Parker-Hannifin - Q4 2024
August 8, 2024
Transcript
Operator (participant)
Hello, and 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. If anyone should require operator assistance, please press star zero. A question-and-answer session will follow the formal presentation. You may be placed into the question queue at any time by pressing star one on your telephone keypad. We ask you, please limit yourselves to one question, one follow-up, then return to the queue. 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 (CFO)
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 on 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 Investors 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 FY2029 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 1-hour time slot.
With that, Jenny, I'm going to hand it over to you and ask everyone to reference Slide 3.
Julian Mitchell (Managing Director and US Industrials Equity Research Analyst)
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 FY2024. 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 Systems 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 2025 guide and the targets we have set for fiscal year 2029. Next slide, please. 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 2020. 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 installed 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 2024.
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 2029. 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 trends. 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, and we have confidence in achieving the fiscal year 2029 targets 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 (CFO)
... Thank you, Jenny. It really was a fantastic year for the company. On slide nine, 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 all 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. The 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 the 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 17.0 return on sales. Earnings per share, Jenny mentioned this as well, $6.77.
That was up $0.69 or 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. It's another data point on Parker being able to deliver on our commitments. If we jump to Slide 10, this is just a 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 Systems 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 paydown. 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. Our backlog remained at near record levels. We have $10.9 billion in shippable backlog, so that was a nice way to finish the year. Let's look at the Diversified Industrial segment, specifically in North America. Sales volume really remained strong, $2.2 billion in sales. Organic growth was -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 25.0%. 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% to prior year, but again, that was also better than our forecast. Off-highway markets continue to be soft. If you look really across the regions, in Europe, we were -5%, in Asia Pac, -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 -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 the aftermarket businesses. Aerospace orders still remain strong. We did get the highest dollar level of orders for the year, and order rates continue to grow at +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 FY2024 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 2.0. 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 gonna hand it back to Jenny, and I'm gonna get to what I know everyone is focused on, and that is our outlook for F2025.
Julian Mitchell (Managing Director and US Industrials Equity Research Analyst)
Thank you, Todd. 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 FY2025 sales growth forecast for each market vertical, resulting in organic growth of 2%-5%. We are providing a realistic guide for fiscal year 2025. 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 Meggitt synergies, and continuing our track record of expanding margins. I'll give it back to Todd to review the guide in a little more detail.
Okay. Thank you, Jenny. So I'm now on Slide 16, and let me share some of the details of the FY2025 guide. Reported sales is forecasted to be in the range of 1.5%-4.5%, or 3% at the midpoint. That will equate to approximately $20.2-$20.5 billion in sales. That is really supported by outsized 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%-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 FY2025. 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 Acclivor 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 30th 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 FY2025, we're gonna 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, 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 Meggitt synergies. A 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 FY2024, 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 35 cents 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-$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 +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 FY2024. 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 FY2024. 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 $2.665 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.
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 2029. Our performance will continue to be accelerated from the WIN 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 14th. I'll turn it back to Todd to get us started with Q&A.
Todd Leombruno (CFO)
Yeah. Okay, Kevin, we are ready to open the lines for Q&A, and we'll take the first person in the queue.
Operator (participant)
Certainly. If you'd like to be placed into question queue, please press star one at this time, and as a reminder, we ask you, please limit yourselves to one question, one follow-up, then return to the queue. If you'd like to remove yourself from the queue, please press star two. Our first question is coming from Julian Mitchell from Barclays. Your line is now live.
Julian Mitchell (Managing Director and US Industrials Equity Research Analyst)
Hi, good morning. Maybe just a first question around the first quarter outlook. So I think first off, maybe to talk about the organic sales guide a little bit. You know, 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 PNL 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 (CFO)
Yeah, Julian, this is Todd. I could take that. You know, there is some seasonality just going from Q4 to Q1. If you look at, you know, our historical sales splits and our historical, our 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 +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 is, 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 to 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.
