Really excited to have the CFO of Parker-Hannifin, Todd M. Leombruno, and also Jeff Miller, we all know from Investor Relations. Thank you, Jeff, for helping arrange Parker coming. A special guest who I'm meeting for the first time today. Yep. Yen. I'll let Todd do the introduction and give a little background on Yen. Well, David, thank you. It's a pleasure to be here. It's a beautiful day in New York. It feels like things are kind of back to normal, we couldn't be happier to be here today. I did a good job. Next to me is Yen Wah. Yen is our newly minted Director of Investor Relations. Yen has been with the company for 16 years, mainly in a lot of operational finance roles, but she's also worked in our compliance and our audit function, she knows the company extremely well, and we're pleased to have her kinda take this new assignment with Jeff and myself. I think a lot of people do know Jeff is our Vice President of Investor Relations. He just took that role starting in January. Jeff now is leading the program with Yen as the director, and we're really excited to have people learn more about Parker-Hannifin. That's great. Well, on that note. Yeah ... I think the most significant thing in the last 5+ years is, you know, from my covering Parker, where there was just numerous small acquisitions... Yeah ... and then kind of went quiet on acquisitions for a bunch of years. Right. The last five and a half plus years, you've probably turned over about 50% of the portfolio. I mean, really increasing the size of filtration and aerospace and... Yeah ... even engineered materials. I'm curious, now that we're five years in, I think some investors initially got a little skittish on the leverage with Meggitt thinking where we were economically. Mm-hmm. Overall, the comfort level with your cash flow, the ability to deleverage. Right. You've even attacked this deleveraging probably even a little faster than people thought. Sure, right. ... right out of the gates. Just curious, now that it's been 5+ years, I remember Tom always saying, "I spend as much time working on a $200 million deal as a $6 billion. Right. I might as well, if I find the synergies there. Right. Get the bigger deal." Just curious, lessons learned, kind of skills honed over the 5+ years, how that sort of influences now, how should we think about you going forward with that in mind? Yeah. It's a great question, David. You know, obviously, the company is not the same company it was 5 years ago, 10 years ago, 15 years ago. You know, I do have a few slides. Maybe I'll just jump into these real quick, and I'll answer your question. You know, the company, as it sits today, is a little over $18 billion in sales. When you look at the makeup of the company, 47% of that is in our North American industrial businesses. About 30% of that is the industrial businesses that are outside of North America. According to our aerospace segment, it's about 23% of our business is in the aerospace system segment. If you think about the portfolio exposure to aerospace, it's really about 30% when you look at certain aerospace technologies that are in our industrial technologies. Things like filtration, things like sealing, things like composites all sit in those industrial segments. You know, the company is fiercely decentralized. We will always be decentralized. We love that. We have 95 individual P&L owners. These are our general managers that are responsible for being entrepreneurial and running the business. That is something that we are fiercely passionate about. The technologies put us number one in the motion control space. That is a vital component. The interconnectedness of these technologies make us something special, so much that 2/3 of our revenue comes from customers that buy from four or more of those technologies. It really is a complete package when it comes to motion control. When you look at our performance, David, this is a little bit of your question, you know, what has happened over the last 7 or 8 years. Clearly we've been active with capital allocation. The vast majority of that has gone to building out the portfolio with some fantastic acquisitions. When you look at our performance, our performance has extremely accelerated. If you look at what we've done with EPS, we've almost increased EPS by a factor of 3. When you look at our Adjusted EBITDA margins, we've increased those by 810 basis points over that time period. When you look at those numbers, about 80% of that EPS improvement has come from really the base business getting better, right? Executing the Win Strategy, both version two and version three, all around operational excellence, all around value, all around margin expansion. About 20% of that increase came from making those acquisitions higher margin, higher EPS accretion. We're really happy with that. We're really poised to grow differently than we have in the past. We know that this is something that we have to prove to our shareholders. There's a whole number of secular trends that the portfolio is kind of