Parker-Hannifin Corporation (PH) Earnings Call Transcript & Summary

Good morning. My name is Andrew Obin. I'm BofA's, I guess, U.S. multi-industrial analyst, and we have a full room here. And we're here for a fireside chat with Jenny Parmentier, here. She is Chief Executive Officer and Chairman -- Chairwoman of the Board at Parker. I've covered Parker for several decades. It's been an amazing transformation story and it just continues to do what it's done for the past 20 years, which I think is a good thing. And I think Jenny has some sort of prepared remarks and slides, and then we'll go to fireside chat. Thanks so much for being here.

So good morning. Thank you, Andrew. Thank you for the kind comments. It's a pleasure to be here again this year. So just a few slides for those of you who may not be as familiar with Parker-Hannifin. First of all, I think you're all familiar with our forward-looking statements and our non-GAAP financial measures. But this is a slide that really shows you Parker-Hannifin at a glance. And I think it's something that we're very proud of and something I'd like to point out is that we have been engineering our customers' success in the motion control markets for over 100 years now -- 107 years this month to be precise. We have the #1 position in $135 billion motion and control industry. We love this space. One of the things that we really like about being in this space is that we feel that our technology powerhouse of interconnected solutions allows us to serve our customers very well. It's critical to our distribution network, and that is another thing that is really special about Parker-Hannifin. It's a competitive advantage. It is our global network of independent distribution outlets. These distributors are our business partners, and they are just an extension of our engineering application expertise and allow us to serve customers well. We believe that we have been as successful as we've been and really see that going into the future because of our decentralized operating structure. We have 85 divisions around the world. Each one of those divisions is led by a general manager who is responsible for the P&L. Decision-making is made at the division level where we resource and how we grow future organically is happening at that division level. And we really are focused on being top quartile performers. And one of those aspects is being a great generator and deployer of cash. And I think that we've demonstrated that in the recent years, and we are committed to continue to do that into the future. Our business system is the Win Strategy 3.0. It is our guide to operational excellence. I'm sure we'll talk a little bit about the Win Strategy in the fireside chat. And we really believe that our purpose statement launched not even quite 5 years ago, is something that we've all aligned around and really will move us well into the future, and that is enabling engineering breakthroughs that lead to a better tomorrow. Looking here, I talked about that decentralized structure and our people, and it is our people, our strategy and our portfolio, our transformed portfolio that drives performance. If you look at our revenue from FY '19 to FY '24, and we picked FY '19 to be -- we have a snapshot here of pre-COVID and kind of take out all of that noise, but 7% revenue CAGR from FY '19 to FY '24, 570 basis points of operating margin improvement, adjusted EPS growth of 13% and 2x the free cash flow. So really good performance from our teams, a lot of hard work and a lot that we're really proud of. Having said that, we're proud of that, but we have a very promising future, and we're not done. We are committed to growing our adjusted EPS to $30 per share and to getting our free cash flow, as you see there on the slide, 20% improvement in our free cash flow. And how are we going to do that? We're going to continue to perform by accelerating through Win Strategy 3.0. I do believe that there's plenty of runway left in Win Strategy 3.0 and a lot of room to grow and expand margins. We have a longer cycle and more resilient portfolio today than we had in the past. This is going to help us to grow organically. And we have a lot of growth that we see in the future tied to secular trends, and this is the reason that we believe that we can grow 4% to 6% over the cycle.

Well, excellent. Thanks so much. So maybe we can talk about long-term growth targets. Your long-term growth target is for 4% to 6% growth through FY '27. So how does '24 guidance fit in with this framework?

So our FY '24 guidance for our fiscal year will end June 30, is for 1.5% organic growth and 4% total growth. And this is after 2 years of double-digit growth. So -- and that even has -- if we look in the past, like I was just saying 7% with COVID. So we really feel that, that 4% to 6% is achievable over the cycle. There's a couple of reasons for that. I spoke about the transform portfolio. The acquisitions that we've made over the last several years have been higher growth as well as margin accretive. So we think that puts us in a really good spot. I spoke about the secular trends. Aerospace is an obvious one. We see plenty of growth into the future for commercial and defense and on the industrial side of the business, we see obviously, following those secular trends as well, electrification, digitization, clean tech. We really feel that there's a lot of upside here. And then also, I would say, the mega CapEx projects. A lot announced, a good portion of those started, and we're starting to see where some of our distribution partners are starting to play in that. So we feel real comfortable about 4% to 6%.

