Parker Hannifin Aktie

Good morning, everyone. Welcome to Parker-Hannifin Corporation's Fiscal 2026 Fourth Quarter and Full Year Earnings Conference Call and Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to turn the call over to Mr. Todd Leombruno, Chief Financial Officer. Please go ahead, sir.

Thank you, Bo. I'd like to welcome everyone to Parker's Fiscal Year 2026 Fourth Quarter and Full Year Earnings Release Webcast. As Bo said, this is Todd Leombruno, Chief Financial Officer, speaking. And with me today, as usual, is Jenny Parmentier, our Chairman and Chief Executive Officer. We have a number of exciting things to review with everyone today, and we appreciate your time this morning. Thanks for joining us.

Let's move on to Slide 2 to address our disclosures on forward-looking projections and non-GAAP financial measures. Items listed here could cause actual results to vary from our forecast. Our press release, the presentation here and reconciliations for all those non-GAAP measures were released this morning and are available under the Investors section of parker.com.

Today, Jenny is going to start with our record FY '26 performance. She's going to share some highlights on what we did with capital deployment actions this year and introduce our new FY '31 adjusted segment operating margin target. She's also going to address an upcoming change to our order rate reporting that will start in FY '27. I'm going to follow with some details on our record fourth quarter financial results. We also initiated our FY '27 guidance today, and we will review all the assumptions for what we expect to be a new record year for Parker-Hannifin. We'll conclude the call with our normal Q&A portion, and we'll try to address as many questions as we have time for.

Now let's move to Slide 3. And Jenny, I will turn it over to you.

Thank you, Todd, and thank you to everyone for attending the call today. Our global team delivered record performance in fiscal year '26, powered by our proven business system, The Win Strategy. We achieved top quartile safety performance with a 9% reduction in our recordable incident rate. This was our safest year ever, and we remain focused on being the safest industrial company in the world.

We delivered record fiscal year '26 sales of $21.5 billion, surpassing $20 billion for the first time in Parker's history. Organic growth accelerated to 6.6% and adjusted segment operating margin expanded 120 basis points to a record 27.3%. Adjusted earnings per share and cash flow from operations was also a record at $4.4 billion, our first time over $4 billion.

I'd like to congratulate our team members around the world for achieving and surpassing our fiscal year '29 adjusted segment operating margin target ahead of schedule. Thank you for everything you do to keep each other safe, create value for customers and demonstrate operational excellence.

Slide 4, please. Fiscal year '26 marks the biggest year in Parker's history with over $15 billion in announced and deployed capital. We announced strategic acquisitions that further build our portfolio of interconnected technologies, giving our application engineers and channel partners with more ways to create value for customers.

We enhanced our electrification capabilities with the acquisition of Curtis Instruments completed last September. In November, we announced the pending acquisition of Filtration Group Corporation, which expands our offering of proprietary filtration technologies and increases our filtration aftermarket by 500 basis points. And just this past May, we announced the pending acquisition of CIRCOR's commercial aerospace and defense business, adding complementary flight critical capabilities.

We are committed to actively deploying capital, and these transactions are right in line with our stated strategy to acquire companies where we are the clear best owner, building on our interconnected technology, creating value for customers and further compounding earnings growth. We look forward to welcoming our new team members into Parker.

Moving to Slide 5. After [ setting ] our fiscal year '29 targets just over 2 years ago, we are raising the bar once again and setting a new margin target. As I said earlier, we achieved our fiscal year '29 margin target early. And now for the fifth time in just over 10 years, we are raising our adjusted segment operating margin target once again. We are raising it by 300 basis points to 30% by fiscal year '31. In addition, we remain committed to organic growth of 4% to 6% over the cycle, 17% free cash flow margin and greater than 10% adjusted EPS growth over the cycle.

We are very proud of what the teams have accomplished over the last several years, and we are confident in achieving these targets. Parker has a fantastic track record of achieving and raising margin targets. Margin expansion has been an exciting part of the Parker story for over a decade. And by using The Win Strategy to drive operational excellence in each of our divisions, margin expansion will continue at Parker-Hannifin.

Slide 6, please. Today, we are announcing a move to rolling 12-month order rates beginning in fiscal year '27 for our Industrial segment, aligning all businesses on a rolling 12-month calculation. Parker's portfolio is profoundly different today than it was 20 years ago when we began disclosing quarterly order rate comparisons for the Industrial business. Our portfolio has been shaped by strategic positioning, one of our organic growth enablers, and has been transformed by acquisitions.

Over the last decade, these acquisitions have more than doubled the size of our aerospace and engineered materials businesses. And once Filtration Group Corporation closes, we will have more than tripled the size of our filtration business. These technology platforms combined now represent approximately 65% of our pro forma sales today. This is clearly a different Parker, with greater exposure to longer cycle, secular trends and more resilient end markets. And rolling 12-month orders provide a stronger correlation to near-term organic sales growth.

I'll give it back to Todd to review fourth quarter highlights.

Thank you, Jenny. I'm going to jump through the fourth quarter. We couldn't have had such a great fiscal year without such a strong finish in the fourth quarter. It was a record-setting numbers across the board. The team delivered new records for sales, adjusted segment operating margin, adjusted EBITDA margin, net income and adjusted EPS all in the quarter.

Sales were up 10% versus prior. Organic was up 8%. That was the strongest quarter of the fiscal year when it comes to organic growth, really finished the year strong. Currency was just slightly unfavorable at 0.3%, and the Curtis acquisition added 1.5% to the sales.

When you look at margins, adjusted segment operating margin for the quarter was 28.0%, that is up 110 basis points from prior year. That is the first time the company has ever generated segment operating margins above 28%, just a great way to finish the year. Adjusted EBITDA margin was 28.6%. That's up 180 basis points. And adjusted net income was $1.2 billion, which is a 21% return on sales. And that actually drove earnings per share up also 21%. And we achieved $9.27 for the quarter. That's the first time the company has ever generated over $9 in a single quarter.

Just an outstanding way to finish the year, 8% organic growth, record margins across the board and 21% EPS growth. Jenny said this already, but really, we can't thank our teams enough for their continued hard work and dedication throughout the quarter and really finishing the year strong.

If we jump to Slide 9. This just displays the walk, the $1.58 increase in EPS versus prior year. Really, you could just see what a high-quality quarter this was from the team. Over 80% of the EPS growth came from increased segment operating income dollars. That added $1.29 or 17% of the EPS growth versus prior year. Corporate G&A and other, really, it's other, contributed $0.25, and that was really the result of foreign currency exchange being favorable.

Lower share count. We've done a significant amount of share buybacks over the last year that added $0.09 for the quarter and lower interest expense added $0.02. Income tax was favorable to our guide, but compared to last year, it was unfavorable by just $0.07, and that was really due to just higher discrete -- favorable discrete items in the prior year. If you look at all of that, that's how we got the $9.27, $9.27 of adjusted EPS, just a great way to end the [ year ].

Slide 10. Let's take a look at the segments. In total, I already mentioned this, but organic growth was up 8%. We expanded margins across the board, 110 basis points in the quarter, and incrementals were 40% for Q4. We are very pleased to see the order rates accelerate across all these businesses. Jenny just mentioned this, but beginning in FY '27, we will convert to order reporting for all businesses using the 12-month rolling. I've provided the 3-month and the 12-month here, but this will be the last quarter we do this going forward for FY '27. In the appendix of this deck and in our press release, we provided 8 quarters of historical comparisons, if you're interested in that. But in total, orders were up 19% on the 3-year comparison, using a 12-month rolling of 12%. Backlog increased 16% versus prior year and is now a new record at $12.8 billion.

If we move to the North American businesses, sales were $2.2 billion, organic growth was just about 5%. Really, this is just a base on a broadening recovery across all those businesses. Margins are up 70 basis points to a record 27.4. That also exceeded our expectations and really marked the highest quarter of margin performance for the North American businesses of the year. Orders in North America improved just plus 16% on a 3-month comparison and 9% on a rolling 12. Just a great way to finish the year for the North American.

Moving to the international businesses. Sales were a record $1.6 billion. Organic growth, really impressive at 6.5%. Asia Pac really leading the way for us there. Organic growth in Asia Pacific was 16%. EMEA was positive, but just 1% positive. And Latin America was down 3% versus the prior year. What's great here is adjusted the operating margin is a new record at 26.8% for the international businesses. That is up 210 basis points versus prior year. And orders, amazingly strong here, 24% on a 3-month comparison, 10% on a rolling 12. Just a nice way to finish the year for our industrial team members based in our international businesses.

Aerospace continues to lead the way here, a record $1.9 billion in sales for the quarter, organic growth of 13.4% versus the prior year. This marks the fourth year -- fourth full fiscal year in a row of double-digit organic growth for Aerospace. The team has really outperformed and executed unbelievably well, generated $1.9 billion in sales. Margins are also up in Aerospace, up 80 basis points versus the prior year and reached 29.8% for the quarter. If you move to orders in Aerospace, order rates, unbelievably strong here, again, 18%, double-digit growth in both commercial OEM and aftermarket and really strength in the defense OEM markets. Backlog in aerospace is up 15% versus prior year and reached a record $8.5 billion. Just a great series of results from the team.

If we can go to Slide 11, this highlights our cash flow performance, and we detailed some of those capital deployment actions that Jenny mentioned. Cash flow from operations surpassed $4 billion for the first time ever in the history of the company, really blew it away at $4.4 billion. That's 20.3% of sales. That is up 16% versus the prior year. Free cash flow increased by 17% versus the prior year and also came in at a record at $3.9 billion. That's 18.2% of sales, and the conversion on that is 107%.

In addition to delivering a record year of cash generation, we reached new highs when it comes to deploying capital. We returned nearly $2 billion to shareholders. That is $1 billion in share repurchases and nearly $1 billion of dividends paid. We invested [ $500 million ] of CapEx into our operations to make them safer and more productive. We completed the $1 billion acquisition of Curtis Instruments. And as Jenny said, we announced nearly $12 billion for the acquisitions of Filtration Group Corporation and CIRCOR's Aerospace and Defense business. In total, that's nearly $15 billion of capital deployment actions for the year, really underpinning our commitments to be great generators and great deployers of cash.

And even with all those actions, we still reduced debt by $1 billion in the quarter, bringing our net debt to adjusted EBITDA to 1.4x, that is down from 1.7 at this time last year. Just a great year of cash generation.

Okay. Now let's move to Slide 13 and address our FY '27 guidance. Jenny, I will hand it back to you, and she will start with our sales growth forecast by market vertical.

Thank you, Todd. I'm on Slide 13. Our fiscal year '27 organic growth forecast by key market verticals. For Aerospace & Defense, our largest vertical, we are guiding high single-digit organic growth. We expect another year of robust double-digit growth for commercial OEM and sustained commercial aftermarket growth. Defense orders finished strong, supporting a solid outlook for fiscal year '27 and beyond.

We expect mid-single-digit growth for In-Plant & Industrial. We see signs from distribution that the industrial recovery is broadening as customers demand gradually accelerate. Customer spending on automation continues to lead the growth here.

For our Transportation vertical, we forecast mid-single-digit growth, led by strong growth for heavy-duty trucks, driven by production rate increases. This is offset by lower growth assumptions for our automotive business, resulting in mid-single-digit growth overall for this vertical.

Moving to Off-Highway. We are guiding mid-single-digit growth, driven by a continuation of the trends we saw in fiscal year '26. We see continued strong growth in construction and mining, offset by continued softness in agriculture. We also expect mid-single-digit growth for energy. We see strong and sustained long-cycle growth from our businesses supporting gas turbine power generation, while we are expecting Oil & Gas to be flat this year.

Lastly, we are guiding mid-single-digit growth in HVAC and refrigeration. We expect commercial HVAC to lead growth, and we see our residential business improving as inventories stabilize. For the first time ever, we are guiding positive sales growth across all market verticals, resulting in an organic growth forecast of 7% at the midpoint.

I'll get it back to Todd, and he'll share more details on our guidance.

Thank you, Jenny. I'm on Slide 14, and I'm just going to go through some of the details here. Reported sales growth for the year is going to be in the range of 5.5% to 8.5% or 7% at the midpoint. That will calculate to approximately $23 billion in annual sales for the company. Sales are modeled as usual, 48% in the first half, 52% in the second half. Consistent with what we've done historically, this guidance does not yet include any impact from the pending Filtration Group or CIRCOR acquisitions. We will provide current data on those transactions as soon as they close.

When you look at organic growth, the range is the same, 5.5% to 8.5% or 7% at the midpoint. Specifically for the North American businesses, we're expecting 6.5% organic growth at the midpoint. And for the International Industrial businesses, we expect 5.5% organic growth at the midpoint. Aerospace, we expect 8.5% organic growth at the midpoint. And again, that's coming off of 4 years of double-digit organic growth. So the base is very high.

Currency is based on our June 30 spot rates, and is expected to be just slightly unfavorable by 0.5 point. And previously completed acquisitions, this is really Curtis, adds approximately 0.5% for the year of FY '27.

On adjusted segment operating margins, we're guiding 27.7% at the midpoint. That's 40 basis points above prior year, and there will be margin expansion across all of our businesses. And when it comes to incrementals, we're forecasting that near the top end of our stated 30% to 35% range for the full year.

Just a few additional guidance items. Corporate G&A is expected to be about $200 million. Interest expense is about $340 million. That, again, excludes any pending debt we take on when Filtration Group and CIRCOR closes. And other expense is forecasted to be around $100 million.

Tax rate, the full year tax rate, we are guiding to 22.5%. EPS, full year adjusted EPS is going to be $34.75 at the midpoint, that's an increase of 8% versus prior year. The range on that is plus or minus $0.50 on either side. The split on EPS is 47% first half, 53% in the second half. And for cash flow, we're expecting a range of $3.4 billion to $3.9 billion, that is free cash flow with conversion of approximately 100%.

Now on the right-hand side of the page, just some details for the first quarter of FY '27 and all of these are at the midpoint. Our reported sales are forecasted to be positive, approximately 9%. Organic growth is expected to be positive at approximately 8%. For the quarter, we're forecasting adjusted segment operating margins at 27.7%, and adjusted EPS is expected to be just over a little over $8 at $8.07 for the quarter. As usual, there are lots of additional guidance details in the appendix.

On Slide 15, if you look at the bridge, this just shows the growth versus prior year. We're forecasting an increase of 8.5% in segment operating income dollars. That is a little over $3 of additional EPS for the year. Lower interest rate resulting from what we've been able to pay down in the year, adds about $0.38. Lower share count, we're at [ $0.07 ]. We've got a little bit of a headwind here on tax. That's usually a forecasted rate of 22.5. That does not include any discrete items that are not yet known, and it is a bit of a headwind from what we've experienced in FY '26. Nothing unusual there, just still unknown. Corporate G&A and other, it's really other, is forecasted to be unfavorable $0.14. All of that will be in the other line, and that's really due to the nonrepeat favorable foreign currency exchange that we experienced in FY '26. In summary, the adjusted EPS is $34.75, that's up 8%.

And with that, Jenny, I will hand it back to you.

Thanks, Todd. On our final slide, a reminder of what drives Parker: safety, engagement and ownership are the foundation of our culture. This is our team members living up to our purpose every day to drive top quartile performance and allows us to be great generators and deployers of cash.

Okay. Bo, we are ready to start the Q&A portion of the call.

[Operator Instructions] We'll go first today to Scott Davis with Melius Research.

Congrats on a great year. It might sound like a broken record because you've had quite a few of them in the last few years anyways. But just a cleanup item here. What are the final hurdles left to close The Filtration Group and CIRCOR? Any major hurdles?

No major hurdles. We still anticipate closing both of them during the second half of this calendar year, the first half of our fiscal year. As you know, closing remains subject to all the customary conditions, pending regulatory clearances. But the process is ongoing and continuing to progress on both of them.

Okay. Fair enough. And then just as a follow-up, when you look at your targets, your new targets on Slide 5. And can you give us a sense of maybe where you're most comfortable and least comfortable, if that such thing? I'm sure there's some minimum level of comfort, but just love to get a sense of where you feel are going to be the easier targets to hit versus the harder targets to hit.

Scott, I'll start with that, and I'll let Jenny jump in here. None of these targets are easy by any strategy imagination, but what gives me great confidence is the way our team embraces them. I've told you this many times before, I've never seen such alignment across the company. These are not easy to achieve by any stretch of imagination. I look at our track record, and we are just so proud of what we've been able to accomplish here. Raising that margin target to 30, that's a big number, right? That is a big number, it's a 300 basis point improvement. But if you look at what we've done in the past, I have great confidence that we're going to be able to achieve that. We've done a great job on the EPS CAGR. If you can get margin expansion and top line growth, sprinkling a little bit of accretive capital allocation, that works as well. So I feel really good about this. I don't really have any concerns.

No. I mean I echo Todd's comments, The Win Strategy has never been stronger, and the alignment has never been stronger. Obviously, in these targets, we've included the acquisitions that we've yet to close. We're going to use our integration playbooks and do a great job as we have done in the past, and the team is going to continue to do what we've been doing.

We'll go next now to Jeff Sprague with Vertical Research.

So where to start? [indiscernible] here. I guess the first thing is just on the strength of the orders on the rolling 3 basis here in the quarter, particularly in international. But can you just provide a little bit more color on what was going on there? Was there something that proved to be a real catalyst in a couple of key end markets?

Yes. I would tell you, for international, Jeff, it was really a nice -- nice, driven by electronics. I mean there was really -- it was 24% with the 3 12 method. And last year, it was 0. So it was an easy comp of 0. But it was really driven by electronics and in-plants, double-digit growth for Asia Pacific and mid-single-digit growth for EMEA. So positive quarters across all the major market verticals, but really, the strength is electronics.

And then just thinking about the new framework here. If we look at the rolling 4 exit for Q4 2025, right, it almost exactly called the 2026 organic growth for both NA and International. So I guess the question here is for exiting at 9 to 10 here in Q4 on the roles, what sort of the gap or the hedge between sort of the 5 to 8 or the 4 to 7 that you're giving us in North America and International? Anything else to be aware of in that equation?

What I would say, Jeff, is that obviously the orders remain a leading indicator, but they're not an exact forecast. I think the 12 12 gets us much closer, as you already pointed out. And the guidance is really in line with the progression of the orders that we've been seeing. Coming out of FY '26 is 3.5% and guiding to 6%. We're really excited about that and really, really happy to see that Industrial business to be [ above ] 6%. And this is at the high end of our target range too, over the cycle, 4% to 6%. We also we have 10% of Aerospace & Defense business on the -- in the Industrial. So that tends to be even a little bit longer.

Even longer, yes. All right. Great. I appreciate it.

I would just add. When you look at the Industrial businesses, we are showing an increase from Q4 on an organic basis. When you look at the full year, the comps in the second half get a little bit tougher. So while the organic growth numbers are towards a little bit more from a percentage standpoint, a little bit more weighted in Q1 to [ 2 ].

We'll go next now to Chris Snyder of Morgan Stanley.

Maybe just following up on some of that commentary on the Industrial business line. So you guys guided every vertical to mid-single-digit growth in Industrial for next year. Can you just maybe talk about ones maybe that are exiting with more strength or the ones where you guys feel better about the prospects and the opportunity into 27?

Well, what I would say is, again, I'll repeat, -- as a reminder, 10% of Industrial sales are tied to Aerospace & Defense growing high single digits. So that is very strong. While it's not large enough to be a vertical, we are expecting another year of strong electronics and data center business.

When we look at the market vertical forecast and we look at implant and industrial equipment, -- we've been saying for quite some time, a gradual recovery here. And it's been very encouraging to see that the demand is improving, and we expect gradual acceleration on a broadening recovery. We've seen distribution orders be strong in the fourth quarter. We're not calling a full restock yet, but we have heard from some distributors that they are doing more stocking than they have done in the past. So we feel really good about what's going to happen in In-Plant & Industrial.

Transportation, strong heavy-duty truck orders, build rates are increasing. When you look at Off-Highway, acceleration in construction has been driven by infrastructure spend and -- as I commented earlier, we see strong power gen growth in the energy vertical. So a lot to be excited about here. And we feel good about the guide here at mid-single-digit growth.

Absolutely. And then maybe going over to the M&A side. So obviously, you have the 2 big deals that are closing over the next quarter or so. Can you just maybe talk about the appetite or bandwidth to do incremental deals in '27? Or is it going to be a year more about focusing on just integrating those 2 businesses? So anything you could just kind of talk about the appetite willingness. Even anything just on the pipeline of opportunities you guys see.

Yes. So obviously, we're very, very committed to continuing to actively deploy our capital. We're going to get these 2 acquisitions closed. The teams are going to work hard on integration. But the work on the pipeline never stops. We are always working on that pipeline, building relationships with targets. Many times, we're not in control of the timing of when these targets become available. So we might touch 3 with our levers with these 2 deals. It will take us about 6 quarters to get that back down to 2. So I would say we still have an appetite, but we're going to stay true to doing what makes sense for the company.

We'll go next now to Steve Volkmann of Jefferies.

I echo the embarrassment of riches, I think you've tripled the margin since I started covering you guys. But in the spirit of what have you done for me lately, I'm curious, I think '27 might be -- we might be on track for an Analyst Day, and I know we've had Win 3.0 here doing well for the last few years. Is there a Win 4.0? And sort of what's next for The Win Strategy? Have you progressed from here?

So there will be a Win 4.0, definitely, there will be. And we're talking about the next Investor Day now. So I would say stay tuned, but we definitely think that we'll have more things to share in the future.

We'll wait for that.

I just checked the math, you are correct. We have tripled margins since you've been covering us.

Yes. I got it right. So just a quick -- a quick follow-up here. Are your orders getting a lot lumpier? Are you taking in some like some really chunky orders now and uncertainty around that, maybe that's behind the switch to the trailing 12 and maybe expecting that the fourth quarter might not be repeated going forward?

I wouldn't stay here sitting here today that I don't think the fourth quarter could be repeated. I will tell you that International orders have been very choppy in the past. We've also seen some quarters where we've had some high Aerospace & Defense orders that are very long term that have hit some of our businesses. And then the next couple of quarters, we don't see that. So we do think that this, this method of 12 12 is a much better correlation to what we can see for near-term organic growth.

The business is just so different than it was when we started reporting these quarterly order rate comparisons. Aerospace, Engineered Materials and Filtration used to be 35% of the company, and now it's 65% of the company. So we really think that this is going to give a more accurate view of what's to come for organic growth.

Steve, I would just add, when you think about orders that are lumpy, the Aerospace business is the business that jumps off the page. Today, 10% of the Industrial business is Aerospace & Defense end markets. So that does create some choppiness, whether that's in the Industrial, International businesses or in the North America businesses. So what Jenny said is we feel that this is just a better way to look at it.

We'll go next now to Andy Kaplowitz at Citigroup.

Nice quarter. Jenny, I think you prudently initially forecasting 7% to 10% growth for [ Aero ] in FY '27. But as you've said, you've now had 4 years in a row of double-digit growth in Aero and I think backlog is up mid-teens. So maybe give us a little more lay of the land between what you're seeing in Commercial Aero & Defense. Are you still forecasting strong commercial aftermarket growth in FY '27, for instance? Or do you expect the [indiscernible] much higher OE-related growth?

Yes. So I'll give you the rundown of what we have built into the guidance. So for commercial OEM, well, first of all, the OE aftermarket split that we have in the guidance is 52% OE, 48% aftermarket. And we just ended the year at 51% OE, 49% aftermarket. So we're planning on higher OE mix here.

Commercial OEM, we see mid-teens growth for the fiscal year, and that's really built on commercial aircraft build rate increases. Aircraft demand is still greater than supply, and widebodies are growing to meet international traffic demand.

Commercial MRO, we're seeing plus mid-single-digit growth for fiscal year '27. There's still a lot of older aircraft line. The fleet still relies on that into repair shop visits and component restacking continues. And again, international traffic continues to grow faster than domestic.

On defense OEM, mid-single-digit growth, demand for legacy and missile programs continues, increasing defense budgets in response to what's going on in the world, and F-35 deliveries are at peak.

Defense MRO, plus mid-single-digit growth, and that's really based on fleet upgrades and service extensions, increasing defense budgets and a focus on retrofits and upgrades. So bringing that all together is how we've come up with the guidance for the full year.

Very helpful, Jenny. And then, Todd, for the FY '27 margin guide, it was nice to hear that you're guiding to the high end of your normal 30% to 35% incrementals. But obviously, you've been trending closer to 40%. So how should we think about mix or any price cost headwinds impacting the businesses? FY '27? I assume you do want to be somewhat conservative given those things?

Yes, that's a great point. When it comes to price, we're obviously going to cover any increases that come across, whether that is tariffs, whether that is labor, whether that's logistics, commodities, so that will be in there. But we've said this constantly, we want to return to a normal pricing environment. And what better time to do that is when you're not [indiscernible] the growth here. So when you look across the businesses, we are at the higher end of that 30% to 35% range. It feels good when we look at -- when we pressure tested it internally, it looks abnormal when it comes to timing on those incrementals.

We'll go next now to Mig Dobre at Baird.

A couple of longer-term questions that I guess I'm just going to roll into one. From a capacity standpoint, when we kind of look at your growth, right, you talked about higher growth than what you've had in the past. And I'm sort of curious, it's where you are from a capacity standpoint in your facilities, manufacturing facilities to be able to deliver on that sustained higher growth over the next few years. So maybe it'd be helpful if you can comment on that, and I'm thinking about the Industrial business specifically.

And related to all of this, you guide for CapEx here, 2.5% of sales, which is pretty much consistent with what you've done historically. A lot of other industrial companies that are talking about higher growth are also talking about higher CapEx and investing in capacity. So I'm curious if your circumstances are different and whether or not we should be planning for maybe a little more CapEx as we think about later in a decade or maybe early 2030?

Yes. So actually, Mig, the last -- outside of the last couple of years, we were really more around 2% or a little bit under. And it's just within the last couple of years that were higher at 2.5%. And we have definitely invested in capacity over the last couple of years, and we have some capacity expansion built into this year. So I think in some businesses, the capacity is already there. Others, we can see that we had to improve, but we're not expecting anything more than we've guided to right now.

Another thing, too, that I would tell you is just our ongoing continuous improvement culture and everything that we do with Kaizen and our lean tools. The whole output of that is, number one, a better working environment for the team member, but higher output and efficiency. And we've really greatly benefited from that over the last several years. So I think that just kept some of our capacity expansion at a much lower rate than possibly others. So we have invested in capacity. We'll continue to do so.

We'll go next now to Jamie Cook with Truist.

Congrats on another fantastic quarter of guidance rate -- and guidance raise. I guess a couple of questions. Just Jenny, back to Sprague's question. I don't think you commented on the strength in North America orders, the up 16%. So sort of what were the end market drivers there? And was there any lumpiness? And even within International, you commented specifically on electronics. Just trying to get a feel for what's going on in the other end markets?

And then I guess my second question is just -- congrats on raising the medium-term targets to 30%. How do we think about what's implied in that margin target in terms of International versus Aerospace? Do you think, over the next several years, we can get to a point where International closes the gap on Aerospace, orders Aerospace continued to move higher to get you to that 30%?

Okay. Well, I'll take the first half of that, and then I'll pass it over to Todd. So first of all, for orders in Q4 in North America, obviously, 16% on the 3 12 and 9 on the 12 12 that we're talking about. So strength in Aerospace & Defense, In-Plant. And I mentioned that we saw distribution orders much stronger in Q4. Construction, again, on infrastructure spending and heavy-duty truck and commercial HVAC. So really, we saw positive orders across all of the major market verticals.

International, plus 24%. I did mention earlier that kind of that easy comp, but still 10 on a 12 12, and it was really driven by electronics and In-Plant. Double-digit growth for Asia Pacific and mid-single-digit growth for EMEA. In EMEA, we do see some strength in construction and mining and some In-Plant. But again, positive orders across all of those verticals. And with Aerospace, listen, double-digit growth in both commercial OEM and aftermarket and strength in Defense OEMs. So Defense OEM was stronger than expected with double digits order growth. So really just a really nice quarter for orders.

