Earnings Call Transcript - PH Q4 2022

Operator, Operator

Good day, and thank you for standing by. Welcome to the Parker-Hannifin Fiscal 2022 Fourth Quarter and Full Year Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Todd Leombruno, Chief Financial Officer. Please go ahead.

Todd Leombruno, CFO

Thank you, Carmen. Good morning, everyone, and thank you for joining Parker's fiscal year 2022 Q4 earnings release webcast. As Carmen said, this is Todd Leombruno, Chief Financial Officer speaking. And as usual, with me today are Tom Williams, Chairman and Chief Executive Officer; and Lee Banks, Vice Chairman and President. Today, our discussion will address forward projections and non-GAAP financial measures. Slide 2 of the presentation provides details to our disclosure statement in these areas. Actual results may differ from our projections due to uncertainties listed in these forward-looking statements and detailed in our SEC filings. Reconciliations for all non-GAAP measures, along with this presentation, have been made available under the Investors section at parker.com and will remain available for one year. In respect to the Meggitt transaction, while we expect this transaction to close in the fiscal year 2023, that's our current quarter, we are still bound by the requirements of the UK Takeover Code in respect to discussing certain details. We do plan to hold an investor call shortly after the close to provide expanded color on the transaction once the regulations allow. For the call today, we will start with Tom discussing the fourth quarter and our fiscal year 2022 full year results. And I'll follow with a brief financial summary and review some of the assumptions around our initial fiscal 2023 guidance that we issued this morning. After that, we'll finish the call with the Q&A section for any questions you have for Tom, Lee, or myself. So with that, Tom, I'll turn it over to you and ask everyone to refer to Slide number 3.

Tom Williams, Chairman and CEO

Thank you, Todd, and good morning, everybody, and let me welcome everybody as well to the call. Starting with Slide 3, we had a great quarter. It was absolutely a dynamite record performance, great execution by the team around the world. The first two bullets really drove our success. Safety has always been our top priority. We're leveraging high-performance teams. Think of that as how we are organized around the world and how we engage and involve our people. Lean is how we run the factories, and Kaizen is our culture of continuous improvement in how we go about making things better. We also just conducted our 2022 engagement survey. We were able to capture over 90% participation of our people around the world, asked them questions around empowerment and engagement. And we got great results. We got results that put us in the top 8% of industrial companies. It's really these first two bullets driving an ownership culture within the company, driving an ownership of results, and our business performance. Going down to the third bullet, sales were $4.2 billion. It's an increase of 6% versus the prior year. Organic growth was 10% versus the prior year, with an excellent quarter organically. Segment operating margins were 20.9% as reported or 22.9% adjusted. So that's a 70 basis point increase from the prior year. This is really excellent margin expansion in light of all the challenges you're fully aware of: supply chain inefficiencies, inflation, and of course, the China COVID lockdowns. Just really outstanding performance in a very difficult environment. Lots of records, and my thanks to the global team for all their hard work. If we move to Slide 4, talking about the full year, it came in at $15.9 billion in sales, a 12% organic growth versus the prior year. So a really big year for us organically. Record segment operating margin, 20.1% as reported or 22.3% adjusted. That was a 120 basis point improvement from the prior year. It really speaks to the robustness and agility of our business model. Operating cash flow was $2.4 billion, which represented 15.4% of sales. So a mid-teens CFOA with growing sales, which was very commendable. Of course, all of you hopefully are aware we announced our FY '27 targets on the March Investor Day, and I'll just summarize it: bigger growth, bigger margins, bigger cash flow targets, and we're confident in our ability to get there in the future. So a transformed company with a promising future. What drives us is on Slide 5. It's what's been driving us in the past and will drive us in the future. First is living up to our purpose, enabling engineering breakthroughs that lead to a better tomorrow, being great generators of cash as evidenced by the mid-teens CFOA that you saw, and being great deployers of cash by our pending Meggitt acquisition. Then being a top quartile company, it's how we perform versus our peers. This leads to Slide 6, which I'd like to show. This slide is updated now for FY '22 numbers, and the reason for showing it is objective evidence that our company is significantly different, significantly better than it's been in the past. On the left-hand side is adjusted EPS, and on the right-hand side is adjusted EBITDA margin. I think the pace of improvement speaks for itself. You can look at this chart; everything is moving high and to the right, and it's really great progress. In particular, if you look at '21 versus '22 on EPS, going from $15.04 to $18.72, that's a gain of $3.68. It's the largest year-over-year dollar gain we've had on EPS in the history of the company. So it was a 24% improvement. On the right-hand side, almost 800 basis points of EBITDA margin improvement, which is fantastic. If you look at these two improvement trends side by side, arguably the most improved industrial company out there over this time period, and I hope for the shareholders, a great company to invest in as well. Going to Slide 7, I like the picture here, we're trying to symbolize that we're coming in for a landing here on Meggitt. We're close to the end. We expect to close sometime in Q1, our current quarter FY '23. The only remaining regulatory approval is the U.S. Department of Justice, which we expect to complete sometime this quarter. Following the U.S. DOJ, it's customary to go to court in the UK to get final approval, which we expect also in the current quarter. The timing here is perfect. We're adding a transformational acquisition, doubling aerospace at the beginning of a commercial aerospace recovery with the synergies in front of us to help us grow the top line and the bottom line. As Todd mentioned, we'll host a call after this closes to provide an update regarding Meggitt and our guidance. Moving to Slide 8, we're going to talk a lot in the Q&A about FY '23 sales guidance, I'm sure. But I wanted to highlight the future growth drivers that we talked about in the March Investor Day. These growth drivers remain intact. I will briefly walk you through the five columns that you see here. The first is our business system, the Win Strategy. It's about the things we can do ourselves to grow differently organically. It's about innovation, strategic positioning, distribution growth, and incentive plan changes that we're making to simplify design. Go to the next column, the CapEx changes that we expect over this time period; we believe this will be a very constructive time for industrials. There's going to be a need to invest in supply chain development, tool sourcing, and automation— all things that are going to be very helpful in targeting marker products regarding channel restocking, particularly referring to the distribution channel. It's improving, but there's still a long way to go. I believe our partners will probably be somewhat cautious as they add inventory. As we go out the next several years, they're clearly not at the inventory levels they would like to be, so that's additional tailwind. The acquisitions are transformational. They've reshaped the portfolio—doubling filtration, doubling engineered materials, and doubling our aerospace business once Meggitt closes, reshaping the portfolio to be much more longer cycle, accretive, and resilient. Our linkage to the secular trends around the world, including aerospace, digital, electrifications, and clean technologies, will all help us grow differently. So there's targeted organic growth by FY '27 of 4% to 6%. We believe industrials and Parker in particular will be a very attractive space over the upcoming years. With that, I'll turn it back to Todd to talk more about the quarter.