You know, there's some below-the-line stuff that just, you know, 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 (Managing Director and US Industrials Equity Research Analyst)
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, you know, maybe fourth quarter rates in some of those end markets, and I suppose in plant and industrial, I'm particularly focused on. 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.
Todd Leombruno (CFO)
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 FY2025 guide is forecasting neutral in the first half, low single digit in the second half, resulting in the 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.
Julian Mitchell (Managing Director and US Industrials Equity Research Analyst)
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 2025, 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.
That's great. Thank you.
Todd Leombruno (CFO)
Thanks, Julian.
Operator (participant)
Thank you. Next question is coming from David Raso from Evercore ISI. Your line is now live.
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, the impression I get, that's coming from industrial, going from, you know, 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, you know, in the mix of orders. Are you seeing it more from distributors? Is it the lack of destocks, maybe from a year ago, with the manufacturers?
Just trying to get more comfortable with that delta on year-over-year growth for industrial 1Q, and then getting, you know, essentially, you know, slightly positive for 2Q. Thank you.
Julian Mitchell (Managing Director and US Industrials Equity Research Analyst)
Yeah, so I'll take that, David. So, you know, as some of the things that Todd mentioned earlier, you know, total company order rates did go positive to 1% in Q4. Industrial North America improved to 0 in Q4, after being -4. So that was a positive sign, and as Todd mentioned, that did end 5 quarters of negative order entry. International orders improved to -1 from -8, and that was driven by Asia Pacific. When you look at, you know, the channel, that destocking in the channel started over a year ago, and we believe that it is 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, you know, these are all the things that are into, you know, are placed into our guide. Todd mentioned also, the backlog remains strong, you know, Q4 flat with Q3, dollars at near record levels. So all of these things are, are based- are baked into the guide and, and the reason that, we feel good with the organic growth numbers we have in the first half.
All right. Thank you.
Todd Leombruno (CFO)
David, I 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 deal.
Yeah, the reason I ask is it doesn't seem like there's much pricing in new pricing for July 1. So I'm just trying to figure out what's the incremental bump maybe. But you're saying it is a little bit of comp and obviously-
Julian Mitchell (Managing Director and US Industrials Equity Research Analyst)
Yeah, and we're-
Maybe some pickup, right?
We're back to a-
July 1.
We're back to a normal pricing environment, so, you know, it's more about, you know, those comps getting easier. You know, if you look at North America, you know, Todd mentioned this, you know, 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, you know, on easier comps.
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 five verticals, would you give us a sense of kind of force rank, highest to lowest, the margins between those five, just so we get a sense of the mix looking at it in this format?
No, we're not gonna disclose that, David.
All right, I tried. All right, thank you. I appreciate it.
You did.
Todd Leombruno (CFO)
You know, I would tell you, just look at those, the Diversified Industrial segment. Those margins are, you know, they're record levels. The international businesses are not that far off from the North American 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.
Julian Mitchell (Managing Director and US Industrials Equity Research Analyst)
All the businesses are performing really well in margin expansion.
Operator (participant)
Thank you. Next question is coming from Scott Davis, from Melius Research. Your line is now live.
Hey, good morning, Jenny and Todd, and congrats on another great year.
Julian Mitchell (Managing Director and US Industrials Equity Research Analyst)
Morning, Scott. Thank you.
Todd Leombruno (CFO)
Thank you.
I know it probably hasn't changed much since the Analyst Day, but perhaps if you give us a little bit of an update on M&A and what you're seeing. I think you know, you clearly have a 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.
Julian Mitchell (Managing Director and US Industrials Equity Research Analyst)
Yeah, you're right. Not a lot different, but, you know, obviously, you know, we still have some debt to pay down. That's still our focus. But when we look to acquisitions, you know, we're always working the pipeline. Those relationships and maintaining and building those relationships is really important to us, and, and we've been doing quite a bit of that. You know, we're, we're looking for those things where we are the clear best owner with the interconnected technologies and building on the secular trends. But, you know, the one thing that I say the most is that, you know, we're looking for deals that are accretive to growth, resiliency, margins, cash flow, and EPS. It really has to, to tick all of those boxes, and, in some cases, it, it really is, is based on timing.
