Earnings Call Transcript - PH Q2 2024

Operator, Operator

Greetings, and welcome to the Parker-Hannifin Fiscal 2024 Second 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.

Todd Leombruno, CFO

Well, thank you, Diego, and good morning, everyone. Welcome to Parker-Hannifin's fiscal year 2024 second quarter earnings release webcast. As Diego said, this is Todd Leombruno, Chief Financial Officer speaking. And I'm here today with our Chairman and Chief Executive Officer, Jenny Parmentier. We know that this is an extremely busy day for everyone, and we appreciate you joining us, and we appreciate your interest in Parker. On Slide 2, you'll see our disclosures addressing forward-looking projections and non-GAAP financial measures. Actual results could vary from our forecast based on the items listed here. Our press release, this presentation and reconciliations for all non-GAAP financial measures were released this morning and are available under the Investors section at parker.com. The agenda for today is Jenny starting with the highlights of our record second quarter. She's also going to reinforce how our portfolio, our team members and the Win Strategy, our business system, are driving margin expansion and position Parker for a very bright future. I'm going to add some color on the financial results and a few details on the increase to our guidance that we released this morning. And after that, we're going to open up the lines, and Jenny and I will take any questions from those in the queue. I now ask you to move to Slide 3. And Jenny, I'll turn it over to you.

Jennifer Parmentier, CEO

Thank you, Todd. Good morning to everyone, and thank you for joining our call today. Q2 was a quarter of exceptional results, excellent operating performance driven by all of our team members executing the Win Strategy. Starting with safety. A 16% reduction in recordable incidents over prior Q2. Safety has been and will remain our top priority. Record sales of $4.8 billion in the quarter, a 3% increase over prior year, with organic growth of 3%. Record adjusted segment operating margin of 24.5%, a 300 basis point increase over prior year, with all segments expanding margins. And adjusted EPS growth of 29%, along with 11.9% year-to-date free cash flow margin. Aerospace strength was a significant driver of our performance in the quarter. We now expect to achieve $200 million in cumulative synergies in fiscal year '24, a $50 million increase to our original guide for this fiscal year. We remain committed to achieving $300 million in synergies by fiscal year '26. And our backlog remains resilient at $10.8 billion. We had a strong finish to the first half and, as a result, are increasing fiscal year '24 guidance, Todd will go over this later in the slide deck. Next slide, please. I'd like to spend a few minutes highlighting the power of the entire Parker portfolio. We have a technology powerhouse of interconnected solutions that delivers value for customers in both Aerospace and Industrial markets. Today, two-thirds of our revenue comes from customers who buy four or more of the technologies you see across the top of this page. And two-thirds of our portfolio product solutions that we have today enables clean technologies. Next slide, please. Parker has significant content on leading Aerospace programs. We have a comprehensive product offering with proprietary design on premier programs. On the upper left-hand side of this page is our first half sales mix by application. You see a nice balance of commercial and military, as well as business jets, regional transport and helicopters. This diverse aerospace and defense exposure allows us to have multiple products and technologies on every major aircraft program globally, many of them seen along the bottom of this page. All of this adds up to be a compelling value proposition for all of our aerospace customers. Next slide, please. And equally compelling is our global distribution network, a competitive differentiator for Parker. Fifty percent of our diversified Industrial revenue is through distribution, a high-margin channel serving aftermarket and small- to medium-sized OEMs. Our distribution partners integrate Parker technologies that solve customer problems. They are truly an extension of Parker's sales and engineering teams. Building on the success of the North American distribution channel, we continue to drive an increasing revenue mix of 100 basis points per year in international markets. This past December, we held our North America national sales meeting for the first time since the pandemic. Nearly 100 distribution partners attended the meeting, along with Parker divisions and sales teams. It was great to have everyone together again. And despite the destocking we've been talking about for several quarters, the overall sentiment and tone was very positive for the future. Next slide, please. We continue to be very proud of our margin expansion progress. Our people, our business system, the Win Strategy, and our portfolio have truly transformed Parker's performance. The progress can be seen in every segment on this page. In addition to our core strategies on lean pricing and procurement, Win 3.0 initiatives like Simple by Design, our focus on demand forecasting, zero defects, and productivity and automation will take us to 25% adjusted operating margin and beyond. Every strategy and tool in the Win Strategy expands the margins. I'll now turn it back to Todd.