Jamie, I could speak about the FY '31 walk. The thing I love about these targets is, is that everyone has a part in these targets, just like the way we got to over 27%. Every single one of our businesses has generated higher margins than they did when we started those targets. So everyone's got a new target, and that's what I love about the company.

Aerospace has been outsized when it comes to margin expansion, 4 years of double-digit organic growth, great aftermarket exposure, and growth has really helped that. But we expect every one of these businesses to be part of our walk to FY '30, including Aerospace.

Our International teams have done an unbelievable job. They are constantly looking at growth opportunities, cost out opportunities. And that's no different than North America. My gut feel here would say that North America or the Industrial businesses will expand more than Aerospace, just with what Aerospace has on its plate with next-gen investments and OEM mix. They still will expand margins, but I think the Industrial businesses will expand at a greater clip as we walk to FY '30.

We'll go next now to Tim Thein with Raymond James.

I had a longer-term question on Aerospace within the context of your 2031 target, the organic growth target. I'm just curious, I mean, they're obviously coming off what is, as Todd pointed out, a really long stretch of growth. But the demand backdrop for both Commercial and Defense seems to be getting a bit better. So -- and you obviously have a bit more visibility here given the backlog. So how would you think about that kind of growth algorithm for Aerospace looking out beyond '27?

We've forecasted long-term growth drivers for each of the areas in Aerospace. And we see Aerospace as high single digits through that time period. So we feel like it's going to be -- it's going to continue at that rate until the time that we reach these targets.

We also have the CIRCOR Aerospace and Defense business, when that closes, that will be another growth driver, obviously, from the [ inquisitive ] side, but once that becomes organic over the 5-year period, that will be another growth driver when it comes to Aerospace. And again, I can't de-emphasize enough, 10% of the Industrial business has Aerospace & Defense end market exposure.

Yes. All right. Understood. And then just on more near term on pricing with respect to Aerospace, just given some of the LTA that, I'm guessing where it may have been renegotiated coming out of COVID, it may have provided a little bit of a bump. Are we kind of back to a setting where those are more, I guess, normal in terms of the -- I guess, the spirit of the question is just the contribution to price, not asking for quantification, but just directionally how that is trending in, in '27?

Yes. So on the Industrial side of the business, we are back to a -- what we would consider more of a normal pricing environment. And in Aerospace, there's still pricing opportunity. There have been a lot of negotiations. There are some negotiations that are still in play. So I would say that there's still some opportunity in Aerospace.

We'll go next now to Amit Mehrotra at UBS.

I guess the first one, just on the North American industrial inflection, the 16% growth for orders. Any color you could talk about between sort of the distribution channel and the direct OEM channel? I know the distributor channel has been maybe a little bit more stubborn. And I think you talked about it a little bit more positively, but any more color around the activity you're seeing and the confidence coming back in that specific channel?

Yes. Well, I've been saying for a lot of quarters here that distributors have been very positive. And the order growth, the strength that we saw in Q4 really supports that positive sentiment and what they've been telling us. So we definitely feel like that is a broadening recovery instead of what we've just been saying is a gradual recovery. So we feel good about that.

Still not calling a restock though. Some distributors are telling us that they are stocking for projects that they're working on for their customers or business that they see coming. But I wouldn't call the whole channel as an overall restock.

On the OEM side, obviously, we've seen production rates increase for heavy-duty trucks. That's been very encouraging. We've seen construction and mining get stronger. But we've also seen agriculture remain where it's been pretty soft and automotive is pretty soft, but there's commercial HVAC and refrigeration that is growing. There's energy with power gen. So there's been some strong OEM orders and strong OEM growth along with what we see in distribution.

Okay. And just the sort of natural follow-up question to that is, obviously, the mix dynamic, if there is one between distributors versus OEM have -- I know you've taken a lot of price in the distribution channel and we're kind of waiting for the volume to recover. If I think about this guidance as an inflection in growth, organic growth in North America and Industrial, is it all the incremental -- is it all volume? Is there a little bit more price as maybe some of that distribution volume comes through? Just give us a little bit of a flavor, specifically with North America and Industrial?

Yes, we're back to a normal pricing environment here, and this is all volume.

Okay. Okay, easy enough. Very good. Congrats.

We'll go next now to Andrew Buscaglia at BNP Paribas.

I know this is small, but can you comment on your data center exposure. I believe you have some interesting equipment hoses and connectors that play into the space. And I'm wondering if we're seeing interesting order activity there? And then any comments you can make on -- are you seeing any specification activity related to liquid cooling as an interesting growth driver?

Yes. So we do have really nice exposure. And it grew nicely last year, and we think it's going to continue to grow. It's about 1.5% of our sales. And we've been previously saying 1%. So it is growing, but it's not quite large enough yet to have its own market vertical.

This is a great story for our interconnected technologies because you mentioned a few of our products, but it's hoses, couplings, manifold, bidding, engineered materials for thermal management. So really, really a good showcase of all of the corporate technologies. And we are working with industry leaders. We are seeing good orders here. We provide liquid cooling systems and subsystem components. So our teams are doing a really fantastic job in this space. We have a very highly skilled, high-performance team serving these data center customers. And as I mentioned, it's a nice growth area.

Okay. And maybe just on the longer-term outlook. I couldn't help but notice you called for about 200 basis point margin expansion in 2027 to 2029 and a 300 basis point step up from 2029 to 2031. I think I got that right. Why would you -- what gives that confidence do you see sort of an acceleration in your margins? And I wonder if it's pertaining to the recent acquisitions that you expect to close?

Yes, I could take that. Just to clarify, what we are calling out is we're calling out 300 basis points of improvement from a 27.0 target that we just surpassed in FY '26. That was originally our FY '29 target. We're restating that to FY '31, and the new target is 30% adjusted segment operating margin.

So as far as what's going to get us there, we have included The Filtration Group Corporation acquisition and the CIRCOR Aerospace and Defense business in those margin targets. But when you look at that, it's really coming from our existing business just because of the size of the existing business is so much greater than those 2 great additions we're going to have, and it's going to be everything that got us to 27.3 this year, just more of it. So we feel really confident about the walk to get there, and it should be spread pretty equally across those years, each of the 5 years.

Moving next now to Nicole DeBlase with Deutsche Bank.

Echoing my congrats on a really great quarter. I guess maybe first, Jenny, if we could touch on how the orders progressed throughout the quarter? And if you've observed continued strength in July, I would assume so based on what you guys expect for '27, but would love to hear any perspective on that.

I would say that there's nothing that's happened that concerns me that would not support the guide that we put out.

Okay. Understood. And then with the electronics strength in International, was that like other big lumpy orders that are coming through in the quarter? Do you -- what I'm trying to get at is, is that electronic strength sustainable? Or do you think that was kind of like a 4Q dynamic that might not last into 2027?

I think it's going to remain strong. I mean, obviously, it came in much stronger than we were expecting. I think we had about a 10% in for Asia Pacific, and it came in much stronger. So I would say the guide reflects what we expect out of International. But this is a strong area for us.

We'll go next now to Nathan Jones with Stifel.

I guess I'll follow up a little bit on some of the International order strength here, kind of alerting that there's a good chance that, that continues. If it does, would that maybe improve the outlook for the second half of fiscal '27? And in the guidance that you've given out today, do you assume that some of this order strength in International and in North America continues? Or did it moderate a little bit from here?

What we have in the guide right now is what we see with the order progression that's out there. So obviously, we did have a very strong Q4. We believe that we have the orders to support what we have in for Q1 and for the rest of the year. So I would tell you that, obviously, we -- as the year goes on, we hope that we can raise those, but this is the best picture we have right now.

Well, our 48-52 split somehow works out every year, year after year. That's what we are guiding for here. I think it's more of a comp issue, just the second half of FY '26 was so good, the comps get a little bit tougher. But if you look at the dollars, the dollars are weighted like they normally are much heavier in the second half.

A follow-up question on the CIRCOR Aerospace business. Can you just talk a little bit more about what the strategy is with that? I think it already has extremely high margins after it got rid of all the build-to-print work several years ago. So is this a revenue synergy play? What doesn't seem like it would be a cost synergy play given the margins are already high. But just any comments you could make around the strategy for that acquisition, please?

Sure. So it is the highest growth, highest margin acquisition to date. What we love about CIRCOR is it brings complementary flight critical motion and flow control capabilities to our portfolio. And as I mentioned before, these are proprietary technologies. This is what we like to bring into our suite of projects.

This is an 80% OEM business and 50-50 sales split across commercial and defense. We have not modeled any revenue synergies. We have said 10% synergies. That's approximately $26 million. They ended calendar year '26 -- their estimate for calendar year '26 is $270 million with more than 40% adjusted EBITDA margins, and that's before synergies. So this is going to be a really nice addition to our portfolio. And like I said earlier, we'll get this hopefully close before the end of this calendar year.

We'll go next now to Joe Giordano with TD Cowen.

Yes. The growth by end market that you guys have for next year, like how consistent is that with where order rates were for you by those end markets for '26?

So I think it's pretty consistent. We finished the year pretty strong on an order to exit rate. We called out the longer cycle nature of some of those things. But what we're guiding for, to give you an example for Q1, is a slight increase from where we exited Q4. So like Jenny said, I think we're giving you the best look that we can right now with the visibility that we have. And we feel pretty positive. This is the highest organic growth guide that we've had in modern history.

And that's consistent on like an end market basis as well? Like is there not like a buildup of backlog anywhere in any of those particular end markets that...

There might be a little bit more strength in heavy-duty truck, but everything else is pretty consistent. That's why they're all mid-single-digit growth.

And you don't feel like the pull forward or anything into the fourth quarter from anything that would have been 1Q orders?

No. We've never really experienced that. I think our focus for years has been on delivering to customers when they need it. And we've been active on price and making sure that there's no slippage in when orders were placed so...

Yes, one of the things that we've worked really hard on the last several years is demand and capacity planning with our customers and with our suppliers. So that's something that's given us the ability to be much more efficient in our operations and make sure that the customers know that they can get the product from Parker in a stated lead time.

Bo, I think we might have time for one more, if we have anyone left in the queue.

We do. We'll take our final question today from Chigusa Katoku with JPMorgan.

I just want to touch briefly on energy. I think it's a tale of 2 worlds: power, strong; and oil and gas, softer. I think last quarter, you expected 2026 was about low single digit for this vertical and you're expecting mid-single digit this year. Just curious, is it more driven by power being stronger and oil and gas kind of unchanged? Just any color there would be great.

Yes. We definitely see power gen growth, and we think that's going to continue to be strong and a little bit stronger. Oil and gas, we think it's going to be flat. There could be an up cycle coming, but we don't have any signs of that yet. So this is flat oil and gas and stronger power gen growth.

Okay. Great. And then just trying to put a finer point on the orders acceleration in North America Industrial. It really accelerated nicely. It sounded like it was broad-based. I didn't hear you call out power or data center, but what were kind of the trends there? Just if you could put any finer point on what really led to this acceleration versus the third quarter, that would be helpful.

Yes. I mean it was across many market verticals. We saw strong Aerospace & Defense in the Industrial businesses, In-Plant & Industrial demand, higher distribution. We saw Transportation improvement with heavy truck. We saw Construction growth. We saw Power Gen growth and Commercial HVAC. So we just saw really, really nice growth across all the market verticals.

Okay. I think that is what we have from a time standpoint. We appreciate everyone joining today. We appreciate your attention.

FY '26 was just a great year for Parker-Hannifin. It was our safest year ever. It was another year of operational excellence. And obviously, as Jenny said, a very active year when it comes to capital deployment.

We are looking forward to even better FY '27. We are confident in that path through our new 30% segment operating margin target by FY '31. And really, none of this could be possible without a sincere thank you to our global team members around the world and to our investors for your interest in Parker-Hannifin. So thank you all very much.

Jeff and Jenna will be available today, if there's any follow-ups that are needed. Thanks again for joining us, and have a great day.

Thank you very much, Mr. Leombruno, and thank you, Ms. Parmentier. Again, ladies and gentlemen, this will conclude today's Parker-Hannifin Corporation's Fiscal 2026 Fourth Quarter and Full Year Earnings Conference Call and Webcast. Again, thanks so much for joining us, everyone. We wish you all a great afternoon. Goodbye.

Good morning, and welcome to Parker-Hannifin Corporation's Fiscal 2026 Third Quarter Earnings Conference Call and Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the call over to Todd Leombruno, Chief Financial Officer. Please go ahead.

Thank you, Chloe. I'd like to welcome everyone to Parker's Fiscal Year 2026 Third Quarter Earnings Release Webcast. As Chloe said, this is Todd Leombruno, Chief Financial Officer speaking. And with me today, as usual, is Jenny Parmentier, our Chairman and Chief Executive Officer. Thank you all for your time and your interest in Parker. We truly appreciate it.

Let's begin the call on Slide 2 and address our disclosures on forward-looking projections and non-GAAP financial measures. Items listed here could cause our actual results to vary from our forecast. Our press release, this presentation and reconciliations for any and all non-GAAP measures were released this morning and are available under the Investors section on parker.com.

Today's agenda has Jenny reviewing our record third quarter performance. Then she will highlight 2 of our largest market verticals, that is aerospace and defense and transportation. I'm going to follow with some details on our third quarter financial results. And then Jenny and I will provide an update to our FY '26 outlook, including an update to market verticals and financial performance. As usual, we will conclude with the Q&A session of the call, and we will try to address as many of the questions as we have as possible. With that, now I ask you to draw your attention to Slide 3. And Jenny, the floor is yours.

Thank you, Todd, and thank you to everyone for attending the call today. Q3 was a quarter of record performance, enabled by the strength of our portfolio. We achieved top quartile safety performance with a 12% reduction in our recordable incident rate. This was our safest quarter ever and puts us in line with our goal of being the safest industrial company in the world.

I did want to acknowledge the severe weather events that occurred in Texas earlier this week, where Parker team members live and work, some of whom may be listening to the call right now. We have a facility in Mineral Wells, Texas, where we employ over 300 team members. Their safety remains our top priority. And thankfully, those on site at the time of the severe weather are safe. However, there was damage to our facility, which we are still assessing. We are thankful to all our team members as well as the responders and service providers who are assisting at our site and in the broader community.

With that, let's share our results for the quarter. Our team delivered record Q3 sales of $5.5 billion, organic growth of 6.5% and 40 basis points of margin expansion, resulting in 26.7% adjusted segment operating margin. Adjusted earnings per share grew 18% and year-to-date cash flow from operations was $2.6 billion. Orders came in at 9% with a record backlog of $12.5 billion. And we are continuing to make progress on the Filtration Group acquisition. Integration planning is underway using our proven playbook.

Moving to Slide 4, please. Many of you on the call today have seen this slide before, why we win. First, the Win Strategy is our business system. We have a decentralized operating structure, 85 divisions run by general managers with full P&L responsibility, acting like owners, close to their customers and executing the Win Strategy every day. Next, we have innovative products to solve customer problems, 85% covered by intellectual property. Our application engineers provide the expertise that allows us to have a competitive advantage with our interconnected technologies that provide efficient solutions for our customers.

And finally, our distribution network is the best in the world. It is truly an extension of our engineering teams, providing solutions to all those small to midsized OEMs that are participating in capital spending and investments. These partners are experts at applying our interconnected technologies.

Moving to Slide 5. We have the #1 position in the $145 billion motion and control industry, a growing space where we continue to gain share. As a reminder, these 6 market verticals represent greater than 90% of the company's revenue. We have a focused portfolio, creating distinct value for our customers. Our powerhouse of interconnected solutions cuts across these market verticals and gives us a clear competitive advantage. 2/3 of our revenue comes from customers who buy 4 or more technologies, and our growth is focused on faster-growing, longer cycle markets and secular trends.

As Todd mentioned, today, I would like to talk about the aerospace and defense and transportation market verticals. Now on Slide 6. I'd like to highlight how we utilize our focused portfolio of core technologies to solve problems and create value for customers in aerospace and defense, our largest market vertical representing 35% of Parker sales. We have been a trusted partner since the inception of the aerospace industry and today have products and technologies on every major aircraft program globally.

Our portfolio is well balanced with approximately 2/3 of our sales from commercial programs and 1/3 from defense programs. We have proprietary designs across commercial transport, defense fixed wing fighter, business jet and helicopter platforms. With the Meggitt acquisition, we increased our global footprint and are now very well equipped to serve current and future demand from OEM and aftermarket customers in the Americas, EMEA and Asia.

Demand remains robust. Orders continue to outpace shipments, and we are on track to finish our fourth consecutive year of double-digit organic growth. Parker is better equipped than ever before with complementary technologies to help shape the future of flight and deliver a compelling value proposition for our customers today and on next-gen commercial and defense programs in the years ahead.

Moving to Slide 7, featuring our transportation market vertical, which represents 15% of Parker sales. Our suite of differentiated and interconnected components and systems create value for customers across internal combustion, hybrid and electric vehicles. We are truly energy agnostic and well positioned to meet changing customer needs. Today, we win with a focused portfolio of innovative products and our application engineers who work closely with customers to specify Parker technologies that improve the safety, reliability and fuel efficiency of their equipment.

Parker Filtration provides protection to the engine and fluid power systems. Our power takeoffs provide reliable power to work functions. Our valves, hose and fittings control the flow of safety critical systems, and our engineered materials provide critical sealing, shielding and thermal management. In addition, our robust network of channel partners serve the aftermarket needs of end users around the world. Lastly, we are seeing an increase in OEM orders for heavy-duty truck, our largest platform within transportation and as a result, are increasing fiscal year '26 sales guidance for this market. I'll turn it back to Todd to review third quarter highlights.

Thank you, Jenny. We are on Slide 9, and I'm going to start with just the summary of financial results. As Jenny said, our team delivered another set of new records this quarter for sales, adjusted segment operating margin, EBITDA, net income and adjusted EPS. Total sales were up nearly 11%. Organic growth was 6.5%. Currency was favorable at 2.5% and acquisitions added 1.5% to the total.

Adjusted segment operating margins were 26.7%, that is up 40 basis points from prior year, and adjusted EBITDA was up 20 basis points to reach 27.2%. We have achieved 2 new first-time ever milestones this quarter. Adjusted net income surpassed $1 billion for the first time ever, and that is a 19.1% return on sales. And in addition, the adjusted earnings per share of $8.17, that's the first time we've been above $8 for a single quarter ever. As Jenny said, that is a growth of 18% versus prior year.

Our teams around the globe did an excellent job this quarter, resulting in another quarter of strong performance. That organic growth, those records across the board and that 18% EPS growth. We're really proud of everyone for their efforts. We're well positioned, and we remain confident in delivering another record year in 2026.

So if we can move to Slide 10, we'll just display the walk, $1.23 of additional EPS, that's an 18% increase. Main driver continues to be increased segment operating income dollars. That added $0.96 or 14% of the growth versus prior year. If you go to the next bar, income tax was favorable, $0.18. There was a couple of discrete items that occurred within the quarter to drive the $0.18 favorable year-over-year comparison.

Share count was also favorable. That drove 14% of improvement from prior year. That was really based on all the discretionary purchases that we've done over the last year or so. Interest was just $0.02 unfavorable, and that was driven by just a slightly higher average debt balance that was slightly offset by lower rates. And corporate G&A and other were a little bit higher, just $0.03 due to some favorable market-based benefits that really occurred in the prior year. So not an FY '26 issue, that was FY '25.

The result is a record $8.17. It's just really driven by strong growth and our team continuing to work the Win Strategy. I really appreciate the team's effort on safety. Jenny mentioned, this was our safest quarter ever, really focusing on our customers, achieving that growth and just really strong operating results. Thank you to all.

If we go to Slide 11, let's look at the segment performance. If you look at orders, we were 9% in total. with positive order rates across all of our businesses. Backlog increased to a record level of $12.5 billion. We generated record segment operating margins. That was 40 basis points of margin expansion. And overall, just a great Q3. If we look at North America specifically, sales were $2.1 billion with organic growth of nearly 3%. That was slightly better than our expectations.

Strongest markets within North America were in-plant and industrial equipment, off-highway and followed by energy. Adjusted operating margins were up 10 basis points for a Q3 record of 25.3% and orders remained robust at 7% compared to prior year. Looking at the international businesses, sales were a record $1.5 billion. That was up 13% versus prior year, with organic growth attributing for 3% of that. Asia Pac had another strong quarter of organic growth of plus 10%. EMEA was flat and Latin America was down versus prior year.

Moving to margins. Margins were up 20 basis points on the international businesses, achieved a record of 25.3% for the quarter. And international orders continue to be plus 6% versus some really challenging comps of plus 11% in the prior year.

Aerospace, same story here, another fantastic quarter for the aerospace businesses. Sales of $1.8 billion. That's up 15.5% versus prior year. Organic growth was 14.2% in aerospace. That is really driven on continued commercial strength in both the OE portions and also the aftermarket. Margins are up 80 basis points and reached 29.5% for the quarter. We had double-digit OEM and aftermarket order growth. That resulted in aerospace order rates of plus 14% and backlog increased 15% in this segment and reached a record of $8.4 billion.

We continue to see strength in the aerospace businesses. Each of our aerospace market segments delivered positive sales growth for the quarter, just a great quarter for Aerospace.

If I could draw your attention to Slide 12, you'll see our year-to-date cash flow performance. Year-to-date cash flow from operations was $2.6 billion or 16.7% of sales. That's up 14% versus prior year. Year-to-date free cash flow increased 17% and came in at $2.3 billion. That is almost 15% of sales, 14.9% of sales. Both the CFOA and the free cash flow dollars are all-time records at this point in the year.

We just have great confidence in our ability to generate cash, and we are committed to actively deploying that cash to create value. You saw last week, our Board approved an 11% increase to our quarterly dividend a quarterly dividend, it's now $2 per share, and that increase will extend our record of increasing annual dividends paid per share to an impressive 70 years.

In addition, in the quarter, we repurchased another $275 million of shares, which brings our year-to-date share repurchases to $825 million. And that is a wrap on Q3 performance. So I'll ask you to draw your attention to Slide 14. And Jenny, I'll hand it back to you to talk about the market verticals.

Thank you, Todd. So Slide 14 shows our updated fiscal year 2016 organic sales growth by a key market verticals. So in Aerospace, we are increasing our forecast from 11% to 12% organic growth as we continue to see, as Todd said, strength in commercial OEM and aftermarket. Implant Industrial remains the same at a positive low single-digit organic growth.

Quoting activity remains strong. Customers are prioritizing spending on automation and productivity. And I would say distributor inventories are stable and continuing to order to demand. As I just mentioned in an earlier slide, we are raising our outlook on transportation from mid-single-digit organic decline to low single-digit organic decline. This is driven by stronger heavy truck orders, while automotive demand challenges persist.

Off-Highway remains the same at positive low single-digit organic growth. We see construction growth from capital and infrastructure investment, while ag remains under pressure. We are maintaining energy at positive low single-digit growth with strong power gen activity. We do see growth in midstream oil and gas, but it is offset by upstream, which remains soft.

And we are maintaining HVAC and refrigeration at positive mid-single-digit growth. We see strength in commercial HVAC, refrigeration, filtration and aftermarket. As a result of these changes, we are increasing our organic sales growth guidance from 5% to 5.5% at the midpoint. I will go back to Todd for some more guidance details.

Well, thank you, Jenny. I'm on Slide 15. This is just some more details. We have 1 quarter left here in our fiscal year. So I'm going to give you some midpoints. Don't read anything into that other than the fact that there's 1 quarter left and the ranges look a little silly when you're just talking 1 quarter. So for reported sales growth, the forecast has been increased to 7%.

Currency based on March 31 spot rates is expected to be favorable 1.5%. Acquisitions are 1 and divestitures are also 1. For the full year, we're increasing organic growth to 5.5% at the midpoint. Aerospace organic growth has increased to 12% and industrial growth is now expected to be 2.5% for both North America and International.

Adjusted segment operating margins, we're expecting to be 27.2% for the year. That is a forecasted increase of 110 basis points versus prior year with margin expansion across all the businesses, and the forecast for incrementals for the full year is 40%. Assumptions for corporate G&A, interest and tax are all detailed out in the appendix, really no changes there.

Full year adjusted EPS has been raised by $0.50 to $31.20 at the midpoint, that would be an increase of 14.2% versus prior.

In addition, we're also raising our forecast for full year free cash flow to $3.3 billion to $3.6 billion. That's $3.450 billion at the midpoint. That would be 16.2% of sales with conversion at approximately 100%. In respect to Q4, specifically, we are guiding reported sales to be nearly $5.5 billion. That is a 5.5% increase versus prior year. Organic growth will be approximately 4%, adjusted segment operating margins will be 27.4%. The effective tax rate, we are expecting is 22%. And for the second time ever adjusted EPS would be above $8, to be at $8.16. As usual, we've got some more details in the appendix. And with that, I will turn it back to you, Jenny, and ask everyone to turn to Slide 16.

On our final slide, a reminder of what drives Parker. Safety, engagement and ownership are the foundation of our culture. With our people and living up to our purpose that drives top quartile performance, that allows us to be great generators and deployers of cash.

Okay. Clearly, we are ready to start the Q&A portion of the call.

We'll take the first question from Micre Dobre with Baird.

Thank you. Thanks for the question here. Maybe I'll start with kind of the topical items of late. You haven't really called out what's been going on in the Middle East in any way that was material. So I'm curious as you look at your business, has there been any disruption or anything that's different that we need to be aware of? And also, there's an updated tariff framework I'm curious if there is any impact to be done about as far as you're concerned?

So first of all, I would say our first concern with the Middle East is the safety of our team members. And we're very, very happy they're all safe. Direct revenue in the Middle East is very small, and there's really no manufacturing. It's primarily a sales organization. So our teams are doing a fantastic job managing the supply chain, handling logistics and doing everything they can to minimize the disruption to our customers. So at this point, we're not seeing any material impact to demand. .

And talking about tariffs and what's going on there. It continues to be very dynamic. And as always, our teams are doing a great job managing them to make sure that there's no impact to earnings. And as you know, price cost management has been a core element of the Win Strategy for us. This is a strong muscle for us for over 25 years, and we don't expect this to have any impact.

When you're looking at changes in tariffs, again, I would say we're very close to it. We analyze it on a regular basis, and it's nothing that we're concerned about taking care of.

Mig, I would just add -- this is Todd. Jenny mentioned, it's a complex process. We're obviously doing everything we can there. We will not recognize any income on those tariffs until we receive them. So we are treating those at [indiscernible] so you won't those forecast or recognize any income that we actually received.

Understood. And then my follow-up, just kind of sticking with your comments on price cost. I guess, optically, even though this was a very good quarter, you guys put up to the incrementals on the industrial side of the business were a little bit lower than what we have seen of late. And I'm kind of curious there is any lag whatsoever that you're experiencing in terms of either dealing with the teridynamics or any other inflationary aspects within your business. any delay look as to where you're able to implement pricing to offset that? .

I'll take that, Mirc, no delays, no concerns there with Mike's cost management whatsoever. We were below what we had forecasted in North America and international. And in North America, this was really driven by stronger OEM growth. And notably, this came from off-highway and transportation. Distribution did hold steady, but no real acceleration there yet. And while we aren't in the excuse making business, as I tell the teams, the teams are always planning for various contingencies. This quarter, we had to recover from more weather-related disruptions than normal, and that was mainly in North America. So we're very proud of the teams, as Todd mentioned, for responding and delivering to the customers. We did have record margin for North America, and we're going to finish the year strong.

We'll move next to Jamie Cook with Truist Securities.

Congrats on a nice quarter. I guess 2 questions, just following Mig's question on the incremental margin on a or the outearn you're still expecting a 40% incremental margin, which is above normalized range or what you laid out at the Analyst Day. So I guess as Todd, while you don't want to talk about 2027, as we think about the setup for next year over the longer term, is there any reason why we shouldn't believe incremental margins just couldn't be in the 40% range? Or does mix on like the mobile side or whatever impact that or can incrementals be structurally better. And then, I guess, Jenny, my question to you just because there's a lot of concerns, obviously, with the Middle East and macro.

