Great. Thanks, everyone, for being here. It's my pleasure to have up next, Todd Leombruno, EVP and Chief Financial Officer of Parker-Hannifin. Thank you, Todd, for coming. I think, you know, we'll go straight into Q&A. I think, you know, I guess there's the question that's been very common for months has been the sort of interplay of Parker with the macro. Sure. you know, I think when people look at it, they're sort of confused. You've got the global PMI sub 50. Parker's orders and revenues seem fine. Yeah. The management tone is confident. Maybe just kind of talk about what you're seeing in demand out there and what underpins that confidence. Sure ... with these sort of macro red and yellow lights. Yeah. Excellent. Julian, thanks for having us. We're glad to be here. you know, we mentioned this on our earnings call, on the red PMIs for some time now. Really, this has been a strategy that the company's been working on for years now. Yeah. We've really focused our internal investment on products that were more resilient than others historically. Really, our acquisitions, the portfolio has transformed significantly. Yeah. If you go back to CLARCOR, if you add LORD in there, if you look at Exotic and now Meggitt, the company really is much more longer cycle. If you look at Aerospace exposure alone, if you look at the company, it's over 30%. If you look at not just our Aerospace Systems segment, but the Aerospace business that's in our Filtration or Engineered Materials technology segments within the industrial. Mm-hmm segment. That has been helping us. Backlogs are at a record high, and demand is fairly robust across, you know, the majority of the businesses that we have. It's been a little bit of a bounce back from the pandemic. Yeah you know, the supply chain has been challenged over the last 2.5 years, you know, that's kind of leading to the backlogs being as high as they are. We feel really good about where we're at as a company. We really like the portfolio changes that we've made, I think you're starting to see that throughout the throughout the businesses. That makes sense. Yeah. You know, if we look at, I guess, you know, one concern investors always have the last year or so is that, you know, tight supply chains pushed up backlogs, and then as the supply chains ease. Yeah ... does the sort of backlog and orders take a sudden lurch downwards. You know, how sort of worried are you about that risk? You know, how comfortable are you when you look around your distributor and sort of OEM- Yeah ... customers? Again, particularly on the industrial side. Yeah. Aerospace, it's still supply chain problems for years ahead. Sure ... probably. Yeah. We've been through these cycles a number of different times, you know... Yeah ... throughout the various economic dips. Mm-hmm. We do feel really good about it. We've been kind of, cautiously optimistic when you look at, the company as a whole. Yeah. We have seen some softness out of Europe, and we have seen some softness out of Asia Pacific, mainly in the, you know, mobile construction markets out of China specifically. Yep. Aerospace remains very robust and, you know, there is a significant amount of industrial markets that is very positive. If you look at North America, our North America orders and sales continue to be positive organically. We did increase our North American organic growth. We doubled it with our last guide, we feel really good about that. That coupled with aerospace, we think is gonna make sure that the company continues to show growth at least for the rest of our fiscal year. Understood. you know, I think if we look out, say to the last quarter of the current fiscal year, you know, you're sort of embedding not a lot of. Yeah ... growth volume down a bit. You know, I think people sort of contrast that with your tone and say, is that just cushion or conservatism-? Yeah ... because there's so many... Yeah ... crosscurrents. Julian, it's a great point. Obviously, we just came out with our. Yeah ... Q2 results, and that allowed us to double North America. We still show positive growth for North America in Q4, and we show positive growth for Aerospace in Q4. It's really the international-. Yeah ... segment that's a little bit negative, and we're just being prudent. Mm-hmm. based on what we saw, that segment, the orders did go negative. Yeah. Yeah. You know, we gave you the best look that we thought we had at that time and, you know, we'll come out after Q3 and give you a better update. Right now we haven't seen much push out. We haven't seen anything really material from the large OEM customers. Distribution's still very strong, and that is 50% of the industrial business. Yeah. That's really good. That has been growing in the international segment as well. That's also a positive. Got it. You know, when you think about China sort of from here. Yeah ... you know, what's your assessment of, you know, pace of recovery? Yeah. Yeah. Yeah. I was just in Singapore and Malaysia last week. Mm. There's a lot of positive things going on in Asia Pacific. If you look at our whole Asia Pacific segment. Yeah ... those countries outside of China have really, kinda held up that segment just with the, you know, the noise around COVID-19 that's been happening in China. I think it's a short-lived. Mm-hmm ... issue. I think that there'll be stimulus that'll work its way through-. Yeah China. They're just coming off of Chinese New Year, so we expect the rebound, you