Todd Leombruno, CFO

Thank you, Jenny. I will begin with Slide 9 to quickly review the financial summary for the second quarter of FY '24. As Jenny mentioned, this was an exceptional quarter for us, marking a strong conclusion to the first half of our fiscal year. The team accomplished numerous records this quarter, and every figure in the gold column of this slide represents a second quarter record. We achieved new highs in sales, segment operating margin, EBITDA margin, net income, and earnings per share. Total sales growth for the quarter was 3% and entirely organic. Notably, this is the first full quarter with Meggitt included in both current and previous year periods. The effects of divestitures and currency fluctuations largely balanced each other out, with divestitures having a slight negative impact of 0.3% and currency providing a slight positive impact of 0.5%. Regarding margins, as Jenny mentioned, the 24.5% margin reflects a 300 basis point increase compared to the previous year, while the adjusted EBITDA margin reached 25.7%, which is a 330 basis point increase year-over-year. Our adjusted net income was $802 million, equating to a 16.6% return on sales, and represented a 30% year-over-year increase. Adjusted earnings per share reached a record of $6.15, a 29% increase from the prior year. This was indeed an outstanding second quarter with remarkable margin expansion, consistent across all our business segments, as Jenny mentioned on the last slide. Moving to Slide 10, the earnings per share bridge illustrates the high quality of this quarter. The 29% increase in adjusted earnings per share translated to an additional $1.39 in earnings per share for the quarter, primarily driven by strong operating performance. Segment operating income increased by $173 million in this quarter, contributing just over $1 of the EPS growth and accounting for 74% of the increase in earnings per share. Aerospace Systems significantly contributed to this improvement, but both Industrial businesses also aided the rise in segment operating income dollars. The tax impact was favorable by $0.18 compared to the prior year, mainly from specific discrete items. Additionally, other expenses benefited by $0.12 compared to the previous year, attributed to currency shifts and favorable pension expenses. We saw a $0.10 favorable change in interest expenses due to our successful efforts to reduce outstanding debt over the last year. Corporate G&A and share count slightly increased by a net of $0.03 compared to the previous year. These components contributed to the rise in adjusted earnings per share, showcasing strong margin performance across the company and excellent results from the Meggitt business. If you move to Slide 11, we can review segment performance. I’m extremely proud of the widespread margin expansion driven by our Win Strategy. Jenny has noted that our synergies are progressing ahead of schedule, and we've increased that synergy target. Aerospace demand remains strong, reflecting consistent execution across our business and global teams. The segment operating margin is documented at 24.5%, showing a 300 basis point increase. Our incremental performance exceeded 100%, with orders up 2% compared to the previous year, and our backlog remains strong, showing slight sequential growth. Jenny noted that total backlog is near record levels, with aerospace activity looking particularly robust. In North America, sales volume hit $2.1 billion in the quarter, though organic growth declined by 1.5% compared to the previous year due to continued destocking, channel rebalancing, and softness in off-highway markets. Nevertheless, the North American team achieved a record adjusted operating margin of 24.2%, a 240 basis point increase, driven by excellent execution and tight cost controls. Orders in North America remained stable compared to the previous quarter, at a decline of 4%. International sales reached $1.4 billion, showing slight positive movement compared to the prior year. Organic growth was flat, which was better than our prior forecasts, with EMEA growing at 0.7%, Latin America at 9.2%, and Asia Pacific down slightly at 2.5%, impacted by underwhelming recovery in China. Adjusted