Your orders in Industrial still were very strong, in particular, on international. Like you said, with the tough comps anything notable on sort of the cadence of orders throughout the quarter into April or just confidence level sort of like last quarter, has it waned at all relative to it last quarter, wouldn't have felt like you've been pretty -- one of the first people to be more positive, I guess, on industrial short cycle.

Jamie, thanks for the congrats. I'll start. We've been trained here to finish strong, and we're focused on finishing FY '26 strong. So our focus right now is on Q4. But I'd tell you what we like to set up for FY '27. You're going to see us to continue to do everything that we do here. You've seen our orders. You've seen our margin expansion over time. We are very much focused on creating great incrementals. We hold the team to a target of 30% to 35%. And obviously, that varies on where your business is.

But really, what we're focused on is growing those segment operating income dollars and compounding EPS, right? That's been very successful for us. And that is a factor of that. I think if you do the math, you're going to get incremental somewhere where you're thinking. But we'll talk to you more about that in a couple of weeks.

And for your second question, Jamie, orders were strong throughout the quarter. And we saw -- I would say the industrial recovery continues. We saw more broad-based positivity on both short and long cycle than we did earlier this year. So we feel really good about the guidance. And as always, we stay close with the customers. So we we not only feel good about the guidance, but we're not seeing anything right now that concerns us. .

We'll take our next question from Jeff Sprague with Vertical Research.

Nominee. Jenny or Todd, could you just maybe spend a little more time on Aero? The organic growth in Q4, I guess, will be sort of the slowest of the year against the easiest comp of the year. Are you dialing in some aftermarket pressure? Or what -- maybe kind of what's underneath that outlook in the fourth quarter?

Yes. I would say, Jeff, the aerospace Q4 forecast is approximately 9%, and that was raised from our previous Q4 guidance of 7.5%. We're not baking in any slowdown here. Orders and backlog continue to be very strong, record backlog here in this long-cycle business. But -- and again, as I mentioned earlier, this is going to be our fourth year in a row of double-digit organic growth for aerospace. But we're not building in any slowdown here.

And there's no indication in orders or anything that has a shift between OE or aftermarket?

Say that again, I'm sorry? .

The complexion of OE versus aftermarket in Aero. I wonder if you could give a little more color there.

Well, if you look at how we performed in Q3 commercial OEM was up 22%, and aftermarket was up 14%. But again, strong orders in both areas. So we feel real good about the mix and the forecast. We were at 51% OEM in Q3 and 49% aftermarket. So the teams are doing a really great job with the higher OEM mix and still being able to expand margins. .

Jeff, I just add, aerospace, specifically, the backlog increased 5% sequentially, $8.4 billion is the total backlog. That's all-time record.

We'll move next to Chris Snyder with Morgan Stanley.

I understand that as the industrial businesses turn to be more longer cycle exposure that there's a lag between when the orders convert to revenue. But if we see industrial orders sustained here in this mid-single digit, even maybe high single-digit range for several quarters in a row because then why sales will not ultimately get to that same level of growth?

Thanks for the question, Chris. I wouldn't say that there's any structural reason. But if you look at North America, orders have been plus 7% for the past 2 quarters. And we noted in Q2 that these included long-cycle multiyear defense orders. And so again, in Q3, we saw orders that are due beyond this fiscal year, including defense, energy and even construction orders scheduled into FY '27, which is usually shorter cycle.

So we're guiding 3% organic growth for Q4, which would be the best performance so far for this year. And as Todd mentioned earlier, we like the way to set up looking for fiscal year.

And then when you look across all of the various industrial end markets that the company serves. Are you seeing the improvement in sales and in orders driven by end demand going higher? Like what's being put out into the channel is being consumed? Or are there where you think distributors could be maybe building a little inventory in anticipation of a cycle maybe some concerns on supply chains or commodity inflation with the events in the Middle East. And I just want to see if there's any like end market differences on that.

Well, I wouldn't say we're seeing any of that yet. I think they're still ordering to demand. for rather quick consumption. We're not seeing any real acceleration or any typical signs of restacking. Haven't heard of any supply chain fears within it on the industrial side of the business.

We'll move next to Amit Mehrotra with UBS.

I wanted to just follow up on that point around, I guess, distributors versus OE mix. And Jenny, I think you made a comment about stable distributor inventories, ordering to demand, strong quoting. I'm just trying to triangulate those items to understand sort of the psychology around inventory stocking and kind of a more structural question are the distributors maybe getting a little bit more sophisticated around inventory management. And so maybe there's a mix more from growth towards OE, which has margin consequences. Maybe you could talk about that.

Yes. What I would say is that over the last several years, I think our distributors have become very sophisticated when it comes to inventory management. Even coming out of COVID, managing cash and really putting all of the processes in place to order what they need and use it and sell it for consumption. So I think that is definitely something that has happened over the last several years. .

And when we talk about ordering to demand, it's -- we're not seeing the increase that would tell us that there is a restocking going on. So they've been telling us for quite some time. The quoting activity is strong. their sentiment has been positive for quite some time. But again, they will tell us that their customers are being selective with capital investments and really focused on those that provide automation and productivity.

So we're not signaling anything changing. It's just not accelerating right now. And we are seeing an increase in OEM with the raise to transportation outlook, and off-highway with construction, we are seeing increased OE, which is classically 10 to 15 points below institution.

Great. And then you also mentioned historically over the last few quarters, you talked about the order strength really being centered on longer-cycle specific verticals. I think you kind of broaden it out a little bit this quarter. Maybe just talk a little bit more about that true short-cycle piece and what your observations have been over the last few months? .

Yes. So when you look as long cycle, it continues to pull strong. We've been talking about that. That's why we raised our aerospace and defense guidance. Power gen cycle business, it's robust. Lots of activity in midstream oil and gas and electronics is also growing nicely. On the short side, as I mentioned before, the industrial recovery continues. And we've been talking about a slow gradual industrial recovery for some time now, and that's what we're seeing. The order that we saw more broad-based and positive on both short and long cycle on the industrial side of the business than we've seen really all of this fiscal year. So construction continues to improve. Heavy-duty truck improvement in plants and distribution, which we just talked about. So we're continuing to see this positive low single-digit growth. And again, we'll say we're set up for a good fiscal year '27.

We'll take our next question from Andy Kaplowitz with Citi Group.

Jenny, could you talk about what you're seeing in the aerospace supply chain, as you know, 1 of your peers continues to have some issues there, but you've continued to execute well. You seem to be absorbing like a little bit more difficult margin mix, while still growing. So as we start to transition to FY '27, is there any reason why you couldn't continue to grow margin even if mix is running a bit more against you? .

I remain confident in our ability to expand margins and committed to that as well. So I don't have any change there. The aerospace supply chain, I would say, is obviously, a much better shape than it has been. And we've seen the big air framers be able to increase their rates, which we're obviously participating in. And I would tell you that we have, over the last several years, invested quite a bit in our supply chain, and that has proved to be very beneficial for us. So I don't really have any concerns here. .

And then, Jenny, continued strong performance in Asia Pac that plus 10% is impressive. So maybe talk about the durability of that growth and be a flat kind of bouncing along there at kind of those rates. I think last quarter was up a little bit. So do you see sort of improvement there? Or is it just kind of so long flat.

Well, this is primarily, as we said earlier, the growth is coming from Asia Pacific. The total backlog coverage in industrial did increase to the high 20s and international orders were plus 6% for the third quarter in a row. But again, driven by electronics and some defense bookings. So EMEA, slightly negative on a tough comp when it comes to orders, but strength in aerospace and defense, some mining, some implant in industrial, but Asia orders are strong, coming from electronics. -- data center in there and implant and energy. .

We'll take our next question from Julian Mitchell with Barclays.

Maybe, Jenny, just wondered if you could flesh out the subsegment sort of assumptions on aerospace. Just kind of what you're expecting in the fourth quarter for the major pieces kind of year-on-year and how they did in Q3. I think you have the commercial bits for Q3, but not military. .

Yes. Let me give you a Q3 rundown and then I'll go to what we have for Q4 guidance. So as Todd mentioned, aerospace organic growth was 14.2%. And commercial OEM was 22%. And obviously, this is driven by production rate increases in both narrow and widebody. Commercial aftermarket was 14% and, even though we were seeing to see -- we're starting to see global air traffic growth begin to normalize, we still saw nice growth in Q3 and strong spares and repair shipments.

Defense OEM, the positive 13%. We see demand for the legacy programs continuing. And then defense aftermarket was positive 8%. So fleet upgrades and service extensions are contributing to that. And I mentioned earlier, aftermarket mix at 49% and OE at 51%. When we look at Q4 guidance, again, we're increasing full year to 12%, and we're raising commercial OEM to be the low 20s growth, we previously had that at 20% -- approximately 20%. We are raising commercial MRO of low teens growth, was previously low double digit. We expect defense OEM to be mid-single-digit growth. That's the same as before and defense or low single-digit growth, also the same as our last guidance.

That's very helpful. And then just to try and circle back again to that point on industrial kind of orders and sales and the fact you've had several quarters of orders in both industrial segments outstripping the revenue growth pace. Maybe just another way to look at, I wanted to confirm that, that industrial the diversified industrial overall backlog? It looks like was that just over $4 billion at the end of March. So you had a decent sort of year-on-year and sequential increase.

So I guess I just want to say, it looks as if that orders outpacing of sales isn't just a sort of comp phenomenon or something like you -- there should be some recoupling of the sales to those orders, even though from the outside, we can't see the kind of dollars of orders you've been booking?

Yes, Julian, you're absolutely right. The -- both the industrial and the aerospace backlogs improved and we obviously see that as a good sign.

Okay. We'll move next to Andrew Obin with Bank of America.

Just to check my math on industrials. I guess organically, it does imply that Q4 will be a midpoint will be a tad lower than Q3 industrials Americas? Is that okay? Is that correct? .

No. We've got it pretty much the same.

Okay. Fine. And a question on pricing. In the quarter. We've been hearing about sort of industry talking about rebates, pushback. Now all of this has been before S232, and I know maybe not a direct impact for you guys. National pricing change, given that the industry now does have to deal with S232, and maybe just -- can you just talk about pricing trends in Q1 and what pricing looks for the remainder. Well, I guess your fiscal year, but any commentary on pricing would be great.

I would say that conversations haven't changed. Obviously, when it comes to the tariffs, as I mentioned earlier, it's dynamic and it requires a lot of analysis and coordination and the teams are doing a great job of that. on the industrial side of the business, as we've mentioned in the past, we're back to -- especially with distribution, we're back to a normal pricing environment, so we'll do that as we have in the past. With aerospace, there's still some opportunity for pricing and the teams are executing on that. But we've been doing this for a long time. And I think we've done a great job of covering inflation and making sure that the tariffs have impacted our earnings, and we'll continue to do that.

And maybe just sneak one in on defense aftermarket. Why not raise the guide given what's happening in the Middle East, I would imagine a lot of wear and tear on key platforms year on, sorry.

Yes. This is a long lead time product, right, even in defense. So you're looking anywhere from 9 to 15 months. So we have the guide out there based on the deliveries that our customers want, and that's what's really driving that number.

We'll move next to Tim Thein with Raymond James.

The first question is just on the mix dynamics within the industrial businesses in '26. I'm just trying to -- you can see if you can help kind of summarize in terms of distributions growth and what you're expecting next year relative to the total, and more forward thinking. I'm just trying to think if that business begins presumably to pick up, does that potentially portend a mix tailwind in '27. Can you help on that?

Yes. Tim, this is Todd. You look at our industrial business, it is exactly 50% OEM, 50% aftermarket. So as these things rise depending on what market they're in, there really is a nice diversified balance across there. When we see something pop it last quarter, I think we mentioned slightly there was a little bit of a mix issue. But these are small in comparison to the total. What we look at is positive. We're looking at those orders. We've had positive orders in the industrial business now for 6 quarters in a row. And again, what that does is that helps us compound dollars, and that leads to EPS growth.

Yes. distribution sits in our -- primarily sits in our implant industrial market vertical. And our forecast remains the same for that for the rest of the fiscal year, positive low single-digit growth. .

And then again, this is a little bit out of left field, but there was -- one of your big European-based competitors. They really flagged certain to see more competition from some of the competitors in Asia starting to make some more inroads into their markets. I'm just curious, made some broad questions just in terms of the competitive dynamics as you think about that globally. Have you your results wouldn't suggest it, but I'm just curious if you -- what you would say to that in terms of any changes that you've seen globally on that.

I've seen any changes, but I would say that our teams are very focused on taking any and all competition very seriously. We have a lot of a lot of pride in the products that we have and the value that they bring to the customers, the quality, we manufacture and many regions of the world that allows us to be very competitive locally. So while competition is always something that something we have to keep an eye on, our performance is what ensures that not only that we keep what we have but that we gain share. .

We'll take our next question from Joe O'Dea with Wells Fargo.

Can you give a little bit more color on what you're seeing in Industrial International. We've seen very steady mid-single-digit order growth. You touched on the tough comp in Q3. So I think kind of pick any stack period you want, looked pretty good in the third quarter. And so Europe, Asia, kind of what you're seeing, any verticals you would call out there?

Sure. So we are increasing full year organic growth to 2.5% for international versus our prior guide of approximately 2%. So in EMEA, we're maintaining a slightly positive low single-digit we're seeing a gradual improvement in plant and in transportation, primarily heavy to truck. And we have seen continued strength in mining and energy, both oil and gas and power gen. In Asia Pacific, increasing full year to positive high single digit versus positive mid-single digit we had in our prior guide. And this is continued strength in electronics and semicon demand. implant orders and shipments progress, but remain a little bit mixed. Minis strong, and there have been improvements in energy. So it's really kind of a mix between EMEA and Asia Pacific, but we're going to end this year at 2.5%.

And then just on Filtration Group, I think you initially talking about a 6- to 12-month window. I think it seems like some deals have taken a little bit longer to work through regulatory processes, I'm not sure if the way you're thinking about it maybe favors the 12-month side of that versus 6 month. And then just any color, recognizing really good margin business, what you're working on in preparation for that is the highest priorities post close? .

Sure. So we still anticipate that we're going to close within the 12 months of announcement date. And just as you said, the closing remains subject to the customary closing conditions receipt of our pending regulatory clearances. So that progress is happening there. It's ongoing. I would tell you that the integration planning is under rate teams that both sides have been formed. So those teams are working together. And we'll put our integration playbook into place as soon as we do close and get the Win strategy into the organization as soon as possible.

We did announce $220 million in synergies by the end of year 3. That is 11%. The majority of those synergies are going to come from the tools in the Win Strategy that you hear us talk about, lean, supply chain, and simplification. We're not providing, at this time any information on the phasing of those synergies, but we're very, very confident in our ability to achieve those. So announcement was last November, and we still anticipate that it will be within the 12 months.

Joe, I would just add on the funding side of it. We have our funding plan in place. There is no prefunding that's required for this transaction. So you won't see any interest before we close the transaction. And you're going to see us do exactly what we've done on the past transaction. A little over half of this will be serviceable debt. The rest will be short to medium-term notes, and we do not expect leverage to surpass 3 when we close. And our delevering plan will be in place that we get back to around 2% faster than we ever have before.

We'll move next to Andrew Buscaglia with BNP Paribas.

Just looking across broader coverage group and broader industrials looking at what life is like if energy prices persist above $100 going forward. I would think Parker would stand to benefit. I'm wondering, you haven't probably gotten this question in a while, but where do you -- obviously, you have that direct energy exposure or maybe there's a nice benefit, but I would think there would be a ripple effect some animal spirits brewing in some other areas, maybe off-highway plant. But what is the net impact for you guys if we still see energy prices sitting here 6 months for now? .

Well, I think it's probably too early to forecast right now, but where we're at today, and what we have in our guide. I think that's representative of the impact today and how it impacts overall Parker Hannifin. We'll have to see how this plays out. But I don't have any forecast to share with you today. .

Yes, Andrew, I would just add, the diversification of portfolio is really one of the strengths of the company. And we often say we're agnostic when it comes to the power source. When you look at the market verticals that we call out, there will be some pluses and some minuses across those. But I think overall, the company will be able to capitalize on any opportunities that come from changes in energy prices.

And then your free cash flow nudge that up a little bit. I'm just wondering in light of the Filtration Group deal closing, are you still evaluating M&A into year-end? Would you rather preserve some capital just to get through the deal and then see where you're at? .

We've been very active. We've been very direct with our commitment to do that. You saw us increase the dividend. You saw us do $825 million of share repurchases. You look at our leverage, it's very, very manageable where it sits today. I just mentioned the full funding of the Filtration Group. We will not -- we might get near 3, but we're not going to cross 3. So that pipeline is always active. It's always being worked on. It's always being measured. And I would tell you the capacity that the company has, you mentioned it. We're raising our free cash flow. If you look at CFO, we're going close to $4 billion of cash generation this fiscal year. It gives us a lot of options, and we're going to be very diligent when it comes to deploying those that optionality.

I don't think I can consider.

We'll move next to Joe Ritchie with Goldman Sachs.

Todd, maybe a longer-term question on margins within the industrial business. So absent volumes, obviously, you guys have done a great job expanding margins in both of those businesses. But as you kind of think about the opportunity here, where do you see is like the biggest levers absent volumes to continue to expand margins in the industrial segment?

Yes. Really, it is our commitment to lean and continuous improvement. Kaizen across the organization, we were just at some of our aerospace facilities. And you look at the margin that those aerospace businesses are putting up. But you listen to our team members and you walk the shop floor and you see the kaizen activity that's happening and the efficiency that it's driving, it is so energizing to see that. We've said this before. We are very confident Jenny said it multiple times today that we're very confident in our ability to continue to expand margin, and that's what you're going to see Parker Hannifin do over the long term.

We're -- our team members have a mindset of we're never done. And some of those visits as Todd was just talking about you're seeing fantastic improvements that they've made and the next breath, they're telling you what comes next. So again, just to reiterate, our confidence in the team, our confidence in our tools and the win strategy. and our ability to really create shareholder value there.

That's good to hear. And look, I know we'll get a guide in early August when you report -- but I guess as you kind of see your end markets right now, Jenny, you sound pretty sanguine on what's happening in the industrial end markets. I mean is it fair to say, just given where we sit today, that the expectation for next year be lease a couple of points better than what you're seeing in '26?

That's a question to try and get a guidance. Listen, it's a fair question. We purposely transformed Parker into a less cyclical, faster growing and more resilient company. And many of our industrial markets turn positive bring this fiscal year, and orders are strong. As we were just talking about, the Win Strategy is clearly working. It's going to continue to drive growth, margins and earnings even higher. We're going to welcome the filtration group into this fiscal year. So I'm confident that we're going to be able to guide to you.

For one more question before the -- we hit the top of the hour.

We take our last question from Nigel Coe with Wolfe Research.

Great. Thanks for being here, the pressure the last question. Lots of questions on orders. Todd, maybe just what was the industrial backlog? I'm getting $4.1 billion. Is that the right number.

Your maths is good, that's right.

Correct, correct.

Yes, that's why I got to pay the big books gain.

Just a quick one on the Texas facility. Obviously, really bad news. But just wondering the scale of that facility and any disruption you factored in.

Listen, we're still assessing what the impact is, but we don't expect this to have any material impact to overall Parker.

That's great news. And then just 1 quick one. The DC business, data center business, I know it's small, but it's growing like a weed. So I'm assuming it's moving the needle on growth rates. So just -- any update on the size and growth profile of data center? .

Yes. It's still approximately 1% of our sales, but a great exposure here. It's growing nicely. It's just not large enough to have its own vertical right now. But this is just a great example of how all of our technologies, our interconnected technologies come together to really provide great value to the customers.

So listen, we're working with all the industry leaders. You're right, very fast growing. We can provide liquid cooling systems, subsystem components. And with the increase in data centers, there's a secondary benefit there around power gen and automation in construction. So this is a great overall impact for our partner.

Okay. This concludes our FY '26 Q3 earnings release webcast. We appreciate your time and attention, and thank everyone for joining us today. As usual, our Investor Relations team of Jeff Miller and Jenna Stuckey will be available for any follow-ups or clarifications that anyone may have. Thank you all, and have a wonderful day.

Thank you. This concludes today's call. We appreciate your time and participation. You may now disconnect.

Welcome to, I guess, which is still a morning session. And our next presenter is Jennifer Parmentier. She's the Chairman and CEO of Parker Hannifin. We've known Parker for decades. We think it's been one of the great compounder stories in our coverage. And under Jen's leadership continues to be so. Welcome to London. Thanks so much for attending the conference. I think there are going to be some slides, and then we're going to go into Q&A. Thank you.

Thank you, Andrew, and thank you, everyone, for being here today and for your interest in Parker Hannifin. So as Andrew said, I wanted to go over a few slides today. Obviously, if you can all read this really quickly, I'll move to the next slide. This is Parker Hannifin at a glance. And for any of you that have followed us for some time, you're familiar with our story. We have 3 businesses: Aerospace Systems coming in at 31%, Diversified Industrial International at approximately 30% and Diversified Industrial North America at approximately 40%.

When you look to the right side of this page, a little more color on those businesses are our 4 technology platforms that make up the company. Motion Systems coming in at 17%, again, Aerospace at 31%; Flow and Process Control at 23% and Filtration and Engineered Materials at approximately 30%. On the bottom of this slide is what makes all the performance and the success of our company possible and will do so well into the future. The first thing is our Win Strategy. Win Strategy is our guide to operational excellence. It's our business system.

And as I like to tell people, it works. It's something that I use as a general manager in one of our businesses, as a Group President and obviously, in the role that I'm in today. We have a very much technology powerhouse of Interconnected Solutions across these 4 technology platforms. And as many examples that we talk about, this is something that I do believe gives us a significant competitive advantage and is the reason that we continue to win. We have a global distribution network, and I've said this many times publicly, that it is the envy of the competition.

Our distribution partners are an extension of our engineering application expertise, and they do a great job with all the small to midsized OEMs, helping those customers in the field and providing those Parker solutions that help them be successful. And finally, our decentralized operating structure. We have 85 general managers. They're P&L owners. They make decisions every day. They stay close to the customers. They know what's best for their business, and they know what's best for the future. We believe in this decentralized structure. And again, it's the foundation of our success.

We do have the #1 position in the Motion and Control industry. We're over 100 years old now, and our guide this year is approximately $21 billion in sales, something that we're very proud of. We talk about the company for the last couple of years in these 6 market verticals that you see to the left of this slide. So again, going around the circle, Aerospace and Defense at 35%. So the earlier slide said 31%. But in total, 35% of our business is Aerospace and Defense as some of that business sits inside the industrial side of Parker as those technologies belong in those specific groups.

In-plant and Industrial is our next largest market vertical at 20%, followed by transportation at 15%, Off Highway coming in close at 13%, Energy at 7% and then HVAC and Refrigeration at 4%. So 2/3 of our sales comes from customers who buy 4 or more technologies. Again, a big part of our story and our competitive advantage and our organic growth is about the interconnectivity across those technology platforms with all of the Parker products. And our growth is focused on faster-growing, longer-cycle businesses and higher aftermarket. This is one of our favorite slides to show, and it shows the performance of the company over the last 10 years.

As you can see, we've had a 6% revenue CAGR, over 1,000 basis points, 1,150 basis points of adjusted operating margin expansion, 16% EPS CAGR over that time period and free cash flow of over 10%. So again, very proud of this performance. And as we look to the history of our EPS, 60% of this performance comes from the legacy Parker businesses and the remaining 40% comes from those significant and very important acquisitions that you see at the top of this slide. LORD, CLARCOR, Exotic, Meggitt, and most recently, last quarter, we closed on the acquisition of Curtis. And in November, we announced our intent to acquire the Filtration Group business.

So again, very proud of this performance, and we've been able to do -- the team has been able to do a great job of compounding EPS over time. This is a slide that I like to end with because it really truly is what drives Parker. And first and foremost, it's the safety, engagement and ownership of our people that help us live up to our purpose, deliver top quartile performance and be great generators and deployers of cash. That is my final slide.

Okay. Maybe we can start with the big picture. So generally, and we'll talk about the macro, but directionally, markets are looking up. You're executing well. You've sort of have teed up your next big deal, the Filtration Group. When you go and when you talk to your Board, what are the couple of things that they really care about 2, 3 years out?

Yes. So we're always talking about our performance and our performance to our fiscal year '29 targets. So we're talking a lot about the components of the Win Strategy and how we're doing quarter-to-quarter against those. But 2 regular agenda items for us are always capital deployment, the acquisition pipeline, which I've said many times, we're always working. It's robust. It never ends. Even quickly after we've announced Filtration Group, we're still working on it. So that is a topic that we are always talking about.

But just as we always talk about the strength of that acquisition pipeline, we spend a lot of time talking about talent development. The strength of our pipeline of our people is very important to ensure future success. So we take a lot of pride in talent development at all levels of the organization. We obviously make sure our Board knows those people, and we talk about stretching those individuals, giving them opportunities to develop personally and really to ensure the future success. It really is all the great people at Parker that get this work done, and we want to protect that well into the future. So talent is a very strong topic.

Thank you. Look, I mean, clearly, lots of things happening in the world. Any latest thoughts on the macro environment? Any comments?

Yes. So obviously, it's a lot going on in the last couple of weeks, right, geopolitically. I would tell you that first and foremost for us is always the safety of our team members in the regions where those conflicts are happening. And I'm very happy to say that everyone is safe, and we keep very close to that. I would say that it's pretty early to make any real predictions or forecast about how that will impact, I would say, primarily our defense business. But we have been positive midterm on the defense business. We've been in that business for quite some time, a big part of our history. And we're ready to support. And obviously, that could be something that increases in the future. But I think it's too soon to tell.

Right. And just general macro other than that, I think PMIs are getting better. You sort of commented that off-highway is getting better. Any thoughts on how things develop?

So Aerospace, fourth year of double-digit growth, right? So very strong Aerospace. And we talked about a gradual recovery on the industrial side of the business. As you said, we talked about at the last earnings call that we saw construction more positive. So that's the bright spot in off-highway, along with mining. We're seeing mining be strong, not only in Europe, but in Asia as well. And the distributor sentiment remains very positive. They're positive about the quoting activity.

I wouldn't yet say that it's restocking. They've done a really good job of managing their inventories and ordering to their current demand level. But there's been some bright spots in there. So we're still seeing a very gradual recovery in Industrial. But we did increase our organic growth, right, for North America. For total Parker, we started the year at 3%, then we went to 4%, and now we're at 5%. And for North America, we went 2% to 2.5%, and we increased International as well. So gradual recovery.

And maybe a price/cost environment. Once again, lots of moving pieces, tariffs, higher raw materials. What's happening with pricing? And how are you dealing -- we've been hearing that perhaps there is some sort of pushback in the channel because as tariffs are being pushed -- sort of being rescinded maybe, what's happening with the pricing? And what are you hearing from the channel?

Yes. So it's the same as it has been for some time. We have a very strong pricing muscle. We know how to respond to tariffs. We have the tools and the analytics, just as we do with any inflation driver to make sure that it doesn't impact our margins or our EPS. And we're utilizing those same tools to make sure that through this environment, we don't have any problems. The distribution channel has most recently been back to a normal pricing environment after those hyperinflationary times. So tariffs are part of something that happens, but I'm not hearing of any pushback from our channel.

Okay. Fantastic. So look, maybe we can sort of go to Aerospace, which is increasingly at the center of what investors talk about it. You do sort of model step down in incrementals for Aero in second half versus first half and sort of step down from 40% to 30%. Can you just talk about how OE spares mix impacting this outlook?

Yes. So commercial OEM is our strongest growth area right now. It's at 20% for the year. That's what our guide has in it. And in Q2 and the first half in general, we did have a strong spares and repairs mix. And it's worth noting that, that -- unlike most of Aerospace that is a long lead time, that is not a longer lead time order. Those are more difficult to forecast. So we don't have those in our forecast. So that's one of the differences.