know, in our Q3, the rest of the Q3, I should say. I think we'll get that figured out. Yeah. Perfect. Then on aerospace, you know, I think one area has been, you know, sort of military OE. Yeah ... has been under some pressure, I think partly just tough comps from. Yeah ... COVID. Yeah. Maybe supply chain is in there as well. How do you assess where we are on military OE and looking ahead? Military OE is really the one component of aerospace that is negative. Yeah. You're right, a little bit of it is the comps. We sensed the pull forward in the pandemic on some of those military platforms. Yeah. mainly the F-35. Mm-hmm. That was really we feel it was a way to keep the aerospace military suppliers kind of intact. Yes ... during COVID. We're experiencing a little bit of a pullback on that. The F-35 program is fantastic, and that will continue to, you know, grow for many, many years. We expect that maybe more in our FY 2024 to kind of see that return to growth. Yeah. What is offsetting that is great strong growth in commercial- Yes OEM and then also commercial aftermarket, which we expect to continue to grow as, you know, flight miles get back to pre-pandemic levels, which we're, you know, not still quite there yet. We feel really good about that. Of course, the military, MRO stuff is slightly positive. Mm-hmm. We expect that to remain positive going forward. Got it. On the commercial side, on OEM, you know, a lot of companies still complaining about supply chain. Yeah ... slow ramp, always the sort of finger of blame- Yeah ... seems to rotate, depending on the week. How do you sort of assess your supply chain in commercial OE, your ability to get things done on time for your customers? Well, we pride ourselves on that, right? Yeah. Throughout the pandemic, we really strive to satisfy customer demand as best as we possibly could. Mm-hmm. You know, we have a local for local model that supports that. Yeah. Aerospace has been a little bit slower to recover than maybe. Sure ... supply chain. I've started to hear that throughout our businesses, but I don't think it's anything material that's gonna keep us from reaching our guide. Mm-hmm ... supplying customers. It, it's something that we pride ourselves on managing, and we don't think that'll be an issue. Got it. On, on the point on sort of aerospace, you know, it's been around, I guess, five months now since Meggitt. Right ... got pulled in. you know, any thoughts around... You know, I noticed you took up your revenue guide- Yeah slightly, very early days. Yeah. How is that sort of synergy extraction looking as well? Yeah. We couldn't be happier with the Meggitt transaction. It was a long road to get to the close, we're ecstatic that we got there. It is a great business. It is being integrated as we speak. The first five months have been meaningful. We did put $60 million of synergies in our Fiscal Year 2023 guide. Mm-hmm. We will achieve those synergies. There's no doubt about that. I would confirm the $300 million that we had in the deal. Mm-hmm. That's by, you know, the first full third year. Yeah out in FY 2026. There's no issues with that whatsoever. We're going through and, you know, we're making that a Parker-like entity. What we found is a little bit heavier SG&A than what we see in our Parker businesses. They did decline faster than our aerospace business throughout the pandemic, so we've got a little bit of a natural recovery that's going on there. We expect Meggitt to grow faster than our legacy business just, you know, mainly because of the decline that they had. You know, so far it's great. I, we have a location here that's nearby in Miami, so we're visiting that after the conference. Mm. The operational pieces of Meggitt are extremely ecstatic to be part of Parker. Yeah. They've seen our transformation, they've seen our performance, and they wanna be part of that. It's really been a fantastic addition to the company. I think it's gonna work out great. You know, more broadly, when you think about, you know, M&A at Parker. Yeah that's really something that Tom had made maybe more programmatic than was the case before. maybe sort of, you know, where we are today. Yeah. Just had a CEO change very recently. Right. you know, how different is the confidence around M&A, maybe the way it's approached? Yeah ... sourced, integrated? Yeah. Give us a sort of a broad sense of that. That's a great question, Julian. Yeah. Jenny Parmentier is our new CEO. Yep. That transition has been as smooth as possible. Mm-hmm. Jenny's been with the company for 15 years. She's been part of the leadership team for some time. You're not gonna see us go high and to the right on any of these things. Yeah. We've long been an acquisitive company. You're right, Tom had kind of changed the game, starting with CLARCOR and then obviously LORD, Exotic, and now Meggitt. You know, he really wanted to focus on growing our Filtration business, our Engineered Materials business, our Aerospace business, and our instrumentation business. Really, you know, hit home runs on three. Yeah ... of those, of those targets. If you look at the company now, it's more balanced across those portfolios. We're not so tied to trying to grow those four specific. We certainly would grow those, with, the right targets and the right acquisitions, but we're in no rush to do the next deal. It doesn't have to be bigger than Meggitt. Mm-hmm. What it does have to do is it has to help the company grow better. It