levered on and that we're looking forward to growing that way. We've been talking about moving from a shorter cycle industry. We've done this for, you know, this has been a long-term plan over a very long period of time. If you look at what's happened with the acquisitions, with those secular trends, where we've assigned our resources, where we've spent investment money on the organic side of the business, we have grown in those areas that are really levered to our higher margin and higher growth. We're really happy about that. We think by the time we get out to FY 2027, more than 50% of the company will be more levered towards longer cycle and these secular trends. When you think about the future, that 810 basis points that we saw, margin expansion, we're very proud of it. We have new targets. Our target for FY 2027 is 25% adjusted segment operating margins. We have another roughly 300 basis points that we're looking to achieve going forward. Really right now, when you think about it, there's a lot of concerns, David, you mentioned about Meggitt. We're very happy with the way Meggitt came into the business. We are 100% committed to delivering those $300 million of synergies over that 3-year time period. We will get Meggitt to 30% Adjusted EBITDA margins, and we're not gonna give up on that base of the business. If you remember, 80% of our improvement came from the base business. Win Strategy 3.0 will accelerate that. We do think the portfolio is levered to grow differently than it has in the past. We changed our target from a market-driven target to a organic 4%-6% over the cycle, and we're very well-positioned for that. We're gonna still continue on this top quartile performance. We think that that has been a galvanizing item across the culture of the company and that's something that we're not gonna stop. Let me get to your question, David. What, what did we learn on these acquisitions? You know, we learned quite a bit, right? When you think about what the company was before CLARCOR, you know, if you go back to FY 2016, we were a little over $11 billion in sales. We were doing about 15% Adjusted EBITDA margins. We generated about $1.7 billion in cash EBITDA dollars. If you look at our guidance today, we're gonna be, you know, well over $18 billion. We will be roughly 23% EBITDA margin, and we'll do over $4.2 billion of EBITDA cash this year. That is a dramatically different company than it was in that time period, and that really has allowed us to think about capital allocation differently, right? Now I don't want anyone to think that the acquisition, the next acquisition needs to be bigger than the Meggitt transaction. What we really believe is it's gotta fit in the motion control space. It would have to be growth accretive, it would have to be margin accretive, and it certainly would have to generate cash and returns for our shareholders. That's really our portfolio as we look at it. That's what our plan is as we move forward. We are very much focused on delevering the company. We have made countless commitments to that. David, you kind of mentioned this. If you look at what we've done the last three times we had a large acquisition, we delevered in about two years. That is our plan for Meggitt, is to delever as rapidly as we can. 100% of our free cash flow outside of the dividend, outside of CapEx, and outside of the little amount that we have for the 10b5-1 program will be allocated to paying back that Meggitt debt. The success you had, excuse me, with the synergies. Yeah. Being achieved on these recent deals. Right. You said accretive in many different metrics, but of course. Yeah. what you think you can do on synergies can make something accretive. Absolutely. What you've seen the last five years, can we think of you as somebody more willing? I don't wanna use the expression a fixer-upper, but. Mm-hmm. Are you more comfortable buying something with margins that could be half or a third of Parker because you feel you can improve the margins that quickly? Are you saying, we are gonna be margin accretive year one, year two? Yeah. I'm just kind of curious how much of a fixer-upper could you... Well, you know, I guess what we'll do is let's talk about CLARCOR, let's talk about LORD, let's talk about Exotic. Those three acquisitions were margin accretive out of the gate. We knew we could improve them, we knew that we could leverage The Win Strategy, we knew that there were synergies of putting those three companies in the Parker-Hannifin portfolio, but they were margin accretive. Without synergies. Correct. I was just curious how comfortable are you getting, "Oh, no, we feel comfortable enough on synergies. We'll buy something at 10% margin- Correct. we can turn into 25. You know, that might be a stretch, but if you look at Meggitt was not, is not margin accretive out of the gate. Okay. Right? There is a significant amount of synergies. We think we got them at a perfect timing in the aerospace cycle, where it's kind of at a, at a trough. We see that growth continuing, you