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

Thanks so much. I'm Andrew Obin, Bank of America multi-industrial analyst based in New York, one of the most exciting presentation's ahead of us, one of my favorite companies, Parker-Hannifin. And we have Chairman and CEO, Jennifer Parmentier. And we're just going to go to...

We're just going to go on my slide.

Yes, yes. A couple of slides, sorry. And then we're going to go to Q&A. Thanks very much.

Yes, that's good. Thank you, Andrew, and thank you, everyone, for your interest in Parker-Hannifin for being here today. I just want to go over a few slides with you to give you an overview of Parker. Obviously, first off, we have our forward-looking statements and non-GAAP financial measures. This is Parker-Hannifin at a glance. So we've been engineering customer success in the motion and control industry for over 100 years now. And this year, we'll come in at approximately $20 billion worth of revenue. On the left side of this slide, you see our 3 businesses. Our Aerospace Systems, it's now 31% of our business. Diversified Industrial International at 29% -- 28%. And Diversified Industrial North America at 41%. On the right side of the page, you see our 4 technology platforms. Aerospace Systems and Engineered Materials & Filtration now making up about 60% of the business, while our legacy platforms Motion Systems and Flow and Process Control are about 40% of the business. Across the bottom of the page you'll see what I'll talk about in a little more detail in a couple of slides. But The Win Strategy is our business system. It's our key to operational excellence. We have a technology powerhouse of interconnected solutions across all of the markets and customers that we serve. Our global distribution network has taken us 70 years to build that, and it is the envy of our competition. And we strongly believe in our decentralized operating structure that has led us to the performance that we've enjoyed over the last several years. We do have the #1 position in the motion and control industry, and we consider that to be a $145 billion market size. And about a year ago, we started talking about our business in these 6 market verticals, 90% of our revenue is in these 6 market verticals. Aerospace and defense coming in at 33%, a few percentage points higher than the previous page I just showed you but that's because we have about 3% to 5% of our Aerospace business sitting in our industrial groups. In-plant & Industrial Automation -- Equipment, coming in at 20%, Transportation at 15%, Off-highway Energy and HVAC round out the 6 market verticals. What is unique about Parker-Hannifin is that we had those interconnected technologies that cut across these market verticals. 2/3 of our revenue comes from customers who buy 4 or more of those technologies. And our growth, as we transform the portfolio is focused on faster-growing longer-cycle businesses and the secular trends, electrification, digitization, clean technologies and of course, aerospace. So why we win? Diving in a little deeper here. As I mentioned, The Win Strategy is our business system. I mentioned that we strongly believe in that decentralized operating structure. We have 85 divisions around the world. Those are run by general managers who have full P&L responsibility. They're working closely with our customers. They're executing The Win Strategy every day. We have innovative products, deep customer relationships that allow us to use our application engineering expertise, which I think is -- one of the secret sauces of Parker-Hannifin is our engineers. And they're able to use their expertise to apply those interconnected technologies to what our customers need. And as previously mentioned, the distribution channel. Over 50% of our revenue serves all of those mid to -- small to midsize OEMs that are participating in the secular trends along with us and some of those mega CapEx projects that you hear us talk about. And here's how we've done. This is the result of implementing and executing The Win Strategy, just looking at over the last 3 years. If you look at the revenue CAGR, 8% from FY '22 to our current FY '25 guide, 350 basis points of adjusted operating margin expansion, 13% adjusted EPS CAGR, and 13% free cash flow CAGR, all on the heels of The Win Strategy and our people as the top of the slide says, it is our people and our strategy and our portfolio that drive this performance. And last May at our Investor Day, we released these FY '29 targets. Organic growth of 4% to 6% was a target that we had -- previously had out there, but we increased all of our margin targets in the center. 200 basis points increase to adjusted operating margin at 27%, 300 basis points on adjusted EBITDA to 28% and free cash flow margin, a 100 basis point increase in that target to 17%. We're very confident in hitting these targets by FY '29 and look forward to the discussion here today.