has to help company achieve our margin targets. It's gotta generate cash, and it's gotta generate returns, and it's gotta be something that fits within our portfolio. Those are really the criteria that we look forward to, and that's something that we're not going to astray from. Jenny is a believer in that. Yep. Policy, that is what, her main focus is, as we go forward. Short term, we're really focused on paying down debt, right? Yes. We've made a commitment to get back to 2x debt to EBITDA in two years. We did that after CLARCOR, we did that after LORD and Exotic, we're confident that we'll be able to do that again after Meggitt. That's kind of been our focus. Obviously from a total capital allocation standpoint, we're committed to our dividend, long-standing 66-year record of increasing our dividends. We will do that. We have increased our CapEx a bit, right? Mm-hmm. Historically, we've been about 1.5%, 1.6% of sales. We'd like that to be around 2%. We are at 2% this year, so we feel really good about that. We have $200 million for our share buyback program that we will remain committed to, and 100% of everything that's left will go to paying down that Meggitt debt. That's what the team is working on, and that's what the team is committed to. Understood. you know, if we're looking at that filtration and engineered materials sort of technology. Yeah ... platform, and it's the biggest one of the four... Yeah sales wise. You know, how do we think about your... You know, there's a lot in there. Yeah. when we're thinking about kind of where are the areas Parker's-. Yeah ... particularly strong. I don't want to mention competitors necessarily... Yeah ... by name, but just some sense of like, where is the market share highest? Yeah. like this is a global powerhouse inside Parker. Yeah. Cause from the outside it's hard sometimes. Right ... for people to marry the sort of technology platforms. Sure. Sure, sure. What marries those two platforms together is the material science element of it, right? Mm-hmm. Whether it's the media and the filtration business or whether it's the chemistry within the engineering materials business, that's really the special sauce. Yeah ... that makes those businesses work. Those are high margin businesses within our company. They are applications that are meaningful to the customers that they serve. They really benefit from our application expertise, our global reach, our distribution network. Yeah. That's what really makes those stand out amongst their peers. When you look at the filtration business, it's really one of the largest industrial filtration businesses that's out there. You know, we like the growth patterns with that, and we like the margin expansion that they've had throughout that business. On the engineering materials side, LORD was a game changer. It gave us. You know, we had a lot of sealing technologies. Mm-hmm. This really gave us adhesives. This gave us a lot of bonding capabilities. When you look at all of those secular trends that we talk about, whether it's aerospace or clean tech or electrification, you know, these are the businesses that are really forefront in those spaces. We like the growth prospects for those businesses as well. How about, you know, if we switch to looking at Motion Systems. Yeah. You know, your sort of sales for various reasons have been, you know, stable... Yeah for many years. You know, is that something that concerns the management? Are there? Yeah ... in place to, I don't know, tweak the portfolio within Motion Systems. Yeah ... to regear it for higher growth? Yeah. How do you think about that? Yeah, it's a great question. You know, I would say if you're looking at those charts over time, right? There is two recessions and a pandemic in there. Yeah. Those are typically our most cyclical businesses, right? Just the timing of those. Mm-hmm ... somehow is a little bit unfortunate on the presentation of those numbers. We did do a little bit of internal movement of businesses within, or moving out of Motion Systems, so that's a little bit of a piece. Yeah. We did have a few small divestitures throughout there as well. We love those technologies, there's no doubt about it. When you look at the core of Parker-Hannifin, Motion Systems is critical to. Mm-hmm ... making sure our distributors are competitive, making sure we can offer total system solutions to our large OEM customers, so we are dedicated to that. You won't see us. Mm-hmm peel that off in any way, shape, or form. There'll be typical pruning of the portfolio throughout all of those businesses that we are committed to do every year, and that's part of it. There's a little bit of currency in there too, when you look at what currency rates have done. You know, that admittedly affects the whole portfolio as well. Sure. Overall, we like the technologies. I think looking forward, what's a positive for Motion Systems is clean tech, right? When you look at, anything from hydrogen to electrification, they're also levered to benefit from that as well. Yes, on that point, I think it's, you know, it's fair to say that, you know, Parker's sort of valuation stands out versus some others. Sure ... because they might have more of a secular, you know, halo attached. What are some of the longer term growth drivers at Parker that you think are most- Yeah sort of underappreciated by investors right now? Yeah. You know, we've focused for many, many years on really improving our margin