Excellent. And maybe just sort of a big picture question, but can you please talk about the decision to move away from before you were sort of thinking about yourself as IP play, right? And you sort of moved away from the IP-driven target to a through-the-cycle number. What drove that decision?

Well, it's -- we're a different company today, right? It's a different portfolio. We are more longer cycle now than we've ever been, and we feel like we're less tied to that, and we really can hit that 4% to 6% over the cycle. If you look at the businesses where we've concentrated the acquisitions, we had an on-purpose plan to double the size of aerospace, filtration and engineered materials. And if you look back pre-acquisition on those, FY '15, those 3 made up about 40% of our revenue and today, they make up about 60%. So really a shift to longer cycle and we believe that in the future, 85% of our portfolio will be longer cycle, aftermarket and tied to the secular trends. We'll grow differently.

Got you. And I'm sure that's the question we've been getting, but I have to ask it. So long-term margin targets. And I guess you are having an Analyst Day coming up. But you have margin target of 25% in FY '27. '24 guide is for 24.3% at the midpoint. So just -- can we just talk about how do you think about long-term margin trajectory?

Yes. So first of all, as I was going over the performance on one of the slides, this has all been due to the Win Strategy, right? All of our teams implementing and executing on the Win Strategy, getting the Win Strategy implemented early with the acquisitions we've done. So we're really proud of that performance. And I've said publicly several times, as I just mentioned at the beginning, that I'm confident that we can continue to expand our margins. 80% of this margin performance to date has come from the legacy businesses, 20% from acquisitions. So I think that really speaks to the power of the Win Strategy and our continuous improvement culture. So I think those are things that they're never going to go out of style at Parker. It's something we're always going to be really strong at. Having said that, in the last 10 years, we've put out 3 new targets. Each one, we've exceeded and then increased the target. We've said in the past that 25%, which is the FY '27 target, is not an exit ramp. It's just a mile marker. So we'll expand further. Stay tuned.

Yes. No, I appreciate it and it's May 16, right?

Yes. May 16.

There we go. So maybe you just sort of talk about EPS CAGR. So what's included in the 10% sort of EPS CAGR target?

Yes. So 10% is our goal over the cycle. And as you know, we've done better than that, right, in the past, but 10% is the goal over the cycle. Any future acquisition would be incremental to that. So we feel really confident that we can hit that 10%.

Okay. So 10% includes what you've done already. But if you go beyond Meggitt, that would be on top of that?

Yes.

Got you. That makes sense. And let's maybe just sort of talk to more nuts and bolts on pricing. I know you don't disclose price. But just maybe can you walk us through the current pricing environment? And just what do you think about sort of stickiness of the pricing? Because as we do our survey work, it's sort of directional, I think it is coming down, but it sort of has been stickier than we would have expected.

Yes, I agree. Yes, I expect it to be very sticky. And I will -- you just go back in history a little bit. Strategic pricing is a muscle that Parker has built over almost 2 decades now. It's part of the original Win Strategy. It's something that we've been doing for a long time. During these extraordinary inflationary times of the last couple of years, we had that muscle built. We had to get even stronger. It was total cost and inflation, and it was several things at once. It wasn't just material. It was labor. It was energy. It was transportation. So we went out early and often. We had the processes in place and the measures in place to see it coming real time, and we reacted quickly. I would tell you, now we are in more of a normal pricing environment, where we have the regular distribution prices and price increases and what we might do with OEMs on a one-by-one basis. So it's a normal environment. Having said that, we're still in inflationary times. And some of those cost drivers, they're not going to reverse, right? I mean labor is not going to reverse. And so I think they're going to be sticky. And we've always had the strategy not only to have a good rigor around pricing, but to really create that value for the customer, to have that value reflected in the price and thus be the customer's first choice.

We recently -- just a follow up, we recently had a sort of meeting with one of your peers and the CEO sort of said that I think -- and we've heard actually from multiple companies that he said, for him, labor cost, actually, the growth is going to be higher than material costs. And he said it's sort of he hasn't seen that in a long, long, long time. If ever, and he said, well, that's why I think pricing is just going to be permanently higher because I have to adjust for that. Would that sort of be your experience as well?

Yes. I mean I agree with those comments. I think that is one of the components that makes it stickier than what we've seen in the past.

Got you. And just second half '24. And just to remind folks, second half '24, it's fiscal first and second quarter for you -- calendar first and second quarter. So just folks know. So what are your expectations for price/cost for the next, I guess, 6 months reported.

