Parker-Hannifin Corporation

Good day and thank you for standing by. Welcome to the Parker Hannafin Corporation's Fiscal Year 2022 Third Quarter Earnings Webcast and Conference Call. 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 session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. And now it is my pleasure to hand the conference over to your first speaker today, Todd Leon Bruno, Chief Financial Officer. Thank you. Please go ahead.

Thank you, Paul. Good morning, and thanks to everyone for joining. This is our fiscal year 2022 Q3 earnings release webcast. As Paul said, this is Todd Leon Bruno. I am Chief Financial Officer. And as usual, with me today are Tom Williams. our Chairman and Chief Executive Officer, and Lee Banks, our Vice Chairman and President. Today, we are going to discuss forward-looking projections, and also we will discuss some non-GAAP financial measures. Slide 2 in our deck details our disclosure statement on these areas. Actual results may differ from our projections due to uncertainties listed in these forward-looking statements, and those are detailed in all of our SEC filings. Reconciliations for all the non-GAAP measures, along with this presentation, have been made available under the investor section on Parker.com, and those will remain available for one year. I'd like to remind everyone before we begin that we are still bound by the requirements of the UK Takeover Code in respect to discussing certain details of the pending MEGIT transaction. As for the call today, as usual, we'll start with Tom discussing some key items for the quarter. I'll follow up with some additional color on our Q3 results and detail the increase to our guide that we issued this morning with all of our press releases. We'll finish the call with any questions you have for Tom, Lee, or myself. And with that, we are now on slide three, and Tom, I'll hand it over to you. Thank you, Todd, and welcome, everybody, to the call today.

