Parker-Hannifin Corporation

Good day, ladies and gentlemen, and welcome to the Parker Hennepin's Fiscal 2019 Third Quarter Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. If anyone should require assistance during the program, please press star then zero on your touchtone telephone. As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Kathy Siever, Chief Financial Officer. Please go ahead.

Thank you, Jonathan. Good morning, and welcome to Parker Hannafin's third quarter fiscal 2019 earnings release teleconference. Joining me today are Chairman and Chief Executive Officer Tom Williams and President and Chief Operating Officer Lee Banks. Today's presentation slides, together with the audio webcast replay, will be accessible on the company's investor information website at phstock.com for one year following today's call. On slides two and three, you'll find the company's safe harbor disclosure statement addressing forward-looking statements as well as non-GAAP financial measures. Reconciliations for any reference to non-GAAP financial measures are included in this morning's press release and are also posted on Parker's website at phstock.com. Today's agenda appears on slide number four. To begin, our Chairman and Chief Executive Officer, Tom Williams, will provide comments and highlights from the third quarter. Following Tom's comments, I'll provide a review of the company's third quarter performance, together with the guidance for the full year, fiscal 2019. Tom will then provide a few summary comments, and we'll open the call for a question and answer session. Please refer now to slide five, and Tom will get us started.

Thank you, Kathy, and good morning, everybody, and thanks for your interest in Parker. We had a very strong performance in the quarter, but before I jump into the quarter, I'd like to take you back for a few seconds here to 2015. We had launched a new wind strategy in our first generation of five-year goals, and if you remember, one of our key goals that we had at that time was to get to 17% operating margin by 2020. And I kind of remember that meeting. We also got feedback that perhaps it might be too aggressive. but we're excited to tell you that we've achieved that goal basically about 18 months early, and that included doing the Clark acquisition during that period of time. So really a remarkable accomplishment, and my thanks to everybody around the world, the Parker team, for that huge accomplishment ahead of schedule. So you might be asking how. How did we do that? It really comes directly from the slide that's up there, slide five, describing our business model and the competitive differentiators that we have. And if you look at that, it's really a powerful lineup And that list represents what makes us different. It strategically positions us versus our competitors, and it helps answer the question, why would you invest in Parker? Why would you buy from Parker? And why would you work at Parker? So I'd like to show this every quarter, but I'm only going to pick one bullet to go over to give you some extra color. And let's talk about the operating CapEx requirements of the company. If you go back before the wind strategy started, we were basically at 6%. CapEx to sales company. And today we balance in that 1.5% to 2%. How we did that is we implemented the Parker Lean system, value stream transformations, waste reduction efforts. And by doing that, we freed up floor space, machine and people capacity. And that enabled us to free up basically 400 basis points of free cash flow. which you can imagine what we can do with 400 basis points of free cash flow, deploy it as effectively as we can back to our shareholders. That's been a big part of our success over the last decade or so. So let's go ahead and jump into takeaways from the quarter. Safety continues to be our top priority. We had 20% reduction in recordable incidents. We continue on about that 20% clip, and it's really making great progress. My thanks to our team members around the world for their ownership on safety. Remember the connection between safety performance, engagement, and financial performance is a clear linkage between all those. We have a strong operational quarter, reflecting the benefits of the wind strategy, and we've put up a number of quarterly records, segment operating margins, net income, and EPS. And our confidence remains very strong for achieving record performance in FY19. Again, a big thank you to all the Parker team members out there for the great progress and all the hard work. So some highlights on the quarter. Organic growth came in approximately 2%, offset by currency and divestiture. Our order rates did moderate, pumping up against some tough comparables, growth moderating and North America distributors destocking. Of course, we'll discuss that more in the Q&A portion of the call. EPS and net income were all-time records. Segment operating margins was an all-time record at 17.1%. And adjusted total segment operating margins were 17.2%. up 90 basis points versus prior year, and we saw improvement across all of our reporting segments. Aerospace posted an all-time record at 20.7% segment operating margin for the quarter, and a big thank you to the aerospace team for their great work. We've seen really nice returns from past investments in aerospace, which is a long cycle business that's performing at a very high level, and that utilizes all of our motion control technologies into that space. Our as-reported EBITDA margin was up 150 basis points to 18.6%, or 18.7% adjusted, and we had very strong cash flow, operating cash flow of 12.1%, excluding discretionary pension contribution. Free cash flow conversion was 104%, so in summary, an excellent quarter with a number of records. Switching to capital deployment, last week we announced a 16% increase in our dividend and we've now made dividend increases for 63 consecutive fiscal years. It's a record we're very proud of and a record we intend to keep as we go into the future. We also continued our 10B51 repurchase program of $50 million in Parker shares, and we made an opportunistic discretionary purchase of $150 million in shares, which we initiated immediately after our second quarter blackout period finished and before the lowered acquisition process started. And, of course, on Monday, We announced the agreement to acquire Lord Corporation for $3.675 billion and lowers approximately a $1.1 billion business, 23% EBITDA, and a leader in material science and vibration control technologies. And if I could just as a reminder, in case some people didn't listen in on the call on Monday, what the strategic rationale was behind that acquisition. This is a strategic portfolio transaction which significantly expands our engineer materials business. It has complementary products, markets, and geographies that are aligned to key growth trends. And it's very culturally aligned with Parker's values and has a rich history of innovation. and product reliability. Strong global brands with long-standing blue-chip customer list that is very similar to our customer list. Strengthens material science capabilities, electrification, lightweighting, and aerospace offerings. And it's expected to be accretive to organic sales growth, EBITDA margin, and cash flow and EPS, excluding one-time costs and deal-related amortization. So moving out to the outlook, We're maintaining EPS guidance midpoint of $11.32 as reported and $11.60 adjusted. Our forecasted organic growth range is in that 2% to 3% for the full fiscal year. And we're anticipating record earnings in FY19 due to the wind strategy execution. We are really in a great position to perform regardless of how the macro environment turns out. And there's a number of positives. They're going to serve as a tailwind to our performance as you look forward for the next several years. The first is we're still early days of the new wind strategy and the execution. And you can see the progress we've made just in the first five years of it, 15% to 17% and the Harker acquisition. So lots of headroom as we continue to improve with the wind strategy. Integration of Clarkor is showing lots of promise. with upside, continued upside to margins as we continue to improve on the manufacturing consolidation. And the lower corporation brings the top quartile performing company into the portfolio that has attractive technologies and material science, vibration controls, and will generate that incremental organic growth margin of cash flow that I referred to earlier. So we continue to have confidence in reaching our second set of financial targets, the ones we set for FY23, and those are just to remind everybody to grow organically 150 basis points faster than the market, to achieve segment operating margins of 19%, EBITDA margins of 20%, continue our free cash flow conversion of greater than 100%, and this would all yield an EPS category of 10% plus over that time period. So in sum, we anticipate another record year for FY19, and we're making progress towards that second generation of five-year targets. And with that, I'll hand it back to Kathy for more details on the quarter.