Parker-Hannifin Corporation (PH) Q4 2024 Earnings Call Transcript

Parker-Hannifin Corporation (NYSE:PH) Q4 2024 Earnings Conference Call August 8, 2024 11:00 AM ET

Company Participants

Todd Leombruno – EVP and CFO
Jennifer Parmentier – Chairman and CEO

Conference Call Participants

Julian Mitchell – Barclays
David Raso – Evercore ISI
Scott Davis – Melius Research
Mig Dobre – Baird
Jamie Cook – Truist Securities
Joe Ritchie – Goldman Sachs
Stephen Volkmann – Jefferies
Nathan Jones – Stifel
Jeffrey Sprague – Vertical Research Partners
Nicole DeBlase – Deutsche Bank
Brett Linzey – Mizuho Securities

Operator

Welcome to the Parker-Hannifin Corporation Fiscal 2024 Fourth Quarter and Full Year Earnings Conference Call and Webcast. At this time, all participants are in listen-only mode. (Operator Instructions). A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It’s now my pleasure to turn the conference over to Todd Leombruno, Chief Financial Officer. Please go ahead, Todd.

Todd Leombruno

Thank you, Kevin, and good day, everyone. Welcome to Parker’s fiscal year 2024 fourth quarter and year-end earnings release webcast. As Kevin said, this is Todd Leombruno, Chief Financial Officer, speaking. And with me today is our Chairman and Chief Executive Officer, Jenny Parmentier. We appreciate your interest in Parker, and we thank you all for joining us today.

If I could draw your attention to Slide 2, you will find our disclosures on our forward-looking projections for non-GAAP financial measures. Actual results could vary from our forecast based on the items we have listed here. Our press release, the presentation we’re going to go through today, and reconciliations for all non-GAAP financial measures were released this morning and are available under the Investor section on our website at parker.com.

We’re going to start the call today with Jenny summarizing our record fiscal year 2024 that was really driven by our portfolio transformation and really some exceptional strength in our Aerospace businesses. She’ll also touch on our bright future and what really is driving the company today. I’m going to follow Jenny with some more details on specifically the strong fourth quarter we just posted. And then both of us are going to provide some color on the Fiscal Year 2025 Guide that we released this morning that sets us off on our journey to achieve our FY’29 targets.

After those remarks, we’ll open the call for Q&A session. We’ll try to take as many questions as possible within the one-hour time slot.

And with that, Jenny, I’m going to hand it over to you and ask everyone to reference Slide 3.

Jennifer Parmentier

Thank you, Todd. And thank you to everyone for joining the call today. Parker delivered an outstanding year in fiscal 2024 on the dedication of our people, the strength and balance of our portfolio, and the value of our business system, the win strategy. We met or exceeded many of our commitments for FY’24. We produced top quartile safety performance aligned with our goal to be the safest industrial company in the world.

The strength of our portfolio was highlighted by a stellar year delivered by our Aerospace system segment. On low single-digit sales growth, the team delivered 200 basis points of margin expansion. Our earnings per share grew 18% on top of earnings growth of 15% in fiscal year 2023. And we generated record-free cash flow of $3 billion. Parker has a very promising future ahead, as you’ll see from our strong fiscal year 25 guide and the targets we have set for fiscal year 2029. Next slide, please.

And it was a record year for Aerospace. Our first full year with Meggitt, achieving over $5 billion in sales, more than two times the sales of fiscal year ‘20. All market segments delivered double-digit sales growth, and the strength continues as we look ahead. We are positioned for growth with significant content on leading programs, and our extensive portfolio will continue to create value for our customers, as well as our large install base will drive continued aftermarket growth.

Next slide, please. As illustrated on this slide, the transformation of our portfolio further expanded longer cycle and secular revenue mix in fiscal year ‘24. And although Aerospace is a big part of the transformation, it’s not the whole story. The acquisitions of CLARCOR and Lord and our on-purpose strategy to expand distribution in Europe and Asia have greatly contributed to the longer cycle secular and industrial aftermarket mix. We see this transformation continuing and expect 85% of our portfolio to be longer cycle secular and aftermarket by fiscal year ‘29.

Early last week, we announced that we have signed an agreement to divest the North American composites business that came with the Meggitt acquisition. As mentioned during our investor day, we continue to optimize our portfolio. Our best owner playbook identifies businesses that find greater value with a different owner. Through this process, we determined that this business is not aligned with our core products and we are not the best owner. It’s a great team and we are confident that they will be successful in the future.

Next slide, please. These are the four key messages we presented at our investor day in May. We are positioned for growth with our interconnected technologies and the secular trend. We have demonstrated the win strategy. Our business system is compounding our performance and driving us to top quartile.

Operational excellence, years of driving a continuous improvement culture through our lean tools creates growth and expands margins. We have confidence in achieving the fiscal year ‘29 target launched at our investor day in May.

Next slide, please. As a reminder of 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, allowing us to be great generators and deployers of cash.

I’ll turn it back to Todd to review our outstanding fourth quarter results.

Todd Leombruno

Thank you, Jenny. It really was a fantastic year for the company. On Slide 9, I just would like to take some time to talk about the fourth quarter. Q4 was an exceptionally strong quarter for the company. Once again, every number in this gold box on this page is a Q4 record. They also happen to be the highest levels of performance that we experienced this fiscal year. Total sales growth was up nearly 2% from prior year. We reached almost $5.2 billion in sales in the quarter. Organic sales were positive at roughly 3%. That was a little bit better than what we were expecting with our guidance. Divestitures were just very slight, unfavorable impact, and currency really turned into another headwind, almost 1%, unfavorable on currency.