Appreciate your participation. It was a record quarter, record quarter for the quarter and record quarter for all-time and a lot of key metrics and was delivered against very difficult circumstances that required exceptional agility and performance by our global team. I know we all lived through it, but just as a refresher, what happened in Q3, we had the Omicron spikes, which drove absenteeism. We had supply chain challenges, inflation, China COVID shutdowns, and the Ukraine war. So just your basic average quarter, obviously I'm being sarcastic, but obviously not ideal conditions. And what was remarkable against that backdrop, we turned in a number of all-time records, as I mentioned, and my thanks to the entire team for just great performance and resilience in these times. So a couple comments about the quarter on slide three. Safety is our top priority. We continue to be top quartile when you look at our performance on safety incidents versus our peers. We're doing that through our high-performance teams, which is how we run the factories and the warehouses, and a culture of Kaizen. And as I've mentioned before to shareholders, There's a very strong linkage between safety, engagement, and business performance. If you look at those three metrics for us for the last seven years, they're all going in the same direction. Our sales growth was 9% versus the prior year. Organic was a positive 11%, so that was very nice. We eclipsed $4 billion in sales for the first time in the history of the company. First time over $4 billion and a quarter, so it was a great milestone. We had strong demand against virtually all of our end markets. Segment operating margin was 20.3% as reported, or 22.7% adjusted. That was 130 basis points, better than prior years. So expanded margins, 130 basis points, and the kind of conditions that I started to call was just remarkable performance. We increased the quarterly dividend 29%. That is the largest increase in our history and clearly signals the confidence that we have about Parker for the future. We have some temporary things which we highlighted in future slides here that Todd will go over about the Q4 impact related to China COVID shutdowns. The comment here I just want to make is that that's a temporary thing. How long it goes, it's hard to predict, but we expect to come up to full production sometime in Q1 and that we'll make up this delta that we're experiencing in Q4 during the course of the rest of FY23. And maybe to clarify, if you're looking at our what we're talking about China versus what some of our peers are, we only have 60 days left in our fiscal year. So it's very hard for us to make that up in the rest of the fiscal year, but we clearly feel confident that we'll make it up in FY23. If you look at these results, it's the win strategy, it's the portfolio changes, it's the fact that the company is now a much longer cycle and a better performing company. On slide four, what drives us is really three things. Living up to our purpose, which is enabling engineering breakthroughs, that lead to a better tomorrow, being great generators and employers of cash, and being a top quartile performer. And I want to give you one example on slide five, really our purpose and action related to clean technologies. As the world migrates to a more carbon-friendly environment and applications, we're going to be there to help. One very topical and current area, given the inflation pressures in the Russia-Ukraine is the topic of energy and the availability of energy and inflation of energy prices around the world. And as the world moves from brown sources of energy to greener sources of energy, it's pretty clear that we're going to need to use all shades of color between brown to green as we walk to that cleaner tomorrow. And clearly a big part of that bridge to that cleaner tomorrow is going to be natural gas. And we wanted to talk about really natural gas, where we play in it, and just how we're going to be able to help society, our purpose and action here. So upstream, there's four main components here, upstream, midstream, liquefaction, storage and regasification, and power generation. On the bottom of this slide, you see the six Parker technologies that we utilize to go into there. A couple anecdotal comments for each one. So in upstream, we've got fluid power controls for the rig equipment. We have instrumentation valves and controls in there as well. In midstream, it's primarily gas filtration. On the liquefaction, storage, and regasification, that would be our pumps, our valves, sealing technologies, fluid conveyance, and this is all under cryogenic conditions, so ultra-low temperatures. Then power gen I'm going to cover on the next slide. So a lot of what we do for society on compressed natural gas and liquid natural gas is going to be directly applicable as the world moves to hydrogen, which is on slide six. So that last value chain as part of natural gas that I think cover is the power generation piece. And clearly, what's obvious here and what's really helpful for us, and I think our customers, is all the technologies we have on CNG and LNG are directly applicable in the hydrogen. You can see in the middle of the page the applications, those five bullets we have in the middle. On the right-hand side are our various technologies, and there's similar technologies for both fuel sources, with the exception of our same technology, will need to be even more sophisticated, which we're working on as we speak, to be able to seal hydrogen, which is a smaller molecule and more difficult to seal. But we'll be a big part of this bridge with natural gas, and we'll be there to help when society is ready for hydrogen as well. You go to slide seven, which happens to be one of my favorite slides. And while you may be tired of me showing this slide, I think it's the simplest way for shareholders and people that maybe aren't familiar with us to understand how different the company is over the last seven years. It's been our people, which is really their engagement, their ownership, those top quartile results that we see from our people driving top quartile performance. So in the portfolio, and I would just summarize it, when we close MEGIT, we will deploy $20 billion of money into acquisitions, reshaping the portfolio. We will have doubled engineering materials, doubled aerospace, and doubled our filtration businesses over this period of time. dramatically reshaping the company and the future of the company. Then on the strategy side, you have the wind strategy 2.0 and 3.0 now over this period of time, and you've seen what it's done to margins. EPSCs are just phenomenal. This is high into the right type of metrics on this page, which is hard to do, I can assure you of that. So hopefully you see from this progress, in addition to the alignment we have with the positive secular trends in aerospace, digital, electrification, and clean tech that our business is poised for a very promising future over the next five years. I wanted to close my opening comments with giving you an update on slide eight with where we stand with the regulatory clearances regarding to the MEGIT transaction. So on the antitrust side, we've already cleared without any conditions from the following countries, Australia, China, Saudi Arabia, Singapore, and Turkey. Brazil has given us unconditional approval subject to their usual 15-day waiting period, so that's in good shape. We've received conditional antitrust clearance from the European Commission, subject to our commitment to divest of our aircraft wheel and brake business, which is in process. And then on the foreign investment side of things, the transaction's been cleared by Australia, Denmark, Germany, and Italy. So probably the simplest way for me to describe it, what remains and what's left, our antitrust clearances for the U.S. and the U.K., and then national security clearances for the U.K. and France. So we're making good progress, and we continue to expect the transaction will close sometime during Q3 of this calendar year, and we're very excited. We're going to put two great companies together. We're going to double the size of aerospace, and we're going to have great synergies as we work together, and we're going to do all this at the beginning of an aerospace recovery, so the timing is perfect. With that, I'll turn it over to Todd to give you more details on the quarter.