know, well out into the future. That is a story of an acquisition that is, you know, slightly margin dilutive to the whole company. We have a clear path on those synergies and the growth that made us feel comfortable doing that. Because your margins are so much higher now, the bogey to find something that's margin accretive out of the gate is getting challenging, right? Well- Many businesses Well, correct. I mean, that's why we're so focused on top quartile performance is because, you know, we know every great company is improving their margins and driving forward. We believe we can be part of that, and we are true believers that, you know, the Parker strategy, the Parker operating system, The Win Strategy can drive any one of those targets even higher. Okay. You mentioned your commitment to deleveraging. Yes. Bless you. The deleveraging, is there anything out in the marketplace right now that you're seeing or even could envision seeing that would change that deleveraging focus? Is there something from M&A? Or just curious- Yeah. Can we just sit here for the next six quarters and go- Yeah. Oh, no, they're gonna delever. There's no question. Yeah, David, that's a great question. We've been fully committed to delevering, right? You know, we've done that the last 3 transactions. We're firmly committed to doing that again with the Meggitt transaction. We continue to work the pipeline. You know, if you look at all 4 of those transaction, CLARCOR, Meggitt, LORD, Exotic, these are companies that we've followed for decades. These are companies that we had relationships with for decades. These are companies that we competed with for decades. we have a long list of targets that fit right into those same categories, and we continue to build relationships, monitor what's going on in the space, and all I can tell you is we'll be ready for whatever comes next. you know, we're not gonna overstress the balance sheet, just because some kind of timing is coming on the, on the horizon. I would tell you, we would be disciplined in our approach. Okay. We speak to this as, you know, not your father's Parker. Yeah. Structurally different company. I assume as the CFO, you've had to sort of stress test that. If you could indulge us a little bit, and I think people think of orders in particular. Mm-hmm. I know there's a little bit of, you know, science to it, but also a little bit of magic maybe. Yeah. When you think of the order downturns that we've seen in the past. Right Now, I'm not even saying you can predict what this macro downturn could be. Mm-hmm. When you stress test and go normally like in North America. Right. We'd have runs of especially when you did it monthly, right? You'd be like 12 months in a row of orders down double digit. Right. The same macro environment. When you go back and try to stress test that, now we're bigger filtration and aerospace. Yeah. How have you quantified for the board? Yeah. -this is paying off in dividends with returns on capital, but also the reduced cyclicality. Can you help- Yeah. quantify a little bit for us? Yeah, David, you said it very well. This is not your father's Parker-Hannifin. If you go back to, you know, great recession, I know you had mentioned that, you know, that's now 15 + years ago, we had some fairly steep declines in orders. You look at every cycle since then, that order decline has been muted. You know, I mentioned earlier, the company's now 30% levered towards aerospace, right? Certainly longer cycle exposure in those markets. Remember, there's a good chunk of that aerospace business in that industrial North American and international business. Where we've invested, where we've put our resources, not just via acquisition, but organically, that has really changed that profile, right? Those secular trends that we mentioned on the slide earlier, are early days in many of them. Those are helping that order pattern go. If you look at, you know, just the sheer math, we know at some point, just based on the past years of double-digit growth, there could be a decline. We're still committed to growing through that. We think we can operate from an EPS and margins standpoint better than anyone in any type of environment. That's what we feel really confident about. When you look at, internally, when we look at it, we really do feel that there has been a detachment from the PMIs to orders and from orders to organic growth. We feel that we see that across our business. You know, one stat that we talk about is, you know, how much of our backlog, what percentage of that represents our forward 12 months sales. If you go back, you know, to FY 2015, FY 2016, it was, you know, high teens percentage. Today, it's about 35%. It's nearly doubled our visibility and our backlog, and that's what makes us feel positive. You know, we are cautiously optimistic about the future here. You know, we've had a great first half. We have given, you know, our guide for the second half. We're cautiously optimistic, and we're following it very closely. I'm trying to get a little