Parker-Hannifin Corporation

Good day, and thank you for standing by. Welcome to the Parker Hennepin Corporation's Fiscal 2023 Second Quarter Conference Call and Webcast. At this time, all participants are now listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during that session, you will need to press star 1 1 on your phone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. And I would now like to hand the conference over to your speaker today, Mr. Todd Liam Bruno, Chief Financial Officer. Sir, please go ahead.

Thank you, Chris. Good morning, everyone, and thank you for joining Parker's Fiscal Year 2023 Q2 Earnings Release Webcast. As Chris said, this is Todd Liam Bruno, Chief Financial Officer, speaking. And joining me today is Jenny Parmentier, our Chief Executive Officer, and Lee Banks, our Vice Chairman and President. Our second quarter results were released this morning, and before we get started, I just want to remind everyone, we will be addressing forward projections and non-GAAP financial measures. Slide two of this presentation details our disclosure statement to issues in these areas. These forward-looking statements detail issues that could make actual results vary from our projections. Our press release, this presentation, and all reconciliations for non-GAAP measures are now available under the investor section at Parker.com and will remain available for one year. We're going to start the call today with Jenny addressing some focus areas for the company as she takes on the role of CEO. She will then address some highlights for the quarter, which we just released this morning, and then I'll follow up with a brief financial summary and then review the increase to our FY23 guidance that we issued this morning. Jenny's going to wrap up with a few summary comments, and then Jenny, Lee, and I will take as many of your questions as possible. I now ask you to reference slide three, and Jenny, I will hand it over to you.