And the aerospace demand has been so strong and the team has executed so well. There is a step down that you see because we are forecasting a higher OE in the second half. But for the full year, we're still guiding to a margin of 120 basis points increase over last year at total year 40% incrementals. So there's a little bit of mix there in the second half, but still margin expansion.

And that, if there is any Defense aftermarket that sort of you see that's not in the forecast.

Correct. Anything additional that we don't see today.

And then '27 is the first year with no official Meggitt synergies. So how should we think about sort of margins incrementals in Aerospace going forward beyond '26?

Yes, this is the last year. Fiscal year '26 is the last year for those. The last year that we'll be talking about them. I think you need to think about it this way. I made the comment that 60% of our performance has come from the legacy Parker businesses that have been using the Win Strategy for almost 25 years now. The Meggitt business has only been using it for 3 years. So there's been nice margin expansion with the high growth in Aerospace, and there will continue to be. The teams have adopted the Win Strategy well, but there's still room to improve.

And commercial aero OEM and aftermarket outlook, specifically on aftermarket, can you remind us what changes you have made to your aftermarket business model over the past year on the commercial side? And then any sort of comments on obvious OEM business because that seems to be dynamic.

Yes. So the final phase of the Meggitt integration, which really started about 2 years ago, was to combine the Parker and Meggitt aftermarket businesses. So that's the change that you're talking about. We brought those 2 businesses together, all those products. It's made it incredibly stronger than what we had to begin with. And it's also given us the ability to serve in all regions. So that's something that has gained us quite a bit of strength in the past.

Bringing that talent together, those customer relationships, the product portfolio has really, really helped us have that low double-digit growth that we're still forecasting for aftermarket. Meggitt also brought a lot of Defense business, too. So it's not just a commercial story when you talk about the aftermarket, it's obviously a Defense story as well.

And just -- we sort of talked a little bit about Defense aftermarket. But could you just -- because we have been questions -- getting questions on Defense aftermarket. Could you remind us what programs are you -- you have this beautiful picture and which is saved in our model, but -- as a visual. But could you just remind us what's your exposure to Defense aftermarket? What products are you -- what platforms are you on, without commenting on this.

Yes. I mean fighter jets, ground, naval, I mean, we're on all the key platforms in Defense.

Maybe we can shift to Industrial. On Curtis acquisition, could you remind us where we are in terms of hitting our plan on financial impact in '26?

Yes. So we've had Curtis for about a quarter now. So we have 1 quarter under our belt. It's very much in line with our expectations. It's been a great addition to our portfolio. Just for those who may not be as aware, Curtis brings to us low-voltage motor controller solutions, which was a gap in our portfolio. It pairs well nice with our higher voltage motors and our control solutions. We've been able to bring this into one division inside of Parker.

And now we have a full suite of motors and controllers for hybrid and electric equipment. And much of that is equipment that's been electric or hybrid for quite some time, proven business case products. So really been a nice acquisition. It will be accretive to EPS this year, initially dilutive to margins, but it's on track.

Yes. No, I mean the CONEXPO stand that Jeff sort of showcase was super useful in actually understanding where the technology fits actually.

Yes, the team did a nice job. I'm glad you could stop by.

No, no, that was terrific. Maybe we can talk about macro and what set of macro conditions would it take for Industrial North America to be able to accelerate from -- and just a reminder, you guys are in June year, but we are in third quarter of fiscal '26. But what set of macro conditions would it take for Industrial North America to be able to accelerate from Q3 to Q4 because your current guidance implies no sequential acceleration.

Yes. It's -- dollar-wise, it is, it is sequential organic growth-wise. We did increase our organic growth target. And dollar-wise, it is. So it's -- we don't feel that it's overly conservative at this point.

No, no, you pushed the company. I'm keenly aware of that.

We do -- like I said before, we do see some bright spots there. I think what it's going to take probably is something we've been talking about for some time with this part of the business. And there's still the uncertainty around tariffs, right, and interest rates. I think that all plays into the decisions that our customers' customers make. So those are some things that I think would make a difference. Obviously, we've had some things happen in the last couple of weeks. We don't know what the impact of that's going to be. But we still feel really good about the increased guide that we put out there. So we'll see. We'll see what happens here.

Maybe sort of pace of recovery in off-highway market. And we were at CONEXPO, it seems like folks are feeling better. The question there is just on capacity. I think I asked this question a couple of quarters ago. But for example, do you have flexibility to toggle capacity between construction, mining and ag? And how does the ramp in off-highway impact margins?

Yes. So we don't give margins by market.

No, no, but that's impacted the...

Yes, I would just tell you that -- something I've long said since I was running plants is volume is our friend, right? So even with a higher OEM mix possibly with some of that ramping up, we'll still enjoy a nice aftermarket, but we'll be able to leverage that volume for production efficiency. So I think -- I think we will like that. And we have in the off-highway space, as you said, we've seen the same thing. Construction is stronger and mining as well. Ag is still in the same place as we've talked about the last couple of quarters, but...

People use the term dead.

I don't think I would say.

Yes, yes, I know you won't, but a number of people use that term.

But yes, we see a nice recovery going on in construction.

So just traditional manufacturing model on the industrial side.

Yes. And one of the things that our teams do really well. And the answer to your first part of that question is that we are able to flex the team members within the factory, if it's different product lines that are needed, if it's not the same products, and in many cases, it can be. And when we need to, we will add team members, right? And we really make sure that we have robust processes for onboarding and really staying ahead of our customers' demand curve to make sure we're ready.

Excellent. And just the same zip code. It seems like Class 8 orders are looking up. Transportation is actually guided to be your weakest end market in '26, down mid-single digits. What would it take for you to get more constructive on the segment? And I appreciate that your year ends when maybe things start looking up on Class 8 and maybe that's the answer.

Right. It really is. I think that -- in the U.S., the emissions, the '27 emissions clarity is going to help, has helped. We have had the forecast for mid-single-digit decline. We haven't changed that throughout the year. And we see that through June 30 that that's what the guide is going to be. Any recovery there, we think would happen in the second half of the calendar year, which is our next fiscal year.

Excellent. And maybe can we talk about sort of evolution of your view on power gen, which is sort of part of Energy in your slide deck. Can you remind us of your exposure, what it is you do and your views on the sector?

Absolutely. This is one of those great interconnected technology stories that I was speaking about with the slides. If you think about that slide that I had up there with the 4 technology platforms, Motion systems, Flow and Process control, Aerospace, Engineered Materials and Filtration. We have products in power gen under each one of those technology platforms. And we have products on all sizes of gas turbines, whether -- and types, heavy-duty, industrial, aero derivatives, diesel, gas. We actually have thermal products from Engineered Materials on battery energy storage systems that are key in data centers and different areas where power is required.

So this is a really good space for us. It's 7% of our total sales, Energy and about half of that is power gen. So it's small, but it has a really nice backlog. We're working with all of the OEMs that you would -- the names that you would know. And we're working close with them to help them increase their efficiency and their power and their products. So it's a real good spot for us.

And how are you views sort of evolved over the past 12 months? And what's really interesting, I think, maybe in the past 3 months, there's a lot more focus on behind-the-meter and microgrids. Has the tone of conversation with the customers changed in the past 3 months?

I wouldn't say that it's changed in the past 3 months. I would just say that the order backlog is robust. And Parker definitely benefits in this space, right, because we have the products that they need. And we see an increase of behind-the-meter request. So I don't know that I would say it was the last 3 months, but it's definitely increased in the last year.

And are there opportunities because you have such a broad portfolio of technologies, other sort of incremental opportunities related to battery energy storage systems for Parker?

Yes. I mean thermal products, we have thermal products today on there, and there will be additional opportunities, I'm sure. Our teams are working very closely with a lot of those battery manufacturers. So it's definitely something that's in our pipeline.

Maybe shifting just Industrial International. What are you seeing there?

So orders have been positive now for, I believe, 6 quarters. Q2 was a great quarter for our international business. And as I mentioned earlier, we've increased the outlook there. EMEA had a very strong -- international had a very strong Q2, primarily due to some longer cycle project orders that we shipped. So we had 4.6% growth.

And you see that come down because those project orders don't repeat in the second half. But again, increase the outlook for International. As we mentioned earlier, we see stronger construction and mining in Europe, also mining in China, electronics in China. So we increased EMEA to low single-digit positive. And we have previously had that at flat, neutral, slightly positive and positive mid-single digit for Asia Pacific.

And within Asia Pacific, maybe China versus the rest of Asia Pacific?

Yes, we see some nice growth in China with automotive and some electronics as well. So growth is nice there.

And how are you positioned in India?

Really well. We have big OEM customers in India. We've localized production there for them over the last decade and in the process of doing some more of that. So I believe we're really positioned well. All of our technologies are represented in India. So we have a nice manufacturing footprint there.

Maybe just sort of talking about growth, particularly maybe sort of looking into fiscal '27, you did talk about gradual recovery. Perhaps recovery could accelerate, maybe it doesn't accelerate. But how do you make sure that the ramp is smooth operationally and that you maintain your very strong incrementals?

Well, it starts with the divisions, right? It starts with the general managers, staying close to the customers, our teams, our customer service teams staying close to the customers, making sure that we have a clear picture of demand and making sure that our supply chain has a clear picture of demand. One of the things that we've talked about over the last several years is the investment that we've made in the supply chain and the investment that we've made in our -- what we call our e-capacity and e-procurement tools, really wanting to make sure that we have the visibility and that we can respond quickly.

And again, too, as I mentioned, making sure that when we do have to bring team members in that we have the time to onboard them properly, and we use all of our programs to onboard them properly. So it's using a lot of the tools in the Win Strategy and making sure that we stay in front of the customer demand.

And maybe just sort of pivot back up in terms of Win Strategy, I know you actually literally have...

Always...

The Win Strategy slide. Can you just expand on Win Strategy? And it has been evolving. I think sort of the new generation of Parker leaders has a lot more experience on the factory floor and you guys are younger, you sort of grew up on the factory floor. Can you just talk -- and I think it's a different group of people running the company today than it was under the previous regimes, which also have been very successful.

Very successful.

How does it inform your view of the Win Strategy? And where does it go as maybe more focused on operations and what's happening on the factory floor? Because everything we've been sort of talking about, you keep bringing into operations.

Yes. Yes. Well, I would tell you this much. The Win Strategy is our business system, as I've said, it's our guide to operational excellence. We have to be good at everything on the Win Strategy to ensure that we can grow organically. And one pillar of the Win Strategy is profitable growth. I would tell you what I think is different about the Win Strategy, even going back to the leadership before the current leadership, the single biggest change that was made to this Win Strategy under my predecessor that's had the biggest impact is having a pillar for the people and putting that pillar first, putting safety first, putting high-performance teams on there and the culture of Kaizen. It starts there.

And even though that was added to the Win Strategy a decade ago, it takes time for all of that to really come to fruition and make a big difference. And it has made a big difference over the last decade, and it is what we start with, and it is why we get the success that we do. High-performance teams are how we run our business. Culture of Kaizen is how we improve it. And so when it comes to things as organic growth, we use that pillar with organic growth and all of our focus around growing this business differently than we have in the past. And I think that's one of the biggest differences.

And I don't think what people appreciate is how flat Parker organizational structure is. Can you just expand on it? And how do you manage -- yes, because it is -- Parker is getting larger and larger and larger. It's a very complex organization, yet the structure remains very flat. How do you sort of -- what I've observed sort of traveling is that how nimble the company is. So how do you maintain this as the company is getting bigger?

I attribute that to our decentralized structure and the focus that the general manager has at the division level. Over the last...

How many...

85.

85.

85 divisions across 5 operating groups. But if you think about it, and Andrew, you know some of this as long as you've known Parker, we used to be 8 operating groups and prior to acquisition, over 120 division groups. And so divisions could be rather small in nature, less than $100 million. So over time, we've consolidated those, brought technologies together, created divisions that can focus on the customer and focus on the markets and succeed.

So that decentralized structure is key. It's key. And the discipline and the cadence we have on a monthly, quarterly and annual basis to not only monitor the business, but to make plans, strategy deployment, strategic positioning at the division level. So putting these tools into the hands of the general managers and then having the accountability around them is what has allowed us to keep the structure that we have and just to build upon it.

Maybe going to back to end markets. If you go on Parker World, life sciences is a pretty big area and now even bigger post Filtration Group acquisition. And I actually remember when the world sort of really slowed. I remember going, I think, to Hanover and like half the booth was life science stuff. So you have very, very -- you've historically had very strong presence in this end market. Can you talk about sort of what are your views on biopharma reshoring in the U.S., how real it is?

Yes. So Parker World, very new. I'm glad you got to experience it. The tiles on Parker...

I hope I don't get a sale -- a salesperson calling me.

The tiles on Parker World are all the same size to show the interconnectivity of the technologies and to show all the places that Parker products are in play. And as you know, it's not a market vertical, right? It's not that size as of yet. I would tell you that we're going to serve the customers at the local level, no matter what business phase they're in, if it is reshoring or it's adding capacity to existing operations. I think we still have to see what we learn after we close on the Filtration Group acquisition.

But obviously, we've traditionally been more in medical devices and diagnostic imaging type products. And with Filtration Group, we get more bioprocessing and more diagnostic testing. So it's different products. So we'll see what we learn on that side of possible reshoring activity. But we're really, really excited about this acquisition because all these technologies are complementary in nature. And even though they bring some new customers, it's markets and customers we know, and that's what's always a good fit into the portfolio.

And just sort of wrapping up on the macro view. I actually have been surprised because if you look at sort of Big Beautiful Bill, which seems to be like eternity away in the past. But I think accelerated depreciation was supposed to be this big material thing. And then when we talk to companies, the large companies ended up saying, "Wow, our capital spending is not really driven by that. We're happy to benefit from it," but that's not what drives sort of the underlying math. But I would imagine for smaller and medium-sized customers, it would be more of an impact. As you talk to your distributors, as you talk to your channel, what has the feedback been on accelerated depreciation and any potential impact that we may see in calendar '26?

I would tell you that, that's not a conversation that I've heard of or that we're having, right? They're not signaling that where they see the bright spots, it's because of accelerated depreciation. They're talking more about their customers are working on automation and productivity enhancements in their businesses, rather large capital projects. So again, I'm not...

No, that has been a huge mystery because in terms of philosophically, right, it should drive it.

Yes, that's...

But it's exactly right. When we talk to people, like nobody has brought it up, like -- so maybe M&A Filtration Group any update on timing?

So when we announced it in November, we said 6 to 12 months to close. So that is still the timing that is out there. We're going through the normal process, the normal regulatory process that we go through, but that's still our estimate on timing.

And can you just step back and remind folks just the industrial logic on the Filtration Group because you're getting it from the Madison Group, which has reputation for running the assets well. You're targeting 11% synergies?

Yes.

It's a healthy number.

Yes, it is.

So how do you get 11% out of well-run business? And how does Filtration Group sort of fit into Parker and how come Parker ended up winning the process?

That's a lot of questions.

Yes.

Well, we have always admired the Filtration Group from afar. And as I've always talked about, the pipeline is active. We're always looking -- a lot of times, it's about timing. And this clearly was a story about timing. We didn't know it was going to become available, but being familiar with it and getting the call, we were able to quickly make some visits, see some of the factories, meet some of the people. And we saw what we thought we would see. We saw a business that we really liked, a very high aftermarket business. We saw a lot of talent in the business.

The products are very impressive, good technology. It is a very well-run business. It's decentralized in nature, which is a lot like Parker. But why we're confident in the synergies is because we really believe in the Win Strategy, right? And while we saw a well-run business, we didn't see all of our tools at play. And we know that, that business hasn't been able to fully leverage the power of Parker, right? So there's -- just as with any acquisition, there are several different synergy buckets, and we could see line of sight in all of our traditional buckets where we could make improvement. We will bring the Filtration Group into existing Parker divisions, so...

Because then you bought Meggitt. Meggitt like disappeared like really fast.

There are some businesses of Meggitt that are stand-alone divisions, but the majority of them were integrated into existing divisions.

Right. Like you took out like multiple layers like...

Yes, I would say that, that was a -- there was more there than we knew, right, after we closed, that's one of the reasons we were able to achieve those synergies earlier than we thought. So integration team has been formed. We put an integration leader on -- in charge of every synergy bucket, and we also bring a member from Filtration Group into that team, and they work on that together. So those team members have been identified. The teams have met. We're doing everything that we can that follows all the rules, and we'll be ready to go when we close.

And maybe last question. Given the pacing of how you guys do M&A and given the development process, you are probably already looking at your next...

Always.

Right, because what does an ideal deal look like 3 years out sort of size end market, right? And as I said, it's a fair question because these things develop for 3 to 5 years or more.

Right, right. We spend a lot of time developing the relationships with the businesses in the pipeline. We're constantly, as we say, working the pipeline and keeping a close eye on it. It is, though, so many times, as I just said with Filtration Group, it's about timing, and we're not in control of the timing. And that's why we stay so close to it. So if it does become available, we're ready.

A future deal looks like the deals that we've done, complementary technologies, customers we know, markets we know, a culture that fits with Parker, a culture that we can see will integrate well with the Win Strategy, accretive to margins with synergies, accretive to cash flow, EPS, following the trends that our business has grown on and really part of the transformed portfolio. So before we did Curtis, everybody thought that the next acquisition was going to be bigger than Meggitt, right?

And Curtis was a great example of a business that we had followed for quite some time that filled a product gap for us, right? And so it became available again and the timing was right, right? And then obviously, quickly thereafter, Filtration Group became available. So the good news is that the business does generate a lot of cash. We've shown that we can hit the synergies and pay down debt rather quickly. So we'll just keep working that pipeline and see what happens.

Thanks a lot, Jenny.

You bet. Thank you.

Always a pleasure. Thank you.

We are really excited to have Parker-Hannifin with us today. We've got Todd Leombruno, who is the Executive Vice President and Chief Financial Officer of Parker. So Todd, as I walk over to you, obviously, there's still some economic uncertainty out there. But in general, your orders, your industrial orders have been inflecting positively. Distributor commentaries continue to support what seems like a gradual recovery.

So maybe just to get it out of the way, could you update us on whether you've seen any changes in the order patterns here over the first couple of months of the calendar year. And so we continue to think this recovery is gradual versus firing on all cylinders.

So first, Andy, thanks for having us. We always love coming to this conference. Thank you all for showing up. I know it's the last day of the conference, right? It is Thursday. It's right before lunch.

You're still in the morning.

Yes, we appreciate your time and attention here. Andy, I don't mean to disappoint you. I'm not here to talk about January or February. We were really proud that our orders turned so positive with the last quarter or second quarter. We just had our earnings call on the 31st, I believe, of January. And it has been a wonderful time to be part of the Aerospace business.

Our aerospace orders continue to be robust. We're now on the fourth year of double-digit organic growth in aerospace. It has really been something that has been transformational for the company. The industrial side of the business, to answer your question, has been under some duress for the past 2 years. But our orders turned positive a few quarters ago. That trend has continued. We were really happy to see North America specifically pop up to plus 7. And what I can share is that we have tried to shift this business to more longer cycle business.

That has been driving a lot of those orders in aerospace. We do have a fair amount of exposure to aerospace end markets in our industrial technologies in the filtration and in the Engineered Materials business. But we also saw some nice lift from things like power gen. And really on the shorter side of the business, construction turned positive, which we were happy about. And obviously, the sentiment from the distribution network has also been positive. And I would say it's probably equally split between longer cycle orders and shorter cycle orders, and we view that as a positive sign.

If you remember, we started our guidance specifically in North America. We started the year at 1. We moved that to 2, and now we're at 2.5. So we hope to see that trend continue.

It's helpful color, Todd. So look, I think one thing also that Parker has done a really good job with is sort of price versus cost and managing the tariff uncertainty that's out there well. So maybe just could you talk through what you've done. How should we think about future impact on Parker's business because as tariffs lap, you might have some tailwinds there. So how should we think about price versus cost in general in the second half of '26 and beyond?

A key element of our strategy, and this is decades long now, has been making sure that we procure parts in the most efficient strategic manner, making sure we convert them in the most efficient manner using our tools of Lean and then making sure we get value from those on the price side. So for decades, we have very much closely monitored input cost and output prices. And our goal has always been to be positive on that.

When we went through those inflationary times, the big spike in energy cost and logistics cost and labor cost, it really -- historically, we've been mainly focused on the material side. But with all those costs kind of spiking out of control, we knew that we had to move to a total cost coverage. And really, we flexed our tools to focus on total cost coverage. Tariffs specifically, we always looked at that as just another cost that we would have to control. And while the pricing muscle is strong, specifically on tariffs, we didn't just use price as a tool.

We have had a local-for-local manufacturing strategy way before it was cool, way before people thought it was the most efficient thing to do. And the reason we did that is because we wanted to be close to our customers. We wanted to procure, convert and invoice in local currencies, and we wanted to keep inventory levels under control. And the best way we thought to do that was through a local-for-local model.

That has been helpful when it comes to tariffs. Our global footprint has allowed us to utilize different production capabilities, different shipping routes that really the goal has been to minimize the impact of tariffs. And if none of those fail, we have dual sourcing elements in there as well. And if none of those work to mitigate tariffs, we would pull the pricing element and make sure that our commitment to you, our shareholders, would be that there'd be no margin degradation, no EPS degradation as a result of these tariffs that clearly are out of everyone's control.

So that's what we've done. I don't think you've heard us call out any negatives or positives as a result of tariffs. We just consider it another cost that we have to manage.

Todd, so maybe a somewhat related question. I think I'm dating myself, but I kind of remember when The Win Strategy was being born. And it's been an integral part of Parker for a long, long time now. So maybe just talk about sort of where you are with the strategy itself and really around Lean and like how much more sort of improvement you have because obviously, your margins are already pretty high. So ability to continue to have greater than 30% incrementals.

Yes. I remember when the first Win Strategy was out, too, it's been now roughly 26 years that we've had a version of The Win Strategy. And what I've been telling people this week is the reason it got the name Win was we created it at a time when the company was not winning, right? We were doing okay, but we weren't clearly differentiating ourselves in the space when it came to things like operational excellence, like growth, like earnings per share growth and cash flow growth.

So that's how it's got its name. And it has been unbelievably powerful. I think it has structurally and culturally changed the company. We've been able to post some numbers that have really convinced our team members that this is a never-ending journey of continuous improvement. We've been doing lean specifically that entire time. And I would tell you, when they say it's a journey, it really is a journey.

If you could sit in some of our meetings, you would think that we were just learning Lean and just learning how to take waste out because it constantly changes. It constantly evolves, whether it's the products you're making, whether it's the lead times that you need to meet, whether it's the cost structure that you need to meet. And I would tell you, it's -- I'm unbelievably proud to be part of the team that is never satisfied with whatever our most recent Lean Kaizen is.

So I would tell you, all of these tools are at various stages of maturity. Some businesses may be more advanced with a series of tools. Others may be advanced with a different series of tools. As we've brought these acquisitions into the company, right, we've done some pretty significant transactions. If you go back to CLARCOR, LORD, Exotic, Meggitt, which was the largest ever. Now Curtis. We had Exotic Metals in there and soon to be the filtration group.

We have shared those tools of The Win Strategy with those new team members of ours. And all of these businesses that we acquired were already good businesses. Each one of them got significantly better when they executed the tools of The Win Strategy. So this will never stop. We're on version 3.0. Will there be a 4.0? Yes. But there's still enormous runway to go on our current version.

Todd, so I'm sure you don't want to guide to fiscal '27 on the stage. So I won't ask you officially to do that. But I will ask you about sort of the puts and takes, right? Industrial is sort of ramping in orders slowly. Maybe some people asking about more difficult comps in Aero. So how do you think about sort of this shorter cycle maybe getting a little bit better, longer cycle still staying the course. When you think about can you -- the 4% to 6% is your framework, so why shouldn't you be in your framework. Let's ask it like that?

Well, we're guiding to 5% organic growth at the midpoint. So we're right in that 4% to 6% range for FY '26. I think you guys all know that ends in June for us. I'm not going to guide for FY '27. We've got 6 more months before we do that. But your thesis is intact, right? Aerospace continues to be great. .

It's hard to continue double-digit organic growth in that business just because of the comps get tougher. But I will tell you the pure sales dollars will continue to increase. So we like that. There are starting to be signs of life on the industrial side of the business, right? I think the longer cycle nature of that business is already intact. And we've been vocal. We've started to see construction turn a little bit. We've started to see some implant in industrial equipment, some positivity around that. Things like power gen have been really great, things like anything electronic has been really good, and we expect that to continue. So to answer your question, I don't see why it wouldn't be in that framework.

Got it. And probably your favorite question around margin targets because you are 3 years ahead of schedule when you're guiding to 27% to 27.4% for this year of margin. And so -- but operating leverage really hasn't helped you that much, at least on the industrial side. So maybe talk about what tracked ahead of your expectations. And why wouldn't it continue to do so. Again, I'm sure you don't want to set a new target here today, although you can, if you'd like.

So let me just start by saying we do have a set of FY '29 as our long-term targets. It is a combination of targets. It's growth 4% to 6% organically. The margin target you called out, 27% adjusted segment operating margins, 28% adjusted EBITDA margins. We want to grow EPS at a 10-plus CAGR every year. We want to get to 17% free cash flow. We want to keep that dividend record going.

And we look at that holistically as a series of targets. We have clearly outperformed on the margin target. We are right on top of that 27% target. You called it out, it is 3 years early. You may say, "geez, how did you get there 3 years early." The clear answer is aerospace has been an unbelievable engine. We did not model 3 years of double-digit organic growth. We did not model a 50% aftermarket OEM mix. And to be honest with you, we've outperformed on the Meggitt synergies. We got those faster and sooner than we expected. And the combination of those 2 businesses made our legacy aerospace even better. So that was something we didn't expect to see come so soon.

But if you look at the industrial side of the businesses, those businesses are operating at record margins as well. And to your point, we've had 2 years of negative top line growth in those businesses. And I would tell you, for however long you've tracked Parker-Hannifin, there has never been a time where the top line has been negative, and we've been able to not just maintain margin, but expand it. It really has been an unbelievable amount of work from the team.

Jenny became CEO 3 years ago. She was crystal clear in her belief that we could expand margins. The opportunity that she saw across the company, she was very clear about that we can do everything better, no matter how well we're doing it today, there are opportunities for improvement, and the team has really delivered on that. And the 27 is not the end target. We would like to get there for a full year before we start committing on new targets. But rest assured, there is going to be a new target.

That's helpful, Todd. And maybe just digging in a little bit on sort of what you're seeing. I think you answered this question already to some extent, but I'm just curious, right, I think you said it's like kind of balanced, right? In short-cycle industrial recovery and also long cycle within industrial, right, is kind of helping you. Are there markets that you're starting to see turn though that are holding you back right now, like the trucks, the ags of the world? How do you think about that?

What we've started to say is construction has been a nice turn positive. Things like Power Gen have been positive. Things like commercial HVAC has been positive. We've started to see positive activity through the distribution network. Sentiment there has been positive for some time. In both channels, the distribution and the OEM network, we feel like inventories have been managed to levels of demand, so they're kind of pulling on demand.

We're starting to hear like little pockets of selective restocking, right? Not anything material, but we're starting to hear that from our conversations with distributors. And we take all of that as a positive. Ag has still got a ways to go. And a lot of these things are muted recoveries. So we are not expecting or waiting for some kind of rapid increase, and we're kind of managing each technology, each product based on the demand that we see.

We've never had better visibility than we have today. We've never had better tools to help us forecast and analyze the business. And what I love about our decentralized structure is each one of those P&L owners is adjusting their capacity and their cost based on the demands of those businesses.

And to your point on visibility, Todd, because you have such good visibility, like I'd like to ask you about like mega projects. When I sit here with other managements, they tell me, oh, we really haven't seen any unlocking of capital this year outside of data centers, of course. How would you sort of respond to that? There's OBBBA out there, too, reshoring. Like are you seeing any of that.

Yes. It is hard to kind of pinpoint that. You see all these things. We've got various tracking mechanisms of it. Parker-Hannifin loves that because we benefit in all cycles of that. We have some discrete examples of wins from these mega projects from infrastructure builds. What I tell everyone is it has helped keep us where we're at without all of that stuff, we'd be much less positive, in many cases, negative. So that has been a positive drive.