operating margins in international businesses improved by 110 basis points to a second quarter record of 23%. The international team remains focused on productivity and margin expansion, demonstrating resilience even in a low-growth environment. It’s noteworthy that orders in the international segment improved from a decline of 8% last quarter to a decline of 5%. Lastly, Aerospace Systems had another impressive quarter, with sales surging to $1.3 billion, a 15% organic increase. This growth was largely attributed to a 25% rise in commercial aftermarket activities. Operating margins improved significantly, by 590 basis points, to reach 26.5%. Healthy volume, a favorable aftermarket mix, and outstanding performance from the Meggitt business were pivotal in achieving these record margins. We are increasing our synergy target from $150 million to $200 million. Order rates in aerospace also remain strong, up 21%. Now let's turn to cash flow. Year-to-date cash flow from operations is $1.4 billion, representing 14% of sales and reflecting a 26% increase from the previous year, highlighting our excellent cash flow performance. Free cash flow stands at $1.1 billion, up 11.9%, also indicating significant growth, with a 29% increase from last year. Our cash flow conversion year-to-date is at 86%. The team is dedicated to being effective cash generators and deployers, as reiterated many times. Recently, our Board approved a quarterly dividend of $1.48 per share, marking our 295th consecutive dividend. This consistency demonstrates our confidence in generating and deploying cash effectively. For the full year, we have raised our free cash flow expectations to a range of $2.8 billion to $3.1 billion, with the midpoint increasing by $150 million to roughly $3 billion. We anticipate over 100% free cash flow conversion for the year. Moving on, concerning deleveraging, we reduced debt by another $400 million in the quarter. Since the closure of Meggitt five quarters ago, we have reduced debt by over $2.2 billion and improved our leverage by 1.4 times, both exceeding our initial commitments. Currently, our gross debt to adjusted EBITDA stands at 2.4 times, and net debt to adjusted EBITDA is at 2.3 times. We project approximately $2 billion in debt reduction for the fiscal year and aim for a net leverage of 2.0 times by June 2024 based on our year-to-date performance. Excellent results all around. Now, regarding guidance, we've made several updates. We’re reaffirming our organic growth midpoint for the full year and increasing our margin and earnings per share expectations. Reported sales growth is now projected to be between 3% and 5%, with an approximate midpoint of 4%, distributed at 49% for the first half and 51% for the second half. On organic growth, we are raising the aerospace organic growth midpoint by 200 basis points to 12%. The international organic growth midpoint has also been increased by 100 basis points to -2%, slightly better than last quarter's forecast. These improvements are somewhat offset by a decrease in North American organic growth midpoint of 200 basis points to -1.5%. Full year organic growth for the entire company remains steady at 1.5%. Regarding margins, we are raising our adjusted segment operating margin guidance to 24.3% at the midpoint, representing a 70 basis point increase from previous guidance. Year-over-year, this signifies a 140 basis point margin expansion compared to the previous year. We've discussed Meggitt synergies, increasing that target to $200 million. Corporate G&A, interest, and other factors are largely unchanged from our previous guidance. We are making slight adjustments to the tax rate, anticipating it to be 22.5% for the full year based on first-half performance, with an expectation of 23.7% for the second half. The full year as-reported earnings per share has risen to $20.30, and the fully adjusted earnings per share increased to $24.20, both at the midpoint. For FY '24 Q3, we expect adjusted earnings per share to land at $6.00 at the midpoint. We’ve included additional specifics in the appendix. That concludes the updates on our guidance. Jenny, I will now turn it back to you and ask everyone to move to Slide 15.