If you look at adjusted segment operating margins, Jenny mentioned this, but we did improve them 130 basis points from prior year. And for the first time in the history of the company, we generated 25.3% segment operating margins for our quarter.

Same story with EBITDA margins. The increase was a little bit greater, 190 basis points. For the quarter, we did 26.3% adjusted EBITDA margins. You look at adjusted net income, $884 million of adjusted net income. That is up 12% from prior year, and that is a little bit better from prior year, and that is a 17 return on sales.

Earnings per share, Jenny mentioned this as well, $6.77 that was up $0.69 or $0.11 from prior year. And it was just really an exceptionally strong quarter. It was a great way to finish the fiscal year, really driven universally across the globe by our engaged team members, and it was really just a nice way to finish the year. And it’s another data point on Parker being able to deliver on our commitments.

If we jump to Slide 10, this is just the bridge on that 11% improvement and adjusted earnings per share. Again, the story is very similar to what we saw all year, strong operating execution continues to drive earnings per share growth. If you look at segment operating income dollars, we increased by $90 million, or 7%. That’s basically $0.54 or 80% of the EPS growth quarter-over-quarter.

And we’ve talked a lot about this already, but the Aerospace system segment, once again, is really responsible for over 90% of the earnings per share growth when it comes to segment operating income. The diversified industrial North American businesses made up the rest.

If you look at some of the below segment operating income line, corporate G&A was $0.16 favorable in the quarter. That really, again, was a result of some favorable items from the prior year just not repeating. Interest expense favorable, again, $0.17 versus prior year. That really is the result of our successful deleveraging efforts that we’ve been working hard on all year.

Tax was unfavorable, $0.12 against the prior year, and that was really just from slightly higher operating tax rate and, of course, the higher EBIT. And then other expense and share count were just both a bit higher than last year, but really the story here has been consistent throughout the whole year, strong operating execution, driving margin expansion, really keeping an eye on cost controls, and being disciplined with our debt pay down. Just a nice way to finish the year.

If we jump to Slide 11, let’s look at the segment performance. You can see, again, margin expansion across every business here. Really proud to see that. Incrementals for the company and really every part of the business were incredibly strong. Order rates inflected positive. It’s 1% that’s positive. We’re really happy to see that. And our backlog remained at near record levels. We have $10.9 billion in shippable backlogs, so that was a nice way to finish the year.

Let’s look at the diversified industrial segment, specifically in North America. The U.S. sales volume really remained strong, $2.2 billion in sales. Organic growth was negative 3, but that was a full point better than our expectations. Softness in North America continues to be driven by off-highway markets and transportation markets. But despite those lower volumes, we were able to increase adjusted segment operating margins by 150 basis points, and the North American businesses achieved 25, that is a record. It is all driven by operational execution, executing the win strategy, and really working hard to deliver for our customers.

Order rates in North America also did improve to flat. That ends our negative string of year-over-year order declines, and we were really happy to see that.

If you look at the International businesses, sales were slightly over $1.4 billion. Organic growth was down 2.5% the prior year, but again, that was also better than our forecast. Off-highway markets continue to be soft. And if you look really across the regions, in Europe, we were negative 5%, in Asia-Pac, negative 1%, which did slightly improve from Q3, and Latin America just continues to be robust at 19% organic growth.

Same story on the margins. Margins increased 60 basis points in the quarter. Our International businesses generated 23.9% segment operating margins, and really just continue to be focused on simplification, productivity improvements, and I’m really happy to see this in the continued margin expansion from those International businesses. Order rates in International finished at minus 1%, with positive order rates in Asia driving the majority of the improvement. So nice to see that improve from Q3 as well.

But if we look at Aerospace systems, right, that business continues to shine. Sales reached a record $1.5 billion in Aerospace. First time we’ve had $1.5 billion of sales in our Aerospace business. Organic growth, 19%, with double-digit growth across all the platforms within Aerospace. Operating margins, a brand-new record, increasing 130 basis points to 27.1%, and it really is driven by great volumes and unbelievable strength in these.

Aerospace orders still remain strong. We did get the highest dollar level of orders for the year, and order rates continue to grow at plus 7%, so all things are looking up in Aerospace.

If we go to the next slide, Slide 12, I just want to highlight our cash flow performance for the year. We finished FY’24 with record cash flow performance. CFOA increased 14% to a record of $3.4 billion, that’s 17% of sales. Free cash flow, nearly $3 billion. That’s also a record. That was 15% of sales. It’s also a 15% increase from prior year, and we did achieve a conversion of 105%.

I really just want to thank our team. This has been a lot of effort by a lot of people across the company, really made some nice improvements in working capital, really nice efforts on AP and AR, but I really want to note this year we were able to reduce inventory by over $120 million, really showcasing the efforts and focus that we’ve had on supply chain excellence. Across the globe, we continue to focus on being great generators and great deployers of cash.

If we jump to Slide 13, you can see what we did with all that cash. We reduced debt by over $800 million in the quarter, $800 million in the quarter alone, and since closing Meggitt, we have now reduced debt by over $3.4 billion. We had a target to reduce debt by $2 billion in the fiscal year. We hit that target, and if you look at our leverage ratios, gross debt to adjusted EBITDA is now 2.1 times, and net debt to adjusted EBITDA is now 2, so it’s exactly what we had forecast. And it really wraps up just a solid Q4 and a great fiscal year.