Well, it's like I said, it's a normal pricing environment. No, I don't see any significant changes other than things that we might be working on as we speak, but back to a normal pricing environment.

And this is something, and I know we sort of discussed, I think it's sort of this pie chart that you have as your first slide. I think really speaks about all the hard work that you guys have done at Parker over the year sort of moving the portfolio. But you have moved to it's a much more long cycle business than it has been, right?

Right.

And does this sort of require a different playbook for managing the business as you are, right? You do have more visibility than you would have maybe a decade ago. So does this change how you sort of manage the business on a day-to-day business -- day-to-day basis given that you do have a lot more visibility?

I would tell you that, first of all, the portfolio has changed, but we like all 8 of these technologies, right? 2/3 of our customers buy 4 or more of these technologies. So we are mindful of continuing to serve our customers as we always have. Having said that, I would tell you, it doesn't require a different playbook. Now with each update of the Win Strategy, we are on Win Strategy 3.0, we've introduced some new tools. We've had some new initiatives that help us from an organic growth standpoint, something we're very focused on. Some of those tools would be what we call the growth triangle. So that's where we partner an account manager, a product engineer and an application engineer with a growth customer and work very closely with them, not only to ensure that we can gain share, but that we'll be on future platforms. So that's an organized effort, and that's been very successful. We have tools like Simple by Design that make us more agile and really control the cost, allows us to apply to existing products and to new products as well. We also have changed our incentive plan. So our short-term variable incentive plan for all of our team members has changed from a RONA, return on net assets, to an annual cash incentive plan. So we have nearly 65,000 -- nearly all of our team members on this plan. And unlike RONA, if you are a team member anywhere in Parker, if you're at the plant level, even to your value stream level, you can understand what makes up your incentive plan because it's simply revenue, earnings and cash. So very powerful to have the whole company aligned around that. Because even at the value stream level, you know what your shipments need to be that day, right? You know that inventory is cash. You know that scrap or lower first-time capability is going to take away from that. So it's really great alignment. It's metrics that can be looked at all levels of the organization and it really helps us run the business better and drive organic growth.

Yes. No, I was going to sort of ask my next question. And I guess I was just going to comment as we look at you outside. You really start -- you look a lot like sort of best-in-class operators that we cover like ITW and AMETEK and those stocks actually a much higher multiples. And we aren't afraid of saying that so. So maybe just focusing on Industrial sort of going through the business units in Industrial. Motion was up 50 bps, Flow and Process Control was down 4% on Filtration and Engineered Materials up 1.5 percentage points. Can you just talk about the performance of the 3 different subsegments and what's driving the divergence in just Industrial motion, Flow and Process Control and Filtration and Engineering materials?

Yes. So Filtration and Engineered Materials is doing well. There's higher aftermarket exposure there, especially in filtration. So that's what's keeping that positive. And then with Engineered Materials and Filtration, there's some aerospace business in there, right? Some that was there before Meggitt but some that we put into those businesses because of the technology. So they're seeing the strength of that. And Engineered Materials, in particular tied to electrification, thermal and sealing technologies. So that's what's helping out there. The Flow and Process Control side of the business, there's just been a broad-based destocking there, right? And also some softness, HVAC and Refrigeration falls in that segment as well as Semicon, which I think everybody understands. And then the Motion part of the business, it's also been impacted by destocking and in some evidence of some OEM destocking at dealers as well. But the Motion business is really going to benefit from some of these secular trends as well, electrification and clean tech.

And maybe just to zero in on Flow and Process Control, sort of where are we there and because we are sort of starting to, a, I know that you sort of have the HVAC business quite well. So where are we there? Because I think there is a lot of debate as to where we are in the cycle there? And also when do you think the semi stuff bottoms?

Well, I'm not calling a bottom, but I can just tell you that when we look at the Industrial side of the business, into that segment as well as Motion. We've been -- North America orders have been negative for 4 quarters, International for 5. We've been in destocking for 4 quarters now. History would tell you that it goes anything between 4 and 6 quarters. So you look at historically and you would have to believe that, that's going to turn at some point soon. But we commented on the last call that we expected destocking to go through Q3. So we'll have another good update here in May, but that's where we're at today.