Todd Leombruno, CFO

Okay. Thanks, Tom. I'm going to start on Slide 10. This is just a year-over-year comparison of our Q4 financial results. As Tom said, I am really proud of our team members for delivering across-the-board record results against the backdrop of several continued global challenges. As Tom mentioned, the sales were up 6%. We did hit a record sales number of $4.2 billion in the quarter. Organic growth was double-digit at 10%. I think everyone is following these currency rates—the strong dollar drove currency headwinds for us. It was a minus 4% impact on sales. Our backlog remains healthy; it did increase 21% versus the prior year, and over 90% of our markets are in growth phase. We are very happy with that. Two markets worth noting: commercial aerospace and North American industrial markets are two that remain very robust. Adjusted segment operating margin was 22.9% for the quarter. That's a 70 basis point increase versus the prior year. Our adjusted EBITDA margin was 23.1%. That's a 100 basis point increase from the prior year in the quarter. Both of these margin numbers—segment operating and EBITDA margins—exited the year at the highest levels of our fiscal year. So we are really happy with the strong finish that the team put forth in Q4. When you move down to net income, adjusted net income was $671 million. That's a 16% ROS, which also happens to be a 60% improvement from the prior year. Again, I will note that due to the continued strengthening of the dollar, specifically versus the pound, we recorded a pretax noncash charge in the quarter for $619 million related to the Meggitt deal-contingent currency contracts. I want to remind everyone that we entered into these contracts really to eliminate the currency exchange rate risk associated with the purchase price of the Meggitt acquisition. The total expected U.S. dollar outlay related to the transaction, included in these contracts, is neutral to the transaction consideration we announced last year. Moving on to EPS, EPS was great at $5.16 on an adjusted basis. That is a record and an increase of $0.78 or 18% versus the prior year—really strong results there. I commend our team for the strong finish for the fiscal year. If you move to Slide 11, this is just a bridge detailing some elements of the $0.78 improvement. We generated 35% incremental margins, aided by our margin expansion, but more significantly, just very solid execution across every one of our businesses. Adjusted segment operating income increased by $80 million or 9% versus the same quarter last year. That accounts for over 60% or $0.47 of the EPS improvement we had in Q4. If you net corporate G&A, interest expense, and other, all that amounts to just $0.01 favorable. We did have a few discrete tax settlements in the quarter that drove a lower income tax expense, resulting in a $0.24 positive impact on EPS, and that was specifically in our fourth quarter. Finally, a slight reduction in the number of shares outstanding accounted for a favorable $0.06 to EPS. All in, that's the 18% increase in adjusted EPS or our $5.16. Moving to Slide 12, I'll talk a little bit about the segments. Across the board, we saw very strong performance here with 35% incremental margins. We increased segment operating income really across the board, and it's nice to see positive organic growth in every segment. That growth continues to be very broad-based. Orders for the total company ended up positive 3%. This performance comes against more challenging comparisons. The team remains agile in the current supply chain and inflationary environment. We are happy with our actions. It materialized in results in the financial statements, and we are proud of the ongoing effort. All of this gives us confidence in our performance that we will achieve our FY '27 targets that Tom mentioned, which we just announced back in March. If I jump into the businesses in North America, we saw very strong organic growth of 15% versus the prior year. Sales reached $2.1 billion, and adjusted operating margins increased 40 basis points. Our North American team achieved 22.9% ROS. We have been discussing this all year. They continue to manage well through a more difficult regional supply chain environment, so just kudos to them. Incrementals in this segment were about 25%. We are happy with that, considering all the headwinds. Orders continue to impress at plus 10%. In the North American segment, our backlog is up 50% versus the prior year and increased 5% sequentially from Q3. Moving on to international, international sales were $1.4 billion, with organic growth just above 5% for that segment. Organic growth in EMEA and Latin America was mid-teens positive with Asia Pacific experiencing mid-single digits negative. Obviously, that was driven by the shutdowns in China based on the COVID outbreak. Margins, if you look at them, were 22.4%, increasing 30 basis points from the prior year despite all those challenges. Tremendous effort from our Asia Pacific team deserves recognition. We forecasted a $100 million negative sales impact based on the shutdowns; however, the team outperformed our expectations, resulting in only a $50 million impact for the quarter, with a strong month in June. There was great overall performance by the international team. Looking at Aerospace, we had another strong quarter from Aerospace. This was the best organic growth and margin performance the segment had all year. Sales were $676 million, with organic growth around 8%. The operational margins increased by 260 basis points, finishing at an impressive 24.2%. Those Q4 margins benefited from a favorable aftermarket mix and lower-than-expected NRE expenses due to program timing. This represents a record margin performance for that segment, and I note that we are still below pre-COVID sales levels. We're pleased with the