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

[Audio Gap] 2024 Investor Day meeting here in New York City. It's great to be back in New York and have a full room with us today. I'm Jeff Miller, Vice President of Investor Relations for Parker-Hannifin. I'm sure we have many other folks joining us live on the webcast as well. A brief safety announcement if there is a reason to evacuate the building, go to the back of the room through the doors you came in through, through the foyer and there's 2 stairwells A and B in the hallway that will take you the lobby and then outside. We are here today to share our long-term strategies designed to drive Parker's bright future financial performance and shareholder value creation. It was only 2 weeks ago, when we had an earnings call, increased guidance and discussed some near-term trends. Our intent today is to focus on the long term, hence you'll find with our materials coming up. To draw your tensioner or forward-looking statements slide. We will be making forward-looking statements and non-GAAP financial measures today. They have been reconciled and are disclosed in the appendix of this presentation. Live video of this event is being webcast on our Investors site and will be available for replay later. Today's presentation will be posted on our Investors site as well at the conclusion of today's meeting. Today's presenters include Jenny Parmentier, our Chairman and Chief Executive Officer; Andy Ross, our Chief Operating Officer; and Todd Leombruno, our Executive Vice President and Chief Financial Officer. Our agenda, Jenny will cover transforming the company, how we're positioned for growth from secular trends. Andy will discuss our strategies around operational excellence, and Todd will walk us through financial performance. After that, we will take a short break. We'll move to a Q&A discussion after the break. And then for those here in the room, we will have a reception outside in the foyer to interact with Parker leadership. So with that, I'd love to welcome Jenny Parmentier to the stage. Thank you, Jenny.

Thank you, Jeff. Good afternoon, and thank you for being here today. Thank you for your interest in Parker-Hannifin. As Jeff said, it's great to be back here in New York. It's been since 2018 when we had an in-person investor meeting. And as you know, a lot has changed since then. So we're excited to tell you about how we've been transforming the company, how we're going to continue to transform the company. But first, we would like to share with you a video with our team members and Win Strategy 3.0. [Presentation]