Well, Jenny, as I said, thanks so much. So maybe we will start with macro. Parker reported its first quarter with positive orders in Industrial North America in 8 quarters. In fiscal second quarter, I think half of this audience probably is convinced that we're in a recession already. So at this stage, how are you feeling about the macro? What are you hearing from your distributors? Maybe we can start that.

Yes. So as we talked about during the Q2 earnings call back in early February, end of January, Industrial North America orders did turn positive for the first time in 6 quarters. And they turned positive on some of the longer-cycle business, some that I was just mentioning. So some of the aerospace business sitting inside of the industrial groups. We saw some strength out of Asia Pacific in semicon. And we saw some strength in our HVAC business. So usually, once they turn positive, they stay positive, but this is definitely longer-cycle driven. What we also commented on at the time is that distribution sentiment is still positive. Feeling good about a lot of quoting activity. But admittedly saying that there had been some project delays and fit in line with what we've said about having a gradual recovery on the industrial side, shifting to the right a bit.

Right. But all of that, you've stated that already.

Yes.

Okay. But how much of -- and in terms of -- the follow-up, I guess, and you have said some -- these are longer-term projects. We also said the longer-term projects will remain on this path. So how do we reconcile positive order growth with a lower fiscal year '25 organic guide?

So we think we're going to grow differently over time, right? We've done a lot with the portfolio. We've transformed the portfolio quite a bit. Just as a reminder, we've doubled the size of filtration with our CLARCOR acquisition, higher aftermarket. We doubled the size of Engineered Materials with our LORD acquisition, longer cycle business. And then obviously, Exotic and Meggitt really benefiting, obviously, from the aerospace market right now. And again, I would point to the core technologies that we have and the way we're able to apply those across all the markets with the customers that we have. And if you take that and you look at the secular trends that I mentioned, electrification, digitization, clean tech, aerospace. Again, reasons we're going to grow differently. We have growth enablers built into The Win Strategy and our processes. We have strategic positioning that is done at the division level. That's something we've done for about 4 years now. So that's every general manager looking at their business and saying, how am I going to grow with the customers I have and the markets I'm in and how am I going to run my business. Along with that, we have a metric. We've talked about in the past a little bit, product vitality. And that measures the percentage of sales that come from new products. So just for instance, 10 years ago, we were at about 10%, and now we're in the mid-20s. So it shows that we're focusing on the right things, the right innovative products, solving our customers' problems and making sure that we're using our resources in the right area. We also have a tool called Simple by Design. You've probably heard us talk about that. That really helps us drive complexity and cost out of the product, but it also helps us really solve the customers' problems by making the right product for them and giving them the enhancements that they need.

No, I saw the impact when I visited the facility like the solenoid valves and how now they've been standardized, and you can just automate the process. It's quite incredible to see that in action.

And then I would tell you, too, we've, I think, always been really good at running our businesses and operations. Even though you'll hear us say we still think we have improvement we can make. We're getting everyone aligned. We've been getting everybody aligned to this 4% to 6% organic growth. And one of the things that had to be done was looking at the compensation structure and making sure that almost all 62,000, 63,000 of our employees were focused on the right thing. So we changed our compensation structure for almost all those people. We're on year 3 of that, and it's a very simple formula. It's sales, earnings and cash. So that helps every team member, no matter where they work in Parker, understand how what they do every day impacts those numbers and how it winds up in their compensation.

And just sort of this 4%, 6% that you've mentioned. So will there be a catch up, right? Because given where we are in '25 in terms of the guidance, does that imply that sort of '26 should be above the trend just to catch up to be on target?

Yes. I mean that's why we said it over the cycle, right, 4% to 6% over the cycle. And with all those things I mentioned about us growing differently, we think we're going to benefit -- different businesses will benefit at different times in the cycle.