profile. Yeah. making the company, less cyclical. Mm-hmm. Performing better throughout those cycles and we're really proud of what we've been able to do in that space. There's no doubt. Looking forward, we do realize growth is probably the last thing that we haven't made meaningful progress on. If you look at where we're at right now, we do feel extremely positive that, you know, there clearly is a pent-up CapEx element that I think we will benefit from significantly. There's countless billions of CapEx projects that are announced that are in progress that will benefit Parker-Hannifin Corporation. When you look at aerospace, for example- Mm-hmm. We see a clear trajectory to growth there that is clearly helping us this year, there's no doubt, but we see that as a longer term growth cycle. All of those portfolio changes are all focused on companies that historically grew faster than Parker. We feel good about that. You know, the last thing I would say is all of those secular trends, clean tech and digital supply chain, they're bringing opportunities to us that we hadn't seen as we have gone through certain other cycles in the past. Our prospects are positive. We feel really good about that, and we're committed to it. That's why we changed our target to 4%- 6% growth over the cycle. That is, you know, through FY 2027. We think that that will show that we have the capability to grow differently. That makes sense. I guess one element is around of on operating improvement is on free cash. Yeah. You know, I think Parker's done very well, even recently with a lot of working capital. Sure. constraints and so forth. Should we see the free cash flow margin kind of moving up over time with operating margins, and you get to that sort of mid-teens plus? Yeah. You know, it's absolutely one of the things that's critical to Parker when you look at, you know, we try to boil down our The Win Strategy, and we try to boil down what drives the company. One element is being a great generators and great deployers of cash. When you look at our cash flow generation, there's been a step change, both in the dollars and the percentage that we've been able to generate from a cash flow standpoint. We are committed to 16% free cash flow. Yeah. in our FY 2027 targets, and we're positive that we're gonna be able to hit that. One element that I would say that's been really interesting to watch is we've changed our variable incentive plan program. This is a program that 100% of the company's on. Whether you're a general manager, whether you're based in the Cleveland headquarters, whether you're a line team member or, you know, someone that works in the warehouse, everyone is on the same annual incentive plan program. There's three elements of that program: sales growth, earnings growth, and cash flow. What makes me excited about it is it's the first time that we've had, you know, all 65,000 team members across the world compensated on generating free cash flow. We expect that to be another lever that drives us to achieve those FY 2027 targets. It's really, It's certainly changed the conversations within the company and, I think we're gonna like what those results bring. Understood. You know, I think people often ask, you know, are there things that Jenny might do differently? Yeah. Yeah, it's not like there was... Yeah. -emergency to fix or something. No, no. Jenny and Tom are very similar. You know, they have a passion for our team members that is fantastic to watch. You know, safety is our number one metric. Yeah. the company, Jenny will continue that. We've always believed if you have the most engaged, empowered team, you're gonna win. She will continue that as well. We certainly are focused on the growth elements that we just talked about. We have all those targets. We, you know, Yeah. -clearly committed to meeting those targets, so we don't have to make a change with any of that. Meggitt, we talked a little bit about Meggitt. Jenny was part of that decision. Mm-hmm. She was involved in that. Between her, Lee, myself and Andy and our entire Aerospace team, we are fully committed on making sure that that works and that goes extremely smoothly. You'll see that. I think what Jenny might do a little bit different is one of her areas of strength is supply chain. You look at what we've just come through, this two plus years of supply chain noise. I think she thinks we can be better, right? Yeah. certainly is better than it was, 5 years ago. Yeah. Our goal is to make it the best company in the world, the safest industrial company, to be top quartile financial performance. I think what Jenny is seeing is that there's probably some tools and expertise that we can add to be even better suppliers to our customers and do that in a way that is even more efficient and even more productive. I think that's what we'll see her focus on. That's interesting. I guess one element on the portfolio or growth-wise is that, you know, I think a lot of companies will try and talk to a digital or software element. You know, there's often a lot of hype around that versus the reality of. Yeah. of the business. Kind of how does Parker see that transition? Does it see it as something sort of- Yeah. You know, it's participating, but look, it's not a step change, so we don't need to- Yeah. Well, what we've tried to do is we've tried to let our customers pull that from us- Yeah. instead of push that to us. You know, there's nothing more terrible than creating a function