Aren't they fantastic. This is how it all happens. It's our people. It's our strategy. It's our culture, and it's our values and our transformed portfolio. So let's get started. These are the 4 key messages I want you to leave here with today. We are positioned for growth with our interconnected technologies and the secular trends. We have demonstrated with The Win Strategy 3.0 that we are compounding our performance and operational excellence, years of building a continuous improvement culture using our lean tools, Kaizen, high-performance teams, not only creates growth opportunities but expands margins. And today, we are launching FY '29 targets. So what drives Parker? Before we get into each of today's key messages, I want to give you an overview of who we are, why we win and how we have been transforming the company. As we just saw in the video, safety, engagement and ownership are the foundation of our culture. All of our team members take great pride in living up to our purpose. This delivers top quartile performance. And this is what allows us to be great generators and deployers of cash. So let's take a look at how our business is organized. We have been engineering customer success in the motion and control industry for over 100 years. The chart on the left side of the screen shows our businesses, Aerospace Systems, Diversified Industrial North America, and Diversified Industrial International. The chart on the right shows our 4 technology platforms, Aerospace Systems at 27%; Filtration and Engineered Materials at 31%, Flow in Process Control at 23% and Motion Systems at 19%. The Win Strategy is our business system. We have a technology powerhouse of interconnected technologies. We have a global distribution network that is the envy of our competition and we have a decentralized operating structure, 85 divisions run by general managers who are owners of the business. We have the #1 position in the $145 billion motion and control industry, a growing space where we are continuing to gain share. This is how I'm going to talk about the company. Outside of a few comments that I made on our earnings call a couple of weeks ago. This is the first time we're looking at our markets this way. 6 market verticals that represent greater than 90% of the company's revenue. Aerospace and defense, in-plant and industrial equipment, transportation, off-highway, energy and HVAC and refrigeration. Our interconnected technologies cut across these market verticals and provide solutions that no other competitor can do. Our growth is focused on faster growing, longer cycle markets and the secular trends. In 2022, at the last investor meeting, we told you that Parker was going to act and feel like a different Parker. And now just 2 years later, this is a different Parker. In FY '15, our revenue was $13 billion. We had an on-purpose plan to double the size of Filtration and Engineered Materials and Aerospace. And through strategic acquisitions and our growth enablers, we have done just that. Going from $5 billion and 40% of our revenue in FY '15 to approximately $12 billion and 60% of our revenue today. Important to note out here that although Motion Systems and Flow and Process Control are a smaller percentage. They continue to grow, and they are a critical part of our interconnected technologies and a key driver to our margin expansion. So now I want to talk about why we win. The Win Strategy, again, is our business system. We have a decentralized operating structure with 85 general managers, full P&L responsibility, acting like owners, close to the customer using The Win Strategy to improve their business every day and solve customer problems. We have innovative products of them covered by intellectual property. Our application engineers have the technical expertise to apply our interconnected technologies with our customers and provide very efficient solutions. And our distribution network, as I already mentioned, the envy of the competition and the best in the world. These distributor partners are working with small to midsize OEMs today on these secular trends on these mega CapEx projects, helping those customers. These partners are experts at applying our interconnected technologies. And these interconnected technologies provide unmatched value. No competitor can offer the breadth of product that Parker can, whether it's aerospace, in-plant industrial and automation, transportation or off-highway markets. 2/3 of our revenue comes from customers that buy 4 or more technologies. This creates an extreme amount of customer collaboration and again, is a competitive advantage. In addition, 2/3 of our portfolio enables clean technology. This allows us to help our customers meet their sustainable -- sustainability targets. And clean technology is just one example of how we are living up to our purpose to enable engineering breakthroughs that lead to a better tomorrow. We are very proud of everything on this slide. We are on track to be carbon-neutral by 2040. Every one of those 85 divisions established a baseline in FY '19, identified projects and have measured to them since, and we have already achieved a 20% reduction to that baseline. We have 160 sites that are certified to ISO 14001. We have achieved a 45% safety incident reduction since FY '19. As you saw in the video, our number priority is keeping our team members safe. 93% of those team members participate in one or more high-performance teams. In the past 10 years, we have donated approximately $70 million to the communities where we live and work. And by the end of this fiscal year, our team members will have volunteered 13,000 hours in those same communities. And I'm proud to say that we recently announced an expansion of that program doubling the amount of hours that our team members can take off work to volunteer where they choose. We have continuous shareholder engagement, a diverse and experienced Board. Our integrity, ethics and compliance programs are robust, and we are very proud of our advanced cybersecurity programs that engage all team members at every level of the organization. So I've been referring to it a lot already. And in case you haven't seen it, this is The Win Strategy 3.0. This is our business system, our guide to operational excellence. We trust the process. It is a proven strategy. And as you've heard me say it many times, I've used it and it works. So using FY '19 pre-COVID as a baseline and our FY '24 guide, here is the evidence of our people, our strategy and our portfolio driving performance over the last 5 years, 7% revenue CAGR, 600 basis points of adjusted operating margin expansion, 14% adjusted EPS CAGR and double the free cash flow, $1.5 billion to $3 billion. And now just 2 years after setting FY '27 targets, we are raising the bar again and launching FY '29 targets. We remain committed to our organic growth of 4% to 6% over the cycle. And we are increasing margin and cash flow targets. 27% adjusted operating margin, 200 basis points higher than the previous target, 28% adjusted EBITDA margin 300 basis points higher than the previous target and 17% free cash flow margin, 100 basis points higher than the previous target. And our continued commitment of 10% or more in adjusted EPS growth. We are very proud of what the teams have accomplished over the last several years, and we are confident in achieving these FY '29 targets. So in summary of our transformation, our people, our portfolio and our strategy drive performance. We have the leading position in the global motion and control industry, a powerhouse of interconnected technologies. We've been transforming the company, and we will continue to make it a more resilient, higher aftermarket and higher margin profile business. And we just launched new targets for FY '29. Now to our first key message for today, how we are positioned for growth from secular trends. At our last investor meeting in 2022, we highlighted the secular trends seen in the top 4 pictures of this slide. Mega CapEx is an additional secular trend that, as you know, is applicable to all. There's been a significant amount of announced industrial CapEx over the last several years. Depending on which track you look at, it's hundreds of billions or in some cases, over $1 trillion that has been announced for projects over the past 2 years. And those of you familiar with Parker have seen this slide before, the transformation of the portfolio from FY '15 to FY '19 shows how we have and we will continue to intentionally and significantly expand longer cycle and secular trends and industrial aftermarket businesses. This mix is more resilient through the cycles and demonstrates a consistency of performance. As a reminder, this is the same slide I showed a few slides back. This is how we're going to talk about the company. We are #1 in the motion and control industry and 90% of our revenue comes from these 6 market verticals. So let's take a closer look at how the secular trends are driving growth across these verticals. Across the top of the page are the 6 market verticals that I just mentioned on the previous page. For each market vertical, you see the current percent of sales and now for the first time, our anticipated long-term growth percentages and the secular trends that are driving growth across these market verticals. Over the next several slides, I'm going to show you examples and details of each of these secular trends. In each section, I will show you an animation of the key application tied to these trends. The animations aren't just to show you that the opportunities are real but there to demonstrate the interconnected technologies at play, how they complement one another and how they're going to work for us for higher growth into the future, that's the real power behind this portfolio. So first up is the clean technology secular trend, which presents many attractive growth opportunities for Parker. On each of these leading secular trend slides, I'll orient you to the market verticals with the most activity for the trend and our interconnected technologies that support them. For clean tech, our market verticals are off-highway, transportation and energy. And our technologies that support them are engineered materials, filtration, fluid and gas handling and process control. Clean technologies solutions have and will continue to evolve over time. Our expertise in natural gas is a bridge to hydrogen. We have a large existing bill of material for natural gas applications, as you can see on the left side of this page. This pedigree gives us a running start and requires minimal R&D for hydrogen. Electrolyzers, refueling stations, fuel cells and carbon capture are where we see Parker product being relevant for customer needs well into the future. Our first animation shows a hydrogen fuel cell truck that incorporates a range of Parker technologies, such as Engineered Materials, Filtration and Flow and Process Control. Though the timing of scaling up is still pretty far out. We are working with our key transportation customers today to ensure we meet their development and testing needs. In this next animation, we are showcasing an electrolyzer a crucial technology that will be used in the production of low emission hydrogen. As the hydrogen infrastructure continues to develop, electrolyzers are envisioned to be the key factor in the production of hydrogen. Electrolyzers use electricity to split water into hydrogen and oxygen. Parker equipment is used in the fluid and gas handling, purification and ceiling of the process. So you bring these 2 animations together and our existing technologies and deep application engineering expertise with minimal R&D investment, are providing the solutions our customers need. We estimate this to be a $5 billion total addressable market through 2030, and we see double-digit revenue growth for the hydrogen market. So now let's take a look at electrification. At the last 2 investor meetings in 2020 and 2022, I spoke to you about the electrification secular trend. I was running the Motion Systems business then. So it was a big part of my job to make sure we didn't fall behind for electrification, especially in the case of our mobile customers. As a reminder, for Parker, our bill of material is 1.5 to 2x for electrified applications. The market verticals for this trend are aerospace, transportation and off-highway, and our interconnected technologies are electromechanical, engineered materials, fluid and gas handling and hydraulics. As you can see across the top of this page, the electrification opportunities are numerous across the market verticals. Current sales in this trend is about $2.5 billion. We have decades of electrification engineering and application expertise from our aerospace systems. This has given us a competitive advantage with our off-highway customers. With Meggitt, we acquired power conversion, sensors and electric braking technology. With LORD, we acquired adhesives, thermal management and shielding that is used in batteries and throughout hybrid and passenger vehicles. Electrification is a trend that is definitely real and it's happening today. In this animation, you are seeing a fully electric wheel loader with a broad range of Parker products. This is a great example of how we brought aerospace and Motion Systems engineers together, brought their experts together to collaborate with off-highway customers and provide them with the electric solutions they were looking for. We formed our Motion Technology Center over 5 years ago. We brought these engineers together because we wanted to accelerate the development of the product that these customers needed. And I'm happy to say that it has been very successful. The Motion Technology Center, along with the key operating divisions have developed the suite of products that you see at the bottom of this page for our off-highway customers. Our Global Vehicle Motor is one of the most efficient and power dense motors on the market. Our motor controller was developed to work specifically with our motors to create the safest and most efficient system. We see the FY '29 addressable market at $800 million and a 20%-plus market growth rate. And this is another example of where our bill of material doubles. In traditional off-highway equipment, our hydraulics have powered what we call the work function. That's the scoop or the implement doing the work. So with our Global Vehicle Motor, not only are we electrifying that work function, but in many cases, we are gaining the propel function, the actual drive of the piece of equipment. Off-Highway is earlier in adoption than on-highway trucks, as I mentioned earlier, and Europe is definitely leading the way. It's important to note that all of our major OEMs, off-highway customers have electric equipment but Hydraulics is not going away. In this next animation, you see an aerial lift truck. This truck is diesel powered for the propel, the drive function and electric powered for the work, the lift function. This is a great example of our interconnected technologies all on one truck. And as we have shared with you before, we are truly energy-agnostic. It does not matter if it is fossil fuel, hybrid or electric. We benefit from all applications. And in this example, our bill of material is double that of a fully diesel-powered vehicle. And like the off-highway wheel loader, a few slides back, this truck utilizes our global vehicle motor to control and operate the lift. This motor is ideal for this application because of its package size and power density. This is what we call a power takeoff application or a PTO if any of you are familiar with any Parker acronyms. We are the market leader in the traditional diesel-powered power take-off market. And as shown in this example, we are quickly becoming the leader in the e-PTO, the electric power takeoff application. We estimate the FY '29 addressable market at $1 billion and a 25% market growth rate. And again, 2x the bill of material expansion versus an internal combustion. And our final electrification example is hybrid and electric passenger vehicles. Parker LORD technologies have been all over these vehicles since their inception. Our adhesives are used in battery packs to support production and reliability while they are in use. Our thermal management is used to protect components in demanding environments and our thermal shielding capabilities are there to create safe electrical operation. We estimate the FY '29 addressable market at $5 billion with low double-digit market growth rate, again, 1.5 to 2x the bill of material expansion versus internal combustion. I know there's been a lot of recent press on lower electric vehicle sales and production. And I would just comment that this is still very much a growing market. So now let's take a look at the digital trend. In-plant and industrial equipment is a key vertical market for this trend. And although not their own market verticals today, semiconductor and data center have significant potential and are driving a lot of quote activity today. Our interconnected technology supporting this trend are climate control, engineered materials, fluid and gas handling and process control. We see the digital secular trend accelerating growth in factory automation, semiconductor and data centers. Starting with the factory. Again, this is the second largest market vertical for Parker. Our products and technologies enable the motion and control on all of the machinery equipment inside factories today. This includes machine tools, presses, die casting, testing, assembly lines. Our products are all over these factories. Increasing semiconductor demand requires more fabrication capacity and data center cooling requirements are driving the need for advanced thermal management solutions. This animation is showing a semiconductor fabrication facility. This part of the digital trend is perhaps the most evident by the fact that there is a substantial amount of onshoring going on for semiconductor fabrication. This growth trend is a little bit different in its impact on Parker as it's not a singular application for Parker technologies, but Parker benefits through various stages of development and our technologies will be used heavily. So as seen in the animation and on this slide, our differentiated solutions are on tools and throughout semiconductor facilities. We currently have multiple Parker divisions providing products for semiconductor fabrication. The semiconductor industry is expected to more than double to $1 trillion by 2030. Digitalization and artificial intelligence are driving the need for more semiconductors and data center cooling. Parker will certainly benefit and we will benefit, as I mentioned before, throughout the entire development. We're there when the job site is being prepared. We're there when the walls are going up, we're there when the machinery and the equipment is going into the building and we will continue to benefit for years after through the aftermarket business. So once all these chips are produced and in use, we have the solutions to provide data center cooling. The heat load demand of today's chips is much higher and traditional air cooling just doesn't work anymore. So our competitive advantage, our differentiator is that we create packaged solutions for liquid cooling. The fluid going through the cold plate that is attached to the electronics that keeps it cool are Parker products, pumps, fluid conveyance, hoses, quick connects and hydraulic systems. We estimate that FY '29 total addressable market at $2 billion, and we are currently aligned with the industry leaders in this rapidly growing and developing industry. And our final trend, aerospace. Our interconnected technologies that support aerospace and defense, are electromechanical, engineered materials, filtration, fluid and gas handling, pneumatics and process control. Talk about the power of the portfolio positioned so well for today's growth. On the top chart, you see our well-balanced sales by market segment. And on the bottom chart, you see our sales by platform. Our competitive advantages are the reason for the double-digit growth to date. Our diversified customer base and markets, our proprietary designs on premier programs and our long life cycle with strong aftermarket, just to name a few. In the first of our aerospace animations, we're showing you a commercial airliner. Parker products and technologies are on every major aircraft flying to date. And as you can see from this animation, almost all of our technologies are present on this modern day aircraft. At 1/3 of our business now, Parker is a significant partner in the aerospace and defense industry. 7 of our top 10 customers are aerospace, the acquisition of Meggitt has given us a much bigger seat at the table. And in many cases, we are 1 of top 5 suppliers with our major customers. Taking a deeper look at the commercial market landscape, air traffic has recovered to 2019 levels, greater than GDP air traffic growth continues and there is a demand for more efficient air craft. As I already mentioned, we have strong positions on the leading programs that you see across the bottom of this slide. We have a large installed base that drives aftermarket growth. And we have more electric and low-carbon technologies for current and next-generation aircraft. One example would be our fuel nozzles, they provide greater efficiency and lower emissions. And we have a nice mix of 50% OEM and 50% aftermarket. We estimate 7% traffic growth calendar year '23 through calendar year '27. And 10% plus commercial aircraft deliveries growth for that same time period. And we also see narrow-body leading widebody. Our final animation is a defense aircraft. On this aircraft, we not only have legacy Parker technologies, but we also have products that we acquired through LORD, Meggitt and Exotic Metals Forming. Reinforcing the complementary nature of the technologies that we got with those acquisitions and the expanded value that we bring to our customers. Now taking a closer look at the defense market landscape. We are in a time period of increased global defense spending and an aging defense aircraft fleet, we have strong positions on a leading program that you see across the bottom of this page, 3x the F-35 content of the previous generation aircraft and key technologies for the next generation aircraft. A nice mix of 60% OEM and 40% aftermarket. The Department of Defense budget is forecasted at low single digits for fiscal year '23 through '27. Parker growth is expected to be a little higher than that because of our public private partnerships, fleet retrofits and upgrades, the F-35 aftermarket ramp later this decade and the V-280 going into production sometime around 2030. We are very proud to be a key player for the military and the overall defense space. So the animations and the detail behind these secular trends and supporting materials show you how real and exciting this is. If you multiply this by our growth enablers, strategic positioning done at the division level by the general manager, close to the customer, solving their problems market-driven innovation, our product vitality index is the measurement of the percent of sales that comes from new products. We are in the mid-20s now. And 2 years ago, we were at 20%. We have grown our international distribution 900 basis points to 44%, and we are not done. And as Andy will show you in some upcoming slides, Simple by Design is not only a margin expansion tool, but it helps us work with the customer and give them exactly what they need and want. And finally, our annual cash incentive plan that is now out to almost all of our 60,000 employees with a simple formula of sales, earnings and cash flow. We are in our second year of this now, and it is working great. You put those together and you get the 4% to 6% organic growth over the cycle. This is how Parker has been and will continue to grow differently than the past. So summarizing our growth from secular trends. We have a powerhouse of interconnected technologies. We are truly energy agnostic, and we can meet the changing needs of our customers. Our core technologies, as you saw in many examples are applied across all our major market verticals. And when you use the formula of the secular trends multiplied by our growth enablers, you get higher growth and a different partner. I will now turn it over to Andy Ross, our President and Chief Operating Officer, to talk to you about operational excellence.