And the 4% to 6%, how much of it is predicated on sort of better CapEx cycle? And how much of it is predicated on you outgrowing the market in any of your key businesses? How much is outgrowth? And how much of it is good at market?

I would say that it's a mix. It will be us doing everything with those tools that I mentioned to grow organically. So we're going to benefit from changes in the market, and we're going to benefit from the tools that we use for share gain.

Yes. And maybe just thinking about the tariffs. So how should I think about your exposure to let's just start -- what is your exposure to the key region that have been announced in terms of the tariffs?

Well, it's -- we know how to do tariffs, right? We've been here before. We have exposure, but we have the tools we need to make sure that they don't impact our margin. Our goal is to remain margin neutral and we'll be able to take care of it. We don't expect it to be a material impact to the company.

And so from that perspective, does '25 guidance embed any impact related to the tariffs? So it's just, the idea is that whatever happens is just going to be a wash towards that.

The current -- the last guide does not have anything because that was before a lot of the discussion that's going on now. But again, we know how to deal with tariffs, we can handle it, and we don't expect it to be an impact.

And have you seen any prebuy ahead of the tariffs?

No, somebody asked me that question during the last call, and we really haven't. We haven't recognized anything like that.

And then how fast would the pricing -- would those be surcharges? Have you already announced the surge or what happens with the backlog? Maybe can you just describe the dynamic assuming nothing happens on April 2. What happens at 12 or 1 a.m.

Yes. We're able to quickly implement based on the knowledge that we have about what's going on. And we use a mix of different pricing mechanisms depending on the customer and how we've dealt with them in the past.

And do you have the ability to reprice the backlog?

In some cases, we do.

Okay. And would it take a quarter to work it through or multiple quarters? .

I would say that it's different based on the customer. So some would be shorter and some would be longer.

Okay. And in terms of sort of margin impact, is it margin neutral?

Margin neutral is our goal. We have good relationships with our customers. And even though these are tough discussions, our customers understand what needs to be done, and it's not an area for us to take advantage of.

And I think you've done quite well on margins historically. I think the margin target, well, it is 27%. So I think for '25, the guide is 25.8%. So -- at the midpoint. So what's the main driver to get 27%. Is that simply just getting a little bit of volume?

Well, we're really proud of how far we've come, right? We're proud of the teams. We're proud of the work they've done around margin expansion. And it's The Win Strategy. It's all the tools and The Win Strategy. It's from the very first pillar, keeping people safe and engaged and then using all of our tools inside of our lean system, Kaizen, Simple by Design, all the tools that we have out there for margin expansion. Every general manager understands what their targets are and has the plans to make sure that they hit those targets. If you think about it, over the last 10 years, we've increased those margin targets 4x after sitting at 15% for over a decade. So it's part of what we do.

Maybe moving to long-cycle. Aerospace has scaled to be 1/3 of the business. Is aerospace different in terms -- as an end market? Does that require a different playbook or evolution of a different playbook relative to the rest of the company?

No. The Win Strategy -- if you think we've had aerospace business for a long time. So we had that long-cycle business, and we've had pockets of long-cycle business on the industrial side, too. So The Win Strategy works no matter what the length of the cycle is. And I think Meggitt's a good example of how it works, the integration of Meggitt bringing it into the company and being very successful with it.

And you have the chart sort of this shows the evolution of the portfolio. How much of it is early cycle, mid-cycle, late cycle. And over time, the company is just becoming more and more balanced, more and more late cycle. As this happens, how does increased visibility change the way you manage the business?

Well, I would say that it really -- it doesn't drastically change the way we manage the business, right? We -- it goes back to the comments about having that longer cycle business and being able to use all the same tools for that business. We have the ability to analyze demand in our capacity inside of all of those businesses. So it doesn't really change things.

And I think Win Strategy has been with Parker for a long, long time. But for those in the audience that may be not as familiar with Parker, what are the key KPIs that you track as part of The Win Strategy? And yes, maybe we can start there.

