Parker-Hannifin Corporation

Good day, and thank you for standing by. Welcome to the Parker Hannafin Fiscal 2021 Fourth Quarter and Full Year Earnings Conference Call and Webcast. 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 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, Parker's Chief Financial Officer, Todd Liam Bruno.

Thank you, Dawn, and good morning, everyone. Thanks for joining our FY21 QCOR earnings release webcast. As Dawn said, this is Todd Liam Bruno, Chief Financial Officer speaking. I'm here today with Tom Williams, our Chairman and Chief Executive Officer, and Lee Banks, our President and Chief Operating Officer. If you could focus on slide two. This is the company's safe harbor disclosure statement addressing forward-looking statements and non-GAAP financial measures. Reconciliations for any non-GAAP measures are included in today's materials. Those reconciliations and our presentation are accessible under the investor section at Parker.com and will remain available for one year. As usual, we'll start today with Tom providing some highlights of the quarter and our record fiscal year, as well as some color on Parker's transformation. Following Tom's comments, I'll provide a brief financial summary and provide some details on our FY22 guidance that we just released this morning. I'll then hand it back to Tom for closing comments, and then Tom Lee and I will open the lines for Q&A. And just one reminder, in respect to the announcement we made Monday concerning the MEGIT acquisition, we are still bound by the requirements of the U.K. takeover code. With that, I'll ask you to move to slide three, and I'll hand it off to Tom.