So with that, I’m going to hand it back to Jenny, and I’m going to get to what I know everyone is focused on, and that is our outlook for FY’25.

Jennifer Parmentier

Thank you, Todd. So at our Investor Day in May, we introduced the six key market verticals of our business that you see on this slide. This slide represents our FY’25 sales growth forecast for each market vertical, resulting in organic growth of 2% to 5%.

We are providing a realistic guide for fiscal year ‘25. At the midpoint of this guide, we have Aerospace at 8.5%, industrial North America at 2%, and industrial International at 1.5%. We are confident in growing EPS, achieving mega synergies, and continuing our track record of expanding margins.

I’ll get it back to Todd to review the guide in a little more detail.

Todd Leombruno

Okay. Thank you, Jenny. So I’m now on Slide 16, and let me share some of the details of the FY’25 guide. Reported sales is forecast to be in the range of 1.5% to 4.5% or 3% at the midpoint. That will equate to approximately $20.5 billion in sales. That is really supported by outside support in our Aerospace businesses. Total sales for the company are modeled at 48% in the first half and 52% in the second half, so right in line with what we’ve historically done on sales splits.

If you look specifically at organic growth, we are forecasting organic growth in the range of 2% to 5% or 3.5% at the midpoint, and we’re expecting high single-digit growth from Aerospace, roughly 8.5%, and a gradual recovery in the industrial markets throughout FY’25. For the North American businesses, we are forecasting organic growth of 2% at the midpoint, and for the International businesses, we are forecasting growth of 1.5% organic at the midpoint for the full year.

If you look at the mix on organic growth, it’s 2.5% first half, 4.5% growth second half. And I will note that this guidance does include sales from the recently announced divestiture that Jenny mentioned. We are expecting that to close sometime in the second quarter, and we will give an update once that closes to the impact it has on the company.

We are based on June 30 currency spot rates, and we’re forecasting that to be a slight headwind of about 0.5% or $100 million on currency versus prior year.

Jenny mentioned margin expansion, 50 basis points of margin expansion is our plan. And in FY’25, we’re going to get that by continuing to do exactly what we’ve done over the last couple of years, is really implement and advance the win strategy. Adjusted segment operating margin guidance is 25.4% at the midpoint. There is a range of 20 basis points on either side of that, and segment operating income is split 47% first half, 53% second half. If you do the math on incrementals, we’re expecting slightly at 40% incremental margins. That’s a little bit higher than what we normally have had just based on the growth in Aerospace and of course, continued mega synergies.

Few additional items on the guide. Corporate G&A is expected to be approximately $230 million. Interest expense is $450 million. That is a reduction of approximately $50 million from FY’24 and other expense is expected to be about $5 million. Tax rate, we are modeling a 23% tax rate and full year as reported EPS of $23 or adjusted EPS of $26.65. Both of those figures are at the midpoint and the range on those, both of those ranges is $0.35 on the high end and the low end. And if you look at adjusted EPS, it is split 47% first half, 53% second half.

In respect to cash flow for the full year, we are giving a range of $3 billion to $3.3 billion. That is $3.15 billion at the midpoint. That will be approximately 15.3% of sales and of course, we expect free cash flow conversion to be greater than 100%.

If you look at the far right column on this page, you’ll see some specifics, specifically about Q1. And these are all at the midpoint. Reported sales, we are forecasting to be plus 1%. Organic growth is 1.5% positive. Adjusted segment margins of 25.2% and adjusted EPS is expected to be $6.05. As usual, we’ve provided several other details for guidance in the appendix.

If you look at Slide 17, this is a very similar story to what we just did in FY’24. Segment operating income is the main driver of our EPS growth. That is $1.51 of EPS growth. We’ll continue to have lower interest expense as a result of our great cash flow generation and our deleveraging efforts. That will add $0.34 to EPS. If you look at the tax rate, that will be an unfavorable number. Just a reminder that that will be a 23% model tax rate. That is a headwind of $0.41, really compared to a favorable rate that we had in the full year of FY’24.

Our corporate G&A is slightly unfavorable, just $0.06. Other expense is $0.10 unfavorable, and share count is just another headwind of $0.07. But if you look at that all in, that’s our walk to the $26.65 midpoint or 5% increase year-over-year.

With that, Jenny, I’m going to hand it back to you and ask everyone to reference Slide 18.

Jennifer Parmentier

Thanks, Todd. As mentioned at our investor day and demonstrated in our results, this is a different Parker. We will add more than $10 to EPS and generate an additional 50% free cash flow by fiscal year ‘29. Our performance will continue to be accelerated from the wind strategy. We have a longer cycle and more resilient portfolio. We will experience growth from secular trends, and we will continue to be great generators and deployers of cash.

Next slide, please. We are very proud to be celebrating 60 years on the New York Stock Exchange, and we’ll ring the closing bell next week on Wednesday, August 14.

I’ll turn it back to Todd to get us started with Q&A.

Todd Leombruno

Yeah, okay, Kevin, we are ready to open the lines for Q&A. And we’ll take the first person in the queue.

Question-and-Answer Session

Operator

Certainly. (Operator Instructions) Our first question is coming from Julian Mitchell from Barclays, your line is now live.

