Parker-Hannifin Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Parker Hannafin Corporation's fiscal 2021 second quarter earnings conference call and webcast. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Todd Liam Bruno, Chief Financial Officer. Thank you. Please go ahead, sir.

Thank you, Gigi, and welcome everyone to our earnings release webcast. This is Todd Liam Bruno, Chief Financial Officer, and joining me today, our Chairman and Chief Executive Officer, Tom Williams, and President and Chief Operating Officer, Lee Banks. Today's commentary and the slide presentation will be accessible as an on-demand webcast on our investor information website, located at phstocks.com and will remain available for one year. If you move to slide two, you'll see the company's safe harbor disclosure statement addressing forward-looking statements as well as non-GAAP financial measures. Reconciliations for any reference to any non-GAAP financial measure is included in today's material and are also posted on our website at phstock.com. If you move to slide three, you'll see our agenda. We'll begin with Chairman and Chief Executive Officer Tom Williams providing some strategic comments and highlights from our second quarter. Following Tom's comments, I'll provide a more detailed review of our second quarter performance and review the components of our increase to guidance for the remainder of our fiscal year FY21. Tom will then provide a few summary comments and we'll open the call to questions from Tom, Lee, or myself. And with that, Tom, I'll hand it off to you.

Thank you, Todd, and good morning, everybody. Thanks for your participation today. Now, before I move to slide four, I wanted to make a few opening comments. Calendar 2020 was an extremely difficult year, to say the least, for all of us, both professionally and personally, and I hope all of you are staying safe. Our global team has come together like no other time in our history and has responded to this combination of a health and economic crisis. We've rallied around our purpose in the wind strategy, and we've showed that Parker is an exceptional performer, even in the most difficult of environments. I'd like to take this opportunity at the beginning here to thank our global team for just great performance. You're going to see evidence of that over the next couple slides. If you go to slide four, one of our key competitive advantages are breadth and motion control technologies. We're now up to two-thirds of our revenue. You heard me talk about this historically. It was 60%. We're now up to two-thirds of our revenue comes from customers who buy from four or more of these technologies. It's these interconnected technologies that enable us to create even more value for our customers and create that distinct competitive advantage versus our competitors. If you move to slide five, we just had outstanding performance in the quarter when running through some of the highlights. Top quartile safety performance, we had a 23% reduction in recordable incidents. This now makes 75% reduction over the last five years, which has been phenomenal. Bill's decline was 2.5% year over year. You can see it was a little over 6% from an organic standpoint. This was significantly better than our guidance. and about a 50% plus improvement from where we were on Q1. Q2 was a record net income at $447 million. The EBITDA margin was a little over 23%, as reported, or 20.8% adjusted. You can see the significant improvement versus prior at 230 basis points. Year-to-date cash flow from operations was a record at 20.4% of sales. And then the table at the bottom there has got segment operating margin both as reported and adjusted basis, so I'd call your attention to the adjusted row. 20.4% segment operating margin adjusted, and again, a giant increase versus prior, plus 250 base points. So there's a lot of numbers on this page. We have a lot of companies to track. So the easy way to remember this is this is a quarter we put up 320s, and we happen to highlight them in gold, so greater than 20% EBITDA margin, CFOA margin, and segment operating margin. So we're pretty proud of that, and those are all great results during a pandemic. So just fantastic job by the whole team. If you go to slide six, we're going to talk about cash flow. Big cash flow quarter paid down $767 million of debt in a quarter. If you look at the last 14 months, it's $2.8 billion of debt. This is a little over half of the acquisition debt that we took on with lower-end excise, so just great progress there. You see the ratios in the middle of the page there of significance. If we go back a year ago, we were 4.0, and now we're at 2.7 on a gross debt to EBITDA basis. And we've now reinstated, effective in this quarter, Q3, our 10B51 share repurchase program. So I'll move to the next slide, which is our transformation of the company. And hopefully, just the last two slides are indicative of how the company has transformed. But I'd like to give a little more color and context as to what we're doing. So if you move to slide eight, this is our strategy summary on a page, and it's flanked on the left side with why we win, which you've heard me talk about this in the past. This is a list of our competitive advantages, and I've highlighted them, so I'm not going to talk about them necessarily today. But they're historical