cost controls and execution in our aerospace business. A note on orders: Aerospace orders are showing flat. However, we did have some very significant military orders booked in Q2 of FY '22, making our 12-year comparisons difficult. Excluding those items, aerospace orders were positive by 24% for the quarter. The aerospace dollar orders continue to remain strong overall. Hence, segment performance has been very strong, and I'm proud of our teams. It really shows our strategy in action. If we jump to Slide 13, cash, we had an unbelievable cash flow generation quarter in Q4. It was stellar. We exceeded the forecast at Investor Day for both cash flow from operations and free cash flow by about $100 million for the full fiscal year. Tom mentioned this, but we generated $2.4 billion in cash flow from operations, which was 15.4% of sales. Free cash flow was $2.2 billion or 13.9% of sales. The conversion is an outstanding 168%. We have been managing working capital diligently throughout the year. As the year progressed, that use of working capital normalized across the company. The change in working capital this year was a 1.6% of sales use of cash. Last year, that was a 1.0% source of cash. Our teams are focused on generating top quartile cash flow performance, and we are confident we can achieve that FY '27 target of 16%. Just a few comments on leverage: at the end of the quarter, gross debt to EBITDA was 4.7, with net debt-to-EBITDA at 4.5. This increase from last quarter is a result of our issuance of $3.6 billion in bonds we will use to fund the Meggitt transaction. That cash is sitting in escrow and is on our balance sheet listed as restricted cash. Excluding that restricted cash, our net debt to EBITDA at the end of June was 2.0x. We are pleased with the reduction there. The spike is just a preparatory measure for the Meggitt transaction. Lastly, regarding our strong cash flow performance: we've already used $1.5 billion of cash generated this year to fund the Meggitt transaction. We are very satisfied with our position on that and are looking forward to closing and welcoming all team members into Parker-Hannifin. If we proceed to Slide 14, guidance, this includes some details on the guidance we released this morning. We are providing this on an as-reported and adjusted basis. While expecting that the Meggitt transaction to close in this quarter, we have not included any sales or earnings in our guidance number. However, we have provided color on the interest expense already committed for Q1. If you look at sales, reported sales growth for the year is forecasted at flat to 3%, with 1.5% positive at the midpoint. Organic growth is expected to be better than that at an anticipated 3.5% at the midpoint, with a range of 2% to 5%. We are using currency rates as of June 30 and forecast currency as a headwind this year, expected to impact sales by about 2% versus the prior year. It is typical for our sales split to be 48% in the first half and 52% in the second half. Moving on to segment operating margins, as reported, segment operating margin guidance is 20.4%. On an adjusted basis, that's 22.5%, with a range of 20 basis points on either side of that. The division of segment operating income splits as 47% first half and 53% second half. We forecast incremental margins to be 30% for the full year. For additional clarity on a few items: corporate G&A is expected to be $204 million in FY '23. The interest related to the legacy company—this excludes Meggitt interest—is expected to be $228 million. The Meggitt-related interest covering Q1 only is $42 million, or roughly $0.25 of EPS. We will provide an updated interest expense number once we schedule that update post close on Meggitt. Other income and expenses are expected to be $14 million, and any acquisition-related expenses associated with the Meggitt transaction will continue to be booked as incurred. We do expect the tax rate from continuing operations to be 23% next year, which is essentially what our continuing operations rate was this year. This does not include any discrete items that may be favorable or unfavorable. Finally, we expect a full year EPS on an as-reported basis to be $16.53 at the midpoint, or $18.50 adjusted, with a range on both figures of plus or minus $0.40. EPS is split 46% in the first half and 54% in the second half. A little color on Q1: we foresee Q1 adjusted EPS to be $4.13, right at the midpoint, with the adjustments primarily being related to acquired intangible asset amortization now at $300 million and expected business realignment charges of $35 million. We tried to provide a lot of detail here and hope it was helpful. Slide 15 might give a little bit more color; this is just the bridge highlighting the continued strength and demand across the board. Our productivity initiatives and expectations across all operations are expected to increase segment operating income year-over-year. The total is $0.49 EPS increase, noting that includes an estimated headwind of approximately $0.40 based on currency. In constant currency, that $0.49 would be $0.89, but we're incorporating that $0.40 currency headwind, resulting in a $0.49 increase in segment operating margin. Looking at corporate G&A, that legacy interest and other items are all forecasted to yield favorable results against last year, helping us by $0.09. The expected tax rate of $0.23 creates a $0.55 headwind compared to the lower tax rate from FY '22. Our FY '22 did have a higher-than-normal amount of discrete items we do not try to forecast. As previously mentioned, we've included that interest expense, the Q1 amount being $0.25 or $42 million, and have demonstrated how we walk from our FY '22 finish to legacy $18.75—which includes that $0.25 of Meggitt for an adjusted $18.50. With that, I'll turn it back to Todd and ask everyone to move to Slide 16.