Julian Mitchell

Hi, good morning. Maybe just a first question around the first quarter outlook. I think first off, maybe to talk about the organic sales guide a little bit. I think you’re dialing in a bit of a deceleration from the June quarter year-on-year, even with better orders. So maybe just any commentary around kind of very recent demand trends, any big movement month-to-month?

And then sort of on the firm-wide P&L for Q1, you’re basically saying flat EPS dollars year-on-year but with sales growth and margins up. So is there something below the line moving around?

Todd Leombruno

Yeah, Julian, this is Todd, I could take that. There is some seasonality just going from Q4 to Q1 if you look at our historical sales splits and our historical earnings split. What we’re modeling here is in line with what we’ve historically done.

Our organic growth guide for the total company is plus 1% for the quarter. That is driven by Aerospace, which continues to be a low double-digit organic growth is what we’re expecting in Aerospace. But in the industrial businesses, both in North America and International, we are still expecting that to be down from prior year. So it’s low single digits, but it’s still down. We expect that to improve throughout the fiscal year, and this is just our best look at a roll-up. So you’re right, it’s a little bit of a soft industrial environment, but really offset by strength in Aerospace.

If you look at margins, you know, what we just did in Q4 was all-time record for the quarter. We are guiding the 25.2%. That would be a Q1 record for the company. So it is not an easy number there. It really is, it would be a record. And to do that in light of some softness on the industrial side of the business, we’re pretty proud about that.

There’s some below-the-line stuff that just is a first-quarter phenomenon, but nothing abnormal. We are experiencing earnings per share growth and net income growth in Q4. And that really supports what we see throughout the balance of the year.

Julian Mitchell

That’s helpful, thank you. And then maybe just my follow-up would be around Slide 15. So you have that very helpful color on the end-market verticals outlook for the year. Maybe just any context you could give around sort of, maybe fourth-quarter rates in some of those end markets. And I suppose in plant and industrial I’m particularly focused on. It seems like the CapEx environment is getting a little bit worse out there. Just wondered what you’re seeing in that in plant and industrial piece, please.

Jennifer Parmentier

Sure, Julian, be happy to do that. So if you look at in plant and industrial equipment, it improved from negative low single digit in Q3 to neutral in Q4. And as you can see on the slide that you’re referencing, our FY’25 guide is forecasting neutral in the first half, low single digit in the second half, resulting in a low single digit for the full year.

If you look at transportation, it was mid single digit negative in Q4, and that was primarily driven by automotive cars and light trucks. We are forecasting low single digit negative growth for transportation in the first half, mid single digit growth in the second half because we expect automotive to return to growth then. Work truck strength continues and heavy duty truck is positive now. So full year is at that low single digit growth.

If you look at off-highway, it was high single digit negative in Q4. And we are forecasting the same for the first half, neutral for the second half, and mid single digit negative for the full year. Inside of there, we expect ag to be double digit negative this year, offset by construction, low single digit positive. So that’s some color there.

And then energy is forecasted to be low single digit for fiscal year ‘25, neutral in the first half, mid single digit in the second half. HVAC was low single digit negative for Q4, but it is improving. We are forecasting mid single digit growth for the first half. This is driven by a recent regulation change on refrigerant. And the second half growth forecast is at low single digit growth, but that’s dependent on how fast some of these manufacturers get through their inventory and ramp up production under the new regulation. So for the full year, we have them at low single digit.

Julian Mitchell

That’s great, thank you.

Todd Leombruno

Thanks, Julian.

Operator

Thank you. Next question is coming from David Raso from Evercore ISI. Your line is now live.

David Raso

Hi, thank you. My questions are on your comfort with the organic sales guide, right? We have 1.5% in the first quarter. We can back into 2Q, right? It’s 3.5%. So that 2% faster growth in 2Q from 1Q, I’m the impression I get that’s coming from industrial going from, say down 1.5%-2% in the first quarter to going slightly positive.

And I just wanted to get some color on why do we see that turning flat to positive in 2Q? The comps get a little easier in North America, but just any color around that, particularly in the mix of orders. Are you seeing it more from distributors? Is it the lack of de-stocks, maybe from a year ago at the manufacturers? Just trying to get more comfortable with that delta on year-over-year growth for industrial 1Q and then getting essentially slightly positive for 2Q. Thank you.

Jennifer Parmentier

Yeah. So I’ll take that, David. So some of the things that Todd mentioned earlier, total company order rates did go positive to 1% in Q4. Industrial North America improved to zero in Q4 after being negative for — so that was a positive sign. And as Todd mentioned, that did end five quarters of negative order entry.

International orders improved to negative 1% from negative 8%, and that was driven by Asia-Pacific. When you look at the channel, that destocking in the channel started over a year ago, and we believe that it has pretty much played out. We see the distribution trend going up, but I would say it’s not a step change yet. We aren’t actually seeing them add inventory. But these are all the things that are placed into our guide. Todd mentioned also the backlog remains strong. Q4 flat with Q3, dollars at near-record levels. So all of these things are baked into the guide and the reason that we feel good with the organic growth numbers we have in the first half.

Todd Leombruno

David, I’d agree with everything Jenny said there. As usual, your math is spot on. You mentioned the comps. Comps are 2% easier in Q2 than against the prior. So it’s a little bit of all that stuff, but I just wanted to call out the comps.