And, once again, just sort of -- I think a lot of your peers are actually talking about sort of -- I think, collectively, you all guys are saying the same. And I wonder if you're reading the same transcripts, but you're actually talking to the same customers. But as I said, there was another one of your peers and they sort of they were expecting sort of similar schedule, orders storm positive, maybe -- how long is that? Everybody is in a different quarter -- so second quarter calendar and I guess they're sort of expecting fourth quarter sort of orders to actually to turn positive. And they sort of say they are starting to see a change in customer behavior on the margins. When they talk to customers, they are seeing actual budget changes. So it's more than, "Oh, it's 4 to 6 quarters, where" -- are you seeing -- just based on what you've seen already, are you seeing tangible changes in your behavior and their behavior? And I'm also quite intrigued, you sort of said mega projects because I think our work sort of suggests if you look when the orders for the mega projects should come in just looking at the schedule, what's out there, just calendar '24 should be a good year. So maybe if you could expand sort of any tangible signs of change in customer behavior that you can observe and sort of what are you seeing sort of on schedule for these mega projects because some of them actually also seem to be being pushed out?

I think you do see evidence of some being pushed out, but you also see more being announced and a good amount of them being started. When we talk to distribution, their sentiment is positive, right? Very positive. We just had a national sales meeting in December with 100 of our distribution partners and very, very positive sentiment about the future. They're very energized by our focus on strengthening supply chain, really getting -- making sure we have the right capacity for the demand today and the demand that's coming. Some of our distribution partners are participating in quoting in some early stages of these projects. Some of them have been involved in supporting contractors for site prep for one of the chip factories that's going in, some are supporting some of the early stages of the EV battery plants. So they're starting to see it. They're starting to talk about it. And we're really putting a lot of effort into aligning with them so we can quantify that. But it's still early days. It's early days with those mega CapEx projects. And on the OEM side, I would say that the -- what I would see as the good news is we're not seeing any cancellations or pushouts of magnitude, right? So I think that's a good indicator as well. Yes, there's been some destocking. There's no doubt about that, but I don't think tangible changes. I don't see them in their ordering behavior or their order patterns. I think everyone wants to make sure that they have their demand out there.

Right and you know you sort of mentioned distributors. So what are distributors telling you about their inventory levels?

Well, I mean, they're in destocking, right? And I think a lot of the distributors got smart through the pandemic and the increase in demand that came afterwards and really working harder to carry the right inventory at the right time. But again, positive sentiment. Positive sentiment and -- but still in destocking.

And what metrics do you think your distributors track to sort of figure out when to stop destocking?

I think it's clearly the demand from their customers, right? And what they see happening in the areas where they specialize, right, whether it's construction, whether it's some of the support that they give to their customers. I think they all have various metrics that they follow. But they're looking at their own inventory, and they have a close pulse on the demand coming in their back door.

Got you. And as we think, I think the [ filing is ] constructive on oil and gas end user demand. So can we just talk about the trends you're seeing there? And just could you remind us how you're positioned across upstream, downstream and how are you exposed to LNG?

Yes. So we participate in upstream, midstream and downstream. So all 3 areas. Upstream is about 2/3 of the business that we have. I would say that both upstream and downstream have been positive, but downstream has been more positive. So that's where we see that today.

And do you have any particular exposure to LNG? Or...

We do. I wouldn't tell you that I would see any significant changes or trends there, but yes, we do.

So I think the other thing is just when I look at the model, I think the margin story, particularly over the past 5 years is quite remarkable. And I think part of it is just when we did the analysis, we did one during COVID, you guys were out there with all the folks I sort of described it as the best in class. But you have been able to grow operating income with organic sales declines in second quarter in Industrial North America and Industrial International. We are getting questions. I think people are worried about potential destock and maybe change in macro scenario. So how would that dynamic work if there was a steeper downturn that's what you're forecasting?

Yes. So first of all, obviously, and where we're at today with a forecast of 1.5% organic, 4% total, negative orders for several quarters, destocking. As you mentioned, we're expanding margins. We're going to expand margins 140 basis points in this fiscal year. So we're really confident about our ability to do that. And if we would see a further decline, we hold the businesses to a decremental 30, but if you look at where we performed during COVID and in other times, we're much better than that. So we believe all the tools we have in the Win Strategy, the operating -- strong operating cadence we have, we believe we can continue to expand margins.

Got you. That's a good answer. So just -- you do have 20% market share target. So can you just talk about the tools that you use to drive the market share?