Jennifer Parmentier, CEO

Thank you, Todd. A few key messages to close this out. Q2, as we stated many times, was an exceptional quarter that closed a strong first half. We'll continue to drive positive results and accelerate our performance using the Win Strategy. Our portfolio and strengthened customer value proposition, along with growth from secular trends, will deliver organic growth of 4% to 6% over the cycle. We remain committed to our FY '27 targets of approximately $30 earnings per share and greater than $3.5 billion free cash flow. We expect another year of record performance, and we have a very promising future ahead of us. We look forward to talking to you about our promising future at our investor meeting on May 16 of this year. Back to you, Todd?

Todd Leombruno, CFO

Okay. Diego, we are ready to open the lines for Q&A, and we'll take whoever is first in the queue.

Operator, Operator

Our first question comes from Joe Ritchie with Goldman Sachs.

Joseph Ritchie, Analyst

Great quarter. The first place I'd like to start is just around North America. So clearly, good color, Todd, and what the guidance now implies. But it looks like your order rates are at least stabilizing there, even though you took down the growth guidance for the year. So maybe just talk a little bit about what you're seeing across those end markets and whether you're seeing any stabilization or green shoots on your North America Industrial business?

Jennifer Parmentier, CEO

Sure, Joe. This is Jenny. So yes, we did see, as Todd said, a negative 1.5% of organic decline in Q2. We've had four consecutive quarters with negative orders now, but as Todd stated, the orders did remain the same as last quarter at minus 4%. What I would say is that destocking in the channel continued. We saw weakness in off-highway, primarily construction, in Q2, some weakness in transportation and automotive and in heavy duty. We did talk last quarter about this inventory rebalancing and destocking, not only through distribution, but also at the OEM level with customers, dealerships, and that we did anticipate this to go into calendar year '24. So I would say, overall, destocking is in line with our expectation for Q2, but North America was just a little worse. It's been a year since it started, and it's going to continue into the second half here. And that's what we have in the guide. But backlog remains strong. We had this longer horizon of backlog strength. And I would say that, as I mentioned earlier, distribution sentiment is very positive. We haven't seen any major cancellations or pushouts out there right now. So we lowered the guide, the 2.5% on this continued destocking, and the softer off-highway we think was going to continue. We see it will be construction again and ag too this quarter. But we're feeling good about this guide right now.

Todd Leombruno, CFO

Joe, this is Todd. I would just add. If you look at the total Industrial business, right? In total, it kind of came in exactly as we were expecting. You're exactly right, there was a little bit of a shift from North America into the international markets. But when you look at total reported sales, at least what we're guiding to, these are really very, very close to all-time highs when it comes to volumes. So we feel really good about that. We think we can continue to expand margins despite what's going on with the choppiness in the order market. So we feel really good about that.

Joseph Ritchie, Analyst

Yes. That's great color from both of you. I guess my quick follow-on there is, look, the margin performance, despite the kind of weaker growth expectations in North America and really across your Industrial businesses, has been incredible. Last couple of quarters, you're above 24%. So I guess the question is like, is 24% kind of a new baseline for the Industrial businesses going forward?

Todd Leombruno, CFO

Joe, it's a great question. Like I said in the comments, I couldn't be prouder of the team. We talk about this all the time, the Win Strategy. Every single item on that win strategy is a margin-enhancing set of tools. And it really is rewarding to see the team put up numbers like that. We have a target set out there. We want the company to be at 25% segment operating margin. We have not achieved that yet. We will achieve that, there is no doubt. But we're just keeping an eye on what's happening with the top line. And obviously, we're doing everything we can within the walls of our facilities to make sure that we keep pushing that number higher.

Jennifer Parmentier, CEO

And Joe, I would just add that our culture focuses on continuous improvement. We're not waiting for a downturn; we are actively using the tools in the Win Strategy to enhance our margins. I must echo Todd's comments that we couldn't be prouder of the team. They are doing an excellent job even in a slower growth environment, and we expect this to continue.

Operator, Operator

Our next question comes from Julian Mitchell with Barclays.

Julian Mitchell, Analyst

Maybe just wanted to understand on the international business in Industrial. Orders have been down, I think, for five quarters now. You slightly took up the sales guide. What's your impression of sort of where we are in that orders downturn? Maybe help us understand sort of what on the revenue side changed a little bit. And are we thinking it's sort of a very gradual, maybe we find a floor in the next couple of quarters and then a very gradual recovery thereafter across those main regions in international?