quantification out of you. Yeah. Great financial crisis. Let's hope we don't see that again. Yes. Orders are down 25%. Right. Multiple quarters, right? Since then, those mini dips of 2013, 2016, I don't want to call the pandemic a mini dip- Yeah. Officially it wasn't down that long. Correct. Those were sort of in that down 4%-7% total company order declines. Right. Your comment in committed to grow through this. Yeah. Can you put that in context of down 4 to 7s in the past? Does that mean your orders can grow- Yeah. Just trying to get some... Well, you know, I don't know if I wanna put an exact number on that, David, but we feel very confident in the aerospace business growing, no matter what happens on the industrial side of the business. You know, we're really committed to those secular trends, which we think will help. Backlogs are extremely strong. We haven't felt, you know, much shuffling within the portfolio, so we have confidence in what we've given in our guide. Speaking of the backlogs being strong. Mm-hmm. In simple terms, if you think of the supply chain pre-COVID. Right. We'll make it easy here. Scale of 1 to 10, that was a 10, life was normal. Yeah. I don't know if it was a 10, but. Okay, well, I have to start the index at 10. Okay. All right. Let's say the worst of the pandemic, it was a two. Yeah. Where are we today getting back toward that 10? Well, it's certainly normalizing. You know, I would say anything outside of chips. Labor is kind of, you know, still a challenge, but not anywhere near it was in the pandemic. You know, I guess I would, I would put it at a 6, you know, just kind of giving a number. I think there still is room to improve. There still is challenges every day that our team is fighting through. But, you know, we're really proud of our performance over the past two years. I don't think you heard us call out supply chain in a significant way on any of our earnings calls, right? We've been pretty much dedicated to making sure there's continuity of supply for our customers and working to streamline that as best we can. Not typical for Parker to have as many intra calendar year price increases. Correct. as the last two years. Correct. Yeah. Not every part of the logistics are down, but you are seeing a little, say, uptick in hot rolled steel, for example. Sure. If there's a little wave of inflation here that might kind of surprise us a little bit to the upside- Mm-hmm. your ability to go back to the market for price. Yeah. I'm not saying you explicitly told your distribution channel, "Hey, that's it for January. That's all. Yeah. just give me this little feel what you've been seeing a little bit lately on some input costs. Yeah. -your ability to kind of go back to the market again after the last 18 months of abnormally- Yeah. -frequent. You're absolutely right. The last 18 months have been clearly abnormal, and they've been chaotic. It's been kind of unprecedented, the rate and the amount of cost increases that everyone has seen across the supply chain. You know, David, you've followed us for a long time. Our pricing and analytics, it's been a long-term skill of Parker-Hannifin, going back to Win Strategy 1.0. I would tell you that, you know, we exercise that muscle extremely well as soon as we started to sense something was amiss in the supply chain. To your point, we went off cycle, and we did that immediately. You know, we have this long-standing goal to remain margin neutral on a price-cost relationship. In normal times, we hold ourselves accountable for productivity and efficiency improvements that kinda absorb and drive our margins higher, without having to pass that on to the end customer. Things like freight and energy and labor and obviously materials, really increased in ways that they never have before. We went off cycle, and we did it as much as we needed to do in order to remain margin neutral. We hope to not have to do that again, but, you know, to answer your question really simply, yes, we would go off cycle if we need to, if that was driven. I go back to the decentralization of the company. 95 individual P&Ls, 95 pricing teams, 95 supply chains working on input and output, input costs and output prices every single day in the business. There is no lag on that kinda stuff. We do it when we need to, and we do it immediately. Right now, the incremental cost we've seen, just maybe steel in particular, hasn't necessarily required maybe a rethink for. Yeah. Correct. the last nine months. That hasn't bubbled up to conversations that I've been in. Not to say that that's not happening on individual areas where it might be more prudent. Also, I mean, when you think of the organic sales cadence, right? Yeah. Your fiscal first quarter in September, you know, 14%. Mm-hmm. December quarter, 10. Right. We're basically saying the second half, meaning this calendar first half is all the way down to 2. Yeah. Given pricing is clearly year-over-year more than two-. Sure. Yeah ... is the volume clearly down or is there? Yeah. It's evolving as we