So we like all of the eight 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 question that I get a lot, too, is, you know, you've built with each one, is the next one gonna be, you know, bigger than Meggitt? And that's, you know, that's not, that's not something that, you know, we're focused on. We're focused on the right deal with all of that criteria that I just mentioned.
Okay. And Jenny, the portfolio optimization and the small divestitures, is the lens here that you guys are looking at, you know, the Slide 15 lens, you know, the key market vertical stuff that's outside of that verticals, or is it more a function of kind of margin growth potential and kind of more traditional metrics?
It's the latter. We have to see that it's, you know, part of our core technologies, our core product offering. You know, 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.
Okay, that makes a ton of sense. Thank you. I'll pass it on. Appreciate it.
Todd Leombruno (CFO)
Thanks, Scott.
Operator (participant)
Thank you. Our next question is coming from Mircea Dobre from Baird. Your line is now live.
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 Flow and Process Control kind of behaved the way we would sort of expect them to in the kind of industrial downturn we're experiencing, you know, 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 a impact on margin from a mix standpoint within your industrial business, from this Filtration business hanging in there a little bit better?
Jenny Parmentier (Chairman and CEO)
Yeah. So thanks for the question, Mick. So, you know, 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, you know, 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, you know, 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.
Julian Mitchell (Managing Director and US Industrials Equity Research Analyst)
The margin impact?
The margin impact is accretive, just like, you know, the criteria that we give to the acquisitions that we would do in the future. Those have both been very successful deals where synergies were hit, and they continue to use the Win Strategy to improve margin.
Todd Leombruno (CFO)
Mick, let me, let me give you a little color on this. If, 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, for the quarter, 25.4, that Motion Systems platform, that Flow and Process Control, those were, equally, contributing to those, margin records.
Jenny Parmentier (Chairman and CEO)
Yeah, wouldn't have happened without those-
Todd Leombruno (CFO)
Yeah
Jenny Parmentier (Chairman and CEO)
... two areas.
Todd Leombruno (CFO)
Yeah. When you look at the cash that we generate, those businesses are stellar cash flow generators as well. 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.
Jenny Parmentier (Chairman and CEO)
Those technologies are very important part of our portfolio and, you know, participate in the secular trends that we talk about.
Julian Mitchell (Managing Director and US Industrials Equity Research Analyst)
Thanks for the color. I'll pass it on.
Operator (participant)
... Thank you. Next question today is coming from Jamie Cook from Truist Securities. Your line is now live.
Jamie Cook (Managing Director and Senior Equity Research Analyst)
Hi, good morning, and congratulations on a nice quarter and guide. I guess, my first question, Todd or Jenny, I'm just looking at the implied incrementals for the year, the 40%-ish. It's a, 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, you, in, you know, in, in the mix this year that would allow you to have above average incrementals on a lower organic growth versus your targeted range? And then I guess the, the follow-up question, is, you know, once you get to the 4%-6% organic growth, like, why shouldn't your incremental margins be better than that, just given what we're seeing already today? And then, Jenny, you're probably not gonna wanna answer this, but I'm gonna ask it anyway.
You know, 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, you know, since April, and did the orders outperform your expectations as well? Thank you.
Todd Leombruno (CFO)
Yeah, Jamie, let me start on the incrementals. This is Todd. Thank you for the recognition on the quarter. We appreciate that. You're right, the incrementals are a little bit higher than what we have historically forecast. And, you know, 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 FY2025 versus FY2024, so that's putting aerospace a little bit higher than historically where we've been at. And when you look at the industrial businesses, you know, 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 with the numbers. So we feel, we feel really good about that, that the team is energized and focused on making sure that we deliver that.