Jennifer Parmentier, CEO

Thanks, Julian. This is Jenny. We have experienced choppy conditions in international for several quarters, resulting in flat organic growth in Q2. As Todd mentioned, orders improved from a decline of 8% in Q1 to a decline of 5% in Q2. Europe and EMEA saw positive organic growth of 0.7%, which exceeded our expectations, largely due to resilience in our filtration business and favorable project timing. However, we continued to see destocking and some softness in off-highway and industrial markets. In the Asia Pacific region, Todd noted a 2.5% organic decline, with the recovery in China still being slow. We did observe slight positive growth in China in Q2, but this was against an easier comparison from last year’s COVID shutdown. Off-highway construction remains weak in Asia Pacific, although India continues to be a bright spot. Looking ahead, full-year organic growth improved by 100 basis points due to the strength in Q2 and an uptick in orders from Asia Pacific. We expect destocking in Europe to persist and the softness in off-highway and industrial markets to continue. The recovery in China is still slow, but our team is effectively managing costs and maintaining margin performance in that region. Japan and Korea remain soft in the semiconductor sector, while Southeast Asia and India currently show promising signs.

Julian Mitchell, Analyst

That's helpful. And then just my follow-up on Aerospace Systems. Maybe help us understand sort of, is it more volume or price perhaps in commercial that drove the revenue guide uplift for aero? And on the synergies point, it came in with a much stronger margin than I think people were expecting for the second quarter, in Aerospace. Maybe help us understand kind of any bucket of those synergies that's coming in ahead of plan?

Todd Leombruno, CFO

Yes, Julian, this is Todd. I'll begin with the increase in revenue, which clearly shows strong demand across all sectors of the Aerospace business. We achieved 15% organic growth this quarter, providing us the confidence to raise our expectations for the second half. This has been a significant advantage. Within the business, the mix is at 47% aftermarket, which was higher than our forecast and contributed to margin expansion. We've been discussing Meggitt and our base Aerospace business for a year now. While volume certainly helps, it’s really the team's efforts to improve efficiency that are key. The aerospace supply chain remains somewhat unpredictable, but the team has begun to perform well in a more stable environment. That’s what gives us confidence in the Aerospace sector.

Jennifer Parmentier, CEO

Yes. We've obviously, with pulling the synergies ahead, we've had some great performance by the team. We've done a really nice job delayering the organization and getting it into the Parker division structure. And now we're really starting to see the benefits of implementing the Win Strategy. So the team is really doing a nice job. And as Todd said, we expect this to continue. Volume always helps.

Operator, Operator

Our next question comes from Scott Davis with Melius Research.

Scott Davis, Analyst

I have a nuanced question, and I hope it’s not too strange, but your gross margin has significantly increased, right? Before COVID, it was around 25%, and now it's over 35%. Operating margins have improved by roughly 500 basis points in the same period. In terms of future margin improvements, do you expect more growth to come from gross margin or from SG&A leverage? Or do you think it will be a balanced approach? I find it intriguing because it seems there could be potential for operating margins to exceed what you’ve presented today.

Todd Leombruno, CFO

Yes, Scott, it's a great question. It's something we look at intensely across the organization. I think there's upside on both areas, to be totally honest with you. But you're right. If you look at what we've done, and it depends on if you're looking at the as-reported gross margin number, there is a lot of noise in there from the purchase accounting transactions over the last year. But this quarter was fairly clean. So I expect it to stay at the high levels it was at this quarter and obviously improve from there. We are constantly looking at SG&A and reinventing ourselves everywhere that we do business. So I really do think that there is potential in both areas.

Jennifer Parmentier, CEO

Yes. I'll just pile on a little bit there. The Win Strategy tools apply to the entire business, right? So I agree with Todd to be in both places. And I mentioned earlier some of the Win Strategy initiatives that came with 3.0. And you look at Simple by Design, just yielding benefits everywhere up and down. And then some of the initiatives that we have around demand forecasting, allowing us to better analyze demand, better staff our factories, really be able to serve the customer better, really reduce our overall cost of service to the customers. So that's really a plus. And then our Zero Defect initiative. A lot of activity around producing a product 100% quality the first time, and that's a lot of cost reduction there. So just a lot of tools in our toolbox to continue to expand margins. And a lot of nice work done across the board by all the teams. The high-performance team structure really lends itself to improvements throughout the whole organization. So it's not going to be in just one area, it'll be across the board.