Yes. So I would say that the 2 most important KPIs are safety and engagement. If you look across the way The Win Strategy is designed, those 2 sit inside of the very first pillar, which is engage people. And the next pillar is customer experience and then profitable growth and then financial performance. If you don't get the first pillar right, you won't be able to sustain any of the performance in the next 3 pillars. So we take safety very seriously, and we take the engagement of our team members very seriously. Those are both measured at all levels of the organization. And then after that, it would be the metrics that you would think. It's sales, earnings and cash flow. And we track margin expansion through all the tools that I've mentioned a couple of times today, right? We track it through what we get through Kaizen. They're Simple by Design through our 0 defect initiatives. And each general manager and their team is well versed not only in the tools, but and where they sit with those margin expansion targets.

So maybe we can just talk about Simple by Design and specifically New Product Blueprinting. So can you just talk about shifts in your R&D strategy? Well, a, let's just start with design and how does -- what does it do R&D spending? What do you spend money on R&D? Just maybe expand on that because I think that's a big focus internally.

So market-driven innovation is on The Win Strategy, and one of the tools used there is New Product Blueprinting, and another tool that is used when we're innovating products or working with customers on next-generation products is Simple by Design. So New Product Blueprinting, we started doing this over a decade ago. And it's the process of not just partnering with your customers but really understanding what their customers, the end user's pain points are. What do we need to do to improve this product, make it more efficient. And that allows us to be much more efficient with our engineering resources and any R&D spend that needs to happen. Simple by Design drives complexity and cost out. So that's the process of bringing together a multidisciplinary team to look and see how we make the product, the components of the product and how we can just make it that much more efficient and take the cost out easier to manufacture. So those tools combined have really helped us, again, be more efficient with our resources. And if you look -- in the past, our R&D was about 3%, especially during the aerospace super cycle, but now we're running at about 1.5%. We're just much more efficient.

And for a company, as I think about Parker, I sort of think about decentralized structure, right, 80-plus units. I think I was one of the units where the guy was making a decision whether or not he was going to serve coffee like cappuccino to folks that he was not going to put on his P&L but...

Glad to hear that.

But from that perspective, how do you run sort of a centralized R&D organization with a business that has 80-plus units? And maybe you can describe just sort of global product platforms, how do they fall into the regional product platforms. And how does it translate sort of into country-specific offerings? Because there does seem to be -- there's the global matrix that overlays into regional -- it's quite intricate but it seems to work actually.

Right. Right. Well, on my previous slide on one of my slides, we talked about the 4 technology platforms, right? So we have 5 operating groups, right? And those operating groups house those technologies, those similar technologies. Actually have filtration, engineered materials, Motion Systems, fluid connectors and aerospace. So you would look at those in and then see the platform -- the product platforms that sit underneath those. So those products are made in different divisions. And in those divisions, they decide what they need to do through their strategic positioning when it comes to R&D spend sometimes, capital investment, right, to produce the product. But we will, with certain initiatives like electrification, we'll lift that up a level to make sure that we are able to leverage not only all of our existing technologies, but our engineering expertise. So electrification initiatives and R&D that need to happen in that -- in this case, led by the Motion Systems Group, with involvement of the Engineered Materials Group and the Filtration Group. So some of those initiatives will lift to a higher level, but still very much have to be led by the divisions. They ultimately land in the division, that's where the product is going to be made. That's where the customer interaction is going to happen.

So maybe we can sort of switch to industrial, and I just sort of maybe talk about mega projects. If you look at the industrial starts, right? They spiked a couple of years ago, if you look at the manufacturing and construction activity in North America. I think it's an all-time peak right now. At the same time, you're sort of talking about CapEx being pushed out. How do I reconcile the manufacturing starts data with the manufacturing construction, was the fact that stuff is being pushed out to the right, right? Because I think there was a fear that some of these projects were just never -- the company was just put up walls and just sort of sit and wait, there's business, they'll fill them up. But there is no business, people sort of highlighted that there's a risk that some of these mega projects would never really be at capacity or anywhere close to capacity. What are you seeing, and as I said, I would have thought that there was definite lag between starts and construction. That was a -- given where the construction, as you would think, over the next 12 to 18 months, you will start putting equipment into these facilities, yet no company will commit to the fact that there's any visibility over the next 12 to 18 months, exactly when this equipment goes into these factories. And frankly, over the past couple of years, I think, sort of the confidence that there will be equipment going to these factories seems to have diminished. So maybe can you just sort of square the circle?