Thank you, Jenny. Good afternoon, everybody. Again, I'm Andy Ross and today, I'll be speaking to you about what operational excellence means to Parker and how our teams work very hard every day to deliver it. So obviously, you're familiar with The Win Strategy highly effective tool set that our over 60,000 team members use every day in a myriad of different challenges. So really, it's up to our teams at a local level to choose which of these tools to apply at what time to make sure that we're making a difference for our customers. Today, I'll walk through some examples of the how within The Win Strategy. And towards the end of this section, I'm going to show 4 division level examples, which is a really granular look at how we've applied it and what the results have been. Additionally, it's important to note that while this strategy tool sets over 20 years old, there's a lot of expertise behind every one of these initiatives. So as our team members matriculate through their journey at Parker. There's always somebody there to help and educate and talk about how do we use these tools to drive continuous improvement. So the first and most important pillar is engage people. So within that, the physical and psychological safety of our teams is paramount. So the only way to really lead an organization over 60,000 team members, 40 countries plus all over the world, is to really build a foundation of trust. So that's how we really work to run the organization is through that foundation. Ultimately, our team members have to trust us and we them to deliver the kind of results that we do. And also it's incumbent upon us to continue to earn your trust every day as we work to execute our strategies. And we've also got a strong culture of Kaizen. So we use that tool, and we'll talk about that how we use it in our operations. Our high-performance team model is critical with respect to how our teams organize and solve problems. And then ever since our founder, Arthur Parker talked about being an entrepreneur and having an ownership culture that's been paramount and bedrock to Parker since that time. And while there's irrefutable evidence that when people feel like we belong, matter and make a difference that we absolutely unlock discretionary effort and raise the level of engagement. And ultimately, that engagement of what allows our team members to deliver exceptional results and leads to a better, more resilient company. So Jenny touched on the result with regard to safety. So significant reduction in safety, and we've made progress with respect to our engagement as well. Again, safety being the most important, we use several tools to help make sure that we're keeping our team members safe every day. We do things in our Kaizen. We do things with machine guarding. But by the time it makes it on this chart, that's a lagging indicator of a team member that was hurt. So we do a lot with tools to make sure that we're as predictive as we can be with respect to potential injuries and keep people safe and take action before it happens. With regard to engagement, we measure it formally with some frequency, and we make sure that we take those survey results. We share every result with every team member. And then locally, we talk about the things that are most important to that location. So that we'll make sure that we're really well aligned on what we can do to improve our operations. Ultimately, we also work very hard to link to our purpose because the team members around the world care about what we do, care about our communities, our products and how we impact the world around us. I talked the slide before about our high-performance model. So again, this really helps to fuel the culture at Parker. And it starts with a foundation of building trusting relationships. From there, we leverage strengths of team members. We work on the clarity of a certain project. We define a purpose and drive results. So with each of these high-performance teams, and Jenny mentioned, well over 90% of our team members participate in one of these on an annual basis. There's a charter. So we know what the goal is. There's boundary conditions, there's roles and responsibilities. So there's a lot of accountability that's built through that process to make sure that we're driving the result. Again, this helps us to build a stronger, more resilient company. We've got a very mature lean system at Parker. So we can conduct Kaizens at all different levels of the company. So we typically will break into 6 or 8 teams. Those teams will be focused on always -- there's a safety component to it. We focus on quality improvements, lead time reduction and the actions that we take make sure to deliver the results that we want with respect to growth, margin expansion and cash flow. So you can see we spent over 450 weeks in Kaizen just in the last year alone. We don't mandate how many Kaizens to do. We let the teams use them as appropriate. But what we do expect is that every level of the organization participates, including the most senior management. I can tell you that Jenny, Todd and I participate in Kaizens along with our teams. Ultimately, we want is for our team members all around the world to be highly skilled and educated problem solvers so that we can deal with issues at a local level before they become something more significant. After the focus of the first pillar, engage people, we really turn our attention to make sure that we're delivering everything we can for our customers. It's all about the customer experience. And some of the tools that we deploy are around zero defects, demand capacity management and digital operations. So all these tools work to improve the experience I get into all of these to a certain degree in coming slides. And that team on the picture or Parker team members in front of what we call a team improvement Board. So that helps to set the priorities, understand the roles and responsibilities that each team member has and helps us execute on a daily basis. The zero defect strategy I touched on, really, it's about robust products, capable processes driven by an engaged team. So it's really about designing the product right and making it right. And so some of the things that we do is we execute failure mode effects analysis on parts. We identify the critical characteristics of those parts. And then our teams both who are designing the product and making the product work together to ensure that we've got capable processes that are repeatable so that we can take care of our customers to the best of our ability and exceed their expectations. So we use this example within the company to really help educate and understand at every level, the importance of quality. So if you look at those 90 percentiles across the slide in each of those blocks represent part of the manufacturing process of a metal component that goes into a Motion Systems assembly, you think, okay, 93% is the worst one on there, and that may not be that bad. But if you look at the rolled throughput yield or the cumulative impact, obviously, there's a lot of inefficiency in this value stream. So we work to make sure that we've got extremely high first pass yields. We also use this example to make sure our team members think about who the customer is, not just the end user of the product, but the customer who's downstream. So in this case, the turning team would make sure they're working with the milling team to make certain that we're doing everything possible to provide a quality product all the way through the value chain. And then this is a picture of Jenny and one of our team members, Scott, at the Parflex division. And again, Scott is really linking the importance of quality to our ability to expand capacity and to be able to grow our business through taking care of our customers through a great customer experience. So also important to note that, again, we manage by walking around at Parker. So Jenny, Todd and I and the whole leadership teams spent a lot of time out in the field with our customers, our distributors and at our facilities. Jenny spoke about how we're well positioned for profitable growth in the secular trends. In this section, I'm going to talk about some of the things that we do to drive financial performance at the company. Some of the ways that we've been able to deliver the expanded margins that we're talking about. And it's really around supply chain excellence, simplification, lean enterprise and then some of the ways that we use artificial intelligence and robotic process automation. So demand and capacity tools. First and foremost, we learned over time that some of our teams had a challenge managing the inflow of orders and matching that up with our internal capacity. So our teams internally created a software that sits on top of our operating system that makes it crystal clear as to how the demand that's coming in, it matches up with our capacity. So that does a couple of things. One, obviously, we can manage the customer from a delivery standpoint and make sure that we're doing what's necessary and then it highlights internal constraints, so that we can work on those should we need to invest in additional capacity. As far as artificial intelligence, we've been using it to forecast for years at high level, and we continue to kind of map that down to lower levels of the organization. It's just very simply the cleaner and more accurate, the signal coming into the company, the better that we can set up our operations to serve the customer well. We use a lot of predictive analytics to make sure that we're fast and agile. And then I'll talk about robotic process automation. And one tool that we use, and we've got dozens deployed across the company is -- there's a really good tool in our transportation management system or TMS that we use, where traditionally, our team members would have to manually go through and figure out what's the most optimal freight lane. How much are we paying right then for fuel? How do we make sure that we have the right amount of fuel charge. So there's a ton of data that you had to go and look up. And now by deploying an RPA tool, that's done automatically. So the teams can use that and obviously spend their time in a more valuable manner. So we often talk about the best and most resilient supply chain really helps to win, right? So some of the ways that we do this are local for local strategy, dual sourcing, sustainability and cybersecurity. So local for local really simply means that we're in a region for region. So that helps us to reduce costs, reduce complexity of the overall supply chain and improve flexibility and speed. Dual sourcing, so we understand within the company, what percent of our product we really need to have redundant capacity within the supply chain, and we work to make sure that we've got that. Another tool that we've got when there was the unfortunate tragic incident with the Baltimore bridge. We've got a tool that within minutes, we were able to discern that we didn't have any product on that particular container ship. And with all the exogenous shocks that happen in the world, that's really important for us for our customer's sake for the consistency of performance. Sustainability, Jenny touched on some of our initiatives there. Quite simply, our customers have zero carbon emissions goals. We have them and we flow that down to our supply base. So we have exact measurements. So we know how each one of them is doing and that their commitments are being met. And then cybersecurity. There's a lot of bad actors out there who would love to disrupt companies and supply chains. And so really, our customers, ourselves and how we link digitally to our supply base is extremely important, both from on protection and then a business continuity standpoint. So we work with them to make certain that, that is taken care of. We use a lot of simplification tools, many fastness of our business. So you don't necessarily hear us come out with big bangs as far as restructuring, and that's because we really don't wait for a shock to take care of it. We work it every day, all the time. So we're constantly looking and scrutinizing at our footprint. And over time, we've obviously reduced the number of operating groups. We've consolidated divisions and continue to work on our footprint. Our organizational design tools really just help to make sure that we link our strategic positioning, again, how we're going to win, where we're going to win and what that looks like to an organization that's built to deliver it, so we use that tool consistently. Revenue complexity, really the 80-20 principle, we look at the complexity within that revenue profile, and we work to make sure that while we take care of the customer we leverage some of our channel partners to do it and simplify the overall revenue profile. And Simple by Design, as you'll probably recall, this is -- this has been and will remain a major initiative within the company. So a significant amount of the product cost comes from the design and the material. And so we've got Simple by Design tools that really focus on forward-thinking approach that reduces the components that we use and is designed to help maximize the flow on the manufacturing floor. So in the video, one of our team members was talking about that. It's making sure it's design right so we can flow it right on the shop floor. Digital leadership, it's another important aspect of our business. Jenny talked some about the front end and how we're working on the secular trend to grow our business. We do a lot of work with respect to digital experience for customers products, operations and productivity. So there's a lot of work that's been done and tools that have been developed like e-configurators, digital CAD drawings, a lot of self-service tools on parker.com for our distributors, and we continue to evolve that. Within strategic positioning, we determine which products need connected, how they should be connected, how to monetize those things and also how to protect them. Digital operations, I'll touch on some machine learning examples in a minute, but within -- what we term smart manufacturing, an example would be day by the hour boards. So a few of us were talking before the meeting. And what we were talking about is on a shop floor at Parker you measure things every hour. And if something is off for an hour, somebody's alerted to it, and we kind of marshal the right resources. So things never drift very far before we've got the discipline and the tools and the team to address what the issues are. We used to do this manually. It was -- it served us very well for a long time, but now we've started to incorporate digital [ e ] by the hour boards or day by the hour boards. And what that does is it just automatically takes information off the machine, so that our team members can spend time -- more time on problem solving and analyzing the data than writing it down. So this has been highly effective. It's also given some of our shop floor leaders the ability to see things virtually and to help be able to drive the business forward. And then with regard to digital productivity and application for artificial intelligence as it relates to the Simple by Design is over the years, you could tend to build complexity into the product offering. So we use AI tools that scour a lot of information to look for light components and to be able to streamline that offering. And I'll show you examples of what that means at a division level. So again, artificial intelligence is obviously kind of front of mind, and it's a broad topic. I talked about -- we used it for a long time to help from a forecasting standpoint. We've got machine learning that helps from a cybersecurity perspective and performs predictive analytics and helps identify different behaviors and stop things before they become an issue. Machine learning, I'll touch on in a minute. And then when it comes to generative AI, we're constantly looking at what that means for us and how to deploy the right tools. And right now, we're working on some content generation and advanced searches as far as generative AI. So we talk about automation, really where we focus automation is on the dull-dirty and dangerous work, high labor content if it's ergonomically challenging for our team members. We obviously want to eliminate that. Our approach is really to work through the high-performance teams, the Kaizens that we talked about. We never want to automate a bad process. So we always talk about lean it out before you automate it. And then we partner with automation experts who are really good at applying the right tool for the right issue. And you can see some of the improvements there that we glean from that. So it's about safety, customer experience and productivity. And Josh, who is our leader in Livingston, Tennessee at one of our Engineered Materials factory and I were standing there and we're front of an automation -- or automated vision piece of equipment. So this used to be done by hand. It was manual, and that's highly laborious somewhat ineffective. And what we did was to automate that process. So it's a high-speed machine that uses machine learning from AI to get smarter and build intelligence over time. So we can continue to speed this machine up and it continues to improve its ability to identify different defects and become more productive. So I'm going to show you a brief video here. This is really some of our Motion Systems team and the automation work that they've done. So as you think about this, think about the impact that we've got on digital, both as a supplier and a customer as well as some of the automation things that you're going to see. So really good examples of electrification and digital on our own shop floors. [Presentation]