The data center builds are real. There's activity going across there. I don't want you to think that Parker-Hannifin is going crazy on data centers, but it's a nice positive bit of growth in those businesses that are challenged in their other markets.

Got it. And your comments on your distribution, we know what's the strength of Parkers. And to your point on visibility, it's very interesting to me, right, because I think you've talked about them being positive for a while, right? But then they started to see better sellout. Maybe a couple of quarters ago, it started. Can you walk me through that? Like has sellout gotten better over the last few quarters. And you did mention maybe some limited restock. So where is that?

Yes. We've been saying gradual recovery for some time now. We're almost getting tired of saying it. What we do like to see is the order trends turn positive, that organic growth has turned positive. So we like that. Still an enormous amount of challenges out there from interest rates and tariffs and certain end markets still being under pressure. We feel like we're closer to the growth cycle than any kind of negative cycle. But I keep going back to our belief is it's going to be gradual. It will start in these selective markets and the others will pull through. And I think we're seeing evidence of that.

Got it. So I'm going to open up to the audience in a second. But maybe I wanted to turn to the international markets for a second. Asia has been pretty strong for you guys, led by electronics and semicon. It's been mixed for others. So maybe talk about what Parker does maybe better in those places? Or is it mix or...

Well, again, I mean, we have -- we're in region for region. That is true of our Asia Pacific region. There's nothing we make in Asia that we ship to other regions. It's pretty much in the region for the region. The Electronics business has come back. It has been a challenge in Asia Pacific post-COVID. That has historically been a growth engine for us.

The way Asia opened up after COVID, it slowed growth. Where we have won is on those electronics on semicon, where we have won has been construction equipment is coming back. And what we have seen there is a lot of positivity from our team being able to serve locally local customers. It's been a plus.

Got it. And then I think you mentioned Europe posted its first organic growth after 7 quarters of decline.

Yes, Europe is more challenged, and we are excited about it. There's still a long way to go. Some of the comps are a little bit easier when you've got 7 quarters of negatives there. But the team is very much focused in Europe. They know what they've got to do. They are adjusting the businesses accordingly. And they're focusing on where we know we can win, where we can continue to expand margins.

That alone, Europe has been negative for 7 quarters. They're posting record margins, right? So that is something that Parker-Hannifin of 3, 5, 10, 15, 20 years ago would never have been able to do. And it's really around rallying around those tools of The Win Strategy, taking actions that are difficult in a timely manner, not waiting for things to get better, but adjusting the businesses, demanding value from customers and just taking control of the environment that you're in.

Got it. And then I do think historically, you've had a particular strength in Latin America as well. Maybe to step back a little bit in your Q2. Anything.

Yes. I mean, Latin America, I've been unbelievably impressed with our team there. It is a small piece of the total company. But the last few years, they have really figured out how to operate in that region, right? It's probably the most challenging region from a currency standpoint, from an inflation standpoint, from a demand standpoint, and they've done unbelievably well.

This is a tougher year for them, challenges in Brazil. But again, the team is -- if you looked at historically, these are all-time high margins, and I love that they're taking actions and taking control of the demand environment.

And one more before I open it up to the audience. Like you did talk about data centers, Todd. So obviously, it's still a relatively small part of the business. But certainly at this conference, one of the themes is that it's really been a wave again of big orders. And it's not just -- you have direct exposure, but you also have Power Gen exposure. Maybe talk about how much Parker now is exposed because it seems like there's multiple avenues.

What we've tried to do is we've tried to simplify the way we talk about the company. We've kind of shown 6 major market verticals. It is not yet those 1 of those 6 major market verticals. So it's still small for us. But what we love about it is this is existing technologies that we have being applied in these applications that are bringing value to those customers. And we hope someday that it does become one of those market verticals that we talk about. And the other thing is it pulls all those other technologies that we have. It helps on the construction side of the business. It helps on the filtration side of the business. All of those things are positives when these large projects take shape.

Yes. Questions from the audience questions. Any questions? None? Luckily, I have -- just stretching. Okay. So let's move to Aero then. So supply chains seem like they're getting better, but it seems like you've been able to navigate better than peers. So I mean, I think it's a good time to talk about your focus on supply chain and why you've excelled. And you mentioned at the beginning that part of the reason for the good margins you have is Aero. So we're all kind of focused on how much better can it get?

Well, I will tell you, I hear less and less noise about the entire supply chain today than I did a year ago, 2 years ago, certainly 3 years ago. And part of that is when you have 3 years of organic growth, you're able to invest, you're able to add capacity, you're able to deliver. But we've also partnered with our customers.

I would say, the relationship between the aerospace customers and the aerospace team has never been more robust, never been more intense. Adding Meggitt to the portfolio helped with that. We got bigger with every one of our aerospace customers. We have more content on every platform than we did before. And we could do more for those customers than we've ever been able to do from a design standpoint, from a product improvement and retrofit standpoint, from a global service standpoint, and it's really been meaningful for the customers.

I got to tell you, I think it's going to bode well for us when we get into the next-generation platforms. We've never been able to do more for our aerospace customers than we can now.

On the supply chain side, our team has been working with that channel to share some of the tools of The Win Strategy to help them be able to deliver to these demand levels. So we view it as a partnership. We have a partnership with our customers. We have a partnership with our supply base. And I would tell you, less and less noise than I'm hearing as a result of all of that effort.

And Todd, you mentioned Meggitt went better than expected. So like what sort of lessons learned as you continue to do deals because you have.

Well, we'd love to do a deal and then roll into 3 years of double-digit organic growth. That's the biggest lesson that we've had. All of these transactions have been unique. All of them have been unbelievably meaningful. I think we have gotten better at identifying potential targets, at building relationships with potential targets on being able to clearly identify how we can make these businesses better.

Every one of them has been a great business. We just made it better. And we've made it better using the same tools that we've used to make the legacy business better. And I would tell you the alignment we have across the company, I've been there 34 years now. It's never been stronger. And when you're able to post numbers like this, you get a lot of alignment on continuing to make changes. And it really has been an unbelievable driver of our performance.

The other thing that we've done is because these things have been sizable, we've been able to create integration, an integration team for each one that we've taken our highest talent people from across the business. So it hasn't just been aerospace people integrating Meggitt. It has been our highest talent people from across the entire business and we have paired those with team members that have came from those acquisitions.

So this wasn't a team of Parker people coming in and telling you how to run the business. This was a combined team, some Parker people, some people from the acquired business. And we set out to integrate and we had a clear plan on what that model looked like, and we monitor it every 2 weeks. So this is not -- you get a month, you get a quarter, you get 6 months. Every 2 weeks, it is a senior level meeting. Our CEO is in there. Our COO is in there. I am in there. Every one of our senior leaders that owns a synergy bucket for the transaction is in there. The integration team is in there. The business leaders from the group that is doing the acquisition is in there. And we get status updates. We find out what the barriers are. We figure out how to remove those barriers. We make sure they have what the support and what tools they need, and we'll see you in 2 weeks.

So this is the way we've been able to do it, and it's been very successful. So that's something we didn't do in the past because we would do a lot of smaller ones, and it was hard to kind of -- you would -- they would get lost across the business so on and so forth. And that's exactly what we're going to do with the Filtration business.

What we love about the Filtration business is, again, technologies that we know, very complementary, customers that we know, end markets that we are familiar with. And this is going to make us one of the largest industrial filtration offerings on the planet, which -- what can you not do when you have scale. It becomes really powerful. So we're excited about that. We saw a clear path to the $220 million in synergies that we called out. And I would tell you, our team is already assembled. We are talking with filtration group team members. Obviously, we're 2 separate companies until close. So there's -- we're running those businesses separately, but there's already progress being made.

I should just ask you about that now because you brought it up, Todd. So initial progress, you are talking to them a lot. So like any sort of initial findings on that $220 million. It seems like, again, given your process, I'm not going to tell you it should be a slam dunk but you tell me.

I don't want to get too far ahead. We'll share more of that when the time is right. But I would tell you, we feel very confident in the number. When you look at this business, our plan is to combine that with our existing filtration business. We talk about 85 discrete P&L owners that run those businesses that make those decisions every day. We think this is going to fit very nicely when there's not going to be any additional businesses. Those will all complement our existing businesses extremely well.

So getting back to aerospace aftermarket, again, it's been strong, expected to grow low double digits in FY '26. So again, you get -- you kind of mentioned this, the law of large numbers, it's several years in a row of this. So how do you think about the growth drivers on that side of the business for you guys? How much is continued sort of innovation, self-help going to lead to continued strong growth in that business.

I mean it's all of the above, right? Air traffic has been tremendous. People have had concerns, as this OEM ramps, are you going to have pressure. Is your aftermarket going to go down. We are glad the OEM is ramping. These are the investments that we've made years ago. We are ready to deliver those higher levels of sales. And we always say this internally, the reason we like the longer cycle business is because you have great visibility. When you know what you have to ship and you've got great visibility, you can do that in ways that are way more efficient than you can when you don't know what you need to ship or the quantities change.

So we believe that there's enough self-help improvement that we have that we're not going to have any issues as that mix shift changes to be more OEM and slightly less MRO. Meggitt was a structural change to that mix. That added 800 or 900 basis points of aftermarket mix to our Aerospace business. And that has continued to be robust. We have combined our support organization. Meggitt had a support service MRO organization. We had a support sales and service organization, that's now one global organization. We go to market as Parker Aerospace. We're able to do so much more for customers than we did before, and that will continue to be a growth driver.

So Todd, to that point, you have 20% growth dialed in for '26 commercial OEs, right? Like...

Yes. Think about that, and we're at record margins within Aerospace.

It's pretty big, right. That's what I'm saying already. Like so do we just kind of -- do we still ramp up from here? Again, you mentioned sort of mix, but it's already growing pretty fast.

You're saying ramp-up margins?

OE like growth.

Yes. Yes. We expect that to continue. Sure.

And so like as that happens then, you just said you have enough sort of self-help to sort of offset the mix that we see.

Yes. And that's in the Aerospace business. Obviously, people have asked on the industrial side, boy, when volume comes back, are you going to have to inject a whole bunch of new costs in the business. The answer to that is no. The best way we convert earnings per share growth is by having a great top line. And there's nothing we can't do when that top line is growing.

We're agnostic on where we take cost out of the business. We are relentlessly driven to do everything that we do better. And the tools that we have in this Win Strategy have been proven, and I have great confidence in them.

Todd, to that point, if industrials does inflect, if we go more than 2.5% growth, the tendency is to think very good operating leverage. How much do you balance sort of that versus plugging more money back into the business investments, all that kind of stuff ramping that up.

We've been asked a couple of times today, "Hey, have you done anything different on the investment because of the volume challenges or the tariff issues." The answer really is no. We're in this business for the long term. We have designed it to be CapEx light. We've committed to 2.5% of sales. That's roughly 50 basis points better than what we've done historically. And that 50 basis points is all around safety. It's all around productivity, automation. There's some technology in there. and we think it's the right number.

Got it. And then lastly in Aero, just to ask you about defense. Jenny on the call talked about maybe not seeing proposed stimulus of EMEA yet impacting '26. But it seems like there's a lot of money out there flashing around.

There's certainly a lot of talk about it. You can't go anywhere within Europe without them being positive about defense spending. It's a net positive for Parker-Hannifin. It's probably a year or 2 out would be my guess. We're well suited on the Eurofighter program. Obviously, the F-35, we've got great content on. So we're looking at that as a positive. And I'm confident that's going to come. I think it's just going to take a little bit while. It's not a short-term shot yet.

And Todd, it doesn't seem like you have any perturbations from U.S. government, like shutdowns, partial shutdowns, things like that, U.S. defense.

It's just -- listen, what we have learned is that the world is a complex place.

I think we've all learned that.

We call it VUCA within Parker-Hannifin. And whether it's a pandemic or tariffs or supply chain or logistics or energy or anything, what we've tried to do internally is we try to rise above it. We try to focus on keeping our team members safe. We try to focus on meeting our customers' needs and making sure we're doing that and achieving our financial commitments. And that's what's made Parker-Hannifin work.

Yes. So Todd, over the last several years, as you said, you've done some larger deals. So how do we think about it from here? You announced Filtration Group, you'll close it. Your balance sheet is still in good shape. You generate a lot of cash flow. So how much can you sort of do at once? Or how do you think about that. Yes.

Well, so I love what we've been able to do. The company has never been bigger. We've never been more profitable. We've never generated more cash. Our EPS algorithm is strong. So it gives us a lot of options, right? And we're going to be $23 billion when we close the Filtration Group annual sales. We play in a $150 billion space.

The number of potential acquisition targets within that space is very robust. We continue to work relationships. We continue to work that channel. We never stop, whether we're announcing one or working on 8. It constantly is something that happens across the business. And we have seen how powerful it's been to the portfolio. We've seen how powerful it has been to our results. But we're not naive to know that anyone will do the same. They're all unique in themselves.

We definitely do not want to have a bad acquisition. So we're not going to rush into anything. We won't do something just because the balance sheet is ready. I think you saw us over the last year, we did the largest number of buybacks that we've done in the history of the company because we felt that was a better use of the capital than doing any of the acquisitions that we could have done at that time period. We're really happy we got Curtis done. We're super happy we got the Filtration Group done.

And I think what you're going to see from us is more of what we've done in the past, thoughtful acquisitions that make sense. There's not going to be a head scratcher announcement that, geez, why did Parker-Hannifin buy this. We're going to have to have a clear path to synergies to make that business even better than it already is. And it's going to have to be in customers and end markets and technologies that we're comfortable with.

I'm sure you like all of your technology platforms.

We do. We definitely do.

Yes, I know you do. But Filtration is going to be large now.

It is. It is.

Filtration aero will be sort of much larger than sort of Flow and Motion, for example.

Correct.

Do you then say, "Hey, I want to beef up Flow and Motion? Or do you like...

Yes. I mean, Curtis was obviously a small acquisition, but that was a commitment to bring more electronics into the Motion Systems technology. To be totally honest, transactions in those spaces are a little bit harder because we have such a great market position that much of that business we could go get in other ways if we wanted to versus having to acquire the market share.

And there's just been better opportunities in the aerospace businesses and the filtration businesses and the Engineered Materials businesses, but we love them all. We would add to all of them. These technologies are not separate. They are totally interconnected. 2/3 of our sales comes from customers that are buying 4 or more technologies. Filtration fits with Motion Systems. It fits with flow and process control, it fits with Engineered Materials.

When a customer applies these technologies, they all touch each other. They all work together. We believe we are best-in-class when it comes to building a system that requires all of those elements. And that's why we love all of those technologies.

So last question, Todd. What are the top 2 or 3 innovations and structural changes affecting your company over the next 5 years? And are there any emerging industry trends that are perhaps being overlooked in the current discourse?

Yes. I mentioned it already. We have been extremely close to our customers globally. We haven't had to take any flyers on risky things. All of our innovation is tied to an alpha customer. The biggest thing that I would say that we're talking about now is that next generation of aircraft. We've never had a stronger presence in aerospace. We've never been able to do more. That is meaningful to those decision-makers in the aerospace end markets because the value that we bring is greater than we've ever been able to bring before.

So we have never been more set to win those contracts, and that's probably something that we're most focused on. When you look across the rest of the portfolio, the world continues to get more electronic, whether that's in aerospace or other applications, we are going to be supportive with that. We think there's true value in that. And those are the 2 things that we've been driving. And I think that those are great things for Parker-Hannifin in the future.

Excellent. Well, we're almost out of time. So we appreciate it. Thanks, Todd.

This was wonderful. Thank you all for sticking with us through lunch.

Great. Thanks, everyone, for being here. It's my pleasure to have up next Parker-Hannifin Corporation; Todd Leombruno, Chief Financial Officer.

Todd has, I think, a couple of slides to go through. And then we'll get into questions after that.

All set? Well, Julian, thanks to be here. It's great to see so many people in the room. It's a wonderful time to be here to talk about Parker Hannifin. I just have a few slides to give an overview, for those people that aren't familiar.

We are now 109 years old as a company, and we have been in the motion and control space that entire time. You could just see here, our sales, we're guiding to be $21 billion in sales this year. And what is really nice is it's almost equally split across our businesses. The company now has 31% of our sales exposure in Aerospace -- in our Aerospace segment. In our Diversified Industrial segment, we split that into North America and International, and you can see here it's about 30% International and about 40% North America.

If you're looking for a little additional color, you could see our technology platforms, which we break out just to give a little bit more color. And again, Aerospace is 31% of the company. Filtration and engineered materials is now nearly 30% of the company. Flow and process control, a little over 20%. And then motion systems is 17% of the company.

So all of this is interconnected. It all works. The portfolio is extremely focused on serving customer needs in that space.

What's a unique concept about our portfolio is 2/3 of our portfolio comes -- or is sold to customers that buy from 4 or more of those technologies. These things can be interconnected in any way that creates value for our customers, and that we have been trying over the last 10 years to shift the portfolio from more short-cycle business to more longer-cycle business. And I think we've been pretty successful with that process.

We try to give you a breakdown of our markets. This is end market exposure. You could see our largest is Aerospace and Defense. You may say, well, why is that not 31%? We do have technologies in our Industrial business, mainly filtration and sealing technologies, that go to Aerospace end markets. We just keep them with the technologies that are in the Industrial business. That's how we get to 35%.

But our second largest market is in-plant and industrial equipment, you can see that's 20%. Transportation would be #3 at 15%. We go off-highway at 13%. And then obviously, it's a nice energy and HVAC exposure. And I already said this, we're guiding to $21 billion in sales this fiscal year.

If you ask yourself, well, how has Parker Hannifin been able to win? We have an unbelievable operating system, we call it The Win Strategy. We are fiercely decentralized when it comes to our operations. We have 85 individual P&L owners across the business that are responsible for growth, for margin expansion, for cash flow generation. Those are their expectations; that's how their team is compensated. And it has worked wonderfully.

Our products are innovative. Some people have thought maybe these are commodity-based products. These are technologies that we apply to solve customer problems in ways that no one else can do, with our offering. We have an unbelievable distribution network, .50% of our Industrial business goes through this distribution network. That is mainly serving the aftermarket, but also small to medium-sized OEMs across the globe.

And all of that could be put together in a system if a customer finds value in it or we could sell an individual technology if there's more value in that transaction as well.

So a very strong competitive moat. That's why we believe we're the leader in the space.

And it has all worked. I love this chart. This is just a 10-year look at what we've been able to do. As a company, you could see we've grown revenue at a 6% CAGR over a 10-year period. We have expanded margins unbelievably, 1,150 basis points of margin expansion over that time period. We've grown EPS at a 16% CAGR over the last 10 years. And we've grown cash flow at 10%, which is you could see greater than what we've been able to grow sales.

So all of that has worked. And it's not over yet. When we look at how we grew EPS 16%, roughly 60% of that growth came from implementing The Win Strategy in legacy Parker Hannifin businesses. And you can see we've added 5 wonderful companies to the portfolio, CLARCOR, LORD, Exotic, Meggitt and, just recently, Curtis. All of that has accounted to 40% of our EPS growth.

And then you probably have seen, we just recently announced the agreement to acquire the Filtration Group. We expect this trend to continue as we go into the future, and we expect Filtration Group to be just another addition to the portfolio, that we're very much looking forward to close.

So I believe that's my last slide. So Julian, I'll take questions from wherever, and we can get started.

Great. Thanks so much, Todd. Maybe first question, I think a lot of investors here are kind of wondering about, is there a real U.S. industrial recovery, something picking up in short-cycle MRO or CapEx, wallets being opened a little bit wider? How do you see that environment right now in the U.S.? Any changes in kind of recent months?

Well, I can't start without mentioning the strength in our Aerospace business. Obviously, that's a separate segment from the Industrial business. But that business has been unbelievably strong. I think we're in year 3 of double-digit organic growth in Aerospace, and it just continues to perform beyond expectations. So we expect that to continue.

What is promising is, on the Industrial side of the business, we've started to see some movement. Obviously, we've had 2 years of negative organic growth in that space. But our orders have turned positive. That has been trending upward. We have raised our organic growth guide. We started with 1%, we went to 2%. We just recently updated to 2.5%. So we feel really good about that on the North American side of the business.

We're starting to see some pickup in the in-plant and industrial equipment. That has been really positive. Off-highway has been positive. Things like mining, construction have been really positive. Transportation still continues to be a more challenged market. We are expecting still softness in that market.

And then there's starting to be some growth in energy. Certainly, power gen has been a nice positive spot there. Our oil and gas markets are showing some positivity, which is nice. And then lastly, I would say, on the HVAC side, the commercial side of the business has been positive. Residential is still pretty soft, but the commercial has shown some strength.

So we think it's real. We think it's time. We have been preparing for this. And I would tell you, our operations are ready, I believe our supply chain is ready, and we're ready to see that organic growth trend continue.

And what do you think underpins some of that -- I mean, different end markets have idiosyncratic drivers, but any broad-brush trigger for the animal spirits kind of warming up?

Well, obviously, this has been a pretty dramatic times with tariffs and geopolitical noise and all of that. And I think we're starting to see at least we've been able to kind of deal with it, right? Tariffs, we've got some clarity on; interest rates are moving lower.

I think our -- both our distributors and our OEM customers have done a great job leveling inventory levels to demand. I think they've been at a good level. They've been matching demand for some time now. But we're starting to hear a little comments around restocking. It hasn't been material enough yet to get overly excited about. But we view it as a good sign and we view it that it's a good sign for our future demand.

Got it. And when you think about that split of sort of distribution type channels versus OEM customers in the Industrial side of the company, any difference in sort of behavior on orders or sales between the 2, or it's pretty consistent?

Like I just mentioned, inventory levels, we think, are at a good level in both parts of the channel. There's been positive sentiment in the distribution network for some time. And we're starting to see a little bit, I would say, pockets of activity, right? Some things around data centers, some things around power gen, some things around oil and gas have been popping up as being positive.

On the OEM side of it, I think we're almost there. We're starting to see some good stuff in mining that is driving that. I think ag still has a way to go before that becomes anything to talk about. But overall, I would say the sentiment is leaning positive in both.

Got it. And in-plant equipment, a big end market vertical for you. How do you see that kind of globally looking at present? It's been a difficult 2 years, manufacturing PMIs globally, tough for a while.

Yes. North America and Asia Pac, I would say, are showing some signs of growth. Europe continues to be, I would say, struggling, bouncing around the bottom. What has been really fantastic about our team is our team has been able to generate record margins in all 3 segments, in every business by utilizing tools within The Win Strategy, being proactive, managing the demand levels as they are and preparing for the rebound. So I couldn't be more happy with the teams, that we've been able to generate these record margins even in a not-so-great growth environment.

And you mentioned a good sign of pickup in orders in different parts of Diversified Industrial recently. To what extent is that kind of longer-dated activity, or do you see the longer and short cycle both...

It's a great point. It's something that we've talked about. It's something that we've strived really hard to transform our portfolio into longer cycle. Orders have been positive for a number of quarters. Usually, historically, that would immediately turn into positive organic growth. It's been a little bit more stretched out. There's been some Aerospace orders, those are very long cycle. There's been some power gen orders, which are certainly longer cycle.

And when we dig into the detail on the orders, we're seeing more longer-cycle orders than we've ever had. So that is just kind of changing that relationship to orders and organic growth. But we're happy that they're both positive. If you look at our backlog, our backlog is at a record level. Aerospace has been extremely robust. But even on the Industrial side, we finally returned to growth on that Industrial backlog, and we expect that to continue.

I think automation investment by customers is an area Parker had mentioned recently as seeing a bit of a pickup. Any way to frame -- and I realize the definition of automation is a bit subjective, but what the sort of...

Yes. Well, I would tell you, we are doing it within our facilities. I think we're doing a measured job at that. We always use Lean first. We always take waste out of the process before we even think about automation. We have really focused on what we call the 4 Ds: dirty, dull, dangerous or difficult. So the tasks within the facilities that fit those criteria, those are the first ones that we strive to automate.

And we've been really conscious to not make big monuments when it comes to automation, but to be very flexible, very focused and making sure that we do the right things for the business and our team members in that process.

When it comes to customers, we're seeing a lot of the same stuff, right? Our products are, in many cases, driving some of those automation things when it comes to robotics or even material handling-type applications. So it's a good fit. And I think the customer base and ourselves, I think we're learning together and making great progress.

Great. And as you said, The Win Strategy has had phenomenal success. I think you pointed out the margins are up 1,150 basis points. How do you make sure I guess the business, in what is a decentralized structure, keep reinvesting sufficiently, make sure they don't get too focused on margin percentage expansion?

Well, it's a great concept. We did raise our CapEx, our internal CapEx budget. For years, we'd been between 1.6% and 1.8% of sales. We did move that to 2.5%. So I think that we're appropriately investing in things like automation and productivity. In some cases, capacity, where we need it in the world. So I feel like that is a great sign.

But it is clearly a balance. And when we have these 85 units, the team that is running those units, they're responsible for growth, they're responsible for margin expansion, they're responsible for EPS growth and they're responsible for cash flow. So all of those things kind of goes into that equation.

And I feel like it's the right formula. I think we're investing the right amount. I don't see it spiking above that 2.5% of sales. And it is generating the results and we can see them in the P&L.

Great. And then on the Aerospace side, more of a focus now, I suppose, on OE production rates picking up in commercial; defense, a lot more discussed for 18 months now. How would you say Parker's positioned on the military side of the Aero segment?

Yes. Whether it's military or commercial, we are unbelievably positioned. With the addition of Exotic and with the addition of Meggitt into our business, you see it's now 35% of our exposure. So we're able to do things for both commercial and military applications that we never had been able to do before in the past. Things around safety, things around fluid conveyance, things around actuation, things around braking and landing systems, that just gets you into deeper conversations with those OEMs.

We have a nice mix between our commercial and defense business. We see the world clearly needs more defense, and we're ready to react appropriately as that comes. So it's a great space to be in. It's been part of our growth story up to now, and it will continue into the future.

And I think within Aerospace, as an industry, commercial aero aftermarket has been huge driver the last 5 years. As those other areas start to show high growth as well, is there much of a margin mix impact we should watch for?

We're not concerned about that. We now have -- it's basically a 50-50 mix between OEM and aftermarket. We are glad the OEM is ramping. You need the OEM to ramp to have aftermarket into the future. We are in the business for the long run.

What we say about the OEM ramp is there's clarity. It's very clear what you need to do. It allows you to take efficiency and wastes -- or improve efficiency, take wastes out of your business when you know what the deliveries are. And if you look back at what's been happening on the commercial side, there was a lot of noise based on delivery demand and all that kind of stuff, that I think create a drag in the P&L. And with volumes ramping, we're able to take all of that noise out.

There's new platforms coming. We are going to win those platforms. We're going to invest appropriately in this business. And we're going to love this aerospace exposure for a long time. So we don't expect to have a margin drag from OEM ramp.

And the absolute margins in Aerospace has been a huge increase, partly top line growth leverage, partly Meggitt synergies coming through.

Yes. It's been wonderful.

Any sort of natural feeling you worry about there? Or no, it's about operating leverage...

No. I mean it is wonderful what you can do with the business when you have 3 years of double-digit organic growth. Coupled with some synergies, coupled with great aftermarket mix, and it really has been stellar. It has allowed us to get closer to our customers.

I said this already, but the offering that we have now has never been more robust. And the capabilities that we have across the portfolio, applying things like filtration, things like material science, things like thermal management, in the Aerospace markets, we've never had more capabilities than we have now. So we really like the space and I think we're positioned to win.

One thing that's come up with some other companies in commercial aerospace, OE, other suppliers has been kind of contract renewals and sort of catching up on many years of inflation in sort of one go with a program renewal. Is that a thing to watch at Parker or there's a lot of different programs in the...

There's countless programs. And I would tell you, we've been very active. We feel that we are a partner with our customers. In many cases, we have frank discussions with the customers. If the environment has changed from the time that the contract was made, we think that merits a discussion.

