarket in the quarter. I anticipate that this mix will remain for the rest of the year. Aero margins are strong in Q1, and we had a nice amount of spares in Q1, which yielded good margins for us. This helped us reach that record 30%. Going forward, we are very confident in our ability to maintain the margins where we’ve been and to advance with strong margins. We've set the full-year margin at 29.5%, which is now 100 basis points higher than the prior year, having been raised by 60 basis points in the initial guide. For Q2, we're forecasting 29.1%, which is 90 basis points higher than the previous year. We’re in a good spot with aerospace; our teams are executing the Win Strategy exceptionally well and benefiting from this volume.

We'll move next to Jeff Sprague with Vertical Research Partners.

Can we just dig a little deeper into aerospace? Also, Jenny, can we get a bit of color on how you see the defense side playing out in 2026 versus the commercial side? Has there been any change of thinking there?

We came out with mid-single-digit growth for both defense OEM and MRO, and that remains unchanged. We haven't forecasted any change there.

Great. And then just on Curtis, I think it comes in a bit margin dilutive, though it’s not apparent given all the other execution and everything that's going on. Can you give us some color on the margin rate it comes in at, the work you're doing to integrate it, and your thoughts on how it might be positioned next year once you've fully digested it?

Yes, Jeff, this is Todd. I mentioned earlier that we added about $235 million of sales into the guidance. You're right; it is slightly dilutive. However, it's smaller, so it doesn't really have any significant impact. You can see we raised both North America and International margins for the full year while including Curtis in the mix. If you’re looking for a margin estimate, I would say high teens, low 20s would be a reasonable expectation. It is EPS accretive even as a stub year, and it’s been just over a month of integration. The team is excited about it, and they are working hard to integrate Curtis into Parker, similar to how we've done with our previous acquisitions.

As Todd mentioned, integration is well underway. We’ve assembled a dedicated integration leader with a talented team to ensure a seamless integration.

We'll take our next question from Joe Ritchie with Goldman Sachs.

Could you size the opportunity on Slide 7 or give some color around the growth rates? I’m curious how to think about this business for you guys going forward.

I don't think we're in a position to share the growth rates just yet. What’s great about this power gen business is that we do have this suite of interconnected technologies for power gen applications. You can see on that slide all the examples of the products we have. We have a very robust order book, which I previously mentioned is multi-year. We expect solid growth for years to come, working with all the leading industry customers. While this market vertical comprises about 7% of our sales, and power gen is about half of that, it’s a small percentage overall, but it presents a nice growth area for us moving forward.

That's great to see, and I'm glad you highlighted it. One other quick question: I know we won't be discussing pricing specifically, but if we see some rollback of tariffs, how would that impact the pricing you’ve already executed? And ultimately, is that another potential boost to margins if we see tariff reductions?

As we've talked about tariffs, we have the analytics and the processes to navigate and act quickly in both directions. Over the past several months, our teams have done a fantastic job. So we’re strong on pricing and price/cost management, and we’ll adjust as we need going forward. However, as I've mentioned numerous times, we can't use tariffs as a margin expansion device. We need to recover from a cost standpoint, and we'll adjust as needed moving ahead.

We will take our next question from Joe O'Dea with Wells Fargo.

I wanted to start on the North America implant side of things and what you're hearing from customer activity or dealers with respect to greenfield and brownfield investment in the U.S. And around that, are you getting any insights into whether these investments are local for local or whether you're seeing foreign participants investing in the U.S.?

I don’t have detailed insights regarding local for local versus foreign investments. My previous comment about selective CapEx remains; it’s still selective. In the past, we spoke about delays, but we saw stronger activity through distribution and implant in Q1. We’re starting to see certain projects get started, but I don't have specific breakdowns for you at this time.

And on the HVAC side, we've seen strength in commercial refrigeration and filtration. Can you expand on that with respect to which verticals you are serving and where you see that strength coming from?

We've achieved some nice filtration wins with gas turbines. Our proprietary technologies in filtration have seen significant growth in the energy market, and we've also had wins in filtration on the mobile side. This area has been a growth sector for our filtration group this past year.

We'll move next to Christopher Snyder with Morgan Stanley.

North America Industrial turned organic positive in the quarter. I imagine there's some benefit of incremental pricing and that the longer-cycle verticals helped that. My question is, do you feel like the cycle is starting to improve?

Yes, I would definitely state that Q1 is evidence of that, especially in those key market variables where we've increased our outlook for the year.

I would add that we've discussed inventory across the channel, and we feel that it's hit a trough level. I can’t say we’ve seen restocking yet, but we feel like we’re closer to that than going in the other direction.

You've mentioned that implant is doing well with momentum. Can you provide any color on how that business fared in the U.S. versus the international markets to gauge if there are policies driving activity into the U.S.?

In North America, as I previously stated, it's a gradual industrial recovery. However, we haven't seen restocking yet; there is, nevertheless, positive sentiment from our distribution channel and a lot of quoting activity. In EMEA, uncertainty persists. Therefore, we expect a slow recovery in implant industrial. In Asia Pacific, the picture remains mixed; delays continue in China, but there has been growth noted in India and Japan.

We'll take our next question from Jeff Hammond with KeyBanc Capital Markets.

At Analyst Day, you highlighted data centers, and I know power generation is certainly benefiting from that. Could you update us on what you're seeing on the liquid cooling side? We’ve seen some impressive order rates from peers, etc.

We do have nice exposure to liquid cooling, and we're witnessing rapid growth in that area. However, it isn’t yet substantial enough for us to label it as a separate market vertical; it still represents less than 1% of our sales. Nevertheless, Parker possesses unique interconnected technologies and a competitive edge that allow us to provide great value to our customers in this space. We have the required products for data center cooling, and we have been working with various industries there. Our ability to provide liquid cooling systems and subsystem components has given us a strong position.