Yes. So we're really proud of the team and the work that they're able to accomplish. And some of what you saw there was actually manufacturing components for our Global Vehicle Motor which is an important part of our electrification strategy. So again, over 60,000 team members, over 40 countries around the world. People often ask, how do you make sure that you maximize alignment within an organization. So there's really a great tool called strategy deployment from lean manufacturing. And that just helps to make sure that at every level of the enterprise, people are very clear about what the goal is and then The Win strategy helps us to get there. So once a year, the senior leadership team analyzes the 3- to 5-year goals, we set the annual improvement priorities, and we worked to cascade that throughout the organization. So whether you're running a company, where you're running a plant in Nebraska or France, you know exactly what's expected. You've got the tools and the ability to deliver. So now that we walk through some of the pillars and some of the tools, I'm going to give you 4 quick examples of the impact of The Win Strategy at a division level. And again, this is a pretty granular look at the company and one that we haven't typically shared. So we'll start with the Parker LORD business in North America at the time of acquisition, really strong from an innovation standpoint, really strong with the customer, not super-efficient on the shop floor, and there was a fair amount of complexity. So we really employed a lot of the tools around safety, zero defect, lean and strategic positioning. And since the time of acquisition, you can see significant reduction in safety. And we typically see that and acquire companies where the desire is there, but maybe the tool set is to deliver some of the results. So a big drop in recordables, big drop in return parts per million. So much happier customers, we were able to deliver 7% CAGR over that time. And you can see significant margin expansion since the time of acquisition. In Industrial International division. So this happens to be a fluid advance division. We had a pretty challenging margin profile. Jenny mentioned when she was leading the Motion Systems Group, some of the work that she did with the MTC, and this particular division was in the fluid conveyance space that I was responsible for at the time. And we had a lot of complexity, challenging margins, and we really needed to reduce cost. So broken to high-performance teams used the Simple by Design tools that we talked about. We deployed a significant amount of automation. And then you can see we did some work in supply chain. So we had a significant reduction in the number of raw materials and SKUs, but it's important to note that it didn't hurt the product offering. So we're still able to cover all the range of applications that our customers needed. We just did it in a much more simple manner. And you can see the margin improvement that we were able to gain. This is an industrial air filtration business. Again, international business. really had the need to drive safety. We weren't growing the way that we wanted to. Even though we saw we had a lot of significant clean technology opportunities. So we did a refresh on the strategic positioning, which, as Jenny talked about, we do at the division level. We leveraged our distribution channel, simplified the revenue complexity and profile, really drove best-in-class lead times through Kaizen, and you can see huge reduction in safety incidents much better on-time delivery. We're able to kind of break out of the stagnant growth and grow 7.5% CAGR and added 270 basis points to an already very profitable division. And then lastly, in Aerospace Systems division. This is an exciting one. It's part of Meggitt. And so obviously, we haven't even come up on a 2-year anniversary to Meggitt. What we found is just a tremendous culture, just great people, very congruent with the culture at Parker, a lot of SG&A opportunities. and really didn't have the strong operating rhythm that we've got. So when I talked about the day by the hour earlier, again, we don't get off more than an hour before we do something and act, right? So we've got very rigorous operating cadences around how we run the business. And the team was great about really embracing and using The Win strategy. So through lean, through the decentralized model and really entrusting that team and helping them that operating cadence and some pricing opportunities. Again, you can see a huge reduction in the number of safety incidents. The productivity was incredible and a large part of that was on the shop floor, not just SG&A. Obviously, we're experiencing tremendous growth right now in the aerospace business and 900 basis points from a run rate. So just incredible improvement from that division. So again, I'll leave you with -- we've got a terrific team at Parker. The Win Strategy is as comprehensive a tool set as you're going to find. And a lot of times, we talk about everybody likes to win, right, teams like to win. But I can assure you that our team is always willing to do the work necessary to prepare to win, right? So we've got a terrific team, highly disciplined, highly dedicated working together to make a difference and to make sure that we deliver our promising future for everybody. So with that, I'll turn it over to Todd.