These things are long term in nature and there's give and take on both sides. But I don't feel like we've been disadvantaged by the contracts when it comes to Aerospace. It's been an unbelievable time of inflationary increases, but the pricing muscle at Parker Hannifin is unbelievably strong, and that would include the Aerospace business as well.

Within Diversified Industrial, again, there's been a lot of price increases. Do you get any impression of price fatigue by customers or...

Like I said, it's been an unbelievable time on inflationary pressures. We reacted quickly. We went often. We didn't wait. We didn't have large price increases. We did that kind of in line.

We are back -- outside of tariffs, we are back to like a normal pricing cadence, a normal pricing discussion. And we've always said this on tariffs, "This is something that wasn't agreed upon when the PO was issued, when the contract was made, so that is a discussion that we have to have." And that is when they go up and when they go down. So the thought is that we'll be flexible on that and we'll make sure that works. But I don't sense that there's any pricing fatigue in any of our end markets.

And I think in the last earnings deck, you had a good slide sort of focusing on the off-highway exposure, and it seems like some share gain has been happening there. Maybe flesh out kind of why you think that's happening. Is it something to do with the broad kind of systems sale that Parker can do? And do you see that in other verticals beyond off-highway?

Well, we certainly do. We've been trying to highlight maybe one vertical a quarter when it fits into the space that we have in the earnings call. But it really is a testament to the portfolio of Parker Hannifin and being able to apply conveyance and electronics and hydraulics and filtration and sealing, shielding, thermal management. And we believe that we can integrate that better than anyone else in the space. And if there's value to be had, if a customer sees value in it, if that brings a clear, documented value to their product, then we're going to win on those applications.

The off-highway market is just one example of that. When you look at what technologies we're selling into that market, we tend to win when there's more than one technology on that application. And it's really not different from any of the end markets that we play in. It really is very thoughtful on what we invest organically in and what we invest in via acquisition.

And on the acquisition front, a large transaction will close later this year, Curtis closed last year. Any impression you could give us around kind of organic growth profiles of those businesses?

Well, one of the things that we have really focused on when it comes to our acquisition pipeline is, do they have a history of growing faster than our legacy businesses? In both cases, Filtration Group and Curtis, they had displayed the ability to grow slightly better than our legacy businesses.

And obviously, we haven't closed Filtration Group yet, but I could tell you, on Curtis, it's doing exactly what we expected out of that transaction. And what is really unique about that is it's completely paired with our electronics offering, and that is now one business, 1 of our 85 businesses, combined with our existing electronics business, and the integration is underway.

And maybe kind of walk us through -- because, yes, the upcoming acquisition is pretty large, how should we think about, I don't know, first sort of 100 days?

Yes. Well, we've already created the integration team. So our integration team is staffed. That has been one of the key elements of success for every one of the transactions that we've done in the past. We are talking to and meeting with the Filtration Group team. Obviously, we're 2 different companies, so we're operating totally separately up until close. But we're starting to lay out the plans for how we would do that.

The first thing that we would do would be a win immersion session, where we would welcome the Filtration Group team members to the Parker Hannifin team, and show them how we've created so much value over the past 10 years. And that usually is a wonderful process that both parties benefit from. So that's really kind of where we're at now. And I would say that we're on track [ for a lot of the ] transactions to work their way through the system.

Perfect. And when you think about the -- I think, the channel, as you said, or distribution is a key strength of Parker, how easy is it to kind of use that channel push through different product? What's been the experience...

Yes. So it's an unbelievable benefit that we have. The best benefit that we have through our distribution network is the offering that Parker Hannifin has. We could cover every element of the motion and control space. So that there is very little competitive pressures within our distribution channel.

And what we'll do is we'll add the Filtration Group to that, just like we will add Curtis to that, just like we added LORD and CLARCOR to that channel. So it is a benefit that will drive growth and margins for years to come.

And then kind of firm-wide operating margins, that '29 goal is on track, I think, this year. So -- yes.

Yes. We set '29 targets, I guess it's been 2 years ago. And the team has totally outperformed. So it's been great to be part of that. We set a 27% segment operating margin target for FY '29. We're right up on top of that right now as we speak. Aerospace has totally outperformed. Some of our longer-cycle Industrial businesses have totally outperformed.

When we look at those margin targets, it's not just the margin target that we're looking for. It is the organic growth target. We have a range of 4% to 6%. It is an EPS CAGR; we want to be plus 10% every year. And of course, we have cash flow targets that we are very focused on. We also have a dividend record that we're very proud of, 69 years of raising our dividends every year. We're not going to let that record break.

So we look at that holistically. Is '27 the end of margin expansion? No. It certainly is not. And we'll set a new target when we need to on that. But certainly not the end of margin expansion. I don't expect us to see a slow in margin for the foreseeable future.

And when we think about the kind of portfolio today, do you feel confident that you can get to x 100 bps higher operating margin firm-wide with the current mix? Or does there have to be a change in mix or?

No. I think the company is unbelievably set up right now. You could see on those technology platforms, it's pretty balanced. You could see the aftermarket OEM mix across the company is 50-50. That includes Aerospace and the Industrial side of the business. We've never been in a more favorable aftermarket to OEM mix. We see continued opportunities to expand the aftermarket. Filtration Group is a great example; it expands our filtration aftermarket exposure by 500 basis points.

So we continue -- we expect to see continued expansion across all of those businesses and all of those channels for the foreseeable future. So we don't have to do anything structurally different to continue our margin expansion story. A lot of it comes from just executing The Win Strategy over and over and over again. If you look at that Win Strategy, every item on that strategy is a margin expansion tool.

And then capital deployment, you had the big announcement a few months ago. How do we think about sort of M&A cultivation or pipeline, like do you go into a 12-month digestion period or?

It's part of our DNA. It's part of our muscle. We never rest. We never put pencils down.

Some of these transactions that we've been able to do, we had been working with, talking with, understanding for 10 or 20 years. And you never know when you're going to get to yes. We've been fortunate enough to get the yes 6 times over the last number of years, and that has been unbelievably meaningful for the company, and our goal is to continue that.

We're not naive about this. We know that a bad deal can do a lot of damage. Our goal is to not do a bad deal. And that's because we have not strayed from our financial metrics, we have not strayed from our strategic philosophies on what is a good Parker Hannifin business. We have not needed to reach out into some other technology that we're not expert in. And we're going to be $21 billion, $23 billion when we close the Filtration Group. It's a $150 billion plus space that continues to grow and flex as the world needs more motion control technologies. So we have room to grow within that space.

And with that, we'll pivot to the audience response. Survey question, please.

This is my favorite part of the show.

The first one is current ownership of Parker Hannifin.

Yes. It's been a great stock to own over the last 10, 5, 2 years, no matter how you look at it. Hopefully, this is won.

There we go. Thank you for your support, everyone.

We'll get that 39% over the line.

Yes. And we've got opportunity with the 39.4%. That's great.

The second one is around kind of current bias or attitude aside from ownership.

Yes. I don't want to bias the audience, but I've never seen a more positive environment around Parker. I've been with the company 33 years, so.

You've seen a lot of cycle.

A lot of smiling faces on share owners, yes. Look at that. Fantastic, 78%.

And thirdly, it's around EPS growth profile, and the peer set here is kind of multi-industry.

I mean this is something we worked really hard on. I got -- I gave you the answer, 16% over the last 10 years. I think that is pretty good.

Should be above.

Yes. Look at that.

It's 93%.

Jeff, take a picture of this one. We'll take this one back. We'll take this one back to the team.

I can send it afterwards.

Good work.

There we go. Time for the picture. All right. Perfect. Next question is around, we touched on this, but uses of excess cash, I suppose this is sort of post the acquisition close.

Yes. This one should be fun. A lot of choices here, it's going to be a split. All right, M&A is the big winner.

Yes. 80%.

But we agree. We agree. We're going to -- we're going to continue to select and integrate thoughtful businesses.

This one is sort of year 1, calendar '26 PE multiple.

Yes. Just a high-quality industrial right there.

Yes. You guys are great. I've stopped here every year. You guys are great. I love it. We always didn't use to get these answers.

And it's honest responses. It's not just my team faking it. And then last one is...

Can you tell how many people are voting? It's not just people?

My team.

Right.

And then what's the main kind of anchor on the valuation or headwind at present?

Well, we got 1,000 basis points of margin expansion that we've done there.

It shouldn't be a number.

We've put $30 billion of capital to work. I think our strategy...

The #1, I guess.

Yes. That's no surprise. Good work.

Good. Well, thanks very much, Todd. Great discussion. Thank you for being here.

Thank you, everyone. Really appreciate it.

Good morning, and welcome to the Parker-Hannifin Corporation's Fiscal 2026 Second Quarter Earnings Conference Call and Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions].

I would now like to turn the call over to Todd Leombruno, Chief Financial Officer. Please go ahead.

Thank you, Katie. Good morning, everyone, and thank you for joining Parker's fiscal year 2026 second quarter earnings release webcast. As Katie said, this is Todd Leombruno, Chief Financial Officer speaking. And with me today is Jenny Parmentier, our Chairman and Chief Executive Officer. We both appreciate your interest in Parker as well as your time today.

Before we begin the call, I'd like to call your attention to our disclosures on forward-looking projections and non-GAAP financial measures, that is on Slide 2. Items listed here could cause actual results to vary from our forecast. Our press release, this presentation and reconciliations for all non-GAAP measures were released this morning and are available under the Investors section on parker.com.

The agenda for the call today has Jenny starting with an overview of our record FY '26 second quarter performance. She then will reiterate the strength of our interconnected technologies. In this quarter, she's going to highlight the distinct value we bring to one of our market verticals, that is the Off-Highway market. Jenny will also make a few comments on the recently announced agreement to acquire Filtration Group Corporation, and then I'll follow with some details on our strong second quarter financial results. We will both provide some details on the increase to our guidance that we released this morning. And then we'll move on to Q&A, and we'll try to address as many questions as possible within the hour. We know it's a busy day to everyone, so we will stick to the 1-hour time slot.

Now, I call your attention to Slide #3. And Jenny, I'll hand it over to you.

Thank you, Todd, and thank you to everyone for attending the call today. Q2 was another great quarter where our team and our strategy demonstrated our ability to compound performance. We achieved top quartile safety performance with an 8% reduction in our recordable incident rate. This performance is aligned with our goal to be the safest industrial company in the world. Our team delivered record Q2 sales of $5.2 billion, organic growth of 6.6% and 150 basis points of margin expansion, resulting in 27.1% adjusted segment operating margin. Adjusted earnings per share grew 17%, and cash flow from operations was $1.6 billion. And in the quarter, we announced the acquisition of Filtration Group Corporation.

Moving to Slide 4. Many of you on the call today have seen this slide before. Why we win? The Win Strategy is our business system. We have innovative products that solve customer problems. Our application engineers provide the technical expertise that creates a competitive advantage and our distribution network serves global aftermarket and small to mid-sized OEMs. Today, I would like to highlight the interconnected technologies that provide efficient solutions for our customers across all of our market verticals.

I'm on Slide 5 now. We have the #1 position in the $145 billion motion and control industry, a growing space where we continue to gain share. These six market verticals represent greater than 90% of the company's revenue. We have a focused portfolio, creating distinct value for our customers. Our powerhouse of interconnected solutions cuts across these market verticals and gives us a clear competitive advantage. 2/3 of our revenue comes from customers who buy four or more technologies, and our growth is focused on faster growing, longer cycle markets and secular trends.

Moving to Slide 6. On this slide, I would like to highlight how our interconnect technologies come to life in the Off-Highway market vertical. Parker is a market-leading provider of highly engineered solutions for equipment used in construction, agriculture and mining applications. Our comprehensive offering of interconnected technologies, deep application expertise and embedded engineering relationships with OEMs are key to our success. We win with innovative and differentiated product technology, subsystems and full system capabilities designed to increase the capability and productivity of our customers. Our global footprint allows for in-region delivery and expertise for OEMs, and our extensive distribution network provides aftermarket support for end users.

I'm now on Slide 7. We are making continued progress on the Filtration Group acquisition. Integration planning is underway using our proven integration playbook. We expect to close in 6 to 12 months from our November announcement date. This is a great company with a great culture, and we really look forward to welcoming everyone to the Parker team. The acquisition of Filtration Group adds complementary and proprietary technologies for critical applications, while expanding our presence in Life Sciences, HVAC and Refrigeration and In-plant and Industrial market verticals. The combination of Parker Filtration and Filtration Group creates one of the largest global industrial filtration businesses and increases Parker Filtration's aftermarket sales by 500 basis points.

We will leverage our business system, the Win Strategy, to achieve approximately $220 million in cost synergies, and we expect this deal to meet our disciplined acquisition criteria of being accretive to organic growth, synergized EBITDA margin, adjusted EPS and cash flow. This strategic transaction continues our investment in high-quality businesses that continue to transform our portfolio, accelerate sales growth, improve profitability and drive shareholder value.

Moving to Slide 8. CLARCOR, LORD, Exotic, and Meggitt have been a big part of our transformation. Curtis is still early days, and as I just mentioned, we are very excited about Filtration Group. Over the time period you see on this slide, we have compounded EPS at 16% and approximately 60% of this has come from The Win Strategy and our legacy businesses, while approximately 40% has come from the acquisitions. The acquisition of Filtration Group will continue our track record of accretive acquisitions.

I'll turn it back to Todd to review the second quarter highlights.

Thank you, Jenny. This was another strong quarter of record performance. I'm on Slide 10, and we'll start with just a summary of the Q2 results. We are proud to have once again set new records for sales, adjusted segment operating margin, EBITDA, net income and EPS. Sales were up 9% versus prior, organic growth was positive at nearly 7%, currency was favorable 2%, acquisitions were favorable by 1.5%, and divestitures were a 1% headwind. Just to note, it's been now 12 months since we've completed those divestitures. This was the last quarter that we will have a divestiture adjustment going forward.

Moving on to margins. Segment operating margin was 27.1%, that is up 150 basis points from prior year. Adjusted EBITDA margin was 27.7%, that's an increase of 90 basis points from prior year. And net income was $980 million, that's 18.9% return on sales, just fantastic ROS performance. And lastly, adjusted earnings per share were $7.65, that's up 17% versus prior year.

When you look at the quarter, this was just another quarter in which our team delivered high single-digit sales growth, solid margin expansion, and all of that resulted in mid-teens EPS growth. We do remain confident that we're going to be able to deliver another record fiscal year in 2026.

If we move to Slide 11, this just displays the walk on adjusted EPS. You can see it was a clean quarter that delivered that 17% increase in adjusted EPS. Segment operating margin continues to be the main driver of our EPS growth. Dollars increased by $190 million or 16%. That added $1.15 of our EPS growth. Share count was $0.16 favorable, and that was really driven by the discretionary share repurchases that we completed over the last 4 quarters, and corporate G&A and income tax were favorable by just $0.01. Other was unfavorable by $0.18. That's really primarily due to foreign currency exchange that happened in the prior year period that did not happen this year. That was a prior period item. And interest is just slightly unfavorable by $0.03, and that is driven by just slightly higher average debt balance that was offset slightly by lower interest rates.

The adjusted EPS of $7.65 is a record, and it's really driven by strong growth and great margin expansion. I really commend our team members around the world for just stellar operating performance across the company, and it's a pleasure to be able to share these results.

If we go to Slide 12, let's take a look at the segments. Starting with orders for the company, very strong. Orders were plus 9% versus prior year. And a positive note is order rates were positive in all of our reported businesses. Backlog increased to a record $11.7 billion. This was another quarter of strong incrementals for the company that created the record margins across the board and that 150 basis points of margin expansion. Really nice to see.

If we look at North America, sales were approximately $2 billion. Organic growth was positive of 2.5%. That was slightly better than our expectations. The slightly better was driven by strength in Off-Highway and the Aerospace and Defense verticals in the North American businesses. Adjusted operating margins reached a record 25.4%. That is up 80 basis points from prior year with incrementals of 52%. And orders in North America took a big jump and increased to plus 7% compared to the prior year. And a notable driver there were a few multiyear aerospace and defense orders within those North American businesses. Nice quarter for the North American businesses.

International, sales were up to a record $1.5 billion. That's up 12% versus prior year. Organic growth for the quarter was 4.6% in the International Businesses. In Asia Pac, organic growth was the strongest at plus 9% and Europe turned positive in the quarter to plus 2%. We were really glad to see Europe turn positive. And Latin America is just down slightly 3% versus prior year. It was really a positive to see Europe turn to positive organic growth. We were glad for that team to see that finally make the turn.

When you look at margins, a record was achieved 26% margins in the International Businesses. That's up 190 basis points from prior year. And that margin expansion came from great improvements in productivity and just solid operational execution across all of those businesses. Orders improved in the International Businesses to plus 6% with positive orders both in Europe and Asia Pac. Nice quarter for the international team.

And lastly, Aerospace continues to perform exceptionally well. Sales for the quarter were a record $1.7 billion. That's up 14.5% versus prior year. Organic growth was 13.5%, and that was driven by great strength in the commercial markets, both OEM and aftermarket. Margins are up significantly. Adjusted segment operating margin increased by 200 basis points and reached 30.2% for the Aerospace Systems segment. Again, great productivity. The higher volumes actually helped productivity in that business. This was another strong quarter of commercial spares and repairs volume, and all of that translated to a fantastic performance on the margin line.

Order rates remain impressive in Aerospace at plus 14%. Backlog also increased plus 14% and reached a record $8 billion for Aerospace for the first time in the history of the company. Aerospace and Defense remains robust, and that's really led by the commercial markets. Great performance across all of our businesses. Glad to see these results.

If we move to Slide 13, you can see our year-to-date cash flow performance. Cash flow from operations, $1.6 billion, that's 16% of sales. Free cash flow came in at $1.5 billion, that's 14.2% of sales. Just to note here, on the first half, there's a slight drag from working capital and the timing of some tax payments. We expect that to be a first-half-only issue. I think everyone knows this, but as a reminder, our free cash flow is second-half weighted. We remain committed to free cash flow conversion of greater than 100% for the year, and we'll talk a little bit more on guidance. We are increasing our guidance on cash flow for the year.

Okay. That's the details on Q2. And Jenny, I will turn it back over to you on Slide 15 to talk about our increase to guidance.

Thanks, Todd. This slide shows our updated fiscal year '26 organic sales growth forecast by market vertical. So in Aerospace, we are increasing our forecast from 9.5% to 11% organic growth. We continue to see strength in commercial OEM and aftermarket. In-plant and Industrial remains the same at positive low single-digit organic growth. Recovery continues while customer CapEx spending does still remain selective. Distributor inventories are stable and our distributors are ordering to their demand.

In Transportation, our forecast stays the same at mid-single-digit organic decline. Demand challenges persist in both truck and auto, which is partially offset with some strength in aftermarket. We are raising our outlook in Off-Highway from neutral to positive low single digits. This is based on Construction and Mining growth, while Ag remains under pressure. We are maintaining Energy at positive low single-digit growth with robust Power Gen activity, offset by Upstream Oil and Gas, which remains soft.

And we are maintaining HVAC and Refrigeration at positive mid-single-digit growth. We see strength in commercial HVAC, refrigeration, filtration and aftermarket. As a result of these changes, we are increasing our organic sales growth guidance from 4% to 5% at the midpoint.

Back to Todd for some more guidance details.

Okay. Thanks, Jenny. If you turn to Slide 16, you'll see some of the details that we're talking about. Based on what we've done in the first half with strong orders, we are raising our full year guidance really across the board here. Reported sales are going up to the range of 5.5% to 7.5%, or 6.5% at the midpoint. We expect currency to be a favorable 1.5%. That is based on December 31 spot rates. Previously completed acquisitions and divestitures basically offset each other at 1%. Jenny just mentioned this, but we are increasing organic growth to the range of 4% to 6%. That is 5% at the midpoint.

If you look at the businesses, Aerospace is being increased to organic growth of 11%. In the Diversified Industrial segment, in the North America businesses, we are increasing organic growth to 2.5%. And finally, we are increasing International organic growth to plus 2%. Adjusted segment operating margins, we're raising guidance there by 20 basis points to 27.2% for the full year. That will now be a forecasted increase of 110 basis points versus prior year. And the forecast for incrementals for the full year is 40% full-year incrementals.

A few other items just to note, corporate G&A remains unchanged at $200 million. Interest expense slightly tweaked down by $5 million. We're now expecting that to be $415 million for the year. And other expense is down slightly to $85 million. On tax rate, the guide for the second half is forecasted to be 22.5%. The full year tax rate is expected to be 22.1%, that's with a second half of 22.5%.

And finally, when we look at EPS, we're raising EPS to $30.70 at the midpoint. That's an increase of 12.3% versus prior. And the range on that adjusted EPS is plus or minus $0.30. I mentioned it earlier, but we are raising our full year free cash flow guide to a range of $3.2 billion to $3.6 billion. That is about $3.5 billion at the midpoint with conversion greater than 100%.

Looking specifically at Q3, reported sales are expected to be nearly $5.4 billion. That is approximately 8.5% up. Organic sales growth, we are expecting 5%. Segment operating margins, we are expecting 27% and adjusted EPS for the quarter is expected to be $7.75. Each one of those is an increase to our prior guide. As usual, additional details can be found in the appendix here. And that is a wrap on our guidance.

Jenny, I'll hand it back to you for Slide 17.

Thanks, Todd. Just a reminder on what drives Parker. Safety, engagement and ownership are the foundation of our culture. It's our people and living up to our purpose that drives top quartile performance that allows us to be great generators and deployers of cash.

Okay. Katie, we are ready for the Q&A portion of the call, and we'll take the first one in queue.

[Operator Instructions]

Our first question will come from Jamie Cook with Truist Securities.

Congratulations on a nice quarter. I guess 2 questions, Jenny. First, when I look at your technology platforms, if we look at the technology platforms within Diversified Industrial, Motion Systems, Flow Process Control and Filtration and Engineered Materials, I think it's the first quarter since June of 2023, where you saw positive organic growth across all 3 technology platforms. So just wondering, do you think that's something specific to Parker-Hannifin? Do you think it's more a function of the cycle? Just very encouraging signs there.

And then I guess my second follow-on question to that is it's the first quarter or 2 that Filtration has seen positive growth. Just wondering how you're thinking about that relative to the acquisition that's coming on Filtration Group? Signs that you bought that at a bottom? Or is there any reason why they wouldn't be seeing -- understanding they're more aftermarket and a little different end market mix, why they wouldn't be seeing positive momentum there as well?

Yes. Well, thanks, Jamie. Thanks for the question. So yes, so first of all, we do think that, obviously, you're right, those businesses did see positive organic growth, and it's great to see. The teams have worked very hard for that, and they're performing well.

I would say that it's a combination of what we're seeing in some of our short-cycle businesses that we've pointed out. While all of them are not returning to positive growth, we did see some nice improvement in Off-Highway. And then I would say the Aerospace business that sits inside of these Industrial Businesses is performing very well. So to that point, what you said, some of this is specific to Parker and some of it is seeing some of the short-cycle business return. Our Distribution did have low single-digit organic growth in the quarter. So we're encouraged by what we see, encouraged by the orders. So I think that's part of it.

Your Filtration Group question was a long one. So I'm going to ask you to repeat that for me.

No, sorry. My comment was just that interesting timing, maybe a complement that it's the first quarter we've seen positive growth in your Filtration Group business. Wondering what that implies for the acquisition of the Filtration Group, implying that potentially you bought that business at a cyclical bottom, understanding there's different in mix because they're aftermarket. I'm just wondering, there's differences between the business, but wouldn't -- could their sales also be improving organically just like we're seeing within your Filtration Group business?

Yes, we do believe that, that will be the case. Now historically, Filtration Group's organic growth from pre-COVID to now has been mid-single-digit CAGR. So this is higher than Parker's Filtration Group. But many of the areas where we have the complementary technologies in the same markets with some of the same customers that we play, we do see that their growth will be increasing just as it is with ours.

So again, we think that this is just a great fit for Parker because of the complementary and proprietary technologies that it adds and because they play in the markets that we know, where we expect to see growth. And again, they have this decentralized structure that's very similar to Parker. So we see upside here.

Our next question will come from Andy Kaplowitz with Citigroup.

Jenny, could you give us a little more color on what you're seeing by region? I think Todd's comments around Europe were very interesting. Do you see that sort of turn is durable? And then Parker has continued to do very well in APAC. Do you see still a good outlook for that in '26 and beyond?

Yes. So just let me give you just kind of an overview of some of the market verticals by region. So as Todd mentioned, in North America, we're increasing our full year organic growth to 2.5% versus the prior guide of 2%. So again, Industrial, Aerospace and Defense's growth is very strong; gradual In-plant and Industrial recovery; positive sentiment from our Distribution channel, continued quoting activity. As I mentioned, CapEx remains selective. It seems like a lot of their customers are prioritizing productivity and automation projects versus large capacity expansion.

So we see that increased infrastructure spending will increase In-plant and Industrial equipment demand in the future. I mentioned Transportation is most challenged in auto and trucks. Truck OEM recovery, not expected this fiscal year, but will benefit from some aftermarket. And again, strength in Construction -- Off-Highway Construction, while Ag still remains slow.

Energy, Power Gen, very robust. Oil and Gas is weak with Upstream, but Midstream is benefiting from some capital spending. HVAC is coming off of a strong fiscal year '25. Residential is down, but is more than offset with Commercial HVAC and Refrigeration. So this is what we see for North America.

So International, we are increasing full year organic growth to 2%, and that was previously 1%. So they did have a fantastic Q2. This was primarily from some large project shipments that went out, which really helped them. But we are increasing full-year FY '26 organic growth for EMEA to low-single digits. It was flat in our prior guide. Again, we see gradual improvement in Transportation there, primarily on the Truck side. We see continued strength in Mining and Energy, both Oil and Gas and Power Gen. And then we do see where the proposed stimulus and future defense spending is a long-term positive, but not seeing the impact of that this fiscal year.

In Asia Pacific, we're increasing our full year organic growth to positive mid single digit versus positive low single digit in the prior guide. We're seeing continued strength with electronics and semicon demand. In-plant orders and shipments, there's some progress there, but it still remains a little bit mixed. We're seeing some mining improvements in China. And I would say that there's still some continued uncertainty from tariffs across these markets. So that's really kind of a recap of what we're seeing in the region.

Very helpful, Jenny. And then, Todd, you've continued to generate over 40% incremental margin. I know you've said you're still sort of guiding at 30% to 35%. But as you look forward, how long before -- after this good performance, do you say to yourself like you can do over 40%. And when you talk about price versus cost, is it better pricing? Is it execution? What's sort of driving this performance?

Andy, thanks for noticing that. I'll tell you, it's not easy. It's a lot of hard work from our team members every day, every week, every month, every quarter. We are really proud to see what they've been able to put up there. We are guiding the second half at 35% incrementals really across the company. That puts the full company to 40% for the full year. We still think that, that's best-in-class when you look at what's going on across the environment. We're really happy to see the Industrial businesses pivot to positive organic growth. Those numbers are a little bit muted still.

So I think our guide is unchanged when it comes to what we think is best-in-class on incrementals. If you look at these margins, these margins are all-time highs across every business. It is great to see that work, and that's generating these results.

Yes. Strong operational execution.

Yes. It's a litany of things. I couldn't even give you like a list of the top 3 because it varies by business, and it depends on what opportunities exist across each and every business.

Our next question will come from Andrew Obin with Bank of America.

Just a question on International growth. I think you may have answered it, but I think if you sort of do the math, it just seems that sequentially, the growth is going to slow down to 2% at midpoint in the third quarter. And then I think the guide sort of implies it stays there in the fourth quarter. And I think you sort of alluded to large projects, but just thinking that the comp is similar from second quarter to third quarter, even easier on a 2-year stack, we're being conservative? Or is there sort of specific dynamics taking place in International in 3Q and 4Q?

Yes. Andrew, it was really -- it did benefit in Q2 from the timing of some large project shipments, and that was primarily Power Gen and Commercial HVAC Filtration, and that was in EMEA. And that -- it kind of aligns with some of the choppiness of the orders from the prior year. So those aren't going to repeat in Q3. So we do forecast 2%, and that's based on a continued gradual Industrial recovery.

