Parker-Hannifin Corporation

Good day, ladies and gentlemen, and welcome to the Parker-Hannifin Fourth Quarter 2019 Earnings Conference Call. At this time, all phone participants are in a listen-only mode, so if anyone should require assistance during the call, please press star, then zero on your touch-tone telephone to reach an operator. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, today's conference may be recorded. I'd now like to introduce your host for today's conference, Ms. Kathy Siever. Executive Vice President, Finance and Administration, and Chief Financial Officer. Please go ahead. Thanks, Liz.

Good morning. Welcome to Parker Hannafin's fourth quarter 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 number 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. We'll begin with our Chairman and Chief Executive Officer, Tom Williams, providing comments and highlights from the fourth quarter and full fiscal year 2019. Following Tom's comments, I'll provide a review of the company's fourth quarter and full fiscal year 2019 performance, together with guidance for fiscal year 2020. 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 number five, and Tom will get us started.

Thanks, Kathy, and good morning, everybody. Thanks for your participation. Looking at slide five, we had a strong fourth quarter and completed Parker's best year ever in our history. But before I jump into all the results, I wanted to just pause for a minute and reflect on the remarkable transformation of our company. Parker is a very different company now, delivering record performance and better able to perform through market cycles. We have a stronger portfolio of businesses following the three transformational acquisitions we've done the last three years. If you look at performance and go back the last five years, adjusted operating margin percent has improved 280 basis points, and adjusted EBITDA margin has improved over 300 basis points. We are a better performer over the cycle. We've always been good on cash flow, over the cycle, but now we're much better on EPS and margins over the cycle. In particular, if you note our margin performance during the 2015 and 2016 industrial recession and our margin performance just in the last quarter, Q4, on negative order growth, they all point to the improved performance that I was referring to. On the three acquisitions, they're going to lift the company up on two levels, portfolio and performance. On the portfolio side, we've wanted to add to filtration engineering materials and aerospace. These are parts that we've talked about, wanted to add to because of their resilience over the cycle. On the performance side, we're adding three great businesses that are accretive to growth and to margins. Our goal here through the wind strategy and our capital deployment strategy is to build a better business that generates higher growth, margins, and cash flow through the business cycle, and you're seeing evidence of that already. Ultimately, this is going to result in Parker being a best-in-class company So my thanks to all the Parker team members that are listening in for all their hard work last year, but really over the last several years to get us to this point. If you turn to slide six, part of what is transforming a company is our business model and the competitive differentiators that makes us special. I want to just talk through these bullets on this page briefly. The win strategy, it's our business system. It is the engine behind our results. Our decentralized divisional structure really drives an entrepreneurial spirit in the company. The eight motion and control technologies that we have really creates that breadth of our portfolio, and this strategically positions us to have a big advantage versus our competition. And recognizing the fact that I've talked about before, 60% of our revenue comes from customers that buy from four or more of those technologies, that's a good evidence that our customers value that breadth of technologies. Our strong intellectual property, 85% of our portfolio, and typically what we ship has some element of intellectual property tied to it. We have long product life cycles, decades long as they go, balanced OEM and aftermarket, and we have arguably the best distribution channel in the motion control space. We have low-cap X requirements. Our lean transformation has really driven a low-cap X to drive our business, and that enables us to have a very robust capital deployment process. And we're great generators and employers of cash, and you've seen us in action over the last five years in that regard. So if you turn to slide seven, some highlights from the fourth quarter, safety continues to be our top priority. Our recordable incidents for the quarter were down 24%. Our high-performance teams are helping to drive these results. Our goal is zero incidents. That's not an aspirational goal. It's really an expectation how we're going to run the company. And the ownership culture that's created from the high-performance team process that has started with safety is It's going to be applied also to