David Raso

The reason I asked is it doesn’t seem like there’s much pricing — new pricing for July 1. So I’m just trying to figure out what’s the incremental bump may be. You’re saying there’s a little bit of comp and, obviously — maybe some pickup —

Jennifer Parmentier

We’re back to a normal pricing environment. So it’s more about those comps getting easier. If you look at North America, Todd mentioned that we expect Q1 to be flat to Q4. But that gradual industrial recovery is what we have really baked into the guide. And the growth uptick, mainly in the second half, is on easier comps.

David Raso

And follow-up, if you could indulge me with one question, you don’t have to answer it. But I’m curious, the verticals that we’re now breaking out. We know the margins in Aerospace, obviously, they’re highlighted separately. But the other 5 verticals, would you give us a sense of kind of force rank highest to lowest the margins between those 5, just so we get a sense of the mix looking at it in this format?

Jennifer Parmentier

No, we’re not going to disclose that, David.

David Raso

That’s right. Thanks.

Todd Leombruno

I would tell you, just look at those — the Diversified Industrial segment. Those margins are — they’re record levels. The International businesses are not that far off from the North America businesses. And it’s really just a factor of some softness in Europe and Asia kind of going through a recovery mode. But the margins are strong across all of those verticals, David.

Jennifer Parmentier

All the businesses are performing really well in margin expansion.

Operator

Thank you. Next question is coming from Scott Davis from Melius Research. Your line is now live.

Scott Davis

Hey, good morning Jenny and Todd, congrats on another great year.

Jennifer Parmentier

Thanks, Scott. Thank you.

Scott Davis

I know it probably hasn’t — the answer probably hasn’t changed much since the Analyst Day, but perhaps you could give us a little bit of an update on M&A and what you’re seeing. I think you clearly have the balance sheet space to probably step up and get a little bit more aggressive. So just a little bit of an update would be helpful, I think. Thanks.

Jennifer Parmentier

Yeah, you’re right. Not a lot different, but obviously, we still have some debt to pay down. That’s still our focus. But when we look to acquisitions, we’re always working the pipeline. Those relationships, maintaining and building those relationships is really important to us. And we’ve been doing quite a bit of that.

We’re looking for those things where we are the clear best owner, with the interconnected technologies and building on the secular trends. But the one thing that I’d say the most is that we’re looking for deals that are accretive to growth, resiliency, margins, cash flow and EPS, it really has to tick all of those boxes. And in some cases, it really is based on timing.

So we like all of the 8 core technologies, and we see opportunities to build on the entire portfolio. We have different businesses that we’re looking at, of all sizes. So a question that I get a lot too is, you’ve built with each one, is the next one going to be bigger than Meggitt? And that’s not that’s not something that we’re focused on. We’re focused on the right deal with all of that criteria that I just mentioned.

Scott Davis

Okay. And Jenny, the portfolio optimization and the small divestiture, is the lens here that you guys are looking at — the Slide 15 lens that — the key market vertical stuff that’s outside of that vertical? Or is there a — or is it more a function of kind of margin growth potential and kind of more traditional metrics?

Jennifer Parmentier

It’s the latter. We have to see that it’s part of our core technologies, our core product offering. Obviously, this business was in Aerospace, and that’s a market that we’re very fond of. But it’s the future profile of the business, both margin expansion and growth.

Scott Davis

Okay. That makes ton of sense. Thank you. I’ll pass it on. Appreciate it.

Todd Leombruno

Thanks, Scott.

Operator

Thank you. Our next question is coming from Mig Dobre from Baird. Your line is now live.

Mig Dobre

Thank you. Good morning. I guess one of the things that kind of stood out to me over the past couple of quarters within your industrial technology platforms is that motion systems and low-end process control kind of behave the way we would sort of expect them to in the kind of industrial downturn we’re experiencing, this whole down high single-digit revenue type. But your filtration, engineered materials platform has been pretty remarkably stable.

So I guess my question is, looking back, why has that been the case? Is this sort of different than what you’ve seen in prior downturns? And is there an impact on margin from a mix standpoint within your industrial business from this filtration business hanging in there a little bit better?

Jennifer Parmentier

Yeah. So thanks for the question, Mig. So if you think back to the on-purpose strategy that we had with our acquisitions to double the size of filtration, double the size of engineered materials and Aerospace. We’ve done that with the last four acquisitions. So if you take filtration for instance, with the acquisition of CLARCOR, we greatly increased our aftermarket exposure in filtration. And that business has become more resilient than it was in the past.

And when you look at Lord, into engineered materials, that’s where we picked up a lot of that longer cycle business. And so you see those two groups behaving a little bit differently than the other two that you mentioned. That is definitely the main reason.

Mig Dobre

And the margin impact?

Jennifer Parmentier

The margin impact is accretive, just like the criteria that we give to the acquisitions that we would do in the future. These have been — those have both been very successful deals where synergies were hit. And they continue to use The Win Strategy to improve margins.

Todd Leombruno

Let me give you a little color on this. If you’re worried, we agree with you, the top line has acted exactly as we expected it. But I would tell you the margin expansion has been equally generated by all of these businesses. When you look at that record that we put up for the quarter, 25.4, that motion systems platform, that flow and process control, those were equally contributing to those margin ramp.

Jennifer Parmentier

Yeah. Wouldn’t have happened without those two areas.

Todd Leombruno

Yeah. And when you look at the cash that we generate, those businesses are stellar cash flow generators as well. So it’s all part of the mix. It’s all why we love the portfolio as it sits, and it’s helped generating all-time record numbers.

Jennifer Parmentier

Those technologies are a very important part of our portfolio and participate in the secular trends that we talk about.