that's not meaningful to a customer. Our customers that wanna work with that, we apply those tools to that. We do think that there's a digital element from a product identification, from an ordering standpoint, from really partnering with our distributors that we've been working on and that we can do better, and we think that that's really where we're gonna make the best progress. Got it. On M&A. You know, you mentioned the cash flow is helping the speed of delivering. Mm-hmm. you know, how quickly could Parker move back to doing acquisitions? Yeah of any scale? Well, I mean, a scale of Meggitt, you know, we're probably looking at a two-year period, right? Just like we did between LORD, Exotic and CLARCOR. I would tell you there's no pressing need to do one bigger than Meggitt or the same size as Meggitt. What we're really focused on is making sure it's the right fit, it fits all of our financial criteria. Yeah. That it makes sense and it fits within the portfolio of Parker-Hannifin Corporation. You know, if there's a bolt on something that supports one of the secular trends like digitization or- Mm-hmm. electrification, you might see us do something like that. Again, our commitment, right now is to reduce leverage. That makes sense, lastly, perhaps before we go to the audience response survey. Mm-hmm. you know, margins international versus North America and industrial, you know, they've been similar for a while. Yeah. Do you think that continues or it's like the progress you've made in international... I don't know. Do you see some chance- Yeah. it moves higher, actually? Yeah. It's a really good question. You know, for years, our international margins were significantly lower- Yeah. -than our North American businesses, we always thought that those margins could and should be similar. It took us a long time to get there, you're right, we actually had a few quarters where those international margins were actually slightly higher. Yeah. than our North American businesses. That's kinda flipped a little bit now. Mm-hmm. with the volume Yeah. changes and supply chain, kinda being a little bit more North American centric. We don't see those going backwards by any stretch of imagination. What's beautiful about what the company has done over the last eight years is, when you look at that, significant margin expansion, it has been shared across the portfolio. It has been shared across the regions. Mm. I think we've convinced a lot of our team members that it's possible, right? It doesn't matter what technology you're in. Mm. It doesn't matter what number you are from a market share standpoint, that if you execute the tools of The Win Strategy, if you serve the customer, that the profitability is gonna follow. Yeah. We don't see that to be any different whether you're based in Europe or Asia or, Latin America or North America. Our goals are really set upon improving from where we're at now, and that is really across the board. Perfect. Yeah. Well, now we'll switch quickly to the audience response survey. You know, I think the first question is really around the ownership of the stock. Yeah. Where's the question? Is the question coming? They should. Oh. here. I don't know... Oh, here we go. There we go. Here we go. Thank you for that. The question's around ownership. You know, we can participate ourselves, as well. Here it's sort of a decent, you know, more overweight than the other. Yeah. Good. Meetings so far this morning. That's fantastic. The next question is around the bias to the stock, positive, negative or neutral. We've been on a bit of a run lately. I think Meggitt has helped that a little bit. Yeah. The quarter results of Meggitt. That's true. Yeah. positive. That seems good. -today reaction. Thirdly is around through cycle earnings growth, and the peers here would be sort of broad industrial- Yeah. -or U.S. multi-industry would be the peer set, to think about. Yeah. You've seen our chart on that. Yes. We're really proud of what we've been able to do there. People thinking above average. Yeah. For the most part. The next question, capital deployment. Yeah. Again, short term, this is. It's very clear it's number five. Correct. Yeah. This is meant to be a, I don't know, three-year-. Right. view probably on what to do with excess cash. This will be interesting. Yeah. Okay. So people have got that. Sure. We're working on that. Very consistent. The next question is on the valuation multiple. Mm-hmm. You know, what sort of calendar 2023 PE should Parker-Hannifin Corporation, trade at? Yeah. I have my opinion on this answer. high teens Yeah. is the consensus. That's great. The next question will be around sort of why, you know, why do you own less, not more? Mm-hmm. Why does someone not own any of it? Why should it trade at 17x. Yeah. not 25x? The biggest reason is. Yeah. core growth. It goes back to that. Yep. lack of secular growth halo. Makes sense. Makes total Makes total sense. I think the last question now, ESG, is it a positive factor or? Yeah. or not? I think almost every company has been very similarly the answer here, which is it's about 1/3 yes to number one. Yeah. 2/3 no- No. on number three. Yeah. a bit of consis- Yeah. A bit more of a skew. It's good. Yeah. Directionally consistent. Interesting. Good. Well, thanks everyone for responding. Well, thanks everyone for your time. Yeah, it was great to be here. Thank you for the. We're working on the growth. Give us some time. Right. Thank you. Yep.