Sure. So 20% is a longer-term aspirational goal. And first of all, with the transformation of the portfolio, we think we're in a better position than we've ever been to achieve that into the future. I already mentioned some of the work done around the growth triangle, Simple by Design. We also have a tool, New Product Blueprinting that we've used for quite a while. That helps us as a process, that helps us partner with our customers and our customers' customers to really truly know what the unmet needs are and what the problems are. This helps us focus on what we need to work on with innovation, and we measure this through a metric called PVI, product vitality index. So if you look back to where we were in FY '15, that PVI as a percent of sales that comes from new products, we were high single digits, and now we're around 20%, a little over 20%. So a very strong tool, making sure we have our resources working on the right products. So not only can we grow organically that 4% to 6%, but so we can hit that 20% share of the Motion and Control market.

And are there areas within your Industrial portfolio where you're materially below this 20%? And are these in areas where you're going to invest more of these particular areas for more M&A because I would imagine it's probably not uniform?

Yes. So one of the strongest tools that we have that we added with Win Strategy 3.0 and that we really think is driving organic growth at the division level is strategic positioning. So strategic positioning is what each general manager does in their division, segment their business, segment their markets, really determine where they're going to grow organically and put the resources there. So every division is held accountable for growth. Everybody has their part of the growth targets. Everybody has their part of the margin targets. So that's a tool that we use to make sure that we're headed in the right direction.

Okay. So let's talk about aerospace because this shows that like my industrial background. But Meggitt management has been bullish. You guys have been bullish on Meggitt. [Audio Gap] What are the still remaining priorities? What's the key to meeting the synergies? And just could you sort of size the relative buckets?

So great acquisition, great team, great products. I couldn't be happier with it. We did announce $200 million by FY '26. We've committed to $200 million by the end of this fiscal year. So we pulled ahead some of those synergies, really just has been a fantastic acquisition. Early, we have a process, we've developed this playbook around acquisitions where we put our top talent in, and we really implemented the Win Strategy as quickly as we can, specifically really working in the first pillar of the Win Strategy around engaged people. And then it makes some of that tough stuff really happen as quickly as possible. And early, we went after SG&A and we were able to really get a lot of overhead out of the business. And now it's really, the team is executing the Win Strategy. And one of the things that really helps them get to this point is getting those businesses into division structure, decentralized operating structure, the cadence that goes along with that and really sets them up for success. So we're committed to that $300 million in synergies, very happy that we're able to hit $200 million higher sooner than we thought. So really in a good position.

And are there revenue synergies and opportunities in Meggitt?

Absolutely, absolutely. I mean first of all, just the aerospace industry being what it is today, right, very, very strong. Aftermarket, picked up a lot of commercial aftermarket with Meggitt. If you look at Q2 alone, the aftermarket was 47%. So really nice aftermarket growth there. And then with this acquisition, there were a lot of complementary technologies, not a lot of overlap. So we're across the entire plane in a way that we weren't before and the entire equipment. So we picked up braking, sensing, fire suppression. All of this just gives us a much bigger seat at the table and really bullish about the future. And Military as well, we see Military really growing strong for us into the next decade.

Yes. And just on Military and once again, we're not aerospace analysts, but your Military business sort of grew 10.5% on a blended basis. And this is faster than what we're seeing at the folks that we cover GE Aerospace, Honeywell, Eaton, right, more like mid-single digits. Are you gaining share? Or does this reflect just different program mix for you?

It's really -- we had some really great partnerships with the Department of Defense and repair depots, where we're doing retrofits and upgrades and repairs. So that's a significant growth driver for us. So it's a good position to be in. And we're positioned well for the future on many of the programs F-35 and V-280 where we'll be there for the aftermarket as well. So it's a good spot.

And the repairs, this is doing what you have not been doing before. So this is incremental to what the business was doing.

Incremental to what we've been doing in the past.

Got you. And there's another question we get a lot sort of -- and last time I think we talked about TransDigm, but I'll take it in that direction. So wheels and brakes, the wheels and brakes business that you divested actually was 38% EBITDA margins. So long term, where can Meggitt margins go?

Yes. So we are committed to getting Meggitt to 30% EBITDA, right? So we believe that, that's achievable. We're well on our way. And we think we can get the whole aerospace business there, right? So we expect aerospace to be a leader in the company.

Excellent. And top line in aerospace, how should we just think, it's just built? Is it just the standard from that perspective, outgrowth opportunities on the defense, defense budgets, right? But how should we think about growth opportunity on the commercial side?

Well, I mean, commercial aftermarket is obviously a place that we picked up with Meggitt. And we're just -- we feel like we're in a really good position across all of aerospace, commercial and defense. We see that there's going to be really nice growth into the future. Some of the things we've already been talking about on both sides of the business. We have a bigger bomb on the plane. We have a larger seat at the table. And those repair depots and those partnerships are really going to help us with growth into the future.