Thank you, Todd. Good morning to everyone, and thank you for joining the call today. As Todd said, before we get into the quarter results, I'd like to remind everyone what drives Parker and give you some insight on where we'll be focusing. Moving to slide two. New CEO, same three drivers. Living up to our purpose, continuing to be great generators and deployers of cash, and achieving top quartile performance versus our proxy peers. Slide three, please. Safety, purpose, and engagement are the foundation of top quartile performance. As I mentioned to all of you in the December call, we are committed to delivering the MEGIT cost synergies of $300 million and we're very pleased with the progress to date. We've said before it's still early innings for Wind Strategy 3.0, and we will continue to utilize it to accelerate our performance. Our culture is one of continuous improvement, as evidenced by past performance and results we will deliver well into the future. And we are fully committed to achieving our FY27 targets that we rolled out at Investor Day last March. All of this will allow us to continue with the transformation and ensure a very promising future for Parker. Moving to slide four, please. You've seen this before. Parker has a proven strategy. The wind strategy is and will remain our business system. It is a system focused on the fundamentals. We trust the process and will continue to get results from it as we have in the past. Slide five, please. So where will Wind Strategy 3.0 accelerate our performance? Well, it always starts with our people. Safety is number one, and it always will be. Our goal is zero incidents, and we believe it is possible. We've brought a lot of new people into the business over the last couple years, and we have the opportunity to double down on the training and chartering of high-performance teams and leaders. This will further strengthen our culture of continuous improvement and our brand of Kaizen well into the future. Moving over to customer experience, we have an opportunity to do even better with the digital customer experience. Anywhere from how we interact with our customers on quotes and orders to the availability of digital products and the use of artificial intelligence for demand forecasting with both our customers and our suppliers. It's early days for our zero defect initiative as well. This obviously drives better quality and overall customer satisfaction. This is the exact same approach that we took with zero safety incidents. Zero defects is possible. It starts with engaging our people around robust products and capable processes. Doing this right exposes the hidden factory, improves quality, reduces cost, and thus expands margin. Best-in-class lead times have been part of our wind strategy for many years. And coming out of the pandemic and subsequent increase in volume, we see even more opportunities to improve lead times and become supply chain leaders. Our customers deserve this level of service, and all of these are strong enablers of growth. Profitable growth is a combination of performance and portfolio changes, which we have demonstrated. Strategic positioning is a tool used by our general managers to segment their business and position them best in their markets and with their customers. This process and cadence will continue to drive the critical thinking about growth in the division and closest to the customer. We are obviously seeing the benefits of a transformed portfolio and we will continue to seek out those opportunities that will enhance the transformation. The most significant CapEx spending in decades will bring growth to Parker with all the technologies we have supporting the secular trends today and for many years to come. We have an annual cash incentive plan which incentivizes the right behaviors and drives a real intensity around growth. Moving over to financial performance, we have a proven set of simplification tools which will continue to help us reduce complexity and cost. Housed in this area is our simplified design process which you've heard us talk about a lot. This has become a fundamental, a business fundamental across the corporation. We have a robust process around value pricing and will continue to strive for margin neutrality in these inflationary times. We will also double down on training the principles of lean. This is the foundation of our continuous improvement culture and it drives safety and productivity in all of our operations. You've heard us say many times over the past few years that while not immune, To the chaos of the supply chain, we fared better than others due to our dual sourcing initiative and our local for local strategy. The pandemic and subsequent increase in volume exposed some areas that we can further improve upon to ensure that we become supply chain leaders. Our teams are looking to further enhance the visibility of the changing demand picture and utilize some new scheduling tools that will drive efficiency in the operations and those best in class lead times that I just mentioned. Focusing on these areas in Wind Strategy 3.0 will help us to achieve top quartile performance. Slide six, please. Our capital deployment priorities remain unchanged. We will maintain our record on dividend payouts and target a five-year average payout of 30% to 35% net income. We will target 2% of sales on CapEx to fund organic growth and productivity. The 10b51 share repurchase program will remain in place and our near-term and top priority is to de-lever post the MEGIT acquisition. We will keep our acquisition pipeline healthy, and we'll continue to build relationships for future acquisitions. Slide 7, please. The Q2 was another quarter of excellent operating performance. We saw a 16% reduction in safety incidents versus prior year, further supporting our ability to reach zero incidents. Sales came in at $4.7 billion, a 22% increase to prior, with organic growth coming in at 10%. Strong segment operating margin across all segments has led us to a full-year guidance increase, and we are very happy with the progress of the MEGIT integration. All activities and synergies are on schedule. Moving to slide eight, we'd like to share some recent highlights on the integration. Key leaders from both Parker and Meggitt are leading over 20 teams that are creating a lot of value and integrating the functions. Engagement with the team members and the customers is high. Widespread activity in all locations. And wind strategy training and implementation is well underway. Just a note here, we have a proven track record of delivering synergy targets, and this acquisition will be the same. The teams are following the integration playbook that has been developed over the last several acquisitions, and I am sure they will add some new best practices to it as well. Slide number nine. So we are on track to achieve the $60 million in synergies by the end of this fiscal year, and the graph on the left illustrates our path to $300 million in synergies and adjusted EBITDA margins of 30% by FY26. Synergies are represented in blue, and the cumulative costs to achieve are in gold. On the right side of this page, this quadrant depicts the use of the overall wind strategy to achieve the synergies and ensure operational excellence into the future. Starting with the top left, safety, lean, Kaizen, high-performance teams all make up our brand of Kaizen and will drive the engagement and continuous improvement well into the future. Simplification is a major area of focus for the integration teams. This is where we look at structure and org design. We use our 80-20 complexity reduction tool, and we implement simple by design principles. All of this drives real ownership and decision-making at the division level, further empowering the team to drive results. Moving over to SG&A, we've had the realization that there is a lot of opportunity moving MEGA from a centralized structure to Parker's decentralized structure, driving that overall decision-making to the local level and improving overall speed. With this acquisition, footprint optimization is very minor. Remember, we have complementary technologies with this acquisition and not a lot of overlap at the plant level. And with supply chain, we'll optimize pricing, terms and conditions, direct and indirect material spend, as well as logistics. Again, off to a great start, very pleased with the performance one quarter in. And now I'll turn it back to Todd for a summary of our Q2 results.