Jenny Parmentier (Chairman and CEO)
You know, from an order standpoint, Jamie, you know, I, on the May call, I did something that, you know, I normally don't do, but made the comment that, you know, we were encouraged at the start of the quarter with what we were seeing in orders. Obviously, that continued, and we saw ourselves get to the order condition that we're talking about today at the end of Q4. So, you know, that, that played out well for us. But, you know, what we have in the guide today, you know, is supported by, you know, the comments that we've made at those, those Q4 orders. So no, no additional color on, on orders.
Jamie Cook (Managing Director and Senior Equity Research Analyst)
Okay. Thank you. Nice job.
Todd Leombruno (CFO)
Thanks, Jamie.
Julian Mitchell (Managing Director and US Industrials Equity Research Analyst)
Thank you, Jamie.
Operator (participant)
Thank you. Next question today is coming from Joe Ritchie from Goldman Sachs. Your line is now live.
Joe Ritchie (Managing Director and Senior Equity Research Analyst)
Hi, good morning, Jenny and Todd. Terrific year, not just the quarter. It was a great year.
Jenny Parmentier (Chairman and CEO)
Thank you.
Joe Ritchie (Managing Director and Senior Equity Research Analyst)
I'm gonna tackle the margin question maybe slightly differently. 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, you know, the 23.9% in International, you know, squarely either at the high end of your guidance for this year, or the bend point for the International segment. I guess, why isn't it gonna be better than that? If we're gonna expect some growth, and typically, you guys have shown that you could expand margins even in a no growth environment.
Todd Leombruno (CFO)
Well, Jl, I'll start. I'm looking at Jenny. She's smiling. You know, we just a few months ago gave you the FY2029 targets, and if you look at this, this is right on track with those FY2029 targets. Aerospace, we're gonna expand 100 basis points off of an all-time record for that business. And you know, 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, you know, outside of Q2, which is a little bit of seasonal volume.
You know, they're aggressive numbers, so that's what we feel today, that's what, that's what we have confidence in, and that was kind of all that went into our guide.
Jenny Parmentier (Chairman and CEO)
Yeah, I would just back that up by saying, you know, obviously, it was a fantastic year. It was a fantastic exit rate. But, you know, 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, you know, this isn't easy.
Joe Ritchie (Managing Director and Senior Equity Research Analyst)
Okay, got it. You'll. I'm sure you'll make it look easy. But the follow-up question is the.
Julian Mitchell (Managing Director and US Industrials Equity Research Analyst)
We'll try.
Todd Leombruno (CFO)
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 2 turns, so congrats on that. I know there was a question earlier around M&A. So just talk to us a little bit about, you know, what's the kind of right leverage ratio that you wanna get to before you get a little bit more front-footed with capital deployment on the M&A side? And then, you know, is there an opportunity to continue to buy back shares as well? Like, how are you thinking about that priority going forward?
... Yeah, Judd, it's a great question. It's something we talk about constantly here. We've been very clear, you know, our target was to get to and operate around a 2.0 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 serviceable 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. And Jenny mentioned it earlier, it's gonna be the right deal.
It's not gonna 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 gonna have to be EPS accretive, and it's gonna 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 gonna keep our dividend record going, and our share buyback is $200 million a year. We're gonna do that at a bare minimum, and we will be active. I could, I could assure you that.
Jenny Parmentier (Chairman and CEO)
And, you know, if the timing and the deal don't line up the way, you know, we'd like one to in the future, you know, we'll always buy back shares, like Todd said. I mean, we believe in Parker.
Joe Ritchie (Managing Director and Senior Equity Research Analyst)
Great. Thank you both.
Operator (participant)
Thank you. Next question is coming from Stephen Volkmann from Jefferies. Your line is now live.
Stephen Volkmann (Equity Research Analyst)
Great, thanks for taking the question. Todd, I just missed it when you said the Meggitt synergies in FY2024.