Operator, Operator

Our next question comes from Nicole DeBlase with Deutsche Bank.

Nicole DeBlase, Analyst

Just maybe starting with the cadence of EPS through the year. I think just looking back at normal seasonality, do you typically see like a step-up in the second half from either the first half or 2Q, however you want to look at it? I mean what are the key puts and takes you're embedding more of like a step down at the midpoint this year?

Todd Leombruno, CFO

Nicole, that's a great question. We looked at that a lot as we put this guidance together. What I like about the guide is the EPS is evenly split now first half, second half, it's 50-50, so there's no big ramp in the second half that should be concerning. I would call out that Q1 and Q2, obviously, those were both record numbers when it comes to EPS. So I think that's a little bit of the driver there. Aerospace business remains strong. We have no concerns about that business whatsoever. But we did see some softness in the North American businesses. And obviously, international got a little bit better, but it's still a little choppiness out there. So that's really the elements that went into our guide. If you look at both of those quarters and really the second half of the year, I mean, we really are still guiding at the record levels of earnings per share.

Nicole DeBlase, Analyst

Totally understood. And then just going back to some of the order trends. You guys gave really good color around the international revenues that you saw. But what actually improved sequentially in the orders going from the down 8% to the down 5% in 2Q?

Jennifer Parmentier, CEO

Asia Pacific orders improved in the quarter.

Operator, Operator

Next question comes from Nathan Jones with Stifel.

Nathan Jones, Analyst

I'm going to start off on capital allocation. Now that the balance sheet is in a much better order post paying down a lot of the debt of Meggitt, being back to maybe around 2x net leverage at the end of 2024, can you talk about your willingness to get back into the M&A market? We're in a bit of a different interest rate environment than we were when you bought Meggitt. You went up to a little over 3.5x of leverage to buy that. What your appetite is for potentially levering up given the different interest rate environment and priorities for debt versus M&A?

Jennifer Parmentier, CEO

Thank you, Nathan. This is Jenny. Well, first of all, as we've said, debt paydown is our number one priority. But as Todd mentioned, we are ahead of schedule for achieving around that 2.0x number by the end of this fiscal year. One thing I would say is that we never let the pipeline go dry. We're always working the pipeline. We've built a lot of relationships over the years. That's how we've wound up with these great companies in our portfolio. And we continue to do that. We have to have the right deal. It has to be the right property out there. We still want to be the consolidator of choice. We like all of our eight technologies. We do see an opportunity to build on the entire portfolio. We want that to be driven by secular trends and longer cycle, faster-growing, more resilient businesses. And we wanted to be accretive to margins, to EPS, to cash flow. So we'll keep this pipeline going. And we'll be looking for that right deal.

Nathan Jones, Analyst

I mean, would you be willing to do something like 3.5x of leverage and then delever after that, again, given the change in the interest rate environment as a lower number kind of your feeling these days given the interest rate environment?

Todd Leombruno, CFO

Nathan, this is Todd. I'll respond to that. We're not aiming for anything more than what we've already accomplished. Jenny articulated it well; our focus is on ensuring we make the right deal for the company and our shareholders. We've demonstrated our ability to reduce debt quickly and generate cash like never before. Our deal structure has provided us with the necessary flexibility in this regard. While we wouldn't shy away from pursuing something similar to our previous deals, we also don't feel the need to proceed unless the opportunity arises.

Operator, Operator

Our next question comes from Mig Dobre with Baird.

