Parker-Hannifin Corporation

Good day, and thank you for standing by. Welcome to the Parker Hennepin Fiscal 2022 Fourth Quarter and Four-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 11 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Todd Leonbruno, Chief Financial Officer. Please go ahead.

Thank you, Carmen. Good morning, everyone, and thank you for joining Parker's fiscal year 2022 Q4 earnings release webcast. As Carmen said, this is Todd Leonbruno, Chief Financial Officer speaking. And as usual, with me today are Tom Williams, Chairman and Chief Executive Officer, and Lee Banks, Vice Chairman and President. Today our discussion will address forward projections and non-GAAP financial measures. Slide 2 of the presentation provides details to our disclosure statement in these areas. Actual results may differ from our projections due to uncertainties listed in these forward looking statements and detailed in our SEC filings. Reconciliations for all non-GAAP measures along with this presentation have been made available under the investor section at Parker.com and will remain available for one year. In respect to the mega transaction, while we expect this transaction to close in Q1 of fiscal year 2023, that's our current quarter, we are still bound by the requirements of the UK Takeover Code in respect to discussing certain details. We do plan to hold an investor call shortly after the close to provide expanded color on the transaction once regulations allow. For the call today, we'll start with Tom discussing the fourth quarter and our fiscal year 2022 full year results. And I'll follow with a brief financial summary and review some of the assumptions around our initial fiscal 2023 guidance that we issued this morning. After that, we'll finish the call with the Q&A section for any questions you have for Tom, Lee, or myself. So with that, Tom, I'll turn it over to you and ask everyone to refer to slide number three.

Thank you, Todd, and good morning, everybody, and let me welcome everybody as well to the call. Starting with slide three, we had a great quarter. It was absolutely dynamite, record performance, great execution by the team around the world. The first two bullets really is what drove our success. You know, safety has always been our top priority. We're leveraging high-performance teams. Think of that as how we are organized around the world and how we engage and involve our people. Lean is how we run the factories, and Kaizen is our culture of continuous improvement and how we go about making things better. We also just conducted our 2022 engagement survey. We were able to capture over 90% participation of our people around the world, ask them questions around empowerment and engagement, and we got great results. We got results that put us in the top 8% of industrial companies. It's really these first two bullets that's driving an ownership culture within the company, driving an ownership for results and our business performance. Going down to the third bullet, sales were 4.2 billion. so an increase of 6% versus the prior year. Organic growth was 10% versus the prior year, so an excellent quarter organically. Segment operating margins was 20.9% as reported, or 22.9% adjusted, so that's a 70 base points better than prior year. This is really excellent margin expansion in the face of all the challenges that you're fully aware of, supply chain inefficiencies, inflation, and, of course, the China COVID lockdowns. So just really outstanding performance in a very difficult environment. Lots of records, and my thanks to the global team for all their hard work. Moving to slide four, talking about the full year, came in at $15.9 billion of sales, 12% organic growth versus the prior year. So a really big year for us organically. Record segment operating margin, 20.1% as reported, or 22.3% adjusted. That was 120 basis points. better than the prior year, really speaks to the robustness and the agility of our business model. Operating cash flow was $2.4 billion, and that represented 15.4% of sales. So a mid-teen CFOA with growing sales, which was very commendable. And then, of course, all of you hopefully are aware we announced our FY27 targets in the March Investor Day. And I'll just summarize. It was bigger growth. bigger margins, bigger cash flow targets, and we're confident in our ability to get there in the future. So a transformed company with a promising future. What drives us is on slide five. It's what's been driving us in the past, present, and will drive us in the future versus living up to our purpose, enabling engineering breakthroughs that lead to a better tomorrow. Being great generators of cash, as evidenced by the mid-teens, see it the way that you saw, and great deplorers of cash by our pending Megadac acquisition. And then being a top quartile company and how we perform versus our peers, which really goes to slide six, which I'd like to show this slide. It's updated now for FY22 numbers. And really, the reason for showing it is objective evidence that our company is significantly different, significantly better than it's been in the past. On the left-hand side is adjusted EPS, and on the right-hand side is adjusted EBITDA And I think the pace of improvement speaks for itself. You can look at this chart. Everything's moving high and to the right, and it's really great progress. In particular, if you look at 21 versus 22 on EPS, going from $15.04 to $18.72, at the gain of $3.68, it's the largest year-over-year dollar gain we've had on EPS in the history of the company. So that was a 24% improvement. On the right-hand side, almost 800 bps of EBITDA margin improvement, which is fantastic. And if you look at these two improvement trends side by side, arguably the most improved industrial company out there over this time period. And I'm hoping for the shareholders, a great company to invest in as well. Going to slide seven, I like the picture here. We're trying to symbolize that we're coming in for a landing here on Megan. We're close to the end. We expect to close sometime in Q1, our current quarter, FY23. The only remaining regulatory approval is the U.S. Department of Justice, which we expect to complete sometime in a quarter. And following the USDOJ, it's customary to go to court in the UK to get final approval, which we expect also in the current quarter. The timing here is perfect. We're adding a transformational acquisition, doubling aerospace at the beginning of a commercial aerospace recovery, and with the synergies in front of us to help us grow the top line and the bottom line. And as Todd mentioned, we'll host a call after this closes to bring you up to date on MEGIT and to update our guidance. Moving to slide eight, we're going to talk a lot in the Q&A about FY23 sales guidance, I'm sure, but I wanted to highlight the future growth drivers that we talked about in the March Investor Day. These growth drivers remain intact. I'm just going to walk you briefly through the five columns that you see here. The first is our business system, the wind strategy. It's about the things we can do ourselves to grow differently organically. It's about innovation, strategic positioning, distribution growth, incentive plan changes that we're making, and simple by design. Go to the next column, the CapEx changes that we expect over this time period. We think this will be a very constructive time for industrials. There's going to be a need to invest in supply chain development, dual sourcing, automation, all things that are going to be very helpful and need to mark our products. Regarding channel restocking, in particular here I'm referring to the distribution channel, it's improving, but there's still ways to go. And I think our partners will probably be somewhat cautious as they add inventory. But as we go out the next several years, they're clearly not at the inventory levels they'd like to be, so that's additional tailwind. The acquisitions are transformational. reshape the portfolio, doubling filtration, doubling engineered materials, doubling our aerospace business once mega closes, and really reshaping the portfolio to be much more longer cycle, accretive, more resilient. And then our linkage to the secular trends around the world, aerospace, digital, electrifications, and clean technologies are all going to help us grow differently. So there's targeted organic growth by FY27, 46%. We think industrials and Parker in particular is going to be a very attractive space over the upcoming years. And with that, I'll turn it back to Todd to talk more about the quarter.