Tom Williams, Chairman and CEO

Just to wrap things up before we open up Q&A, it was a record FY '22; probably easier to say it was not a record, with so many records to speak of. Despite our challenging environment, my congratulations go to the entire global team for a job well done. It's been our people, the portfolio changes, and changes we've made on the Win Strategy specifically on Strategy 3.0 that have driven almost 800 basis points of EBITDA margin expansion over this period. We're positioned to perform well in FY '23, and it's really because of the last three items you see on this page. The portfolio is dramatically different, reshaped from where it was past, with Meggitt closing in this quarter. Very few companies will be in a position to add a great company tied to future growth and synergies that we will be able to achieve. We are positioned for growth with the secular trends— aerospace, digital technology, clean tech, and electrification. Hopefully, you see in our numbers a transformed company with a promising future. I'll turn it over to Carmen to open the floor to Q&A.

Operator, Operator

[Operator Instructions] Our first question comes from Jeff Sprague with Vertical Research Partners.

Jeff Sprague, Analyst

I'm not sure if I'm going to cross any lines with this Meggitt question, but I'll just give it a try. They reported today, as I'm sure you well know. And they posted a 17% EBITDA margin. Just considering the trajectory from your slides last year, right? You had a mid-19% in 2019, dipping to 14% in 2020, clearly on the upswing now. Can you address whether their aggregate results are in line with your original deal case?