Well, I wish I had the perfect answer for you. I think that everybody has their own comfort level with what's going to make them pull the trigger or release the capital and get some of these things off the ground or get them to the next stage. We've gotten some of the best information on some of these projects from our distribution channel who often partners with general contractors and local contractors to prepare the land, stand up the walls, get them ready to get that equipment inside. And I think there's been a lot of starts and stops and delays. So I think it's a comfort level, right? And it's a dynamic environment right now. So I think there are people, as we stated a couple of months ago with a gradual recovery comment. I think there's just some people that are waiting for what stability feels like for them. But I would say, like I mentioned earlier, distribution does talk still about a lot of quote activity, right, out there. So if you look at the list of mega CapEx projects, depending on which one you look at, you see cancellations, but every time you see cancellation, you see another one pop up on there. So I think it's getting pushed out a little bit, but...

And is it supply chain? Is it labor? Can you attribute any of it to that? Or is it just a level of confidence?

I think it's more level of confidence. I haven't heard of any supply chain issue...

And this is not -- just to make it clear. This is not a calendar Q1 commentary. This is more over the past 9 to 12 months.

No, no, this is no new comment from anything we've made at the last earnings call. It's just waiting for the right time.

And specifically on semiconductor spending in North America, you have highlighted semiconductors, but it sounds like it's more of a global commentary, because semiconductor spending is such a big part, and there is visibility there, actually. How should we think about Parker's level of participation in these projects? Like can you give us an example what would you do in the semiconductor facility?

I mean we could -- if it's a greenfield, we could be there from when they're prepping the land, again, putting up the walls...

That would be on the mobile side.

Right, putting different equipment on the inside, filtration. A lot of the industrial in-plant will go into those. So there's a -- we have a slide from our Investor Day presentation that shows just how much we play in that area. So it's good for us, good participation for us. .

And if you look at -- if you look at your filings, right, you're going to actually tease out your workforce reduction. And sort of I think the calculation may show that part of the answer to you magical incrementals is you guys being laser-focused on cost control. If you pull those out and decrementals look fairly normal. But the question we often get from investors -- so you've achieved fantastic decrementals. So what is that being on the way up, right? Are these cost takeouts? Are these structural? Or we basically have to go rehire people as if and when volumes come back and that diminishes sort of your cyclical leverage -- not cyclical, you will get cyclical leverage, operational leverage to the cycle.

Right. So it's a combination of structural and just being very focused on demand and how we staff the operation. So first of all, I would say we're never waiting for a crisis. We're never waiting for a downturn. We've implemented a lot of new demand to capacity tools over the last couple of years to make sure that we are not only able to meet what our customers expect of us, but that we're staffing the most efficiently. So that's something that I think we're really good at. That's something that we expect our general managers, our plant managers to do. So they will, based on demand that's coming in, based on machine capacity, they will pull levers when there's changes and that can be adding or taking away over time. You can be adding or taking away temporary staffing or then making adjustments to full-time staffing. So that's ongoing.

And that's the P&L, right, because we've met with your business units and clearly folks are aware, but if you grow, right? Our sense, if you grow, you get the resources, right? That is business unit by business unit. This is not a blunt instrument.

No, right, right. I mean, performance is key, right? I mean that -- there's no doubt about that. And -- but like I started out saying, we don't wait for something to happen. We're always -- part of that continuous improvement culture is always looking at the organization and at the structure and having that lean mentality and that mindset to optimize.