Thank you, Todd. Good morning, everybody. Thanks for joining us today. This marks the end of FY21 for us, and it was a difficult year personally and professionally for everybody due to COVID, but it was a year where the Parker team really shined. We delivered outstanding results and lived up to our purpose in enabling a better tomorrow, and my thanks goes out to the global team for just a great year, great quarter. So let's start with the quarter. It was dynamite, top quartile safety performance, 29% reduction in reportable incidents. The sales growth in the quarter was 25% approximately. Organic was almost 22, and the industrial portion of the company grew at almost 27% in the quarter. We had six all-time quarterly records, sales, net income, EPS, segment margins for Total Parker, as well as North American International. The EBITDA margins were very strong at 21.8% as reported, or 22.1% adjusted. It was 190 basic points improvement versus prior. On the segment operating margin, On an adjusted basis, if you go to that last row, 22.2% or a 230 basis point improvement versus prior. Just a great quarter and a really great team effort by everybody around the world. Go to slide four. We'll move to the full year. It was a year of records. And I won't read all these to you, but you can see eight all-time fiscal year records. And just that's in the history of the company. So that's 104 years to put up a record. So it speaks to how well the team performed in this last fiscal year. Sales growth came in almost 5% year-over-year. Organic was flat, but clear momentum building on orders and organic growth in the second half of the year, as you see from our order rates. FY23 margin targets, we hit them at full two years early, and we'll be announcing new targets once we have investor date March of next year, and we're going to go out for a new five-year target, so we'll be going out to FY26. We look forward to that discussion at that time. Operating cash flow was $2.6 billion, a record. It was almost 18% of sales. Free cash flow conversion rate was 135%. And we were very pleased to be able to announce the offer to acquire Mega PLC, which greatly enhances our aerospace portfolio, and I'll touch on that briefly here in a few minutes. So if you go to slide five, I want to talk about the transformation of the company, give you a little bit of color behind what's driving it, and the progress we're making on the results. On slide six speaks to the three drivers, living up to our purpose, being great generators and deployers of cash, and being a top quartile performer. I'm going to touch on each one of these over the next several slides. When it comes to purpose, enabling engineering breakthroughs that lead to a better tomorrow, this is something that really resonates with our people. It represents a higher calling to your work, and it acts as our North Star. In the next few slides, I'm going to talk about and highlight our purpose and action Specifically our technologies and how they're helping healthcare and how they're helping the climate and create a more clean technology world for everybody. So on slide eight, we're going to talk about vaccine production. In particular, something that's obviously very pertinent for today, COVID-19 production. On the left-hand side speaks to the challenges that drug manufacturers have today. This is a batch process typically with extensive inventories, long lead times to produce these products. They take huge space requirements, large footprints for storage, large footprints for the manufacturing processes, and very difficult changeovers. The cleaning cycles between the batch processes is very complicated. So the idea here is a simple concept that most of us can relate to. All of us have been in some kind of restaurant with a soda fountain where you can pick your beverage of choice. And, of course, the technology behind that is a concentrated syrup and carbonated water, and you get to pick the soft drink of your choice. So the idea here is instead of soft drinks, could we deliver sterile vaccine ingredients with a similar type of process? And slide nine is that process. So it's our in-line dilution system. It's a preparatory point-of-use process for combining the purified vaccine ingredients. So you look at that piece of equipment, you can see it's on wheels. So it's modular, easy to move around, easy to deploy, has mixing and sensing combined. It has two-way communications via the IoT enabled, It can talk to the manufacturer's enterprise system to enable scheduling just in time. It uses, very importantly, intellectual property protected single-use consumables. So instead of these massive batch processes, huge cleaning events for changeovers, this is a giant productivity improvement for the drug manufacturer on the speed of the changeover, but also just reducing contamination tied to the changeover. Then our software and automation helps control the amount and the flow of of these various ingredients. So this applies, obviously, to COVID-19. It will apply to other vaccines that are being developed. And we can use this for other drugs as well. So this is a really attractive business opportunity for us. But more importantly, it's a great help to customers and society. It's a great example of our purpose in action. Move to slide 10. Move to the climate and the clean technology portion of our purpose. We just recently announced last month new sustainability targets. You see on the right-hand side of this page, is our new sustainability report, which you can reach electronically. But we're announcing a 50% reduction in emissions by 2030, so that'd be scope one and two emissions, direct and indirect. And then by 2040, same thing, scope one and two, to be carbon neutral. So enabling a more sustainable future with what we do with our plants, our operations, our supply chain. But in addition, if you go to slide 11, and actually more importantly, how can we help our customers How can we help society with a sustainability journey? And so on this page, you see the eight motion control technologies across the top. And this portfolio, approximately two-thirds of this portfolio, is a very much part of the enabling of clean technologies for our customers. The exciting part is an expanding bill of material on automobiles, on construction equipment, on forestry, on mining, basically almost every piece of equipment on airplanes, engines, Everything's feeling this impact for more electric applications. So there's onboard opportunities, but there's also infrastructure opportunities. As the world has to build in infrastructures to support that growth, our technologies can help that infrastructure move. And then I want to move to slide 12, which illustrates the top four top performance portion of those three drivers. And you can see we're using two metrics to illustrate this. Adjusted EPS on the left and adjusted EBITDA margin on the right. That's really been our people, the strategic portfolio changes we made, the capital deployment decisions that we made over the last seven years, and the one strategy that's transformed is performance. When you step back and look at this, this is just remarkable improvement. On the left is a more than doubling of our EPS, and that's hard to do. I can assure you that's really hard to do. This is fantastic progress. a little less than $7 in FY16 and over $15 as we closed last year. And the EBITDA margin, which has clearly been propelling that from 14.7 to 21.3, so a 660 basis point improvement there. And then the last part on transformation and the drivers is cash generation and deployment. We touched on the cash generation piece in my opening comments, but clearly in the deployment is how do you deploy capital and buying effective companies. And we're very excited to put two high-quality companies together, an aerospace combination that we announced Monday. Parker and Megat nearly doubles the size of our aerospace system segment with highly complementary technologies, 70% sole source, a strong recurring revenue, excellent growth potential, combination of commercial aerospace recovery as well as the synergies, and this will be accreted to our organic sales growth, margins, EPS, and cash flow. This deal makes sense for all stakeholders, the shareholders of Parker and Megan, the team members of both of our companies, their parishioners, pensioners, and, of course, both of our customers. Following the announcement on Monday, we've introduced ourselves to the key stakeholders in the UK, reinforcing why we are the best home for Megan. Our long, great track record in the UK, the clear strategic rationale for the deal, including the premium we are offering to the Megan shareholders, our shared interest to continue to innovate and invest, and that we are committed to being a responsible steward of Megan. That is why we've agreed with Megan to offer the UK government a number of legally binding commitments about how we will operate going forward. These type of transactions take time, but we are pleased with the reception so far, and we look forward to constructive discussions with the key people in the UK government. And we'll keep you updated as the process unfolds and we go to the planned completion of this in approximately 12 months. With that, I'll hand it back to Todd for more details on the quarter.