Tom Williams, Chairman and CEO

Jeff, it's Tom. Thank you for the question. Yes, we feel very good about Meggitt's results. They're actually growing faster than we had expected, faster than Parker Aerospace. They grew at 11% for the last six months, and their EBITDA held at 17%, as you mentioned. That trajectory, as we looked at it, indicated when they return to pre-COVID levels, that would put them into the 19% range, maybe better, and then include the $300 million of synergies. So they're still on track for when we combine the two companies to get that back to a 30% EBITDA for Meggitt. We feel very positive about what they're doing, and frankly, we can't wait to welcome them to the team.

Jeff Sprague, Analyst

Just then on this interest expense for Todd—just to be totally clear, this $0.25 or $42 million ties to the permanent financing you did, right? So once you close, obviously, there's going to be additional interest expense in the equation. It sounds like you're going to fine-tune that for us when you do close. But just to clarify.

Todd Leombruno, CFO

Yes, it's a good question. You're right. The majority of that $0.25 is related to the longer-term debt we issued, and there is a slice of some CP in there. But the vast majority is the bonds issued in peat. We will provide a full look at the financing and interest layout post close, and we'll fill in the rest of the quarters for the year on that.

Jeff Sprague, Analyst

Can I just sneak one more in? Are we still looking at kind of a $70 million gap, so to speak, between GAAP accounting and IFRS accounting as it relates to R&D and other items?

Todd Leombruno, CFO

Yes, Jeff, I think—I don't know if we can answer that right now. We're still kind of looking at that. Obviously, post close, that will be part of what we give color on.

Joe Ritchie, Analyst

Maybe I'll just start by parsing out a little more the guidance you just gave for Q1, the $4.13 number. Obviously, adjusted for the interest expense would have been around $4.38. Can you provide details on the trends you saw exiting the quarter and expectations for growth or margins for the core business in Q1?

Tom Williams, Chairman and CEO

Joe, it's Tom. I'll talk about Q1 but would like to lift it up to discuss the whole year as well since it goes hand in hand with our thinking. We always relish being one of the first companies to talk about calendar '23, but this forecast is probably more complex than others due to unprecedented actions taking effect that have unknown consequences. We have strong backlogs and resilient order entry. We are very pleased with the order entry shown for the quarter. We saw even for the international market being minus for the quarter, influenced by EMEA and Asia during June; we saw international orders come back nicely in July, reaching mid to upper single digits. Our guidance includes AI model inputs from divisions, customers, and distributors, and we see broad-based growth across almost all our end markets.

Todd Leombruno, CFO

Joe, I'll add some color on Q1. The additional interest expense you noted will factor in, but the tax rate is a major issue. If you look at our Q4 tax rate with discrete items, we are guiding to 23%. We recognize a higher amount of equity-based compensation in Q1 compared to Q4.

Scott Davis, Analyst

You're one of the few companies we cover that's generated cash flow this quarter, and you didn't seem to have many supply chain problems. Is there anything in the supply chain that we should call out as an issue?

Tom Williams, Chairman and CEO

Scott, it's Tom. The key reason we've performed better than most is due to our long-standing strategy of local-for-local. We have prioritized dual sourcing before it became a trend. This has clearly helped us weather the storm. Our team has done an excellent job scheduling their shops and working with suppliers. We've used lean techniques, and Kaizen has helped us perform better than our competitors. If I were to characterize the supply chain going forward, I would say we've stabilized. We're forecasting a gradual improvement. By the end of FY '23, it won't return to normal, but we expect small improvements. Chips remain a different matter; we're fortunate not to be quite as dependent but we do rely on electronics in our Aerospace and Motion Systems. For FY '23, we aren't forecasting any improvement on chips.

Todd Leombruno, CFO

I would add that working capital management is a continuous focus. Our teams have performed excellently in Q4.

Scott Davis, Analyst

You must have confidence in the supply chain to improve working capital like that. Regarding the guidance, the 2% to 5% organic guidance, is that based on pricing alone this year?

Tom Williams, Chairman and CEO

Scott, you broke up midway, but I think your question was about guidance, maybe volume versus pricing? We don’t break out pricing due to commercial reasons and pitfalls of doing so. I'll say as we go from 5.5 in the first half to 2 in the second half, that volume will reflect that. Aerospace will be strong all year with good organic growth expanding in the second half. Industrial side is expected to see weaker second-half performance for the factors I noted during our discussions.

