Parker-Hannifin Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Parker-Hannifin Fiscal 2021 Third Quarter Earnings Conference Call and Presentation. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this time, you will need to press star 1 on your telephone keypad. If you require any further assistance, please press star 0. The opening speaker for today's call is Parker's Chief Financial Officer, Mr. Todd Liam Bruno. Please go ahead, sir.

Thank you, Elaine, and good morning, everyone. Thanks for joining our FY21 Q3 earnings release webcast. As Elaine said, this is Todd Liam Bruno, Chief Financial Officer, speaking. Here with me today, our Chairman and Chief Executive Officer, Tom Williams, and President and Chief Operating Officer, Lee Banks. On slide two, you'll find the company's Safe Harbor disclosure statement addressing forward-looking statements as well as non-GAAP financial measures. Reconciliations for all non-GAAP measures are included in today's materials. These reconciliations and our presentation are accessible under the investor section at Parker.com and will remain available for one year. We'll start the call today with Tom providing some quarter highlights and some strategic commentary, and I will provide a summary of the quarter, financial results, and review the increase to guidance that we announced this morning. Tom will then close with key messages, and then Tom Lee and I will take any questions the group may have. With that, I'll direct you to slide three, and I'll hand it off to Tom.

Thank you, Todd. Good morning, everybody. Before I jump into slide three and a quarter, I want to say thank you to all the Parker team members around the world for an outstanding quarter. It's really more than just this quarter. It's really been a whole year in the performance through the pandemic and also the transformation of the company into a top quartile diversified industrial company. These results are all because of your efforts. So let's look at the quarter on top of slide three. Starting with safety, as we always do, we had a 33% reduction in recordable incidents. We're still in the top quartile. A combination of safety, lean, our high-performance team structure, and Kaizen, we're all driving high engagement and high performance. You see that show up in our results. Sales grew about 1%. The organic decline was minus 1%. But in particular, if you take out aerospace and look at the industrial only, the industrial segment grew organically almost 4%, so that was significant. We had five all-time quarterly records. You can see the net income, EPS, and the segment marks for Parker North American International. The EBITDA margin was very strong at 21.6. As reported, 21.8 adjusted a huge increase versus prior 250 basic points. Year-to-date cash flow was an all-time record at $1.9 billion and a little over 18% of sales. Then you go to the very last row of this page, you see segment operating margin on adjusted basis, 21.4%. Again, a significant improvement versus prior, plus 240 basis points. So a terrific quarter in really tough conditions. So you go to the next slide. I want to talk about the transformation of the company. You know, the old adage that a picture's worth a thousand words is And so I want to take you to slide five, and this is really the picture that speaks to the transformation of the company. Let me explain the chart here for a minute. So you've got in gold bars the adjusted EPS. The blue line is global PMI plotted on a quarterly basis. If you look at the last six years and look at that dotted green line and compare that to the blue global PMI line, you see they are much less correlated. In fact, they are diverging. And there's been a step change in performance. The EPS over this time period has more than doubled from $7 to our guidance of $14.80, so approaching $15. And what's propelled that over that time period is an EBITDA margin that's grown 600 base points. So you might ask, how? How's that happened? It's really that blue takeaway at the bottom of the page. It's our people, that focus, the alignment, the engagement that comes when you have people think and act like an owner. The portfolio, which is a combination of our interconnected business technologies and the value they bring, and the capital deployment we've done, buying some great companies that have added to the strength of the company. Then our performance, which really sits with the strategy of the company. One strategy 2.0 at kind of the beginning of this journey, and then one strategy 3.0 most recently in FY20. So this combination has really transformed the company. You see that as evidenced in this slide, and we're very proud of it. But if you go to slide six, so that's what's kind of in the rearview mirror. But going forward, we're equally excited about where the company is going to go. And I've called this a convergence of positive inflection points. So on the left-hand side is kind of those external inflection points. You're familiar with a lot of these, but the macroenvironment industrial momentum, you see that in our positive orders and positive organic growth industrial we showed in this quarter. Aerospace is going