Mircea Dobre, Analyst

All right. Just a follow-up on that discussion with Nathan. When you're approaching M&A at this point, first, are you sort of just looking at the eight technologies that you currently have in your portfolio? Or are you willing to look more broadly beyond that? And also, how do you sort of think about your specific vertical or end-market exposure? You've done some sizable things obviously in Aerospace. Is that still an area that you're looking at? Or are you, frankly, willing to look to further diversify your portfolio beyond the end-markets that you currently have exposure to?

Jennifer Parmentier, CEO

We like the eight core technologies. We think that that is where we do really well. We don't have a specific Aerospace mix number that we target. Right now, we have a nice balance between the segments. But we're going to continue to keep growing the Industrial business as well. So we're going to be looking at the markets that we know, customers that we know, and technologies that we're familiar with. So that's our current focus.

Todd Leombruno, CFO

And I would just add, you're right, we have expanded the Aerospace exposure pretty significantly. But those are the same technologies that we have throughout the entire company. So they just happen to be in Aerospace end-markets. The applications are part of those eight technologies. So that's why we like those eight technologies.

Mircea Dobre, Analyst

Understood. And then I know a lot of people asked about margins, I guess I'll ask one as well. The performance in Industrial really kind of stood out to me, given everything that's going on in those end markets. And I'm sort of curious as to what are you effectively doing there? Is this margin expansion that we're seeing more of a cost mitigation and an environment in which the volumes are, frankly, not that great? Or is there something more structural in nature? If we see reacceleration, for instance, in fiscal '25, should we assume normal incremental margins at that point on this base? Or will some of these costs that you're taking out eventually come back with volume?

Jennifer Parmentier, CEO

I think we can expect to see normal incremental margins with an acceleration. This aligns with a lot of what we've discussed this morning. The Win Strategy is proving effective across all our businesses, and our teams are excelling with some of our legacy tools in lean and supply chain, as well as newer initiatives aimed at reducing costs. This positive trend will continue in the Industrial business. We've mentioned several times that Win Strategy 3.0 still has opportunities for further growth, and we will continue to expand margins.

Operator, Operator

Our next question comes from Andrew Obin with Bank of America.

Andrew Obin, Analyst

I apologize for the confusion earlier. Just a question on pricing and inflation. I guess our channel work suggests that, just generally, fluid power pricing is running higher, I think, than we would have expected. In the new calendar year, what are your expectations? How your expectations about pricing are evolving? Any change to your framework? And what does it say about sort of just general inflationary environment for the industrials?

Jennifer Parmentier, CEO

So Andrew, this is Jenny. I want to remind you that we took early action on pricing during the significant inflationary period over the past couple of years. We are now back to our regular pricing schedule of January and July. I would characterize the recent increase as quite modest and not significantly higher for fluid power. Looking ahead, we anticipate maintaining this approach unless there are major changes. While we are still facing inflationary pressures, some cost drivers will not revert. This is our perspective moving forward, and we will continue to utilize the pricing strategies we have always employed.

Andrew Obin, Analyst

Got you. And just a follow-up, I think, on Meggitt synergies. I guess, just to clarify, you've raised the synergies from $150 million to $200 million cumulative. So should we think about it as a pull forward? Or is the $300 million target going higher because, clearly, Meggitt has been a big success for you, but just to understand what the formal framework is?

Jennifer Parmentier, CEO

Consider it a pull forward. We originally said $75 million for this fiscal year. Now it's going to be that $50 million higher. So we're in a good position here. We remain committed to the $300 million by FY '26. We're just realizing some of that sooner.

Todd Leombruno, CFO

Diego, I'm being told that, that was the last question in the queue. So unless you see anything different, we will wrap up just a little bit early. I know it's a busy day out there for everyone. If you do need any follow-ups, Jeff Miller, our VP of Investor Relations; and Yan Huo, our Director of Investor Relations, certainly, will be available if you need any follow-ups. And as always, we appreciate your attention. Thank you for your support of Parker. And I hope everyone has a great day. Thanks.

Operator, Operator

Thank you. And that concludes today's conference. All parties may now disconnect. Have a great day.