quality, cost, and delivery, and that will naturally lift up the performance of the company. All-time quarterly records for the fourth quarter, total segment operating margin, total industrial segment operating margin, net income, and EPS. A couple of the notes on the quarter sales were a negative 3.5%. That was composed of a negative 2% on organic and a negative 1.5% on currency. Orders declined 3% against some tough comparables. And we had a fourth quarter record on industrial international segment margins as well. My thanks to the international team for a great job in the quarter. So now I want to turn to full year results for FY19. We had a number of all-time records. Of course, we only do records on a reported basis so that they are sales, total segment operating margins, net income, EPS, and operating cash flow. A couple other highlights for the full year. We came in on organic growth at 2.6% organic sales. outpacing global industrial production. We had excellent improvement in segment operating margin and EBITDA margins versus the prior year. Adjusted EBITDA margins, if you go back to when we acquired Clarkor, we were at 14.7%. We're now at 18.2%. From an EBITDA dollar standpoint, we were at $1.7 billion, and now we're at $2.6 billion. That growth in margins, that growth in EBITDA dollars, has really helped enable us to do both the lowered and exact acquisitions that we recently announced. We achieved 17% segment operating margins one year ahead of our original target, and the first time in our history, 17%, a number that we're extremely proud of, and obviously we're not stopping there, but it was a huge milestone for us to reach. Tremendous cash flow generation, resulting in $1.7 billion in operating cash. When you do it on a percent basis, we came in at 12.1% CFOA, and excluding the pension contribution, that would be 13.5%. Switching to cash and capital deployment. The goal, and you've heard me talk about this, is to be great generators and employers of cash. So on the cash generation side, we ended FY19 at 115% pre-cash flow conversion. That makes 18 consecutive years of pre-cash flow conversion greater than 100%. And on the employment side, it was a big year. Dividends, our stated target is to pay out 30%, 35% of net income. And as a result of our growth in net income, we increased annual dividends paid out by 13%. We had our 63rd consecutive year of annual increases to dividends paid out, a record we're very proud of as well, and one that we intend to keep. We announced two transformational acquisitions, and on the share purchase side, we did $200 million on our 10B51 program, and we purchased $600 million on a discretionary basis. Debt reduction is going to be a high priority going forward. Our target within three years is to get 2.0 multiple from a gross debt to EBITDA multiple, and we'll pause an M&A activity until we get there. Just a few comments on the acquisitions. They're really going to generate great value for our shareholders. We announced in the last 90 days the acquisition of Lord Corporation and Exotic Metals, transformational to our portfolio, adding to our engineer materials business, and the aerospace group with high growth and high margin businesses. When you look at the pro forma EBITDA margin, take Legacy Parker with Lorde and Exotic, and you forecast that out of five years, we're gonna improve EBITDA margins by more than 400 basis points over that five year period of time. That's really gonna help propel us to being that top quartile company that we desire, and both of these companies I'm referring to, Lorde and Exotic, are both great cultural fits, and we expect a seamless integration. Now turning to the outlook, we're issuing guidance for FY 2020, We've got moderating market conditions. We're forecasting sales at a negative three to flat, so minus 1.5% at the midpoint, and I'll talk more about that during the Q&A. I think the effectiveness of the wind strategy is really being observed when you look at our FY20 guide. Historically, on negative organic growth, we would be reducing margins. But with this guidance, we're expanding segment operating margins, and we're posting a record EPS. Adjusted EPS is at $11.50 to $12.30. or $11.90 at the midpoint. Business realignment of $20 million. And we did not include Lorde or Exotic in this FY20 guidance. We will, of course, update guidance after they close. So going forward, really, if you look at the FY19 results, the FY20 guide, coupled with the momentum that we have with the wind strategy and our recent acquisitions, we're well on our way to achieving our FY23 targets. And just to remind people, those targets by FY23 are sales growth of 150 basis points greater than global industrial production growth over the cycle, segment operating margins of 19%, EBITDA margins of 20%, free cash flow conversion greater than 100%, and EPS CAGR over that time period of 10% plus. The actions we're taking, the dedication of our global team members are really helping to generate strong returns for our shareholders. And with that, I'll hand it back to Kathy for a more detailed review on the quarter.