Mig Dobre

Thanks for the color. I’ll pass it on.

Operator

Thank you. Next question today is coming from Jamie Cook from Truist Securities. Your line is now live.

Jamie Cook

Hi, good morning. And congratulations on a nice quarter and guide. I guess my first question, Todd or Jenny, just looking at the implied incrementals for the year, the 40%-ish, it’s a very good incremental margin above your targeted range on lower organic growth relative to your longer-term guide. So is there anything unusual in your — in the mix this year that would allow you to have above-average incrementals on a low organic growth versus your targeted range?

And then I guess the follow-up question is, once you get to the 4% to 6% organic growth, like why should your incremental margins be better than that just given what we’re seeing already today? And then, Jenny, you’re probably not going to want to answer this, but I’m going to ask it anyway. The order surprised me both on Industrial North America and on International. Anything you can do to talk to like the cadence of what you saw since April? And where were there — did the orders outperformed your expectations as well? Thank you.

Todd Leombruno

Yeah, Jamie, let me start on the incrementals. This is Todd. Thank you for the recognition of the quarter. We appreciate that. You’re right. The incrementals are a little bit higher than what we have historically forecast. That 30% is really kind of over the cycle, so sometimes we think we could do better, sometimes it might be a challenge on the top line.

But the way the math works is a little bit funny, right? Aerospace, with the strong growth in Aerospace and the margin profile that Aerospace is operating at, it is driving the incrementals for the company a little bit higher than normal.

We also are committed to the $300 million in synergies that we have promised for Meggitt. We expect $50 million of incremental synergies in FY ’25 versus FY ’24. So that’s putting Aerospace a little bit higher than historically where we’ve been at.

And when you look at the Industrial businesses, we still see margin expansion even in a low-growth top line environment. So when you put all that together, that’s how we came up with the numbers. So we feel really good about that. But the team is energized and focused on making sure that we deliver that.

Jennifer Parmentier

Yeah. And from an order standpoint, Jamie, on the May call, I did something that I normally don’t do, but made the comment that we were encouraged at the start of the quarter with what we were seeing in orders. And obviously, that continued and we saw ourselves get to the order condition that we’re talking about today at the end of Q4. So that played out well for us. But what we have in the guide today is supported by the comments that we’ve made at those Q4 orders. So no additional color on orders.

Jamie Cook

Okay. Thank you. Nice job.

Todd Leombruno

Thanks, Jamie.

Jennifer Parmentier

Thank you, Jamie.

Operator

Thank you. Next question today is coming from Joe Ritchie from Goldman Sachs. Your line is now live.

Joe Ritchie

Hi, good morning, Jenny and Todd, a terrific year, not just the quarter, it was a great year.

Jennifer Parmentier

Thank you.

Joe Ritchie

I’m going to tackle the margin question maybe slightly differently. And so, look, the exit rate for the Industrial businesses were really strong, right, both in North America and International. If you take a look at the 25% North America and the 23.9% in International, squarely either at the high end of your guidance for this year or the midpoint for the International segment. I guess why isn’t it going to be better than that? If we’re going to expect some growth, and typically, you guys have shown that you could expand margins even in a no-growth environment.

Todd Leombruno

Well, Joe, I’ll start. I’m looking at Jenny, she’s smiling. We just a few months ago gave you the FY ’29 targets. And if you look at this, this is right on track with those FY ’29 targets.

Aerospace, we’re going to expand 100 basis points off of an all-time record for that business. And when you look at the Industrial businesses, we’re showing margin expansion there as well, and really an unbelievably low growth top line number. So we feel really good about that.

If you look at the cadence throughout the year, every one of these quarters would be a record margin number for us, and it increases, outside of Q2, which is a little bit of seasonal volume, they’re aggressive numbers. So that’s what we feel today. That’s what we have confidence in. And that was kind of all that went into our guide.

Jennifer Parmentier

Yeah. I would just back that up by saying, obviously, it was a fantastic year, it’s a fantastic exit rate. But this guide is realistic. And this isn’t a slam dunk for our teams. We believe in The Win Strategy, we believe in our ability to continue to expand margins, but this is a — this isn’t easy.

Joe Ritchie

Okay. Got it. I’m sure you’ll make it look easy. But the follow-up question is the —

Jennifer Parmentier

We’ll try.

Joe Ritchie

Yeah. So you mentioned that you’re still planning to continue to pay down debt. You got your leverage ratio, your net leverage down to two turns, so congrats on that. I know there was a question earlier around M&A. So just talk to us a little bit about what’s the kind of right leverage ratio that you want to get to before you get a little bit more front-footed with capital deployment on the M&A side. And then is there an opportunity to continue to buy back shares as well? Like how are you thinking about that priority going forward?

Todd Leombruno

Yeah, Joe, it’s a great question. It’s something we talk about constantly here. We’ve been very clear, our target was to get to and operate around a 2 net debt to adjusted EBITDA leverage. We got there, we’re very proud about that. It was not easy, but the team worked really hard to get there.

The way our debt is structured, we have a service debt that goes all the way out into 2026. So we feel good that we will not — we’ll be putting our cash to good work as we continue to pay down that debt. But I would tell you, our preference continues to be to deploy our capital optionality towards deals, as Jenny mentioned it earlier. It’s going to be the right deal. It’s not going to be one that just happens to be available. It’s got to be able to grow the top line differently. It’s got to be accretive to our margins. It’s going to have to be EPS accretive. And it’s going to have to help generate cash in a way that’s different than what the company has been able to generate.