But generally, we should think that when the volumes come back, you will get your due -- incrementals should be healthy on the way up.

Volume makes us efficient.

Okay. And maybe just a little bit more color on distributors, maybe it sounds like inventory in the channel you're comfortable with?

I think inventory is appropriate for the demand right now. I think that's the way that the distributors are running their inventory. Again, they've been positive, as we said last quarter, but it's right for the time we're in.

But is there room to restock, if demand grow...

We think destocking is over, but we don't think they've started restocking yet.

And what are their primary concern? You sort of stated that general they continue to be fairly optimistic. But what's the key concern in the channel right now?

Well, I think they're managing all of their projects and all of their customers' demand, much like we do. So they've become very, very smart with their cash and their inventory levels. And I think when the demand starts hitting their order books, that's when we'll feel it.

And sort of maybe you talk about market share. You do have a market share -- maybe the way I want to ask, is there a big difference in your market share across your portfolio? Like maybe specifically on the -- forget about ex aerospace.

Different businesses, there is different levels of market share. Our expectation is that we have the #1 or #2 position in the market. That's what we want our general managers to strive for. So we say it's $145 billion market space. We're about $20 billion. That's about 14% right now. We want to get to 20%. We haven't put a specific time on that, but we want them to -- with their strategic positioning and everything that they do to run their businesses, target to be #1 or #2 in their...

But to get to $20 billion, clearly, capital allocation is part of it. .

Absolutely.

And you haven't told us how much is organic, how much is -- we don't know from the outside, right, is to get the 6 percentage points of share, right?

The 4% to 6% over the cycle. We've said that those targets don't require an acquisition. But obviously, yes, we want to do deals.

Maybe on aerospace and specifically, I think aftermarket and aerospace has been such a great story, both military and commercial. What's driving the outgrowth on both military aftermarket and commercial aftermarket and how sustainable is it?

Yes. So we are -- at the end of Q2, we were at 51% aftermarket in aerospace, so that's one of the highest percentages we've seen. I think it's important to note that the Meggitt acquisition came with a significant amount of aftermarket and increased our aftermarket about 900 basis points. I would say, obviously, air traffic demand has increased, and it's projected to continue to increase. The big aircraft framers will hit their rates, right? They will get to their rates eventually. But a lot of the planes are flying longer. So we're benefiting from that in the aftermarket on the commercial side. And on the military side, I would say that we've been very successful with public-private partnerships and our ability to do fleet retrofits and upgrades. The combination of the Meggitt and the Parker aftermarket organizations has proved to be very strong. So we'll be able to leverage the technologies and the products from both businesses. And we see foreseeable -- into the foreseeable future, we see aftermarket strength.

And on the defense side, clearly, European defense big, big focus. What should we think about within your defense? What's your direct exposure to European defense?

Yes. So we have broad-based exposure on a lot of the key defense programs. And we have -- a good bit of that is international. So we think that, that will be even further strength for us, further growth for us.

But you have not, I don't think you've disclosed the specific European defense exposure?

We have not -- we have not, no. 1/3 of our aerospace business is defense and that's about a 60% OEM, 40% aftermarket mix right now.

Well, I guess the question people always ask right Meggitt is U.K. -- it was a U.K.-based company, but Meggitt actually had a lot more DoD business than they had MoD business.

Right, right.

So that's what people are trying to get...

We have good exposure. It will be good for us.

And how long would it take for you to start seeing if...

Well, that's a longer cycle business, right? But I'm sure we would expect to see those orders.

And maybe going to airframers. From your perspective, are there inventory issues at Boeing still. Your commercial OE grew 5.5% in second quarter '25, accelerating from 3.5%, is supply chain improving, right? Big debate what's happening, can you just -- from your perspective?