Thank you, Andy. That was fantastic. Hello, everyone. My name is Todd Leombruno, I am the financial -- Chief Financial Officer for Parker-Hannifin. It is a pleasure to see so many familiar faces in the room and obviously some new ones as well. I couldn't be more proud to be able to talk about the financial performance that our team of over 60,000 team members around the world work tirelessly on to generate. You heard Jenny and you heard Andy talk about how powerful The Win Strategy is. It gives me great confidence in those new FY '29 targets that Jenny shared with everyone today. We have worked hard on transforming the company on moving the company to be more levered towards longer cycle, higher margin, higher aftermarket businesses. We have never been more positioned better for growth. and we've never been more confident in our future. I love those examples that Andy used. It really shows how we leverage The Win Strategy to drive margins higher, to generate great returns and to be strategic with our capital decisions. All of that has resulted in an unbelievable transformation to the company and a transformation of our financial profile. So let's take a look at what that means. Jenny showed that we are a different company, we certainly are a different Parker across virtually any metric you choose to look at. These 2 charts are how we have shifted the portfolio to be longer cycle, more aftermarket, more aerospace, more filtration, more higher margin exposure. Jenny shared that we have now 60% of the portfolio that is levered towards filtration, engineered materials and aerospace businesses. If you look at the other side of the pie, our Motion Systems business and our Flow and Process Control businesses, these are critical to our success. They are key to our interconnected technology offering. They are vitally important to our distribution network. And you saw today how they are linked to the key trends of electrification, digitalization and clean tech. They are also market leaders in their space. All of these businesses have been part of our success. They've been part of our margin expansion, and they generate loads of cash. So let's look at what that has meant to the financial profile of the company. This is a 10-year look, so our market cap now is roughly over $70 billion. That is an increase of $56 billion. Enterprise value, almost $80 billion. That has increased by $66 billion. Our EBITDA multiple has expanded by 7x over this period, and the margin expansion has been fantastic. If you look at adjusted segment operating margins, we've increased that to 24.6%. That is our FY '24 guide. That is nearly 900 basis points of margin expansion. EBITDA expansion is even better, over 1,000 basis points. And if you look at earnings per share, we've added basically $17 of earnings per share to the company over this time period, growing at a 14% CAGR. I think you could agree this is a different Parker than a Parker of old. So we've made progress since the last investor meeting. Just 2 years ago, we met and we set targets for FY '27. Our team has never been more aligned around creating value and driving margins higher. If you look at this, our sales have nearly reached $20 billion and have grown at a 12% CAGR over the last 2 years. Segment operating margins have expanded by 230 basis points. That is best-in-class over 2 years, 230 basis points of margin expansion. And our adjusted EPS has grown $6 over that time period at a CAGR of 15%. Jenny mentioned this earlier, we will generate over $3 billion of free cash flow this year. That is the first time in the 107-year history of the company, that we will achieve $3 billion of cash flow. The free cash flow margin will be 15%, and we remain firmly committed to generating free cash flow conversion greater than 100% of our net income. Free cash flow has grown at a CAGR of 17%. So no matter what period you look at, these metrics are not only improving, they are accelerating, and we are very proud of what we've done. It really has been an eventful 2 years. So we talk about the overarching elements of what drives the company. Jenny shared some of these. Our focus on safety, engagement and ownership, living up to our purpose, focusing on top quartile performance and, of course, being great generators and great deployers of cash. We love looking at our charts that go up and to the right. It really feels good to talk about those charts, but we understand the importance of relative performance. We do that by measuring our performance against a set of peer companies that are leaders in the space. So we know that we have to perform better than those in our space, and we understand how important that is. If you look at these charts, from earnings per share growth and cash flow from operations growth over the last 5 years, we are in the top quartile performers in that space. We are proud of that, and we are driven to make sure that we continue that and drive performance in those areas even higher. In respect to sales, this is a totally different look from Parker of old. While we are not top quartile, we sit firmly in the second quartile on sales growth. And if you look at what we've talked about today, the portfolio has never been levered more towards growth. We have the right strategy, the right people, the right portfolio, and we're levered to the secular trends in a way that will help us grow differently than we ever have before. How do we do this? We do this using The Win Strategy. We've tried to explain that today. These are the components of how our team creates sustainable value. And it's not easy. -- it takes a lot of work from everyone around the company. We are committed to that 4% to 6% organic growth over the cycle. The Win Strategy has proven itself to be a fantastic margin expander. We expect that to continue. We are committed to generating incrementals of 30% no matter what margin profile the company is right now. And we continue to want to be strategic with M&A. But we have a disciplined process. I will talk a little bit about the last 4 acquisitions and what that has meant for the company, but we remain committed to growing the company through adding the right businesses, businesses that are accretive to growth, accretive to margins, accretive to our longer cycle nature and have aftermarket exposure. We love our history of returning capital to our shareholders. We have a target to be greater than 30% of the last year 5-year average net income and we have a long history on that. I'll share that with you. So this is the formula that we believe our team members around the world use every day to generate value for you, our shareholders. So that formula has worked. No matter what indices you compare us against, no matter what benchmark you want to measure us against. We have generated an unbelievable return for shareholders over the last 5 years. If you look at our total shareholder return, over 250%. The stock has appreciated over 225% and we've added $50 billion of that market cap in just the last 5 years. It really has been an exciting time. Jenny mentioned this slightly. 2 years ago in our Investor Day, we talked about wanting to establish our record of setting and achieving margin targets. We set these targets today, the Jenny released, that will be the fourth time in the last 10 years that we've set margin targets for the company. That first target, we achieved way back in FY '20, we achieved that target 1 year early. We set another target. We achieved that target 2 years early. Today, we're on the cusp of almost 25% segment operating margins, what will be 3 years early. Is anyone noticing a pattern here at all. Today, we set a new target for FY '29 of 27% segment operating margins. That is an increase of 200 basis points from our prior target, and we are firmly committed to driving margins higher. So here's the targets again in case you missed them earlier. We are recommitting to the 4% to 6% organic growth. We are recommitting to the greater than 10% EPS CAGR. And of course, we are pushing operating margins, EBITDA margins and free cash flow margins even higher. So people ask us all the time, how have you been able to do this, right? Well, I'll tell you, it's not easy and it doesn't just happen. It really takes our global team, aligning around, believing in and most importantly, executing on those tools of The Win strategy that Andy just went through. You've heard them talk about how powerful it is. It really does work. While we just raised that target 200 basis points based on our FY '24 guide, we expect to finish at 24.6%. If you look at what that means is that means 240 basis points of margin expansion over the next 5 years. And to no surprise, the largest bar of that margin improvement is going to come from implementing and executing on The Win Strategy. All of those things that Andy talked about, all of those things that Jenny talked about, continuous improvement, Kaizen activity, Simple by Design, driving continuous improvement across our business. This has been very powerful. It's how we got here, and it's how we're going to get to FY '29. Of course, we're committed to the synergies that we announced from Meggitt. We are committing to that $300 million of synergies. We'll have achieved $200 million by the end of this fiscal year, FY '24, and we expect to achieve another $100 million, $50 million in FY '25 and $50 million in FY '26. That will complete our commitment on Meggitt. And of course, we're holding our team accountable for incrementals on volume growth that we see throughout FY '27. That's how we're going to do it. We're going to do it just like we've done it in the past, and we're going to do it again. All of that I know there's a lot of models going on here. All of that, what that means is we are going to continue to drive continued earnings per share growth. If you look at what that means, we are committing to generate over $35 of earnings per share by FY '29. That is a $10 increase in earnings per share. These are the assumptions that go into our model, 4% to 6% organic growth, 27% segment operating margins, 30% incrementals. The synergies that I just talked about, tax rate at 23%, shares remaining essentially the same. And the key item here is this does not include any additional capital allocation optionality. And I'll show you what that means to the company in a second. All of this performance, all of this margin enhancement, all of this growth has been meaningful for our cash flow generation. Over the last 5 years, we've generated over $12 billion of free cash flow. We expect to take that a step change higher. We are going to increase that by 50% over the next 5 years, and we will generate greater than $18 billion of free cash flow. That gives us lots of options. We're committing to 100% free cash flow conversion. And as you saw earlier, our free cash flow margin target is 17%. That's 100 basis points higher than our previous target of 16%. We are really committed to driving cash throughout the business. Parker is very proud to be 1 of 5 companies that have consistently increased our annual dividends paid. We have a 68-year record of increasing dividends paid, and we're not going to let that record break. Not only have we increased the dividends paid we've done it at an increasing rate. The CAGR on our dividend over the last 5 years has been 14%. Our goal remains to be greater than 30% of our trailing 5-year net income paid out as dividends. And what that means is our dividend today is roughly a little over $6. We see that increasing nearly 2x to greater than $11 per share over the next 5 years. That will be $6 billion of capital that we will return to shareholders. We are committed to that, and we're very proud of that record. So you've heard us talk a lot about acquisitions. They have been really meaningful. We could not generate these results without doing these acquisitions. People often ask us, what's the strategic rationale? What do you think about when you're looking at acquisitions? Well, I would tell you, each one has been very unique and they've been very powerful. We've expanded our engineered materials business by a factor of 2. We've doubled our filtration business, and we've doubled our aerospace business. The aftermarket exposure in the company, which was already strong, has never been stronger than it is today. We've added an unbelievable amount of technology, capabilities and really most importantly, great talent to the company. And that talent is not just working in these acquisitions. It is already spread throughout the company. So it's been very, very, very powerful. These have been longer cycle, they've been margin accretive. They've been EPS accretive and they've been cash accretive. We couldn't be happier with the performance of these transactions. I already mentioned it, we will achieve that $300 million on synergies for Meggitt that will extend our track record of generating synergies from these transactions. And when you look at our EBITDA margin target, we just raised that to 28% in FY '29. These acquisitions have been -- or will be key in us achieving that 28% target. When you look at the CLARCOR business, by FY '29, we expect that business to be operating in high 20s EBITDA. When you look at LORD, LORD will be over 30%. Exotic will be performing in the high 20s and Meggitt, which we originally committed to getting to 30%, we now foresee that being over 30% by FY '29. These have been extremely powerful for the company. So over the last 2 years, we've been very deliberate talking about our deleveraging plans. The margin expansion, the cash flow generation of the company has never been greater. We've been very intentional on making sure we delever as fast as we possibly can. If you look at this, we achieved a leverage of 3.6x at the close of Meggitt. And what we are committing to is we're committing to a 2x leverage by the end of June. So just a little history. If you remember, when we did CLARCOR, that was a $4 billion transaction. we returned to 2x leverage. It took us 9 quarters. When we did LORD and Exotic, that was $6 billion combined as a transaction. It took us 8 quarters to return to 2x leverage. Now with Meggitt, roughly a $9 billion transaction, the largest ever in the history of the company, we will return to 2x leverage faster than we ever did before. That will take 7 quarters to achieve that. It really has been powerful. Another pattern that I want you to keep in mind. I want you to also know that we are firmly committed to maintaining our strong investment-grade rating. And we commit to operating at a 2x leverage target over the cycle. It's really been great to see that. So people ask us all the time, what do you think if you can get acquisitions? Clearly, we've been strategic with the portfolio, both on where we focus our investments and where we deemphasize. Our acquisition playbook, I would tell you is now a finely-tuned process. We've talked about this a lot. We look at companies that have a great cultural fit. We look at companies that can help us improve our margin profile, companies that help us expand our aftermarket presence. What we do better than anyone else in my mind is we realize value by integrating better than anyone else, by having a clear synergy path better than anyone else and really rapid deployment of The Win Strategy tools. And you can see that in our results. I don't want you to think we're going to change our financial criteria. We're going to remain disciplined. Every single one of these things has been unique and powerful, and we understand that we -- the goal is not to add any company to the portfolio, it's to add the right companies to the portfolio. The pipeline is robust. We continue nurturing, we continue building and we continue the relationships that have been so powerful to the acquisition pipeline over the last couple of years. One thing that a lot of people don't really understand is our best owner playbook, we challenge every business in that portfolio of ours to earn its right to stay in that portfolio. And sometimes, there are businesses that we find that might find value at a different owner. We remain really disciplined on this. We don't see anything major here. We continue to trim around the core. But if you haven't paid attention, we've quietly done 8 divestitures over the last few years. All of this adds up to unbelievable capital deployment options. What's exciting here is we are going to return $6 billion of cash to our shareholders through dividends over the next 5 years. We're going to reinvest in the company greater than $2 billion, and we're going to buy at least $1 billion of our shares back over the next 5 years. What is really compelling is the optionality that we have now with that margin profile, with the performance of the company, we now without going over any leverage limits that we've done in the past, we have between $20 billion and $26 billion of capital deployment that we can choose to deploy over the next 5 years. So I can assure you this is going to be an exciting 5 years. $35, greater EPS and over $35 billion of capital to deploy, I think you're going to like what you see when we get together next. So in summary, from a financial performance standpoint, we have never been stronger than we are today. We are firmly focused on capturing that 4% to 6% sales growth. The portfolio has never been levered better than it is today in respect to growth. I think we've proven our ability to expand margins, to operate more consistently than we ever have in the past. And we are going to continue to drive margins and EPS ever higher. The cash flow profile of the company is powerful, and that gives us a lot of options, and we are committed to returning capital to our shareholders. So thank you for your attention. Thank you for your interest in Parker. With that, Jenny, I'm going to hand it over to you for summary.