Yes. Andrew, we basically doubled the guide there. We were 1%. We're now basically 2%. You look at that from what we thought would happen at the beginning of the year, we're pretty happy with what's going on there. The orders are also very impressive. But like we've kept saying is there are a number of longer-cycle businesses that just don't necessarily need to ship in the second half of our fiscal year. We'll see those in the out months.

And also maybe sort of nitpicking here, but if you sort of back into growth by end market, you had a raise for Off-Highway and Aerospace and Defense. But then the other segments sort of implies a big jump in the midpoint of the guide just to make the math work. Can you just comment, we're sort of thinking from plus 10% to sort of squiggle line 40%. Can you comment on that? What's in the other segment, if I'm doing the math right?

Yes. I don't know if I'm following your math there, Andrew. Jenny went through the logic behind the increases that we've seen by market vertical. Obviously, Aerospace continues to be stellar. We have a significant amount of Aerospace in the Industrial business. That was a driver, and we bumped up Off-Highway a bit.

And one other thing to add, some of what sits in the other, obviously, is Electronics. And what you see in there is some data center, which is still less than 1% of our sales, but it's been very strong. It's been some nice growth for us. So that may be part of what you're not seeing in our numbers.

Our next question will come from Joe Ritchie with Goldman Sachs.

So Jenny, great color as always on the end markets. I guess just a broader question with reshoring and all the investment that's already occurred here in the U.S., like what's your -- I know it's hard to have a crystal ball, but like what's your take on what's happening with In-plant equipment in the U.S.? And then what gets it going? What are you guys looking at specifically as kind of leading indicators for the like short-cycle inflection?

Yes. So we get a lot of intel from distribution, and we continue to say that this is gradual. But the sentiment is still positive, and I've been saying that for quite some time because the distributors do talk a lot about all of the quoting activity. But I would say in the recent conversations, the CapEx remains selective. And the customers are prioritizing productivity and automation projects versus large-scale capacity expansion. And you see that in pockets, and that's why we consider it gradual because you'll see some in different markets.

And I think we're going to continue to see this gradual recovery, and we're going to continue to see better numbers in some of these markets that we've talked about. But I don't know that there's just one catalyst to get this short cycle going. It's really, I think, a matter of taking out some of the noise that really doesn't have anything to do with the business, some of the geopolitical noise, tariffs and maybe possibly interest rates as well.

Yes, that makes sense. And then I guess maybe just for Todd, just a quick question. The Aero business has been doing great. Margins were above 30% in the first half. The guidance implies a step-down in the second half. Just anything we need to be aware of from a mix standpoint and why they would step down in 2H?

No. We called out high spares and repairs in Q2. Those are great. The business is high. It's hard to predict that going forward. So we've not put that into our forward guide there. But I would tell you, the activity is robust. The team is doing a great job converting, serving our customers. And you look at those margins that we're forecasting, it's still showing 60 basis points improvement from prior year, and it's high 29%, mid-29.5% type range. So we feel pretty good about giving you a guide with those numbers.

Our next question will come from Scott Davis with Melius Research.

A great start to the fiscal and calendar year here, couple of quarters in a row. I know you guys don't love to talk about price, but given inflation, like recent commodity prices and some of your input costs, I'm sure, even in things that may be derived from things like natural gas and obviously metals. But -- is it an increasing -- are you able to drive price kind of in time? I know in some of your product that runs through Distribution, that's less of a challenge sometimes, but perhaps for a lot of the product goes through OE, it could be a little bit more of a challenge. Is there some risk mitigation there that's going on at present? Are we being a little too paranoid? Or are you guys -- have any color there would be helpful.

With some of these commodity prices, Scott, we're handling this like we have any other inflation or issues that come about. That pricing muscle is strong. And we've had a long history here of being able to handle these things. But it's ongoing, and I would say that it's nonstop, right? We have to respond to these things and make sure that they don't impact our EPS, and they haven't and they won't.

Yes, Scott, I would just -- you obviously are a follower of our margins. You can see our margins, every one of the businesses posted a record margin number for the quarter. And I would tell you, the eyes on cost and the eyes on price, that's a muscle that never goes out of style here at Parker. So we're all over it.

Fair enough. And then just a quick follow-up. The time line you give to closed Filtration Group kind of 6 to 12 months, so you could drive a bus through that. But what are the major -- are the major gating factors just kind of standard antitrust issues that could get pushed or pulled one direction or another? Or are there other hurdles?

Yes. No. Just the standard regulatory filings and the process that we have to go through.

Our next question will come from Steve Tusa with JPMorgan. [Operator Instructions]

Hearing no response, we'll move to our next. Our next will come from Amit Mehrotra with UBS.

I guess -- I just wanted to ask, I joined a little bit late. So forgive me if I -- this has already been asked. But if I -- I want to talk about the 2Q performance, which obviously was better and then how that corresponds to the full-year guidance increase. It doesn't seem like you assume much of the 2Q goodness into the second half. And then also, I'm sure you addressed this, so I apologize again, but talk about the North American margin decline a little bit for the full year and what the reason for that is?

I'll answer that question for you, and then Todd will follow up. So there's nothing about the North American margin other than Q2 mix was not as favorable as Q1. That's all that's there. Listen, Q2 was a record for us, 80 basis points of margin expansion, 52% incrementals. The team is performing very well. And for Q3, we increased the margin to 26%. So we took that up. And for the second half, we're not reducing the North America margin.

Yes. If you look at the second half, as Jenny said, we're basically 26.5% for the second half for North America. That would be an all-time record for North America, and that would put the full year up 80 basis points. So I'd just reiterate what Jenny said. Q1 was exceptional. Q2 was a record, right?

Yes. Fair. Okay. Totally get it. And then just maybe one other kind of bigger picture question, Jenny, related to that, the pricing commentary, I think, to Scott's question. If I just look at Parker's organic growth over the last decade, it's basically averaged a couple of percent per year for the entire company. In fact, North American industrial has been 1.5%. And when you incorporate price, it's just the implied volumes are actually down over the last decade. I guess my first question is, do you agree with that observation? Is that a fair observation?

And then second, maybe what explains that lack of volume? And maybe we've been in an industrial recession for a decade, I don't know. But at some point, price and margin get incrementally harder and we just need to see some through-cycle volume growth. So I would love to get your perspective on that.

This is Todd. I'll jump in and Jenny, you could add any color if you like. When we look at what we are doing in North America, first of all, it's hard to look at the company over the last decade because the portfolio has changed tremendously. When you look at the 3 acquisitions, where you look at where our growth has been way more Engineered Materials, way more Filtration and a heck of a lot more Aerospace and Defense within those Industrial businesses, both in North America and in international.

The company has never been more focused on organic growth. We have a long-term target of 4% to 6%. We are guiding 4% to 6% this year. So we were right at our target. It has been 2-plus years of choppiness in the industrial markets. So I would tell you the company has never been more aligned on organic growth. And I'm really proud that we're able to generate these record margins in a not-so-great organic growth environment. So I don't think there's too much to read in there. When you look at what we are doing from a margin and a conversion standpoint, the team is really much driving great performance here.

Our next question will be from Steve Tusa with JPMorgan.

A lot of questions have been answered, and there's a lot of good detail in the materials. Just curious on the Construction side, you guys are like a little more positive than others. Is that just like the data center stuff? Or is there -- are there other things you guys are seeing out there?

I would say that's a small part of it, but we're actually seeing an increase in the Construction Equipment.

Okay. And then just lastly on the fourth quarter being a bit below consensus. And anything to call out there mechanically as to why the fourth quarter is, I guess, just a little bit weaker than what we would have thought?

No, I don't think there's anything -- Steve, this is Todd. I don't think there's anything specific that we called out there. When I look at what we have laid out here for the fourth quarter, every single number is an all-time record. The fourth quarter is normally our strongest quarter of the year. We are forecasting fourth quarter to be the strongest quarter of the year again. And I would tell you right now, we're focused on Q3 and making sure we deliver our commitments for Q3, but there's nothing that has us concerned about Q4.

No, no concerns.

[Operator Instructions]

Our next question will come from Julian Mitchell with Barclays.

Maybe just to focus on some of the end market trends. So looking at Slide 15, just wanted to understand perhaps when we look at the far right-hand side column of the full-year growth rates, when we look at Q4, sort of which of those growth rates as you see it are most different from the full year numbers? Just trying to understand kind of inflections or changes or if it's easier to explain? Any color on how the first half trended for those respective markets beyond A&D?

Well, I mean when you look at -- let's just look at Off-Highway, for example. We started off with negative low single digit on our initial guidance back in August. And then we moved it to neutral in Q1. And then we moved it -- just moved it now to positive low single digits. So that just keeps going up. So that's one that I would highlight.

And when you look at -- obviously, you pointed out Aerospace, we're continuing to increase that. But when you look at the rest of the markets, the industrial markets, they've remained the same. We've seen some bright spots within them that we've pointed out. But In-plant and Industrial, still saying at positive low single digits. When you look at Transportation, negative mid-single digit. Like we said, we're not seeing anything right now that would change our mind about that through this fiscal year. And then the same for Energy and HVAC and Refrigeration, we're maintaining those from initial guidance.

Got it. Maybe within A&D, if you could just refresh us perhaps on the end market outlooks for the various pieces for fiscal '26. Another company talked about sort of normalization of outsized commercial aero aftermarket growth, but I feel people have been guiding for that for sort of 3 years running now. So yes, just any thoughts around the market pieces of A&D?

You bet. So we expect Commercial OEM to be around 20% growth. We previously had that at mid-teens. We expect Commercial aftermarket to be at low double-digit growth. So we previously had that at high single digit. So we just had 17% in Q2. And in Q1, that was 13%. So we still see strong Commercial aftermarket. We expect Defense OEM to be around mid-single-digit growth, which is the same as last quarter. And Defense aftermarket is at low single-digit growth. That was previously at mid-single-digit growth, but still in a good spot, just a small change there.

Our next question will come from Jeff Sprague with Vertical Research Partners.

Just want to come back to just kind of orders and sales. Obviously, kind of in the Industrial businesses, we've got more long cycle, and we've talked about that a lot, including on the call here today. But I'm also just observing that orders have outpaced sales now for 8 quarters, which I've never seen that long of a run. So maybe you could just speak to, is it reasonable to think that those do reconnect at some point in time where there's just that much more long-cycle stuff in the backlog. And obviously, at some point, things will cycle and they'll cross over. But in terms of kind of them coming together during an up-cycle, do you think we continue to see kind of a persistent gap there?

Yes. Jeff, it's a good question. I mean we're clearly a longer-cycle business today than we have been in the past. But it is hard to put a figure on conversion timing as it really is determined by the customer delivery schedule. We obviously, with higher Aerospace and Defense -- in the Aerospace segment as well as in our Industrial businesses, we do have a lot of multiyear orders that fall into those buckets. So that definitely has an impact.

And what we see -- from a short cycle standpoint, as I've mentioned a couple of times, it's a gradual short-cycle recovery, some markets sooner than others. In-plant, our Distribution business, we think they're going to benefit from both CapEx and OpEx. So again, I pointed out, we saw low single-digit positive growth in the quarter. And those long cycle and secular trend businesses, HVAC, Energy, they're continuing to really be strong. So record backlog, orders are in a good position, but hard to connect the dots there.

Jeff, on the good side, it is giving us better visibility. It is allowing us to level load our operations. It is part of what's driving the consistency in our performance across all of the operating businesses. And again, I think not as much credit is given to the transformation of the portfolio. And like I said, we are a different company than we were 2, 3, 5, 10 years ago. So it's still an important metric. We watch it every day, as a matter of fact. And we're really happy that orders have turned positive across every business, and it's a positive outlook for the future.

Yes. And we don't have the Industrial backlog. I don't think if you could share it, that would be interesting. But yes, Industrial backlog was down in Q1, right? But it looks to me if it was even flat sequentially here in Q2, then we're starting to get to backlog in Industrial also inflecting higher. Is that sort of what you see in the business?

Yes, I believe that's exactly what we're seeing here.

Industrial backlog has gone up in Q2. Yes, industrial backlog went up. It remains in the mid-20s, and it grew from Q1 to Q2.

Okay. Yes, which means then it's nicely up versus last year, which reflects the order versus sales gap.

Our next question will come from Joe O'Dea with Wells Fargo.

I wanted to circle back to the In-plant comments and just customer kind of prioritization of spend around productivity and automation over some of the capacity expansion. I think we've been in that kind of environment for some time at this point. Maybe just spend a little bit of time on what that means for their spend, like the wallet that goes to Parker and when we think about it on the productivity and automation side versus the capacity expansion side. And if we were to see a pivot toward capacity expansion, what that would mean for you?

Well, the good news is we participate in both scenarios, right? I mean when there's any type of retooling done or upgrading done or retrofitting done, our distribution channel and sometimes many of our divisions participate in that directly. And then some of the examples we've given in the past is when there is capacity expansion that is actually new factory, new building, we're participating from the time that they start clearing the land and all the way through the -- putting the walls up, putting the infrastructure in. So Parker gets a nice share of the wallet in both situations.

It is just still a gradual recovery, though. And our distributors, again, positive sentiment, working with a lot of those small and midsized OEMs, they're participating in these things. They're ready. They're ready to participate at a higher level. But right now, what we have for them is -- we see for Industrial growth is about 2% to 2.5%.

Got it. And then just on your own CapEx plans, you raised the guide a little bit last quarter, maintained it this quarter. It's up about $100 million year-over-year. So some nice growth there. Maybe just elaborate on that and whether there's anything on the capacity expansion side. Is any of that targeted around kind of as you're starting to highlight Off-Highway a little bit and then some of the activity you're seeing there? Just to understand where that higher spend is going.

Yes. We are definitely investing in our businesses. We have investment around automation and productivity. And we do have capacity expansion on both sides of the business. So it's important to us to be able to keep up the level of service and world-class manufacturing. And as our teams use Kaizen tools to improve the processes that we have, we're always looking to make those processes better. So a lot of investment in our factories.

Our next question will come from Chris Snyder with Morgan Stanley.

So I kind of wanted to follow up on some of the earlier conversation around cycle trends. You guys have as broad exposure as anybody, both on an end market but also a geographic basis. So just kind of maybe simply, when you look across all this exposure, is there anything that you think will be worse a year from now where you're seeing signs that there's pointing to next 12 months deterioration?

I don't see anything now. I'm not hearing anything or I don't see any indicators that would cause us to think that the forecast we have out there now for these market verticals is going to get worse. I don't see anything.

Yes, Chris, we called out backlog in total. Backlog is a record. Orders have been positive for some time now. Historically, that has been a positive sign for future growth for Parker-Hannifin.

Yes. No, no, absolutely. I was just wondering if there was anything that wasn't like stable to improving. And then I guess maybe just following up on that. It seems like at least a good chunk of the North America order pickup with some of the longer-cycle businesses. But did the shorter-cycle businesses also see positive rate of change on orders? And any color on the specific end markets? I would imagine construction and some of them we're seeing momentum.

Yes. Yes, we definitely saw some positive orders in In-plant and Off-Highway and Energy. So definitely, it wasn't all Aerospace and Defense, but there were some multiyear Aerospace and Defense orders that hit our Industrial businesses that really caused that jump from 3% to 7%. But positive orders in In-plant, Off-Highway and Energy.

Katie, this is Todd. I think we have time for maybe one more question before we wrap it up at 12.

Our last question will come from Brett Linzey with Mizuho.

I wanted to follow up on Filtration Group. I imagine the teams are already getting a running start on some of the integration and preplanning. Any early observations on confidence around cost synergies? And then as you've been mapping the combination, any early view on the sales synergy side?

Thanks for the question, Brett. As I said, we're just really excited about the Filtration Group. So we are very confident in our ability to deliver that $220 million in synergies by the end of year 3. Part of our diligence process was several plant visits, and that's what gives us that confidence.

We are working with the team. We don't own them yet. So we're building relationships. We're getting that integration playbook going. We have the integration team assembled here on the Parker side and will shortly with the Filtration Group side, but really feel very confident about the synergies. We didn't model any revenue synergies, but we feel that there's opportunities to utilize the customer relationships that we both have to deliver value to customers. So we think that, that is going to give us some upside. And then we'll look at the distribution networks and see what makes sense and learn and be focused on our organic growth with this acquisition, just like we have the last.

That's great. And then just a quick follow-up. So just to close the loop on tariffs, so calendar '25 in the books. Can you update us on what the annualized tariff expense that you absorbed? And as you progress through the mitigation measures, is it fair to think that as you get into the second half of calendar '26 that you do have the potential to drive better-than-normal incrementals as you're lapping some of that expense pain?

Brett, this is Todd. The tariffs obviously have been pretty volatile. I don't want to make any predictions on what's going to happen with tariffs or what has happened with tariffs. I would just tell you, rest assured that we have it covered. You have not heard us call out any negative impact from tariffs. You look at these margins, these margins are all-time records. We're really positive now that a majority of the company has returned to positive organic growth. And we're going to manage whatever happens as it happens and just be as clear and as transparent with our customers as we possibly can be. So that's the way we're running it.

That's right.

Congrats on the quarter.

All right. Katie, I think this wraps up our time here. This concludes our FY '26 Q2 earnings release webcast. We do appreciate everyone's time and attention. We thank you for joining us today. If there are any needs for follow-ups or clarifications, our Investor Relations team will be available as usual, Jeff Miller and Jenna Stuckey will be available for any kind of follow-up that's needed. Thank you, everyone, and have a wonderful day.

Thank you. This concludes today's call. We appreciate your time and participation. You may now disconnect.

Good morning, and welcome to Parker-Hannifin Corporation's conference call and webcast to discuss the company's announced agreement to acquire Filtration Group Corporation. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to turn the call over to Todd Leombruno, Chief Financial Officer. Please go ahead.

Thank you so much, Nikki. Good morning, everyone, and thank you for joining us today. As Nikki said, this is Todd Leombruno, Parker's Chief Financial Officer speaking. I'm here today with our Chairman and Chief Executive Officer, Jenny Parmentier.

Before we get started today, we did want to recognize that today is Veterans Day, a national holiday here in the United States. Today is a day meant for us to reflect upon the dedication and sacrifice of those who served. It is their courage that has safeguarded the freedoms we all enjoy today. Thank you to all the veterans for your service.

Now we are very excited to announce that Parker has signed a definitive agreement to acquire Filtration Group Corporation. On Slide 2, you will find the company's safe harbor disclosure statement addressing forward-looking statements. Items listed here could cause actual results to vary from our forecast. This morning's press release, this presentation and all reconciliations for the non-GAAP measures are available under the Investors section of parker.com. A replay of this webcast will be available approximately 1 hour after we conclude the webcast today. We have planned about 30 minutes to give you an overview of the Filtration Group transaction, its strategic fit within Parker and how it aligns with our long-term strategy and create shareholder value. We'll then open the call up to any questions.

And now I call your attention to Slide 3, and Jenny, I'll hand it off to you.

Thank you, Todd, and thank you to everyone joining the call this morning. I'd like to welcome all of our shareholders, analysts, Parker team members, and a special welcome to all Filtration Group team members that may be listening in this morning. It's an exciting day for us as we announced another strategic addition to Parker. Filtration Group is a great company with a great culture, and we really look forward to welcoming everyone to the Parker team.

The acquisition of Filtration Group adds complementary and proprietary technologies for critical applications while expanding our presence in life sciences, HVAC/refrigeration and in-plant & industrial market verticals. The combination of Parker Filtration and Filtration Group creates one of the largest global industrial filtration businesses, with expected sales of $2 billion in calendar year 2025 at 23.5% adjusted EBITDA margin. This acquisition will increase Parker Filtration aftermarket sales by 500 basis points.

We will leverage our business system, the Win Strategy, to achieve approximately $220 million in cost synergies, and we expect this deal to meet our disciplined acquisition criteria of being accretive to organic growth, synergized EBITDA margin, adjusted EPS and cash flow. This strategic transaction continues our investment in high-quality businesses that continue to transform our portfolio, accelerate sales growth, improve profitability and drive shareholder value.

I'll turn it back over to Todd to review the transaction summary.

Thanks, Jenny. All right. I'm on Slide 4. Let's take a look at some of the numbers on the transaction. We are acquiring the Filtration Group for $9.25 billion in cash. This will add roughly $2 billion of highly recurring filtration sales at an adjusted EBITDA margin of 23.5%. That purchase price equates to a multiple of 19.6x on expected calendar year 2025 adjusted EBITDA. Incorporating synergies, that synergized multiple would be 13.4x. We are expecting $220 million of cost synergies over a 3-year synergy period. In addition, we expect incremental cash benefits of about $140 million at a net present value.

The transaction is on a cash-free, debt-free basis, which we plan to fund with a combination of new debt and cash on hand. Upon funding, we expect our net debt to adjusted EBITDA leverage to reach approximately 3x. I think you all know this, but we have built a great track record on rapid deleveraging after each of our previous transactions, and we are -- we remain committed to operating around a net debt to adjusted EBITDA level of 2x. After the Meggitt transaction, we delevered in 7 quarters. That was our largest transaction ever. That 7 quarters was the fastest that we returned to a 2x leverage. And our goal with this transaction is to delever even faster. Our target is to return to 2x leverage in just 6 quarters.

As Jenny said on the previous slide, this transaction meets all of our financial criteria. We expect it to be accretive to EPS in the first year of ownership, and it will achieve synergized EBITDA margins in the mid-30s and deliver a high single-digit ROIC by year 5.

Slide 5, please. This slide shows a breakdown of Filtration Group by market vertical, sales by region and sales mix. These are markets that we know well, with a life sciences business that expands our presence in this market. Good global presence, very similar to Parker's Industrial business and a robust aftermarket that again increases Parker Filtration aftermarket sales by 500 basis points. Filtration Group's complementary capabilities and strong aftermarket presence enhances our ability to serve customers globally.

Slide 6, please. Filtration Group brings a diverse portfolio with strong brands, material science capabilities, highly engineered products, embedded application engineers and multiple R&D centers. This enhances our exposure in life sciences, HVAC/refrigeration, in-plant & industrial and transportation.

Within life sciences, we have solutions for medical, diagnostic and test applications that include consumable separation technologies, pharmaceutical protection, special chemistry and material science solutions. Within HVAC and refrigeration, our complementary products and advanced media capabilities that ensure indoor air quality in places like hospitals, schools, museums and airports. Moving to in-plant & industrial. Filtration Group brings proprietary media for liquid, air and gas filtration, increasing both safety and productivity for customers. And within transportation, our transmission filters and desiccants engineered to an application-specific form factor.

Slide 7, please. When we combine the Filtration group with our existing filtration offering, we will have one of the largest industrial filtration businesses at nearly $5 billion in annual revenue. Much like our previous acquisitions, this is highly complementary, bringing new capabilities in existing applications as well as near adjacencies, thus expanding our addressable market. This is aligned with our acquisition strategy to acquire high-quality businesses with complementary technologies that accelerate organic growth.

Slide 8, please. And we know from experience that cultural alignment is key to a successful integration, and we see this once again with the combination of Parker and Filtration Group. It is the safety, engagement and ownership of our people that is the foundation of Parker's culture. With Filtration Group, we share an entrepreneurial culture and belief in a decentralized structure, with P&L ownership at the local level. We are committed to being great generators and deployers of cash and living up to our purpose of enabling engineering breakthroughs that lead to a better tomorrow, thus making the world safer, healthier and more productive. We look forward to welcoming the very talented Filtration Group team members to Parker.

Back to Todd to review the synergy opportunities.

Thanks, Jenny. As I said, we are confident and committed to achieving this $220 million of expected cost synergies. That is roughly 11% of sales. Our integration plan utilizes a proven playbook and leverages our business system, the Win Strategy. Key focus areas are similar to what we've done in past successful transactions, and that includes our simplification process, supply chain, lean and obviously, productivity. These expected synergies are in line with what we've achieved in past transactions. The structure of the Filtration Group business is -- very much complements our existing filtration divisions. It's an extremely good fit. The increased scale of this transaction also brings significant opportunity for our combined filtration business. We're very confident in achieving these synergies.

Moving to Slide 10. This is a different Parker. Filtration Group enhances our technology offering with complementary and differentiated filtration solutions. This transaction will further expand our filtration and engineered materials technology platform, where material science serves as a common differentiator. Our past acquisitions of CLARCOR, LORD, Exotic, Meggitt, Curtis and now Filtration Group have meaningfully changed our portfolio, as you can see with this comparison back to fiscal year '15. We value all of these technology platforms as they are critical to our distribution and aftermarket channels, give our application engineers a competitive advantage when solving customer problems and provide us with a powerhouse of interconnected technologies. This is why we win. Parker is clearly a different, more balanced and more resilient company than ever before.

Slide 11. For those of you that have followed us for a while, this slide remains unchanged. We are on track to be approximately 85% longer cycle, secular trend and aftermarket revenue mix by fiscal year '29. Our acquisition of Filtration Group, which brings an 85% aftermarket sales mix, continues this transformation.

Slide 12. And all of this has worked. When you look at the metrics over the last decade, we have a 6% revenue CAGR, adjusted operating margin expansion of 1,130 basis points, 16% adjusted EPS CAGR, and 10% free cash flow CAGR. It's our people, strategy and portfolio that drive top quartile performance.

Slide 13. The first 4 acquisitions on this slide have been a big part of our transformation. Curtis is still early days, and we are very excited about the Filtration Group. Just a reminder that we have compounded EPS at 16%, and approximately 60% of this has come from the Win Strategy in our legacy businesses, while approximately 40% has come from acquisitions. The acquisition of Filtration Group will continue our track record of accretive acquisitions.

Slide 14. This is the same slide where we started, another strategic addition to the Parker that demonstrates our capital deployment strategy of driving shareholder value.

In our final slide, 15, a reminder on what drives Parker. Safety, engagement and ownership are the foundation of our culture. It's our people and living up to our purpose that drives top quartile performance that allows us to be great generators and deployers of cash.

Okay, Nikki. Before we begin the Q&A, we need to apologize to Mig Dobre with Baird and all the shareholders we were planning to meet with this morning at the Baird Conference in Chicago. We are obviously not in Chicago. We're here in Cleveland this morning. As you can imagine, we've been working very hard on diligence, and we are not going to be able to attend that conference today, but we look forward to engaging with all of you very soon in the future.

Okay. Nikki, we are ready to begin the Q&A session.

[Operator Instructions] We'll take our first question from Mig Dobre with Baird.

Appreciate the kind words, Todd. If there ever was a good reason to cancel the conference, well, I guess this would be it. Congratulations on the deal.

My first question, the business you acquired here, Filtration Group, has got an interesting exposure to life sciences and HVAC. Can you maybe talk a little bit about how this fits in your portfolio, some of the gaps that it's filling? And in life sciences specifically, I know Jenny and I -- we've talked about this before. What are your ambitions in this vertical, maybe even beyond Filtration Group longer term?

Well, we'll stick with today's ambitions, Mig. But life sciences and specifically, health care filtration, is mostly a new thing for Parker Filtration. So within that, Filtration Group brings some porous polymer components that are used in drug delivery devices. As I mentioned before, some diagnostic testing and venting for medical devices. So this is a pretty new space for us. But there are many solutions here in medical. And what we like about it is material science solutions, right? That's a sweet spot for us, and these products really characterize that. And we think this is a good expansion of life sciences market for us. So we're really excited about adding it to the portfolio.

Understood. And then maybe a follow-up on the go-to-market for Filtration Group. Maybe a little bit of detail on that and how that matches or maybe is different than your core Parker business.

Yes. So the one thing that I would say is very similar to Parker is these deep customer relationships, these engineer-to-engineer relationships, products that are deeply embedded with the customers, long track record of innovation and really specialized application expertise, which is something that we have said, gives us a competitive advantage for many years inside of Parker. Distribution is about 30% of the business, and about 70% of the business goes direct with obviously a lot of aftermarket flowing direct.