And if we can’t get those done, we have no worries about deploying that elsewhere. We’re going to keep our dividend record going. And our share buyback is $200 million a year. We’re going to do that at a bare minimum, and we will be active. I could assure you that.

Jennifer Parmentier

And if the timing and the deal don’t line up the way we’d like one to in the future, we’ll always buy back shares, like Todd said. I mean, we believe in Parker.

Joe Ritchie

Great. Thank you, both.

Operator

Thank you. Next question is coming from Stephen Volkmann from Jefferies. Your line is now live.

Stephen Volkmann

Great. Thanks for taking the question. Todd, I just missed it when you said the Meggitt synergies in FY ’24.

Todd Leombruno

Yeah. We increased those Meggitt synergies. I think that was in the second quarter or the third quarter, $200 million is what the accumulated synergies were at the end of FY ’24. We’re committed to the $300 million number. That would be $50 million in FY ’25 and an additional $50 million in FY ’26.

Stephen Volkmann

Got it. Thank you. And then I’m trying to think, just mentally, if I back that out, how much did mix add relative to sort of other drivers for the margin in Aerospace?

Todd Leombruno

Yeah. I mean everything in Aerospace is really booming right now. Aftermarket is especially strong. You know the profile of that business. That is the highest-margin business we have, and it’s been really robust. So if you look at what they did for the quarter, I think it was 27% margins. If you look at what we are forecasting for FY ’25, it’s another 100 basis points of margin expansion in Aerospace. And that gets us 27.5% ballpark. So really strong margins in Aerospace.

Stephen Volkmann

Great. I guess what I’m trying to think about is, assuming that the aftermarket OE mix kind of normalizes at some point, maybe that’s a big assumption, I don’t know. But if it does, should we be worried about potential kind of margin headwinds in that scenario?

Todd Leombruno

No. When you look at our team — of all of the forecast tools that we have that we’ve improved across the company, our best tools remain in the Aerospace verticals. And I would tell you, our team, we’ve had multiple discussions with the team. We feel really good about that. And I don’t want to speak outside of FY ’25, but we feel really good about what ’25 has in store.

Jennifer Parmentier

Yeah. We feel very positive about air traffic growth. So we’re not concerned about that.

Stephen Volkmann

Great. Thank you so much.

Operator

Thank you. Our next question today is coming from Nathan Jones from Stifel. Your line is now live.

Nathan Jones

Good morning, everyone.

Todd Leombruno

Good morning, Nathan.

Nathan Jones

I’m going to go back to the revenue guide. For as long as I can remember, Parker has been guiding for a revenue split, 1H to 2H of 58% to 42%. So I wanted to ask, you’ve got a much larger backlog now than you’ve had historically. So potentially some better visibility out into that. So I’m just interested on what you’re visibility into that second half revenue guidance is based on where the backlog is. And what kind of macroeconomic assumptions that you’ve got baked in there? A lot of peers and competitors have been talking about lower CapEx spending going forward, but it’s — maybe that you guys went into the downturn first, you’re coming out of it first. But just any color you can give us there.

Jennifer Parmentier

Well, just to run through it a little bit. Obviously, for Aerospace, as we talked about, we have 8.5% organic growth out there. In the first half is at 11%, second half is at 6%, and that’s really because the comps get pretty tough when you get into the second half. So obviously, we feel really good about Aerospace. We have good visibility over — we have a high backlog there, right? So no concerns there.

When you look at North America, as Todd mentioned, we’re guiding to 2% organic growth, minus 1% in the first half. And as we’ve talked about, that’s based off of a typical Q1 and based off of what we see today in the orders and the information that we have from our customers. Again, we expect continued softness in off-highway all year and transportation in the first half. So kind of going back to those forecasts for the market verticals.

We do expect a gradual industrial recovery, as we’ve mentioned here, and that’s what we have baked in. So again, the growth uptick is mainly in the second half, and it is somewhat on easier comps. Those are the inputs that we’re looking at.

In International, 1.5% organic growth, again, negative 1% in the first half, second half at 3.5%. As we mentioned, order rates improved, but they’re still in negative territory. Our guidance assumes that Asia-Pacific turns positive, offset by continued weakness in Europe. So that’s what we’re looking at right now. Again, softness around end-markets in Europe, neutral growth in the guide for the full year. So that’s what we have built into the guide.

Nathan Jones

Do you need things like interest rate cuts to spur some of that recovery that you’re looking for in the second half in various parts of the industrial economy? Kind of what are the underlying assumptions that you’ve got that inform that expectation?

Todd Leombruno

Yeah. Nathan, this is Todd. Those certainly would be helpful, there’s no doubt about it. What we have baked into the numbers is really — again, you’ve heard us talk about our AI forecast. So we have a variety of macroeconomic forecasts that we’re using.

There’s nothing outside of anything that you’re not seeing yourself. It really is driven by great Aerospace performance, a gradual recovery in the Industrial markets, mainly in the second half of the fiscal year. And that’s based off of what we’ve seen orders do for many, many, many years. We were really glad to see North American orders turn not negative, and we were really happy to see the Industrial orders move to minus 1%. So all of that is what we’ve been using to build our forecast.

Nathan Jones

Awesome. Thank you for taking my questions.

Todd Leombruno

Thank you.

Operator

Thank you. Next question is coming from Jeffrey Sprague from Vertical Research Partners. Your line is now live.