sit here. Yeah. You know. down volume, I guess, is what I'm alluding to. Yeah. It's a very valid point. You know, to your point on pricing, you know, we hit that early. You know, it's been over 18 months, so we don't have as much of a year-over-year pricing lift as maybe others do because we did it so much earlier. You're right, we started the year off extremely strong organically. When you look at what we guided to, we did double our North America organic guidance from 2.5%-5% for Q3. But our concerns around the second half really centered around what was going on in Europe, what was going on in Asia Pac, specifically China. You know, kinda cautiously optimistic, and we've been watching that. You know, you look at North America, extremely strong. Aerospace, still growing very well. Some concern around Europe, and our hope is that Europe would be, you know, flat to slightly positive. Asia Pac would be flat to maybe slightly negative, depending on how quick the COVID ramp-up materializes. Well, you stole part of my next question because Maybe I'll thank Jeff. The driver of providing the geographic splits last quarter. Yeah. I haven't seen that in about 25 years covering the company. Thank you. For the organic geographically in the quarter, EU was up 11%. Yeah ... last quarter. I'd say it's fair to say so far this year, people have been pleasantly surprised by Europe's resiliency. Yeah. Obviously, nat gas prices coming down. Right ... providing some relief. Can you give us some sense of that 11% last quarter and how to think about Europe? Well, yeah. I mean, there certainly were concerns around Europe, depending on what was going on with the Russia-Ukraine conflict, there's no doubt. I think things have turned out better than feared, for sure. I don't know if I'd wanna make any comments about our third or fourth quarter with Europe, but we just continue to monitor it and the team keeps working. Like I said before, what we've proven certainly over the last, you know, four years is that, you know, from an incremental operating performance standpoint, we think we should be able to perform well in any type of environment. That's what we're holding our teams accountable for, and that's what they are working to deliver for us. When it comes to Asia, the 53 PMI. Mm-hmm. First question: Do you feel 53 PMI on the ground? Yeah. Second, when they put out the 5% target the other day. Yeah how'd you react to that and maybe your people on the ground, how did they react? Yeah. It's a great question. Obviously, you know, China is a important region for us. There's no doubt. When you look at that, the breakup of the company, 30% of the company is coming from, you know, international locations. When you look at that, it's about 60% of that is coming out of Europe, about 40% of that is coming out of Asia Pac. China is about half of Asia Pac, so it's a significant piece of the business for us. We have been watching all the data out of China very, very closely. We talk with our leadership team daily. I wish Lee Banks was here because he is really doing that on a daily basis. You know, what we're hearing back is positive feedback, right? The numbers that you mentioned, our team is agreeing with that, and it really now is more of a timing issue. When will the stimulus come in place? When will the customers start to pull that demand? Again, we think it's more of a timing issue. From a long-term standpoint, we think they'll have it figured out. That 53, you would say your people on the ground corroborate that 53? Yeah, I mean... Most people- Yes. I would say. First positive. Yeah ...a long time. Strongest in 10 years. Yeah. I'm just trying to understand. What we're hearing is, I'm hearing more positive than negative, right? It's been bumpy, right. We've had a couple starts and stop, you know, all COVID-related shutdowns. It feels a little bit different this time that maybe it's, ready for launch. Any end markets you can be helpful with how to shine is- You know. ...classic manufacturing. Across the board. Direct or domestic consumption. Across the board, things have been good in Asia Pac, outside of, you know, residential construction. Believe it or not, a little bit of semiconductor softness just based on timing of these new investments being made. Across the board, really, when you look at not just Asia and China, but really the whole portfolio, you know, I think we had a statement that 90% of our markets were still in the growth mode. Outside of, you know, military, OEM and, you know, some construction markets, everything's kind of positive for us. Can you shed any light on the portfolio change could help differentiate your order patterns from PMIs, right? Yeah. Them's, right? Yeah. How much would you also ascribe to there's something unique what's going on with this downturn from how supply chains are being handled? Yeah. Just curious, as much as I know you want to take credit for the portfolio change, and rightfully so. Correct. Yeah. Yeah. Just from a macro perspective, this decoupling of PMIs. Yeah