Yes. Well, I would tell you that we do have very close relationships and collaboration with the airframe manufacturers. So we have a very clear picture of what their demand is and what they're running to and what we're supplying. So we feel very good about being able to continue to see them to success. We think that the supply chain is gradually improving, not as much of a bottleneck as it has been in the past. But like I said, we're going to make sure that we're doing our part to see them be successful. And the more we can help the whole supply chain and improve ourselves, we're going to get there.

Excellent. And -- maybe this is a global conference, so I've been asked to ask a question. What are you seeing in Europe general? What are you seeing in China? Not aerospace, as it was just...

Yes, comments that we made during the last call was that we saw some positivity coming out of Asia Pacific. I mentioned earlier that Semicon, we saw some positive there. But again, easier comps. It was easier comps, but still it was -- looked better than it had. But Europe is still very soft. Very soft for us.

Okay. And commentary out of Asia is very semicon specific. It's not a China recovery [ comment. ]

Right. Exactly.

Okay. Maybe -- look, I mean I know that sort of -- I left it to the end because I don't expect you to say much, but portfolio and M&A, what's the latest message on M&A? Should we be thinking bolt-ons, should we be thinking larger acquisitions? Clearly, you've been one of the best capital allocators in the industry for a decade now. So you clearly have a very strong record, but it's such a key part, I think, value creation for you, just what's the latest color? If you're willing to share.

Yes. I would tell you, probably the same thing that I've said in the past is that the pipeline, we have a process that is very disciplined. We never stop working on the pipeline. That cadence stays in place. So it's very strong. It has small deals, it has big deals in it. A lot of times, it's about the timing, right, about if we can make the timing work. What's really important to us is making sure that we have those strong relationships with -- we've targeted in the pipeline. That's proved to be very beneficial to us, Meggitt over a 10-year relationship, really helps us understand the business, understand the culture, the products and then when it is time, when the time is right, it really helps us if there's a competitive process. So we are very committed to deploying capital to continue to really increase shareholder value, and we want to do deals. So when the timing is right -- and it has to be the right deal. That's the thing I always end with. It has to be the right deal. If you look at the success of the last 4 acquisitions, it's because we had all those things I just mentioned, and we could see a path to margin accretion with synergies. We could see that we were going to grow with the secular trends, the technology fit and not only margin accretion, but EPS cash flow all very important to us.

So high interest rates was supposed to help strategics because it was supposed to sort of flush out private equity. I think it's like 1.5 years later, and it's still supposed to help strategics in flesh out private equity but we haven't seen much what's just the general M&A environment? What's available -- what has -- from your perspective, how has the market evolved over the past 12 months -- 12 to 18 months?

I would say that it's opened up, right? I think it's a good time right now, and we'll see what happens. Like I said, many times, it's all about timing. It's not about some of those macro indicators, but the timing.

And -- but is it fair to say that it sounds actually you do sound more constructive about ability to do something versus 12 months ago. Is that a fair statement?

Well, obviously, we paid down a lot of debt, right? So we paid down quite a bit of debt over the last couple of years, and our leverage is at that point. Now we're -- we get this question a lot because a lot of people see us pull the lever on a deal when we get around it, too, right? So we're there. But again, has to be the right deal. We're not going to do it just because our balance sheet says it's the right time.

And just to go back, and we sort of talked about the evolution of Parker's, how you sort of cultivate deals, what it takes for a deal to move through. So I appreciate that. But today, you're a $75 billion market cap company. And I think literally, I think 10 years ago, you were like more like $15 billion market cap. What's different about doing deals that move the needle at $75 billion versus $15 billion? Just maybe talk about that a little bit.

Well, 10 years ago, we couldn't have done Meggitt, right? And the way we've transformed the portfolio, we're on track to generate $5 billion of cash EBITDA this year. So it gives us opportunities to deploy capital in different ways.

Do you think it's easier to do it at $75 billion?

Integrations are always a lot of work, work that's worth it, right? But when you're generating this much cash, you have the ability to demonstrate, you can make the deal and you can pay down debt. And with our integration playbook, I have a lot of confidence in our ability to keep doing that.

Terrific. Thanks so much.