Parker-Hannifin Corporation

Good day and thank you for standing by. Welcome to Parker Hannafin's fiscal 2023 third quarter 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. You will then hear an automated message advising your hand is raised. To withdraw your question, press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Todd Liam Bruno, Chief Financial Officer. Please go ahead.

Thank you, Chris, and good morning, everyone, and thank you for joining Parker's fiscal year 2023 Q3 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 third quarter results were released this morning, and just a reminder, today we will be addressing forward projections and non-GAAP financial measures. On slide two of this presentation, you'll find further details to our disclosures in these areas. Actual results may vary from our projections based on some of the details that are listed on this slide. Our press release, this presentation, and all reconciliations of non-GAAP financial measures are available under our investor section at Parker.com. and they will remain available for one year. We're going to begin the call today with Jenny addressing highlights of the third quarter and really touching on how Parker is so well positioned for the future. I will follow with a brief financial summary and then review the increase to our guidance that we released this morning. Jenny will then wrap up with summary comments and then Jenny, Lee, and myself will address any questions from the queue. I will ask you now to address yourself to slide three. Jenny, I will hand it over to you.

Good morning to everyone and thank you for joining our call today. Q3 was a quarter of outstanding performance across all of Parker. Starting with safety, we remain in the top quartile with a 17% reduction in recordable incidents. Safety has been and will continue to be our top priority. We had record sales of 5.1 billion in the quarter, a 24% increase over prior year with organic growth of 12%. The wind strategy and portfolio changes have clearly delivered record performance, driving a full year guidance increase. We are increasing the quarterly dividend 11% over last year, and we are happy to report today that the MEGIT integration and synergies are ahead of schedule for fiscal year 23. Moving to slide four, please. We couldn't be more pleased with the enthusiasm and dedication of the talented MEGIT team, further evidence to the shared heritage and culture identified early in the acquisition process. From the start of the integration, safety and engagement have been top priority. We have the key leaders and structure in place to ensure performance into the future, and the wind strategy deployment is well underway. The team picture on the right of this page is from a recent Kaizen event held in the ANSI Park UK location. And at the end of March, we held a wind strategy training session here in Cleveland with over 50 leaders from various MEGIT locations. There are multiple examples of where the wind strategy has already taken root and is being used to improve the business. We are confident in our assumptions around working capital opportunities and are already starting to see some of them materialize. We are increasing our FY23 synergies from $60 million to $75 million, and we remain committed to achieving $300 million in synergies by FY26. Slide five, please. With the addition of MEGIT to our portfolio, we are well positioned for long aerospace cycle growth. We have significant content on premier commercial and military programs, all the right ones with a growing bill of material. These are long lifecycle programs with a growing aftermarket well into the future. As a reminder, with the addition of MEGIT, our aerospace aftermarket has increased 500 basis points. We are greatly benefiting from the recovery of the aerospace market Commercial MRO and OEM is very strong, and military is positioned to do well in the upcoming years. With the addition of MEGIT's complementary technologies, we provide a comprehensive offering and a stronger bill of material that allows us to add value and help solve our customers' problems. We have key technologies, such as advanced sensors for more efficient engine control, thermal management systems for higher heat loads, and lightweight materials for reduced fuel consumption. All of these enabling sustainable aviation. Aerospace and defense markets are now 30% of our sales. All of this adds up to significantly increased shareholder value. Slide six, please. Many of you have seen this slide before as we introduced it last year at our investor relations day. Over the last eight years, we have strategically reshaped the portfolio to double the size of aerospace, filtration, and engineered materials. The combination of the portfolio changes and secular trends is already and will continue to create a profound shift in our sales mix. By FY27, we will have approximately 85% of the company in long cycle end markets or industrial aftermarket. This mix shift is further reason why we will grow differently in the future, and it is why we are committed to our FY27 target of 4% to 6% organic growth over the cycle. Slide seven, please. A lot of discussion, questions, and inquiries lately on backlog. As you can see by the chart on the left of this page, our backlog is at a record level. What is encouraging is that in Q3, we saw our backlog dollars increase 3% sequentially. Since FY16, we've seen a 3x increase in backlog dollars and a 2x increase in backlog coverage. Very important to note here that we are constantly analyzing the backlog at the division and group level. and staying close to our customers on the health of the backlog. We know from the past that it isn't bulletproof, but having said that, this consistent growth over time is an indicator that the portfolio changes are changing the company. Slide eight, please. As demonstrated by the strong performance in the quarter and the increasing power of our transformed portfolio, I want to share a few slides with you on why Parker is built for the present and the future. Slide nine, please. Parker has a proven business system, the WIN Strategy 3.0. Whenever I talk to anyone about the WIN Strategy, whether it's a new Parker team member or someone externally, I say the same thing, trust me, I've used it and it works. It is a system focused on the fundamentals. We trust the process and we know that making the safety and engagement of our team members our top priority consistently delivers results. Our lean tools, Kaizen culture, supply chain, and simplification initiatives have driven margin expansion and will continue to do so well into the future. Our increased aerospace exposure is delivering results today, as well as our 800 basis points expansion of international distribution, which still has room for growth. Our innovation sales are two times the previous decade. And we have a new annual incentive plan that incentivizes the right behaviors and drives an intensity around profitable growth throughout the whole company. Nearly all of our 65,000 team members are on this plan as of this fiscal year. Now more than ever, we have better top line resilience. Slide 10, please. And the good news is we have significant opportunities ahead. As I mentioned earlier, approximately 85% of our portfolio will be longer cycle and more resilient. There are strong MEGIT growth opportunities well into the future, and we are confident in achieving the $300 million in synergies by FY26. The wind strategy 3.0 performance acceleration will further drive margin expansion and ensure we hit our FY27 goals. As I mentioned in our February call, The pandemic and subsequent increase in volume exposed some areas that we can further improve upon to become supply chain leaders. We will utilize new tools and strategies to respond to changing demand while increasing productivity and achieving best-in-class lead time. Simplified design has become a business fundamental and will continue to drive us to design excellence by reducing complexity and overall product costs, thus helping to further expand our margins. We're very excited about zero defects. It's still early days. It exposes the hidden factory, improves quality, reduces cost, expands margins, and most importantly, provides a better overall customer experience. And with all of the announced and already initiated mega capital projects, in addition to the secular trends, we will grow differently in the future. I'll now hand it over to Todd.