success factors that will continue on into the future. I want to focus most of the time for my next couple slides on where we're going, and I've got a slide on each one of these bullets. And the output of really this historical success factors and where we're going is that we want to be a top quartile company, and we want to stand out in the crowd, and we think we're doing that. So if you go to slide nine, the wind strategy, and this is 3.0. This is our business system. And pound for pound, this has been the most impactful change we've made to date to the wind strategy. And it's going to be wind 3.0 and our purpose statement. They're going to be the powerhouse behind our future performance. Go to 10. You've seen our purpose statement, enabling engineering breakthroughs that lead to a better tomorrow. This is a statement that everybody has really rallied around and found very inspirational within the company. It has enabled everyone to connect their efforts to this higher calling, this higher purpose in life. And really, it helps answer the question, how can we help through our customers create a better tomorrow? And given what's going on with the coronavirus and the vaccine, slide 11, is probably a great highlight of our purpose and action and just how essential we are to the vaccine value chain. The way to read this slide is to go left to right and go in a clockwise fashion. We'll start in the upper left-hand corner. So we're in the development and production phase of these vaccines, mixing, purification, filtration, and dispensing. Then you've got to get the product moved around. So we are in sterile transport containers, specially designed. And then all of our motion control technologies are in both air and ground transportation to move the product around the world. You need to be able to store it locally, and that requires low-temperature refrigeration, so our refrigeration technologies are in play there. Then when you administer to the patient, again, you need on-premise refrigeration, and then stoppers and syringe seals as part of our engineered materials offering. So we're very proud to be part of this value chain, and through our customers helping to create a better tomorrow that all of us as I started this call, are striving for as we try to exit the pandemic and deliver billions of vaccines to people around the world over the next quarters of years. So if you move to slide 12, my last slide for my opening comments, I want to focus on our strategy to grow fast in the market. And our proxy for the market is global industrial production growth, which is SCIPI, that acronym. So on the left-hand side, it's a series of portfolio things that you've seen us make. transforming and performing the company, buying three great companies, $3 billion of acquired revenue, that were all accretive on growth, cash, and margins. As a matter of fact, as an example, Lorde grew mid-single digits last quarter, while the rest of the company, the total company, grew minus six. On the right-hand side is a list of organic growth strategies. And what's interesting about this list, with the exception of international distribution, these are all new with wind strategy 3.0. I'm going to make a quick comment on each one. Strategic positioning is really our effort to focus on stronger divisional strategies. We have a cadence with every division. We do three a month. These are extremely productive conversations with our general managers to how they're going to position their division to win versus a competition. Second, both are an innovation. We made two big changes. One is a metric PBI, which is product vitality index. It's a measure of New products as percent of sales looking at a five-year period for new products. And then new product blueprinting, which is that NPP acronym there, is really a change to our ideation process to create better ideas coming into the innovation funnel. The output of what we're trying to do here is that we want our PBI context, the percent of sales, to grow by 600 basis points over the next five years. A more innovative portfolio, better chances to grow, better margins, et cetera. And then simple by design, I've talked a lot about that. It's a speed initiative. It's a cost initiative. It's a customer experience initiative. It's a recognition that 70% of your costs are tied up in how you design a product. And simple by design is all about focusing on design excellence. So when you put together design excellence with operational excellence, it's a dynamite pairing. International distribution is going to continue from the success we've had with 2.0. Digital leadership is really a four-pronged attack, digital customer experience, digital products, digital operations, and digital productivity. And digital productivity is where we have a concerted effort on artificial intelligence and data analytics. And then lastly, a new incentive plan, our annual cash incentive plan, our acronym ACIP, and that's going to focus our divisions and the whole company on driving growth, cash, and earnings. So it's this combination. And it's this combination that's helped us perform better on the top line, organically in particular, in the current downturn. And it will be our catapult to growing fast in the market as we go forward. So with that, I'm going to hand it back to Todd with more details for the quarter.