So just maybe we can shift to a portfolio and M&A because you guys have been really, really good at sort of portfolio management and M&A. So how do you think internally, what internal criteria do you use as you sort of evaluate whether the target business is a good fit for Parker or not?

Yes. So we have a very robust cadence around reviewing -- building and reviewing our pipeline, right? So that's something that we've done for quite some time. That's how we get the great companies in our portfolio that we have today. So it's very key that they'd be higher growth, accretive margin with synergies, create shareholder value, higher EPS. We'd like them to follow the secular trends. So all of that criteria is really important to us. We like the aerospace, engineered materials and filtration business, but we like all of the 8 technologies. And the pipeline has that variety in it of all those technologies and those of different size as well.

Got you. And what about culture? Like how do you think about the culture of the acquired companies?

Very important.

Because it has been, my sense is that culture has been a bit of a secret sauce to your success.

Yes, very important. One of the great things about Meggitt was they already had high-performance teams, they had a high-performance team culture. So bringing the 2 together, putting the real operating cadence and rigor around the high-performance teams and the continuous improvement in the Kaizen culture really, really powerful bringing the 2 together. And the culture is what really empowers our team members to run their business. So it's why we make sure that we get the Win Strategy in right away. We start running the businesses with it and really start showing all of the team members that not only is their safety #1, but their success as well.

So as you think about CLARCOR, LORD, and Exotic and I believe, LORD, you were intimately involved with that one. So those have been successful. So what have you learned from these acquisitions?

So the playbook just gets stronger every time, right? We've learned that you put your top talent as the integration team. We've learned to really, again, get the Win Strategy in place, focus on that first pillar, really engaging the people, explaining to them how the Win Strategy works, getting them in high-performance teams, getting them exposed to Kaizens at existing Parker facilities right away. It really speaks well about the culture and the emphasis on continuous improvement and growing fast, right? Just really growing fast and keeping the people first.

Got you. And Meggitt has been bigger. Each deal is getting bigger, bigger and I sort of feel like talking to investors, Meggitt was perceived as a really big deal. Part of my pun. But has there been anything special about -- was there a step change in the process as you've approached Meggitt? Or is it just evolution of what you've done before?

It's more of what we've done before. Obviously, it was the largest deal we've ever done. The playbook has had a lot of improvements made to it, CLARCOR to LORD and Exotic. So we were able to leverage that playbook along with the top talent and really, really be successful at it. As we said, it's been great so far and to be able to, say, $200 million synergies by the end of FY '24 is really fantastic work by the team.

And how should we think just generally about M&A environment because, a, you sort of I think you're ahead of your sort of delevering targets. You've stated -- clearly stated multiple times that aerospace is a priority end market. I think you sort of talked about Performance Materials is another area. But what other businesses within portfolio, but you also said we have 8 platforms that we really like. So how should we think about the areas of business that you like enough to continue to scale up? And what are the M&A priorities?

Yes. So as I've said, Aerospace, Filtration and Engineered Materials, we like those spaces. We've seen what they've done to transform our portfolio, get us to a longer-cycle business, higher margins, higher growth. So we really like those spaces. But we do like all 8 technologies. I mean if you look at the technologies and the motion and flow and process control side of the business, they are going to benefit greatly from the secular trends and from these mega CapEx projects. So we like them all. The pipeline has a little bit of everything in it. When we look at M&A, we're not trying to just get bigger every time. It doesn't have to be as big as Meggitt or bigger. It just has to be the right business, the right fit for Parker.

I think the market cap today sort of is approaching $70 billion. I think a decade ago, when you really started, a big focus on capital allocation, I think it was like sort of more like $15 billion, $20 billion. So as you become bigger and bigger, right, how does the scale change your approach to sort of the M&A playbook for the next 5, 10 years?

Well, I think right now, Parker is very well positioned -- the scale of Parker, we're very well positioned to make the right M&A, create value for our customers and really use the Win Strategy to be even more successful and further transform our portfolio. So I think our scale and our experience, our track record really serves us well. And we are ahead of schedule. We'll be at 2x by the end of our fiscal year, June 30. But just because in the past, we've levered up and levered down to around that level and then we pulled the trigger, just hitting that 2.0 doesn't make us feel like we got to do a deal right then. It has to be the right deal, right? It has to follow all that criteria that we talked about and really help us reach our organic growth and our margin targets for the future.

I think we are out of time. So Jenny, it's been a pleasure. Thanks so much.

Always a pleasure. Thank you.