Thank you, Todd. So this would be -- there's no better time than right now for me to thank my team and the army of people that it takes to put on a great event like this. So I want to thank each and every person that was involved and really appreciate the time that has been put into this. So again, key messages that I want you to leave here with today, we are positioned for growth with our interconnected technologies and the secular trends. Hopefully, it's really clear to you now why these technologies are important in our portfolio and why they must remain in the portfolio. Andy gave you a lot of examples of how Win Strategy 3.0, all of our tools have helped us compound performance and why we will be able to reach those FY '29 targets. Operational excellence, it is something that we have really driven throughout the organization. It's part of our culture. And the good news is we're never done. We are never complacent. We are never sitting back saying, well, check, there's no more to do. We just keep doing it. And again, hopefully, you will see that these FY '29 targets are well within our reach, and we are more committed than ever. And a final reminder on what drives Parker. It's our people. It's keeping them safe. It's the engagement that we earn by making sure that they feel like they belong and that they matter and that they can make a difference. That drives ownership. It's living up to our purpose. That's what drives that top quartile performance that Todd was talking about. And that's the reason that we will continue to be great generators and deployers of cash. Hopefully, you've seen that this is a different Parker. It's a better Parker. And we're going to take Parker from better to best. Thank you for being here today. I'm going to turn it over to Jeff and he'll give you instructions for the rest of the event.