Just want a couple of housekeeping items. Regarding Curtis revenue, can you provide a split between North America and International, particularly in segments? Also, you've been more active on buyback; I'm assuming the guide doesn't include any more buyback; correct me if I'm wrong?

The sales split is almost 50-50 between North America and International. We will refine that as we progress in the integration process. You're correct that over the past 3 quarters, we have been active with our share buyback. We finished the quarter with a net debt to adjusted EBITDA of 1.8, significantly below our target of 2, even after funding the Curtis transaction. We haven't forecasted any additional buybacks for now. You heard Jenny's remarks about the pipeline, and ensuring a balance of actionability and timing is crucial. However, we will be active in deploying the balance sheet.

We'll take our next question from Andrew Obin with Bank of America.

Regarding all these exciting new verticals like power and AI, how do you view the available capacity of your technology portfolio to ramp up and expand your presence in these markets over the next several years? How much room do you have for organic growth or bolt-on targeting these high-growth verticals?

We’ve been actively collaborating with major players in the data center space globally to assess the necessary capacity for our products. This exemplifies how our extensive global footprint aids us in partnering with customers in the regions they need us in. In certain instances, we can add shifts to ramp capacity, while in other cases, there are other capacity increases required. However, these needs won’t necessitate significant expenses or investments with high returns. We’re constantly evaluating to ensure we stay a bit ahead for timely delivery and quality service.

As we are sitting at the bottom of the cycle, how do you feel about the ramp over the next several years, specifically regarding labor availability, the need to train labor, and any inefficiencies as we transition from several years of stagnation to actual growth?

We rely heavily on our Parker Lean System tools and our Kaizen culture for achieving efficiency improvements. Through our approach with Kaizen and working with our teams, we establish how production lines and assembly cells operate at different volumes and what that requires in terms of labor flexibility or adjustments in factory locations. In many cases, this has allowed us to manage without adding to our team. However, we're prepared to onboard and train new team members if needed. We invest significant effort into those initiatives, and I believe we have robust training programs in place, so I feel we’re in a solid position.

We did increase our CapEx forecast for the year, which is higher than our historical norms. Much of this is directed toward automation, safety-related items, and capacity in certain regions where necessary. We’re being thoughtful and preparing for growth.

We'll take our next question from Nicole DeBlase with Deutsche Bank.

Circling back to the very impressive Aerospace margin performance this quarter. If we look at what you’re forecasting for the rest of the year, there may be a bit of a step-down from 30%. I know it was a strong result, but is that simply due to the spare shipments mix?

Yes, spares are hard to forecast. That would be the largest component of it. For Q2, we have margins set at 29.1% for Aerospace, a 90 basis point increase year-on-year and, of course, higher than our initial guidance.

That makes sense. The incremental bumping up to 40% is also quite impressive. I know you had previously targeted longer-term 35% in your longer-term forecasts. Could this annual year be a new baseline, and are you comfortably exceeding that expectation? Or are there any factors related to mix or discretionary costs that might need to be accounted for?

I'm glad to see those incrementals; they’re indeed impressive. As you know, achieving those isn’t simple, as there's extensive work taking place globally to realize these results. Incrementals depend on the sales growth trajectory, but we’ve actually seen our margins and EBITDA expand quite significantly. However, we’re not ready to change that guidance just yet.

We'll take our next question from Brett Linzey with Mizuho.

On construction, you noted gradual recoveries— is this primarily the MRO aspect of that business, or are you beginning to see load-in from OEMs as they're experiencing some dealer increases?

I think it’s both.

And regarding the fiscal '29 target for adjusted operating margin, the target was 27%. The top of your guide this year is also 27%, suggesting you might hit it 3 years early. Should we view this year as a new baseline, with the expectation that you’re comfortably above this moving forward? Or is there something related to mix or discretionary expenses that might bring it back?

We’re pleased to see what our team was able to achieve in Q1 and happy to increase our organic growth forecast from 3% to 4%. We still have some markets that need to recover. Our current guidance reflects what we see at this time. It’s worth noting that this 27% adjusted operating margin was achieved due to the hard work of our team, but as a reminder, the FY '29 target encompasses more than just adjusted operating margin. We still have work ahead of us, but we're confident we'll get there.

We'll take our final question from Nigel Coe with Wolfe Research.

I have many questions, but I'd like to revisit the Aero margins. Is there a way to distinguish the margins from the legacy Parker Aero and Meggitt? Furthermore, I’m trying to understand how much more runway exists to optimize Meggitt margins?

The integration has progressed excellently. We've embedded Meggitt into our Parker operational strategy so well that it’s challenging to differentiate between the legacy margins and those from Meggitt. A lot of our estimated synergies have emerged from across the group. Currently, we consider it all part of Parker Aerospace, as our teams are excelling on the 30% margin front for the first time.

That’s the right answer. Now with power generation—Jenny, you indicated that roughly half of that 7% is in power generation, and I’d like to know how soon you might consider breaking it out as a separate reportable subsegment. It appears to have reached a size comparable to HVAC. Any additional insights you can share about your exposure in that area, such as heavy-duty versus smaller gas turbines?

We don’t evaluate the percentage on market verticals for deciding when to break out subsegments. At this moment, we don’t have a figure in mind for it becoming its own market vertical. While we are excited about power generation's future, we think energy should encompass all types of energy altogether. Thus, we don't have plans to break it out yet. If you have follow-up questions, you may reach out to Jeff.

Thank you for your participation. This concludes today's call. We appreciate your participation. You may disconnect at any time, and have a wonderful afternoon.