Todd Leombruno (CFO)
Oh, yeah, we, we increased those Meggitt synergies. I think that was in the second quarter or the third quarter. $200 million is, is what, the accumulated synergies were at, at the end of FY2024. We're committed to the $300 million number. That would be $50 million in FY2025 and an additional $50 million in FY2026.
Stephen Volkmann (Equity Research Analyst)
Got it. Thank you. 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 (CFO)
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, you know, if you look at what they did for the quarter, I think it was 27% margins. You know, if you look at what we are forecasting for FY2025, it's another 100 basis points of margin expansion in aerospace, and that gets us, you know, 27.5 ballpark. So, you know, really strong margins in aerospace.
Stephen Volkmann (Equity Research Analyst)
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 (CFO)
No, you know, when you look at, our team knows of all of the forecast tools that we have that we've improved across the company, our best tools remain in the Aerospace verticals. I would tell you, our team, we've had multiple discussions with the team. We feel really good about that, and, you know, I don't want to speak outside of FY2025, but we feel really good about-
Jenny Parmentier (Chairman and CEO)
Yeah
Todd Leombruno (CFO)
... what 2025 has in store.
Jenny Parmentier (Chairman and CEO)
Yeah, we feel very positive about air traffic growth, so we're not concerned about that.
Stephen Volkmann (Equity Research Analyst)
Great. Thank you so much.
Operator (participant)
Thank you. Our next question today is coming from Nathan Jones from Stifel. Your line is now live.
Nathan Jones (Managing Director and Senior Equity Research Analyst)
Good morning, everyone.
Todd Leombruno (CFO)
Morning, Nathan.
Jenny Parmentier (Chairman and CEO)
Morning.
Nathan Jones (Managing Director and Senior Equity Research Analyst)
I'm gonna go back to the revenue guide. For as long as I can remember, Parker's been guiding for a revenue split 1H to 2H of 58-42. 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, you know, what your 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, you know, peers and competitors have been talking about lower CapEx spending going forward, but 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.
Jenny Parmentier (Chairman and CEO)
Well, yeah, just to run through it a little bit, obviously, you know, for aerospace, as we talked about, you know, we have 8.5% organic growth guide out there, and the first half is at 11%, second half is 6%, and that's really based because the comps get pretty tough when you get into the second half. So obviously, we feel really good about aerospace. You know, we have good visibility over, you know, 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.
As we've talked about, you know, that's based off of, you know, 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, you know, 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, -1% in the first half, second half at 3.5%.
As we mentioned, order rates improved, but they're still in negative territory. You know, 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 (Managing Director and Senior Equity Research Analyst)
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? Like, kind of, what are the underlying assumptions that you've got that inform that expectation?
Todd Leombruno (CFO)
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, 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, you know, 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 one.
All of that is what we've been using to build our forecast.
Nathan Jones (Managing Director and Senior Equity Research Analyst)
Awesome. Thanks for taking my questions.
Todd Leombruno (CFO)
Yep. Thanks, Nathan.
Jenny Parmentier (Chairman and CEO)
Thank you.
Operator (participant)
Thank you. Next question is coming from Jeffrey Sprague, from Vertical Research Partners. Your line is now live.
Jeffrey Sprague (Founder, Managing Partner, and Senior Equity Research Analyst)
Well, thank you. Good morning, everyone. Hey, a lot of ground covered here. A couple things from me. First, just on the divestiture, Jenny or Todd. I think this sounds like it's kind of part and parcel to your kind of normal process of, you know, 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, you know, kind of other pieces here and there that could be methodically coming out as, you know, as your margin structure has moved up, right, and your, you know, your threshold for what's good enough rises? Does that cause some additional things to shake out of the portfolio?