Great. Thank you, Jenny. That was terrific. All right. This brings us to a short break as we prepare for our Q&A open discussion time. We will start Q&A promptly at 3:45. For those in the room and on the foyer, we have refreshments available for you. So we'll see us soon. Thank you. [Break]

If you could all find your seats, we're going to get started with the Q&A session very shortly. So if you could all find your seats again, we'd appreciate it very much. Thank you.

Okay, everybody. We're going to go ahead and start our Q&A open discussion. We have Jenny, Andy and Todd here to do a Q&A with you all. When you ask a question, please announce your name and your firm name as well. And we do have a full room, so please limit to one question. Yan, Chantelle and [ Eden ] from our team will be our mic runners, so we'll do our best to get to you. Let's go ahead and get started. If you take one from the right middle there, in.

Joe Ritchie, Goldman Sachs. Todd, I mean you set yourself up for this, right? You're a little -- your patterns of on margins 4 years ahead, you're talking 27% segment margin by 2025 then?

Well, listen, we're really proud of the track record that we've been able to do. By no means do I intend to send the message that we're going to achieve that 27% margin next year. But if you look at it, we're going to expand margins 240 basis points over the next 5 years. That is unbelievably powerful. And I would tell you, our team is really proud of what we've been able to do, and we've never been more committed to be able to drive that closer.

Okay. So here's my real question. Yes. So Jenny, you talk about this I mean, really great performance over the last 5 years. And if you think about the last 5 years, it's just been incredibly volatile, right? We've had a pandemic. We've had wars, we've had hyperinflation, supply chain problems, all of that. And along the way, you guys are able to grow 13% to 14% clip. When you start looking ahead, there's many reasons to be excited, particularly here in the U.S. with all the investment that's happening. The short question is why wouldn't the next 5 years be better than the last 5.

There's no reason why it couldn't be better than the last 5. Obviously, everything that we talked about today with how we're positioned for growth with the secular trends in our transformed portfolio. We're very positive about the next 5 years. We believe in the teams. We believe in our ability to continue to expand margins. And what we launched today, we're committed to. So I think these targets are what they are today based on what we see, but we're never -- like I said, in the closing, we're never done, right? And when we set these targets, these 4 targets over the last 10 years, we didn't set them with thinking, oh, that's easy, we can get there and beat them. We set them with a commitment to hit them and to just double down on The Win Strategy and get there. So we would never say things couldn't be better, but this is what we see right now. We're committed to it.

And we'll take next question here from second row please.

[indiscernible] Scott's question. I've got a couple -- maybe the deal-related questions, Jenny. First you made a little bit of a point at the beginning that you're showing us the businesses in 6 different slices a little bit different. HVAC jumped out a little bit at me, that could have been another and you could have said 5 slices. So I'm wondering if there's some particular ambition you have in HVAC is part -- question 1a for me and I've got a b.

You want me to answer it? You're going to go to b. No, there's no hidden meaning there. It's just -- it's a good business for us. We like the business. And we see that it's going to follow some of these secular trends and -- but no hidden meeting.

Is there kind of a served market opportunity you see there that kind of stands out in your view, maybe the liquid cooling stuff or...

Well, I mean the liquid cooling, a lot of those technologies would fall under flow and process control and some motion systems. Obviously, air conditioning will still be necessary in data centers. There's just going to be a need for more of that direct cooling that comes from liquid cooling. We just -- we see that the air conditioning and refrigeration market is a good one. We think that although right now, it's a negative, it's going to be a positive into the future, and we see growth there.

And then I was just wondering on actually kind of a couple of things. On the 4 deals that you've already done, right? The targets are pretty much in line with where you're saying the total company is going to be in 2029. I wonder if they're on pace right now in 2024 or does any one of them have some catching up to do to be where you want it to be relative to those targets.

They're all on pace, right? They're all working to get to those targets. Every division within those acquisitions and that sit in the operating groups, they know what their targets are. And as we pointed out a couple of times, every division, every business is expected to perform. So they're all on pace to get there.

All right. We'll take the next one on the front here.

Just following up on Jeff's question. When you think about future M&A, would you expect it to be within those 6 key verticals? Or is that not a key criteria?

Yes, we would expect it to be in there. Now obviously, I've said many times, we like all the technologies. And we think that these technologies together are going to what makes us grow differently. So we would expect those to fall inside of those 6 market verticals.

And when you think about your margin targets for fiscal year '29, would you expect gross margins to rise somewhat proportionately with those targets.

We would expect gross margin to increase.

Scott. I would just add to that. We're agnostic of where the cost comes out in the P&L. We are frugal across that P&L when you look at just the makeup of it. the vast majority of the cost is in cost of sales. So we'd expect that to generate to higher improvement in gross margin.

All right. Let's switch sides to the front or the other side [indiscernible]. Chantelle, could you.

Maybe a question around M&A. So the margins are obviously moving from sort of mid- to high 20s a very high level now. Does that change the type of target that you look at? I assume the risk would be that it means you're more likely to buy higher growth businesses, perhaps than in the past because you're wary of diluting margins when a lower-margin business is brought into the portfolio. How does that kind of affect how you're thinking about maybe how the types of deal in the future will change versus the past? And then when we look at the end markets themselves, the 6 that you broke out, should we assume that the ones that are sort of mid- to high single-digit CAGRs get a disproportionate share of M&A capital or not necessarily the whole suite is open to deals?

Well, first of all, as we commented a couple of times, it has to be the right deal. It has to have all that financial criteria that Todd went over, right. We wanted to be accretive to margin. We have to see the path with synergies. So if it's accretive to margin with synergies and we can see the path that Todd outlined in those other 4 deals that we've done, then it's a good deal for us. But it has to be accretive to EPS. We have to see cash flow. We have to see that's going to follow the secular trends. So some of our base legacy business and those technologies that aren't aerospace and engineered materials and filtration. Hopefully, you saw today how important they are to supporting the secular trends. So I wouldn't say that M&A is out of the question for those, but it has to hit that criteria.

We'll take our next question from the second aisle here off the -- on the right side, please. Thanks, Eden.

Jamie Cook from Truist Securities. Sorry, Jenny, another question around M&A. As you think about your 8 interconnected technologies, can any of this product portfolio be enhanced with software? I know some of your multi-industry peers talk about getting more into the software business. And then I guess, the other area that some of your peers are in are sort of health care. So I'm wondering if that's -- if any of your 8 connected technologies could be applied more to health care and if that's an opportunity for you in terms of diversification?

We're not looking to be a software subscription company, okay? We do have some of that business. We also have some business in medical and health care. But we're really looking for the products that enable those secular trends and that enable us to grow faster. Some of the things that we highlighted today. So while we do have software capabilities, it's not who we're looking to be.