to recover. The question is just what the trajectory will be and the timing. vaccines are making progress around the world. There's going to be a significant amount of climate investment. If you put all that on top of it, I didn't write all these down, but low interest rates, pent-up capex demand, and fiscal spending, you have a very attractive environment for industrials for the next several years. On the right-hand side is really the internal things we've been doing, Winch Edge 3.0 in particular, but that last slide that I just went through spoke to all those internal actions because that's what's been propelling us. Remember that last period The last six years really had very little help from a macro standpoint. So you look at the three major things I highlight here, performance, becoming top quartile, strategies to grow fast in the market. You've seen our margin expansion, great cash flow generation consistently over the cycle. Portfolio, we've added three great companies, all accretive on growth, cash, and margins. And with the rapid debt paydown that we've done, we're positioned to do future capital deployment, which is very exciting. The technology I'll get into in the next slide, but the interconnected technologies really is distinctive for us. And then with that climate investment, we are very well positioned with our suite of clean technologies to take advantage of that. So I would tell you that my view and the team's view is this is about as good an environment as we've seen in a number of years. Go to slide seven. You've heard me talk about this page, the power that this interconnectedness of technologies brings, the value it creates for customers. What I want to do today in light of the clean technology discussion is give you four examples of how this suite of technologies helps with a more clean environment, clean technology world. So the first would be electrification. And we've got a full portfolio of technologies here, hydraulic, electro-hydraulic, pneumatic, electromechanical. No competitor's got that breadth of technologies. And we formed about four years ago the Motion Technology Center, which put the best and brightest of engineers doing motion technologies and things that fly, as well as things with wheels underneath it. So we put the motion and the aerospace teams together. And this team has come up with a great listing of products around motors, inverters, and controllers. But there's also, in addition to the typical motion opportunities, there's other challenges around electrification, like light weighting, thermal management, shielding, structural adhesives, and noise vibration. All these, through the combination of what we have as legacy and with the Lord acquisition, we're well positioned to take advantage of those. Secondary is batteries and fuel cells. They utilize most of the technology you see on this page. Third would be clean power sources, and that kind of falls into two buckets. Renewables, which we do a lot and always have done a lot on wind and solar. Then the hydrogen. We just recently joined the Hydrogen Council, and it's going to be both onboard as well as infrastructure opportunities as you go out for the next many years. And it's really building on our high pressure and our cryogenic applications that we have today. And then we've been a more sustainable company for a long time. And really the clean technology example for us that started a lot of things is filtration. And our filtration business protects and purifies assets and equipment for people for a more sustainable environment. So we feel very good about this portfolio as there's more climate investment in the future. Going to slide eight. Just wanted to remind you of our purpose statement, enabling engineering breakthroughs that lead to a better tomorrow. It's been very inspirational for our team. And I think it comes more to light when we give you examples of the purpose and action, which is on slide nine. And again, kind of following with that clean technology discussion, I'm going to highlight electrification. I'm going to highlight, in particular, electric vehicles. On the left-hand side, you see applications that have changed because of an HEV or an EV versus a combustion engine. On the right-hand side, you see the various technologies that Parker has that addresses those applications. I won't read all those underneath it, but you see the major categories, safety-related technologies, things that save weight, thermal management, and a variety of things we do for critical protection. The big opportunity for us, so we obviously are in the factories helping to make these vehicles, and we'll always do that, but the big opportunity for us is the onboard content around engineering materials. Our bill of material for an EV or an HEV is 10x what it was in a combustion engine. And it's one of the key reasons why our Lord business has grown so nicely, even despite the pandemic. So we grew 11% organically in Q3 for Lord. So we're very happy with the progress so far and our purpose and action around electrification as an example. So with that, I'm going to turn it over to Todd with more details on the quarter. Thank you.