Jeffrey Sprague

Thank you. Good morning everyone. A lot of ground covered here. A couple of things from me. First, just on the divestiture, Jenny or Todd. I think it sounds like it’s kind of part and parcel to your kind of normal process of reviewing the portfolio and assets. But should we view this as largely kind of a one-off? And obviously, it just kind of came with something you recently acquired? Or there’s kind of other pieces here and there that could be methodically coming out as your margin structure has moved up, right, and your threshold for what’s good enough rises, does that cause some additional things to shake out of the portfolio?

Jennifer Parmentier

At Investor Day, we mentioned that we would continue to trim around the portfolio, but not anything significant. All of our businesses have to perform. Every year we go through an analysis of our businesses, a best owner analysis. But again, nothing significant, Jeff. It would be just some trimming around the portfolio.

Jeffrey Sprague

And could you also just share with us your view on Aero for 2025 in terms of the big buckets, commercial OE versus aftermarket military OE versus aftermarket?

Jennifer Parmentier

Absolutely. So on commercial OE, we are forecasting high single digit, really based off of narrow-body rates and wide-body ramp-up. Commercial aftermarket, low double digits. And again, air traffic recovery, broad-based growth there, been very strong as we’ve talked about today.

Defense OE mid-single digit increase, increasing defense budget and continued demand for legacy fighters. And then defense aftermarket, high single digit. And again, pointing to those public-private partnerships we have with the depots, that’s really proved to be great growth for us. And again, retrofits, repairs, upgrades. So really it’s going to be a strong year for Aerospace, high single digit at 8.5%.

Jeffrey Sprague

I’ll leave it there. Thanks a lot.

Jennifer Parmentier

Thank you.

Todd Leombruno

Appreciate, Jeff.

Operator

Thank you. Your next question is coming from Nicole DeBlase from Deutsche Bank. Your line is now live.

Nicole DeBlase

Yeah, thanks. Good morning, guys.

Todd Leombruno

Good morning, Nicole.

Nicole DeBlase

I just wanted to ask another question on the divestiture. And we all have the revenue number that was in the press release. But I guess, any color on whether the divestiture will be accretive to margins? And can you just confirm that that’s all coming out of the Industrial North America segment?

Todd Leombruno

Yeah, Nicole, this is Todd. It will all come out of the Industrial North America segment businesses. We do expect that to close sometime in Q2. It will be margin accretive, there’s no doubt about it. I’d rather wait until we get the actual close date to give you exact color on that. Jenny talked about it. It’s a great business, just maybe not perfectly aligned with our core products.

If you look at the enterprise value that we got for that business, it’s $560 million of enterprise value. So there will be a gain on that. And like I said, we’ll be looking to share more of that once it finally closes.

Nicole DeBlase

Got it. That’s really helpful. And then on the outlook for International, it sounds like you guys are expecting Europe to be down again. If you could kind of confirm your thoughts there. And I know it’s small for you, but any color on what you’re seeing in China. Thank you.

Jennifer Parmentier

Yeah. So the guide does assume that Asia Pacific turns positive, offset by continued weakness in Europe. So the full year for Europe is neutral to fiscal year ’24. So just continued softness there. What I would say in China, growth improved to negative low single digits in Q4, and Q4 orders increased due to some project orders. So there’s some positive there.

Nicole DeBlase

Thank you. I’ll pass it on.

Todd Leombruno

Thanks, Nicole.

Jennifer Parmentier

Thank you.

Todd Leombruno

Kevin, I think just in light of time, I think we have 5 minutes left, maybe one last question.

Operator

Final question today is coming from Brett Linzey from Mizuho Securities. Your line is now live.

Brett Linzey

Hey, good morning. Congratulations.

Jennifer Parmentier

Thank you.

Brett Linzey

Just a question on the margin outlook, but specifically gross margins. So another strong year in ’24, but you’re now seeing a better mix of secular in these applications. Are you embedding a higher-than-normal gross margin lift in the ’25 outlook as you’re seeing some traction here?

Todd Leombruno

Yeah. Brett, this is Todd. Thanks for noticing that. We’ve been working hard on all elements of profitability for a long time here. When you look at that 50 basis points of segment operating income expansion, the vast majority of that will come in the gross margin line.

Brett Linzey

Okay. Got it. Great. And then I apologize if I missed it. On off-highway, so I appreciate the color on adverse construction, but I was wondering if you could dimension the outlook between OE, the distribution business in Off-Highway, and what’s your level of visibility is on some of the OE inventories. Thanks.

Jennifer Parmentier

I mean, I don’t have a good picture of that that I could share with you today, but perhaps we can pick that up in a callback.

Brett Linzey

I’ll leave it there. Thanks a lot.

Todd Leombruno

Appreciate, Brett.

Operator

Thank you. We reached the end of our question-and-answer session. I’d like to turn the floor back over for any further closing comments.

Todd Leombruno

Okay, Kevin, thank you. This concludes our earnings webcast. Thanks to everyone for joining us today. As always, we do appreciate your attention, interest and support of Parker. If anyone’s got any more follow-up questions, whether that’s on the quarter, the year or the FY ’25 guide, Jeff Miller, our VP of Investor Relations; and Yan Huo, our Director of Investor Relations, will be available throughout the day and even if tomorrow, if needed. I hope everyone has a great day. We appreciate it.

Operator

Thank you. That does conclude today’s teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.