Okay. Take the next one from left side, second row, please.

Can you unpack the 4% to 6% a little bit, when we think about the 7% you talked about 2019 to now think about kind of the price and volume, how you're thinking about the 4% to 6%, how that price volume dynamic shifts what kind of industrial production environment do you need for the 4% to 6%? And then related to that, in the verticals you outlined, where do you have the best visibility? I think aero has the highest growth profile you're looking at. But is that also the best visibility on growth that you have?

Well, the 4% to 6% is over the cycle, right. And obviously, aerospace has been growing double digits, right? And we just came off of a couple of years of double-digit growth in the industrial space. But as you've heard us talk about recently, with where we've been the last 4 to 6 quarters, we expect to see things turn in the future. And that will be part of achieving that 4% to 6%. So we think that industrial will pick up, and we'll get some of that 4% to 6% from there. But as we highlighted today to, we see longer-term high single-digit growth for aerospace. So it all comes together. And that's really kind of the power of the portfolio right now. It's more resilient to those cycles than it's been in the past. And that's really why we feel comfortable saying 4% to 6%.

All right. Next question. We'll take next to you there, Chantelle. [Operator Instructions]

Nathan Jones, Stifel. I guess I'll ask the other side of the deal. Todd, you talked about divesting businesses also over the last 7 years. Can you talk about what are the criteria that get the businesses into that bucket? What makes it so that Parker is not the best owners of those businesses?

Yes, it's a great question, Nathan. Like I said, we challenge every one of those businesses to make sure they have to earn their right to remain in the portfolio. And if you look at that 1,000 basis of EBITDA improvement, 1,000 basis points of EBITDA improvement over the last 10 years, they have to be contributing to that improvement. And if they're not -- if they're not a core technology, if they're not critical to our distribution network, those are the businesses that we have found that might find better value somewhere else. So that's -- it's really as simple as that.

Next question in the back there.

It's Joe Giordano from TD Cowen. Just a follow-up on Nathan's question there. How optimized do you think you are on the divestiture side? I know when you laid out the various growth by end markets there were a couple that were in like the low single digits. And just curious how that 4% to 6%, like how much can you potentially lever that up just by subtraction?

Yes. I think what we're really trying to highlight there is that we have been looking at the portfolio. But I want to stress that there's no major pieces of the business that we are looking to divest. These would be smaller pieces. That allow more focus on all of the growth areas that Andy and Jenny talked about today. And we're going to make sure that anything that we do is margin accretive to the company. So it was just really a way to signal the fact that we have been active on that. And we will continue to be.

Next question in the back row please.

So Nigel Coe from Wolfe Research. So obviously, Aero is a great end market right now, but I don't think you want to be an Aero company necessarily. So is there an effective cap on like 1/3 portfolio contribution from Aerospace. So would you be happy for that Aero mix to go higher? And then maybe, Todd, just touch on leverage, higher margins, higher free cash flow margins means that you should be maybe carrying a bit more about leverage over the cycle. So just how do you think about leverage through the next 5 years?

Yes. I guess I'll start, Jen, if you have something to add just jump right in. We have no stated target that we're trying to get to an Aerospace and Defense to be a part of the portfolio. We really like that business. As Jenny said, we see it growing high single digits for the foreseeable future. What we really like about that business is it's all of the technologies that we have across the portfolio. They just happen to be on things that leave the ground, right? So when you look at that, that has really been powerful when you look at LORD, if everyone remembers, LORD was 1/3 industrial, third automotive, third Aerospace. Exotic, obviously 100% aerospace and Meggitt roughly over 85% Aerospace. So that has been really a powerful addition to the portfolio. Right now, Aerospace is booming, right? It has been growing at double-digit growth for the last 2 years. We continue to find synergy opportunities from Meggitt and from Exotic and the team really is working unbelievably well, and it's helping us to post those numbers that you're seeing every quarter. In respect to leverage, what I like about our position on leverage today is we've never been bigger. We've never generated more cash. We've never been able to delever as fast as we possibly can. And when you look at what that capacity is, it doesn't necessarily mean that we have to push the leverage to as high as we've been in order to do any 1 of those last 4 deals that we did. So there's a lot of optionality when it comes to using our balance sheet. And what we have found is that when we do it through a disciplined manner, it generates returns that are unmatched.

All right. Next question here in the front on the left side.

Andrew Obin, BofA. Just a question -- another question on M&A. Pace of M&A has been do a large deal, lever of delivered 2x, doing other large deals, rinse, repeat. As you're sort of doing more and more of these, is there a thought to maybe do more bolt-ons and sort of have a more sort of similar to somebody like AMETEK, where there is a more consistent cadence, but maybe smaller deals. Is there a consideration to go to that model?

There's a consideration for deals of multiple sizes. So as Todd mentioned in his presentation, the pipeline is really robust. The day we closed on Meggitt, we were still working our acquisition pipeline and keeping our cadence to reviewing it as a team and keeping those relationships strong. So there are smaller deals and there are bigger deals. We just have to make sure, again, and I know it sounds like I'm just repeating, but we really are serious about it being the right deal and being able to hit that financial criteria and deliver the returns and be accretive. Another big piece, and I think Andy hit on this when he was going through division examples is culture matters. It matters a lot when you do a deal, and we were very fortunate that with all 4 of those deals that Todd talked about, we were joining together with teams who wanted to win, who wanted to be part of a bigger company who wanted to win. So I'd like to remind everybody that part of being in the right business is not always the size, but it's the financial criteria and culture is very important.

No, I don't believe you were the high bidder on any of the deals you've done recently. But just a follow-up question and just a follow up on a previous question. Just maybe that's a different one of asking it. Are you embedding for this forecast, are you embedding more pricing than in the previous forecast, similar or less?

Pricing is a -- like we've said many times, a strong muscle that we've built over the years. And now we're back to more of a normal pricing environment. The last 3 to 4 years were just extraordinary. We have the tools to do what needs to be done to make sure that we maintain margin neutrality, but it's normal pricing that's baked in.

Okay. Next question in the back there.

Nicole DeBlase from Deutsche Bank. A couple of quick ones. I guess, first on Meggitt. A little surprised about why you guys didn't raise this 3-year target. I think as we're obviously going really well there. So how you think through the thought process of potential upside -- or sorry, 4-year target when all is said and done, and then I guess the one question that hasn't been asked on deals is deal size? And how do you guys think about -- there aren't a lot of companies that are willing to say, "Hey, we can do these big deals. We've proven that, and we're willing to do big deals going forward." How do you think about what's in the pipeline from a size perspective and what you guys want to do?

So I'll start and if Todd or Andy, you want to add anything about synergies, I'll let them. So it could be small bolt-ons, it could be a big deal. It has to be the right deal and it has to be at the right time. I mean, obviously, we're getting close to a position where -- as Andrew said, we have a history of levering up and getting down to around 2 and doing a deal, but it really has to meet all that criteria. So we're not hung up on it has to be as big as Meggitt or bigger since each one of the last 4 we've done has gotten bigger. That's not a pattern that we are asking you to take note of. But we want to make sure that it will help us meet our FY '29 targets, even though it's not baked in that it won't be dilutive to that and that we can see what comes next that will help us be part of what comes next and part of the secular trends and mega CapEx projects. So multiple things we could do there, different size deals we could do there.

Nicole, I would just add, when it comes to synergies, we -- I think we've proven ourselves on being able to generate synergies from the models. We are committed to getting that $300 million from Meggitt. And we've talked a lot about this. What gets difficult is we are integrating these businesses into existing businesses across Parker-Hannifin. Over a longer period of time, it gets harder to track what is the synergy or what is just Win Strategy performance. So that's really what our thinking was. We know that Meggitt is going to continue to improve along with all those other acquisitions along with all of our core business. That's why we kind of called out for the first time that we expect them to be over 30% EBITDA when you look out to FY '29. So rest assured, every one of these transactions has been an unbelievable success within itself. But it does get hard the further you get away from integration date or close date to really identify what's a synergy versus just what's great business improvement.

I'll take the next question also in the back there.

Cliff Ransom, Ransom Research. Todd, I think you and I know each other as well then after all my years at Parker. But I'm going to quibble with your comment that this is the new Parker. I will suggest this is the same Parker we identified in 1998 and you've just been doing it for a long time.

We have, we have, for sure.