Mig, one thing I would also add is if you look at the breakdown geographically, the breakdown of the Filtration Group almost exactly mimics the breakdown of Parker's Industrial segment. So it adds nice scale, and it's in geographies that we already operate in, and we think we can leverage some synergies out of that.

We will move next with Jamie Cook with Truist Securities.

Congratulations on a nice acquisition. I guess just 2 questions. Jenny, I don't know if you can give us any history behind the deal, how long you guys have been talking other bidders, just the history behind this and why the timing now is correct?

And then I guess just my other question, food protection and life science is a new sort of area for you. Just wondering if as we think about M&A in the future, should we expect Parker to continue to want to grow in these markets?

And then I guess just last, is there any sort of investment required from Parker's Hannifin side in this business?

Right. So Filtration Group is a business that we've admired for a long time. It's been in our pipeline for a long time. And as you've heard me say -- many times, it's about the timing, right? But it is about developing relationships throughout the years and staying close to these type of businesses. This was an auction process. But obviously, we're very excited today to be announcing this deal.

As far as life sciences and future acquisitions, it's always going to be about really following that disciplined criteria we have, right, and making sure that it fits inside of our portfolio, complementary technologies, and that meets all that financial criteria that we talk about. So we're not announcing a major shift in any strategy here. We've found a business here that is a very solid business, great technologies, great innovation and engineering, having to have a great life sciences business, and we're excited about it.

Jamie, I would just add, the investment profile is very similar to Parker. This is low R&D, almost exactly what we see in our total business, and the CapEx is similar to our industrial businesses. So no overly needed investments, just continue to invest just like we invest in the rest of Parker.

Congrats again.

Our next question comes from Scott Davis with Melius Research.

Jenny and Todd, I'm sure Jeff is there somewhere. But congrats. It's a good asset. I -- since it's a private asset, though, we don't have a great sense of the kind of history as it relates to core growth. And perhaps you could give us a sense of what the growth rates have looked like in the past and maybe how you would expect that to be equal or better in the future?

So Filtration Group has had a mid-single-digit organic growth CAGR from before COVID to today. The business, with 85% aftermarket, has historically been very resilient through the cycles. So we don't expect much cyclicality here. And I would say that recent growth rates have been better than Parker's industrial business. So it's a healthy growth business.

And is it a business, Jenny, where you're able to generally get a regular inflationary price increase every year because there is so much aftermarket?

I mean, listen, we'll use the same tools that we've used with every acquisition. Strategic pricing is a strong muscle for us. So just like you've seen us do in the past, we'll be implementing those tools.

Fair enough. Best of luck. I'll pass it on.

Our next question comes from Andy Kaplowitz with Citi Group.

Congrats on the deal. So cost synergies of $220 million seems relatively good, but I think Meggitt had slightly higher versus sales. And I imagine you have, as you've said, Jenny, a lot of overlap with Filtration Group. So could it be viewed as maybe a little conservative, and do you see a relatively significant portion of these synergies that could come in year 1 after close?

Well, listen, this is 11%. We've historically been at about 10%. So we think that this $220 million is a really, really good target. Like usual, we'll be phasing this in. There'll be multiple phases to the synergy plan, and we'll have our really robust and disciplined cadence wrapped around it. And we're going to use the Win Strategy, all the tools in the Win Strategy to get these synergies. So the team is going to go and get it.

Jenny, let me ask you a follow-up on that. Like just a little more color on the margin opportunity. Their margin is obviously significantly below yours. But maybe just talk about their market positioning. Is there anything that's been holding them back in terms of their margin because you seem pretty confident in getting it to 30% over the next few years?

I don't have any comments about their operational strengths or how they've gone to market or run their business. But I would tell you that I'm just very confident in our ability. There's a clear path to margin accretion here with the Win Strategy. These tools have been successful in previous acquisitions, and we know they're going to be with this one.

We will move next with Julian Mitchell with Barclays.

Congratulations. Maybe my question would just be trying to understand a little bit more on those synergies on Slide 9. Any way you'd characterize the focus areas maybe of what's driving those synergies in terms of the split of items you mentioned like supply chain and lean? Any impression of COGS versus SG&A savings, perhaps in comparison with recent large acquisitions you've done like Meggitt? And do we assume for now just a linear realization of that $220 million goal over 3 to 4 years?

Julian, I'll take that one. This is Todd. I think we've talked before, we are completely agnostic when it comes to taking cost out of the lines on the P&L. We look at every single line on the P&L, whether it's cost of goods sold, whether it's SG&A, and we don't see anything different with this transaction.

Jenny said this, we're going to combine this with our existing filtration business. That business is going to be nearly $5 billion in annual sales. The scale there is significant. I mentioned how complementary it is to our existing businesses. So we see some opportunities there in the combination. But it really is leveraging the power of the Win Strategy, and that's all the levers that we use to expand margins across all of our businesses.

Jenny called out, when you look at that expansion that we've had over the last 10 years, it's now 60% of that expansion has come from businesses that we did not acquire, and 40% came from the great transactions that we were successful on. So we don't see this any differently. It will be just like the last transaction.

And we're not providing a dollar phasing at this point in time for the synergies, Julian. But obviously, there will be multiple phases to the synergy plan. And like I mentioned, we have a really disciplined cadence wrapped around integration, and the team is going to go get it.

That's great. And then just my follow-up would be around the market share maybe in aggregate. So you have Slide 7, the details around the market footprint. I think you said that overall, you'll have a $5 billion-plus filtration revenue base pro forma for this deal. Wonder if you could give us any sense around maybe the addressable market size? How much larger do you think you might be than some of the other leading players here? Any color around that, please?

Yes, I would just say that we expect this to increase our total addressable market, but we're not disclosing that at this time. We don't have that. Filtration Group has a really strong position across diverse and growing end markets. And like I mentioned, it adds near adjacencies and expand the markets that we currently play in and bringing new products. So those complementary technologies are definitely going to help our position.

Our next question comes from Joe O'Dea with Wells Fargo.

I'll add my congrats on the deal. Just wanted to start with confirming that we're thinking about the -- some of the sort of key drivers of the ROIC framework correctly. It seems like something like 7% growth, 35% base incrementals, and then the synergies can get you to around 8% ROIC. And so are we thinking about those drivers correctly? And if we are, just any additional thoughts on that 7% growth, maybe it's a little better than what they've achieved over time, and how you think about getting to that?

Joe, this is Todd. I think you're pretty close there. We're a little bit more conservative on the growth line. We have them right in line with our stated 4% to 6% target. We do expect to rebound as industrial markets recover here. You've already seen, we're starting with a very good EBITDA, it's 23.5% EBITDA. We're modeling those at a similar tax rate to Parker as a total. I did call out there's $140 million of tax benefits that will phase in over roughly the first 3 years. And I don't remember if I called it out or not. But if you look at our expected cost of borrowing, it's about 4.5%, that's based on today's rates. So it's pretty attractive considering where we've been. And all that, you work in the synergies, and that's how we see a path to really being accretive to margins, being accretive to cash flow, being accretive to EPS and obviously delivering that ROIC hurdle.

I appreciate that. And then just in terms of the filtration business that you have today, where are those margins as we think about that? Any kind of blueprint or support for taking Filtration Group margins up? And along with that, as you've presumably competed against them a little bit over time when we think about the mapping you gave on end market exposure, sort of why you've won, why they've won, to understand some of the competitive advantages between the 2?

Well, I think, listen, like I said, we've admired this business for a long time, and this brings a lot of complementary technologies. I think we both won because we've had these deep customer relationships. We've been good at innovation, proprietary media, proprietary products and being able to solve customers' problems. The Filtration Group has built a very impressive suite of brands that are well known in these markets, and these are markets that we know. So I think this just puts us in an even better position from a competitive advantage and really helps us hit that 4% to 6% organic growth.

What we've committed to on this transaction is EBITDA margins greater than 30%. I would just call back to what we saw when we had the Meggitt announcement. We committed to getting Meggitt specifically above 30%. And at that time, our aerospace business was below 30%. And we very quickly realized that synergies come from the entire business, not just the acquired business. And if you look at that business today, that business in total is operating greater than 30%, and we really have a clear path to our filtration business doing the same.

We will move next with Joe Ritchie with Goldman Sachs.

Congratulations. Yes, look, I think 11% synergies is certainly a healthy number. I just -- it doesn't seem like you've got much footprint rationalization embedded in that number. And I just want to touch on that point, just going back to some of the learnings from CLARCOR back in the day in terms of making sure that you guys feel very comfortable in achieving those synergies, and there isn't a lot of footprint associated with those synergies as well.

Yes. So what's been so good is that with every acquisition, this playbook has just become stronger and stronger, right? And we really have some great, great people running these integration teams that when it comes to things like footprint, and it's no different with this deal, the footprint of Filtration Group's businesses will be reviewed and thought out very carefully. We're not giving individual bucket areas right now, but we value the global footprint with this business, and we want to ensure that we continue to be able to meet the global demand and the in-region supply for customers. As you know, that's our model, and that's important to us to be local for local and be able to serve those customers in those regions.

Got it. That makes a lot of sense, Jenny. And look, my follow-on question, it's interesting to see an aftermarket business, 85% of the mix, but predominantly, most of the business sells direct. As you kind of think about the different channels going forward, and maybe it's too early or too premature to start talking about this, like is there an opportunity to even -- maybe even optimize the channels going forward and maybe sell more through distribution? I'm just trying to understand like the path forward from here.

Yes. We obviously will be looking into that. As you know, our distribution network has been very successful for well over 60 years, makes up 50% of our industrial business. And while we think Filtration Group has a great go-to-market story here, we'll obviously be looking for those opportunities. It's something we know how to do.

Joe, just to reiterate, the $220 million, those are cost synergies. We don't have any sales synergies baked into the justification of this transaction. We know there will be some, but we didn't use them to justify the transaction.

Our next question comes from Chris Snyder with Morgan Stanley.

This is obviously a pretty sizable deal for you guys at over $9 billion. Can you talk about bandwidth to continue to push forward on additional M&A, both from just a balance sheet and then just like a management operational bandwidth perspective?

Chris, that's a great question. We're very much focused on the integration planning for this transaction. The Curtis transaction is in process as we go now. That team is set. When we put these integration teams together, we take the best talent from both organizations and we give them the playbook and we give them opportunities to shine, and it's been unbelievably successful.

The company as a whole has never been larger. It's never been more profitable. Core Parker itself is generating over $5 billion of EBITDA. That's in our FY '26 guide. Both of these transactions are obviously accretive to that. But I would tell you, we remain committed to maintaining that net debt to EBITDA and operating in the around 2.0x space. We've done that for the last 1.5 years roughly. This will push us slightly, right? It won't be nearly as high as what we've been in the other transactions. And just the cash flow generation of the company is so strong. We will very quickly return to a 2.0x. This is roughly just 6 quarters.

So we talk about it all the time that the relationship building, the pipeline, the work that occurs across the organization never stops when it comes to what's next. But right now I would tell you, we're very much focused on integrating these 2 transactions properly, making sure the model achieves what we expect it to believe -- what we expect it to achieve and generating great returns.

I appreciate that. And then to follow up, Jenny, you often referenced that Parker's distribution network is the envy of the industry. So I just kind of wanted maybe some color on how expanding the company's portfolio impacts or helps with that distributor network, whether it's bringing new distributors into the fold or maybe even more importantly, making Parker more important to the existing distributor network, which could have positive implications elsewhere. So just any thoughts on that, the scaling of the portfolio and what it ultimately means for the distribution network.

Well I'll tell you, we are always all about making our distributors stronger and healthier. They are truly an extension of our engineering teams. They are our partners. And whatever we can do with products in this portfolio, like I said, that we'll evaluate that. And whatever we can do to help them have more products on their shelf, be able to solve customer problems with these products and these solutions, we're going to do that. So most of the time, our distributors are very excited about new products coming into the Parker family.

Nikki, this is Todd. I think we have time for one more question here, so we'll take whoever's next. Thank you.

All right. We will move next with Jeff Sprague with Vertical Research Partners.

Congrats. A lot of ground covered. I did want to come back to the synergies just one more time. I also thought 11% was a large number for, I think an ostensibly very well-run private company versus Meggitt, right, like ostensibly a poorly run public company with layers and the like. I guess my question is, obviously, you had to undertake Meggitt with very little actual due diligence, right? You had to make your own judgments from the outside looking in, which were obviously thoughtful, but now you didn't have a whole lot of information. Given this situation, have you really been able to get deeply inside the organization and sort of map out the synergies? Or is this still more sort of kind of a high-level Parker playbook, we've done it before, and we're going to do it again in terms of how you approach things?

Well, it is. We've done it before, and we're going to do it again. That's for sure. Obviously, we were able to do more diligence on this deal than we were with Meggitt for sure. One of the most exciting things to me was to be able to meet some of the team members to meet some of the leaders and see the talent that is in the organization. That's from my comments, speaking to culture and how important that is. So that is, I think, the foundation for a successful integration, the buy-in to the Win Strategy, the similarities in our culture. So we feel really good about the way we've mapped out these synergies here, and I'm confident that the team's going to go get them.

And then just on the aftermarket side, too. Obviously, a lot of the aftermarket is going to be tied to utilization of assets, and we've had a period, obviously, of weak utilization in in-plant in a couple of these markets. Did the aftermarket business stay positive through sort of this kind of channel inventory liquidation dynamic that we just went through in parts of '23 and '24 and even into '25?

Jeff, we don't have details on the inventory levels and obviously, not as close to it as we were with our own business. But as I mentioned earlier, with this 85% aftermarket mix, very resilient through the cycle. And mid-single-digit organic growth from COVID to today. And growing faster than Parker's Industrial business. So a nice resilient business here.

Yes. No, it looks like a perfect fit. Congrats and good luck with it. I appreciate the time.

We appreciate it. Okay. This concludes our webcast on the acquisition of the Filtration Group Corporation. Our Investor Relations team with Jeff Miller and Jenna Stuckey will be available if anyone has any follow-ups or model questions. We really do appreciate your time and attention, and we wish everyone a wonderful day. Thank you.

And this does conclude today's program. Thank you for your participation. You may disconnect at any time.

Good morning, and welcome to Parker-Hannifin Corporation's Fiscal 2026 First Quarter Earnings Conference Call and Webcast. [Operator Instructions]

Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to turn the call over to Todd Leombruno, Chief Financial Officer. Please go ahead.

Thank you, Chloe. Good morning, everyone, and welcome to Parker's fiscal year 2026 First Quarter Earnings Release webcast. This is Todd Leombruno, Chief Financial Officer, speaking. And with me today is Jenny Parmentier, our Chairman and Chief Executive Officer. And always, we appreciate your interest in Parker, and thank you for joining us today.

We address our disclosures on forward-looking projections and non-GAAP financial measures on Slide 2. Items listed here could cause actual results to vary from our forecast. Our press release was released this morning, along with this presentation and reconciliations for all non-GAAP financial measures. Those are available on our website under the Investors section on parker.com.

The agenda for today has Jenny starting with an overview of our record FY '26 first quarter performance. She will share some highlights from our day 1 celebrations, welcoming the Curtis team members to Parker. Jenny will also then reiterate the strengths of our interconnected portfolio and share an example from our energy market vertical. I will follow Jenny with more details on our strong first quarter results, and then we'll both provide some color on our increase to our FY '26 guidance. After that, we will move to the Q&A portion of the call and address as many questions as possible within the hour. I now call your attention to Slide 3.

And Jenny, I will hand it over to you.

Thank you, Todd, and thank you to everyone for attending the call today. Q1 was a great start to the fiscal year. Operational excellence was on full display, powered by the Win Strategy. We achieved top quartile safety performance with a 20% reduction in our reportable incident rate. This performance is aligned with our goal to be the safest industrial company in the world. Our team delivered record Q1 sales of $5.1 billion, organic growth of 5% and 170 basis points of margin expansion, resulting in 27.4% adjusted segment operating margin. Adjusted earnings per share grew 16% and cash flow from operations was $782 million. And we completed the acquisition of Curtis Instruments.

Next slide, please. A long-standing practice within Parker is for a Parker leader to personally welcome the new team at every location. This slide shows pictures from our day 1 events held around the world, welcoming the Curtis team to Parker. This was a great day for all of us, and we are thrilled to have Curtis in the Parker portfolio.

Next slide, please. Obviously, we are very proud of the Q1 results delivered by our team and equally excited about our future. So just a reminder on why we win. First, the Win Strategy is our business system. We have a decentralized operating structure, 85 divisions run by general managers with full P&L responsibility, acting like owners, close to their customers and executing the Win Strategy every day. Next, we have innovative products that solve customer problems, 85% covered by intellectual property. Our application engineers provide the expertise that allows us to have a competitive advantage with our interconnected technologies that provide efficient solutions for our customers. And finally, our distribution network is the envy of the competition and the best in the world. It took us over 60 years to build it, and it is truly an extension of our engineering teams, providing solutions to all of those small to midsized OEMs that are participating in capital spending and investments. These partners are experts at applying our interconnected technology.

Next slide, please. We have the #1 position in the $145 billion motion and control industry, a growing space where we continue to gain share. These 6 market verticals represent greater than 90% of the company's revenue. Our interconnected technologies cut across these market verticals and give us a clear competitive advantage. 2/3 of our revenue comes from customers who buy 4 or more technologies, and our growth is focused on faster-growing, longer-cycle markets and secular trends.

Next slide, please. This slide focuses on our presence in the energy market vertical. Parker is a significant supplier of products into heavy-duty gas turbines used for electrical power generation. We bring both proprietary designs and world-class manufacturing capabilities to offer a comprehensive suite of interconnected technologies.

Parker supports multiple global industry-leading customers, and we are seeing significant growth in this space. This business is long life cycle with multiyear backlog and durable aftermarket. This is a great example of products and technology that are shared across aerospace and industrial markets.

I'll hand it back to Todd to go through our first quarter highlights.

Thank you, Jenny. This was a great start to the fiscal year. I'm on Slide 9, and I will start with a summary of our Q1 results. Once again, and I love saying this, every number in the gold column on this slide is a record. It was just a fantastic quarter where mid-single-digit sales growth, combined with strong margin expansion, resulting in mid-teens EPS growth.

Sales were up 4% versus prior. Organic growth was positive at plus 5%. Currency was favorable at 1%. And divestitures were 2% unfavorable. Those are the divestitures that we've previously completed. And I would just note, this is the last full quarter that we will have a full quarter of a divestiture impact.

Moving to adjusted segment operating margins. As Jenny said, we did 27.4%, that's an increase of 170 basis points versus prior year. Adjusted EBITDA margin was 27.3%, that was up 240 basis points. And adjusted net income was $927 million or 18.2% return on sales. All of this drove adjusted earnings per share up 16% to reach a record $7.22 per share.

It was a really nice start to the fiscal year with a strong quarter across the board, and it gives us confidence for the remainder of the fiscal year. Our global team members really continue to drive results enabled by the power of the Win Strategy.

If we could jump to Slide 10, you'll see a bridge on the year-over-year improvement in adjusted EPS. The majority of our EPS growth came from continued strength across our operations as segment operating income dollars increased by $132 million or 10%. That contributed $0.80 to our EPS growth this quarter.

Corporate G&A and other were favorable $0.18. That was primarily due to foreign currency exchange in the prior period quarter last year, that was unfavorable last year, that created a favorable for this year. Interest expense was also favorable by $0.07, and that's driven by lower average debt balances across the quarter and lower interest rates across the quarter.

Share count was $0.13 favorable, and that was driven by the discretionary share repurchases that we completed over the last 3 quarters. Income tax was unfavorable by $0.16, and that was really simply due to a few favorable discrete items in the prior period that did not repeat. And that is basically it, a really clean bridge to the 16% increase in adjusted EPS. This record was really achieved by strong sales growth across the board, margin expansion and great adherence to cost controls across the company.

If we move to Slide 11, we'll just talk about the segment performance. Orders were strong at plus 8% versus prior year, with order rates increasing across all reported segments. Organic growth came in at plus 5%. This was the first time in 2 years we've had positive organic growth across all of our businesses as diversified industrial organic growth turned positive.

Every business delivered record adjusted segment operating margins, resulting in great incrementals and that 170 basis points of margin expansion.

Looking specifically at the Diversified Industrial North America businesses. Sales were over $2 billion with organic growth positive at 2%. That's the first time in 7 quarters North America posted a positive organic growth number, that was better than our expectations going into the quarter. We continue to see gradual improvement across market verticals with positive growth driven by the aerospace and defense businesses in Industrial North America, in the implant and industrial equipment vertical and also improvement in off-highway that exceeded expectations.

If you look at North America, they also had 170 basis points of margin expansion and reached a record 27.0% segment operating margin. That was really driven by higher productivity, some new business wins at great margins and margin mix with strong aftermarket across all those businesses in North America. And North American orders increased sequentially to plus 3% versus prior year.

Looking at the Diversified Industrial International businesses. Sales were up. They were a record at $1.4 billion, up 3% versus prior. Organic growth remained positive at plus 1%. Looking at Asia Pacific, that was our strongest region with a plus 6%. EMEA remained down at minus 3% and Latin America was flat versus the prior year. So Asia Pac really drove the outperformance of growth in the international businesses.

Adjusted segment operating margins were also a record at 25.0%, that is a 90 basis point improvement from prior year. And I can't say this enough, our international teams continue to show great resilience, they're driving margin expansion and its really great cost controls, and they're really executing the Win Strategy to great success.

International orders rebounded, they improved to plus 6% after a flat Q4. Both EMEA and Asia Pac had positive orders this quarter.

And lastly, Aerospace Systems, just another exceptional quarter from this group. Sales were a record $1.6 billion. That's an increase of 13% versus prior. Organic growth of 13%. That's the 11th quarter in a row that we've had double-digit organic growth rate in Aerospace. Commercial OEM is the strongest market segment growing 24% versus prior year.

Adjusted segment operating margins increased by 210 basis points and, I'm proud to say, reached 30% for the first time ever. Record top line, productivity, continued aftermarket strength all drove the margin expansion. And Aerospace orders continue to be impressive, increasing plus 15%, and backlog also reached a new level -- record level for Aerospace. There's just robust demand, and that continues across all of our aero and defense markets. It's great to be in the Aerospace business right now.

If we move to Slide 12, let's look at our cash flow performance. Cash flow from operations, a record $782 million, that's 15.4% of sales. That's up 5% versus prior year. Free cash flow is $693 million, that is 13.6% of sales. That is up 7% versus prior year. Cash flow conversion for the quarter is at 86%. I just want to remind everybody, I think everyone knows this, but our cash flow is historically second-half weighted. We remain committed to free cash flow conversion of greater than 100% for the year. And lastly, on this slide, we did repurchase $475 million of shares on a discretionary basis within the quarter.

That is a wrap on Q1. And Jenny, I'm going to turn it back to you on Slide 14, and we'll move on to our updated fiscal year guidance.

Thank you, Todd. This slide shows our updated fiscal year '26 organic sales growth forecast by key market verticals. In Aerospace, we are increasing our forecast from 8% to 9.5% organic growth. We continue to see strength in commercial OEM and aftermarket. Implant and Industrial remains the same as our initial guidance at positive low single-digit organic growth. The sentiment does remain positive with continued quoting activity, while customer CapEx spending remains selective.

Transportation is our most challenged market this year. Forecast stays the same at mid-single-digit organic decline. We are increasing the off-highway forecast from negative low single digits to neutral. We see gradual recovery progress in construction, while the ag challenges do persist.

We are maintaining energy at positive low single-digit growth, with robust power gen activity offset by oil and gas. And we are increasing HVAC/refrigeration from positive low single digits to positive mid-single digits. We see strength in commercial refrigeration and filtration with some nice new business wins with our filtration technology.

As a result of these changes, we are increasing our organic sales growth guidance from 3% to 4% at the midpoint. I'll give it back to Todd for some more guidance details.

Thanks, Jenny. I'm on 15, Slide 15, with just some of those details. In respect to reported sales, we are increasing the range to 4% to 7% or 5.5% at the midpoint. Currency is expected to be a favorable 1.5 points, and that is based on September 30 spot rates.

Now that we have the acquisition of Curtis closed, we are including sales and segment operating income from Curtis in our guide. We have added $235 million to our guide for the remainder of the year, that is approximately 1% of sales. And divestitures that we've already previously completed are 1% unfavorable.

If you move to organic growth, the forecast has now increased to a range of 2.5% to 5.5% or 4% at the midpoint. We have increased Aerospace organic growth to 9.5% at the midpoint. And for the Diversified Industrial segment, we have increased North America organic growth for the year to plus 2%. And for international, we still expect organic growth to be 1% at the midpoint.

We are raising adjusted segment operating margins. We're raising that 50 basis points to 27.0% for the year. That is now a forecasted increase of 90 basis points versus prior year, and incrementals are now forecasted to be approximately 40% for the full year.

Just a few additional items. Corporate G&A is unchanged at $200 million. Interest expense has been increased by $30 million, we now expect $420 million for the full year. And that is driven solely by the funding of the Curtis acquisition. And other expenses just slightly up to $90 million from $80 million last quarter.

Our full year tax rate, we expect 22.5%. And we are raising adjusted earnings per share to an even $30 at the midpoint. That would be a 10% increase versus prior year. The range on that EPS is plus or minus $0.40 on either side, and the split is 48-52 first half, second half.

In respect to full year free cash flow, we're also raising our guidance there to a range of $3.1 billion to $3.5 billion, with conversion, like I said, greater than 100%.

And finally, looking specifically at Q2 for FY '26, we expect organic growth to be -- or excuse me, reported sales are expected to be 6.5%. Organic growth is expected to be 4%. Adjusted segment operating margins, 26.6%, and EPS for the second quarter on an adjusted basis is $7.10. As usual, we have the -- some additional details in the appendix.

And really just in summary, FY '26 is off to a great start. That gives us confidence to raise full year guidance for sales margin, EPS and free cash flow.

With that, I ask you to move to Slide 16, and Jenny, I'll turn it back to you.

Thanks, Todd. And a reminder on what drives Parker. Safety, engagement and ownership are the foundation of our culture. It's our people and living up to our purpose that drives top-quartile performance, that allows us to be great generators and deployers of cash. Thank you.

All right. Chloe, we are ready to begin the Q&A session. So we'll take the first question.

[Operator Instructions]

We'll take our first question from Julian Mitchell with Barclays.

Just wanted to start off perhaps with the organic sales picture in the DI North America business. Maybe help us understand a little bit better the cadence of demand. It did seem to surprise you positively, I think, in the quarter. How has demand moved there in recent months? And then when we're looking at the full year guide, I think your midpoint for DI North America doesn't embed any acceleration from the September quarter growth rate. Just wondered the thinking there.

Okay. Julian, so yes, we're very pleased with the performance. We had guided to a negative 1.5% and came in at a positive 2%. So North America performed better than expected with the Aerospace and Defense business it sits inside of our Industrial businesses, distribution, HVAC and electronics. Construction continued to outperform versus our expectations. And margin expansion from a higher productivity on slightly stronger volume really helped us. We had some project wins at attractive margins, and we're getting a margin mix benefit with the lower industrial OE and a very resilient aftermarket.

So you are right, we do expect Q2 to be much like Q1 coming in at 2%. So that was prior, as Todd stated, for the year, we were looking at a total of 1%. So as I was just talking about, what we saw in Q1, we do believe that industrial aerospace and defense world remains strong. We're still talking about a gradual Implant Industrial recovery. Certainly positive sentiment from our distribution channel continues. Quoting activity is good. But as I commented earlier, still customers are being very selective on their projects and their CapEx spending.

We still see transportation challenges in automotive and trucks. So we don't expect a truck recovery this fiscal year, but we will see some benefit from the aftermarket. In off-highway, gradual recovery progress in construction, but ag challenges still persist. Energy, power gen, robust. But oil and gas upstream still weak. And we're -- HVAC and refrigeration, we're coming off a very strong fiscal year, and we have increased that for the rest of the year. So while some markets are increasing, not all of them are, and that's why we see Q2 pretty much the same as Q1, but an increase for the total year.