Jenny Parmentier (Chairman and CEO)
You know, at Investor Day, we mentioned that we would, you know, continue to trim around the portfolio, but, you know, not anything significant. You know, all of our businesses have to perform. Every year we go through, you know, an analysis of our businesses, a best owner analysis, but again, nothing significant, Jeff. It would be, you know, just some trimming around the portfolio.
Jeffrey Sprague (Founder, Managing Partner, and Senior Equity Research Analyst)
Could you also just share with us your view on Aero for 2025 in terms of the big buckets, commercial, you know, OE versus aftermarket, military OE versus aftermarket?
Jenny Parmentier (Chairman and CEO)
Absolutely. So on commercial OE, we are forecasting high single-digits, you know, 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-digits, you know, increasing defense budget and continued demand for legacy fighters. And then defense aftermarket, high single-digits, 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 gonna be a strong year for aerospace, high single-digit at 8.5%.
Jeffrey Sprague (Founder, Managing Partner, and Senior Equity Research Analyst)
Great. I'll leave it there. Thanks a lot.
Jenny Parmentier (Chairman and CEO)
Thank you.
Todd Leombruno (CFO)
Appreciate it, Jeff.
Operator (participant)
Thank you. Next question is coming from Nicole DeBlase, from Deutsche Bank. Your line is now live.
Nicole DeBlase (Managing Director and Senior Equity Research Analyst)
Yeah, thanks. Good morning, guys.
Todd Leombruno (CFO)
Good morning, Nicole.
Jenny Parmentier (Chairman and CEO)
Good morning, Nicole.
Nicole DeBlase (Managing Director and Senior Equity Research Analyst)
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 (CFO)
Yeah, Nicole, this is Todd. It will all come out of the industrial North America segment businesses. You know, 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 the exact color on that. Jenny talked about it. You know, 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, that 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 (Managing Director and Senior Equity Research Analyst)
Got it. That's really helpful. Thanks, Todd. 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.
Jenny Parmentier (Chairman and CEO)
Yeah. So, you know, 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 2024. So just continued softness there. What I would say in China, it... You know, growth improved to negative low single digits in Q4, and Q4 orders increased due to some project orders. So, you know, there's some positive there.
Nicole DeBlase (Managing Director and Senior Equity Research Analyst)
Thank you. I'll pass it on.
Todd Leombruno (CFO)
... Hey, Kevin, I think just in light of time, I think we have five minutes left, maybe one last question.
Operator (participant)
Sure. Final question today is coming from Brett Linzey from Mizuho Securities. Your line is now live.
Brett Linzey (Senior Analyst and US Industrials and Industrial Technology)
Hey, good morning. Congratulations.
Todd Leombruno (CFO)
Thanks, Brett.
Jenny Parmentier (Chairman and CEO)
Good morning. Thank you.
Brett Linzey (Senior Analyst and US Industrials and Industrial Technology)
Yeah, it just a question on the margin outlook, but specifically gross margin. So another strong year in 2024, 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 2025 outlook as you're seeing some traction here?
Todd Leombruno (CFO)
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 (Senior Analyst and US Industrials and Industrial Technology)
Okay. Got it. Great. And then I apologize if I missed it. On off-highway, so appreciate the color on adverse construction, but was wondering if you could dimension the outlook between OE versus the distribution business in off-highway, and what your level of visibility is on some of the OE inventories? Thanks.
Jenny Parmentier (Chairman and CEO)
Yeah, I don't have a good picture of that I could share with you today, but perhaps we can pick that up in a call back.
Brett Linzey (Senior Analyst and US Industrials and Industrial Technology)
Sounds good. I'll leave it there. Thanks a lot.
Todd Leombruno (CFO)
Appreciate it, Brett.
Operator (participant)
Thank you. We've 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 (CFO)
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 FY2025 guide, Jeff Miller, our VP of Investor Relations, and Yan Huo, our Director of Investor Relations, will be available throughout the day and even into tomorrow, if needed. I hope everyone has a great day. We appreciate it.
Operator (participant)
Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.