orders have been... It's been pretty unique. It really has been pretty unique. I do think the largest part of that has been our portfolio change, not just with the acquisitions, but where we've invested, you know, some of our innovation and our new products have been focused around those longer cycle end markets. There's no denying it, right? The supply chain challenges of the last 1.5 years, 2 years have changed order patterns. You know, I kind of had that statement that, you know, what we see in our backlog is now 2 x what it's historically been. We've challenged our teams to vet that to make sure that it is valid. What we're hearing back is it is valid. We are, again, we're kind of cautiously, optimistically watching that as it, as we go through the months here. We have only a few minutes left, so happy to open it up to anybody who has a question for Parker. You're a very shy crowd when we're on the phone. Now all of a sudden you're really shy in a larger setting. You know, We talked a little bit about Meggitt, but I could also talk about our CEO transition, right? Yeah. Jennifer Parmentier, Jenny is our new CEO, I would tell you it is a no drama transition. You know, it's been now, I guess, we're 2-plus months in the seat. I would tell you it's not a surprise within the company. Obviously everybody loved and respected Tom. He has stayed on as chairman of the board for the year, so he's still very much connected with the company. Jenny is the CEO, I would tell you that she's doing great for for 2 months into the role. She's really focused on obviously Meggitt. That is the number 1 priority for us outside of safety and making sure we continue with our commitments to our FY 2027 goals. Jenny is an operator at heart, and I think we've prided ourselves on being great operators. She wants to make us greater, and there's nothing wrong with that. I would tell you that the team is behind her, and we're really excited to see what's next for us. That's a great way to end it, but I'm not done. Okay. Two quick questions. You got one more. Your initiatives for building out Parker Distribution internationally. Yes ...obviously a margin improvement. Mm-hmm. Even the Parker stores. Correct. We just spoke of maybe Europe better than fear, but I'm just curious, that build-out. Yep ...how would you rate that on the pace where you hoped? I mean, you would assume in a. Yeah ...little more skittish macro, lease interest rates, you would think it's maybe a little behind plan just given the macro angst. Can you give us- You know, David, I would tell you, I would say it's on track, right? We've, we set a target of growing international distribution by 100 basis points a year, and we've done that. I think we've done that now, Jeff, five years in a row, roughly. We still think that there's room to go on that, and we will continue that, not just in Europe, but also in Asia. We believe that our distribution network is second to none in the space. You know, there's, you know, over 17,000 different outlets for it. You're right, the Parker stores are one vehicle for that as well. What we found is that still has room to grow, and we feel really good about it. Yeah. Lastly, the Product Vitality Index to go from 20% of your sales from products sold in the last five or produced in the last five years to 25%, it's not immaterial. No. What you're saying- It's a big step change. Yeah. Big change. I don't feel like we see it. I mean, your R&D numbers aren't reported every quarter with the release. Correct ...the R&D, but the R&D doesn't feel like it's been highlighted as it's taking a big step function. Correct. Yeah. Can you match those two? Well, you know, we've always taken the approach on R&D that, we want it to be customer driven. We want it to be in the operations and, we don't wanna have a big center of R&D that just becomes, you know, a cost center. We've been, just like we do with really every expense, we manage that very, very closely. What I would tell you is that bridge from 2020-2025, a lot of that is gonna be clean tech. A lot of that will be aerospace. A lot of that will be, you know, all those secular trends, electrification, a big driver for us. You know, I would tell you, the company has never felt more positive about the prospects of growing differently than we do now. Is that extra 5%, despite, of course, you think of it as I can outgrow my market-. Yeah I assume you're bringing to market higher margin products. Correct. The idea of marching the margins higher is made a lot easier. Yeah ...with new product than just trying to play price cost. Correct. Yeah. Yeah. You know, we used to joke around what's the best metric for innovation, it would be gross margin, right? It's if it's higher than your existing product portfolio, then that must be something that's bringing value to your end customer. All right. we watch it very closely. Real pleasure. Thank you. Well, it was a pleasure being here. Thank you, everyone. Great to see everyone in person again. All right. Appreciate it. Thank you.