Stephen Volkmann, Analyst

I presume despite your good margin and incrementals, there's been some kind of productivity headwinds from supplier issues. Can you ballpark what sort of headwinds you've seen?

Tom Williams, Chairman and CEO

Yes, Steve, it's hard to quantify that level of detail, though you're right that it's combined in there. We've managed to overcome it. We're projecting gradual improvement, not a big step change in supply chain improvements. However, chips remain a separate issue.

Stephen Volkmann, Analyst

If supply chains were to normalize, the incremental margins would presumably be higher than what you've shown?

Tom Williams, Chairman and CEO

Certainly, it would benefit us. The incrementals in the guide are respectable. North America is around 30, while international is upper 20s and aerospace in the mid-20s. Aerospace's unique challenge this year is compared to prior years with a mix shift tilting toward commercial. We expect commercial growth to see double the rates of MRO, inversing the trend we had previously in FY '22. This discrepancy explains the biggest headwind.

Stephen Volkmann, Analyst

I've heard of Hydraulics as a bottleneck for many of our customers. Is there a potential for share gains if you're able to manage this better?

Tom Williams, Chairman and CEO

Steve, it's Tom. Absolutely. I wouldn't pretend we’re immune, but we have opportunities since we're typically much better than our competitors with lead times and delivery. We see this as an opportunity to become the go-to supplier of choice. Once customers make that commitment, it tends to be sticky, and they're less likely to switch back.

Jamie Cook, Analyst

Tom, regarding the assumptions within North America and Industrial organic growth for the first half versus second half, your organic growth is below your targeted range of 4% to 6%. How would you assess the macro? How do Europe and China emerge from this? Why does North America appear more resilient?

Tom Williams, Chairman and CEO

The 4% to 6% figure reflects the cycle leading to FY '27 targets. Being at 2% to 5% with the challenges we face—contrasting inflation, interest rates, and a strengthening dollar—speaks to our resilience. Specifically, in North America, we estimate 7.5% growth in the first half versus 1.5% in the second half, while international is at 2.5% in the first half and flat in the second half. EMEA is predicted to be negative, with Asia in low single digits. North America remains robust in order entry, particularly as we've observed over the past quarters.

Jamie Cook, Analyst

That clarifies things. Also, how sticky do you think your pricing is? If we entered a deflationary market, would that work in your favor? Is there much pricing embedded in 2023?

Lee Banks, Vice Chairman and President

Jamie, across the enterprise, pricing is fairly sticky. There are material contracts at the OEM level that adjust according to commodity movements, but that’s a small segment of what's happening. Therefore, I don't have concerns regarding potential price rollbacks internally.

David Raso, Analyst

Regarding the split, your higher organic growth in the first half versus the second half seems to show similar margin improvements year-over-year at about 20 bps and 10 bps respectively. Is your pricing performance fundamentally different in the first versus the second half?

Tom Williams, Chairman and CEO

Yes, that's part of it. Pricing was better in the second half of FY '22, helping us as we move into FY '23. Our track record for maintaining strong margins during slowing top lines supports this outlook. Regarding July, we observed a positive rebound. I emphasize that this data is from just one month and may not be indicative of overall trends. However, both EMEA and Asia turned back positive in July, providing us with a good indicator moving forward.

Julian Mitchell, Analyst

Around free cash flow margin assumptions, you had a strong 14% margin last year. For the current business excluding Meggitt, what should we expect in the FY '23?

Todd Leombruno, CFO

Julian, this is Todd. We take pride in our cash flow performance in FY '22. We project a slight upside in FY '23, while the growth may be less than last year. Our teams will remain focused on managing working capital performance.

Julian Mitchell, Analyst

On the Aerospace guidance, was the organic sales growth assumption for Aerospace higher in the second half due to easing supply chain constraints?

Tom Williams, Chairman and CEO

Yes, our guide assumes a mid-teens growth in commercial OEM and a decline in military OEM. The high single-digit growth in commercial MRO may appear low compared to last year, presenting a difficult comp at plus 36%. The military MRO is projected to grow in the mid-teens. These factors support the return of stronger growth in the second half.

Todd Leombruno, CFO

This concludes our FY '22 Q4 earnings webcast. We appreciate all your support and interest in Parker. We will conduct another session once we finalize the close. Robin and Jeff are available throughout the day for further questions. Thank you for joining, and we will talk soon.

Operator, Operator

With that, ladies and gentlemen, we conclude today's conference. Thank you for your participation, and you may now disconnect.