Parker-Hannifin Corporation (PH) Earnings Call Transcript & Summary

Welcome to the 2020 Annual Meeting for Parker-Hannifin Corporation. Our host for today's call is Tom Williams, Chairman of the Board and CEO. [Operator Instructions] I will now turn the call over to your host, Mr. Williams. You may begin, sir.

Good morning, everyone, and welcome to our first Virtual Annual Meeting of Shareholders. Although we'd hope to be able to hold an in-person meeting this year, we are excited to be able to convene this in a virtual setting with shareholders that are attending via this web portal. I am Tom Williams, Chairman of the Board and Chief Executive Officer of the company, and I will be presiding at this meeting. Sitting with me appropriately distanced, of course, are Joe Leonti, Vice President, General Counsel and Secretary of the Company, who will act as Secretary of this meeting; as well as Lee Banks, President and Chief Operating Officer; and Cathy Suever, Executive Vice President, Finance and Administration, and Chief Financial Officer. The 2020 Annual Meeting of Shareholders of Parker-Hannifin Corporation will now please come to order. First, I'd like to introduce our director nominees and other company representatives who are joined for today's meeting. The 11 nominees for election as to our directors are: Lee Banks, Bob Bohn, Linda Harty, Kevin Lobo, Candy Holborn, Joe Scaminace, Åke Svensson, Laura Thompson, James Verrier, Jim Wainscott and myself. Also joining here today by virtual means is Bill Schneider, a representative from Deloitte & Touche LLP, our independent registered public accounting firm. Bill will be available to answer appropriate questions concerning the company's financial statements during the question-and-answer period following the meeting. And finally, the company has appointed Broadridge Financial Services to act as Inspector of Election. Ms. Anna Hagberg is present by virtual means on behalf of Broadridge. Before we move on to our voting matters, I'd first like to turn it over to Joe to cover a few procedural items.

Okay. Thank you, Tom, and good morning, everyone, and welcome. First, I'd just like to give a high-level overview of the meeting agenda and the rules of conduct, which we'll be strictly following to ensure that we have an orderly meeting. You'll see both of these documents posted on the bottom on the meeting web page. And just to give you a few highlights from those documents, the webcast is scheduled for 30 minutes and will end no later than 9:30 a.m. Eastern Time. We will be first conducting the business of our annual meeting of shareholders. All shareholders of record as of the close of business on September 4, 2020, the record date, are entitled to vote at the meeting. After we adjourn the annual meeting, Tom will make a few closing comments, and that will be followed by a question-and-answer period. We will address questions that are presented in accordance with the rules of conduct. And any questions that remain unanswered here can be directed to our Investor Relations department as described in the rules of conduct. And please note that this webcast is being recorded and all other audio recordings of this meeting are prohibited. A playback will soon be available on our Investor Relations website at www.phstock.com and at this website, www.virtualshareholdermeeting.com/ph2020. In addition to the agenda and rules of conduct, please also note that in my capacity as Secretary, I've delivered and present and will reference and incorporate into the minutes of this meeting each of the following documents. The minutes of our last Annual Meeting of Shareholders, which was held in person at our corporate headquarters on October 23, 2019; the financial statements of the company for the fiscal year ended June 30, 2020, certified by Deloitte & Touche LLP; an Affidavit of Mailing, establishing that notice of this annual meeting was duly given; and a list of the company's shareholders of record as of September 4, 2020, certified by our transfer agent, Equiniti Trust Company. And lastly, I want to confirm that I have been informed by the Inspector of Election that at least 114 million shares of common stock are present, which constitutes well over a quorum for the transaction of this meeting. So at this time, we'll move on to our voting matters, and I'll turn it back over to Tom as Chairman.

Thank you, Joe. I will now present the matters to be voted on. The first proposal to be voted on is the election of directors to serve for terms expiring at the Annual Meeting of Shareholders in 2021. Our Board has nominated the following 11 persons for election as directors of the company: Lee Banks; Robert Bohn; Linda Harty; Kevin Lobo; Candy Obourn; Joseph Scaminace; Åke Svensson; Laura Thompson; James Verrier; James Wainscott; and myself, Thomas Williams. The second proposal to be voted on is the ratification of the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending June 30, 2021. Our Board of Directors recommends in favor of this proposal. The third proposal to be voted on is the approval on the nonbinding advisory basis of the compensation of our named executive officers. Our Board of Directors recommends in favor of this proposal. That concludes the items that will be voted on today. Any shareholder who hasn't yet voted or wishes to change their vote must do so now by clicking on the voting button on the web portal and following the instructions. Shareholders who have sent in proxies or voted via telephone or Internet do not need to take any further action. I'm going to pause this for a few seconds in case there's any changes to the votes. [Voting]

The votes are now in, and I declare the polls closed. Joe, please go ahead and review the preliminary voting results.

Okay. Thank you, Tom. So based on these preliminary voting results, each of the director nominees has been elected. The appointment of Deloitte & Touche LLP as our independent registered public accounting firm for fiscal year 2021 has been ratified, and the compensation of our named executive officers has been approved on a nonbinding advisory basis. The final voting results will ultimately be available and disclosed on a Form 8-K that will be filed with the SEC after the votes have been certified by our Inspector of Election.

Thank you, Joe. And no further business to be addressed at this meeting. The meeting is now adjourned. I'd now like to make a few brief closing comments followed by our question-and-answer session. I think everybody knows we're going to have our earnings call next Thursday to go over Q1 results of FY '21. So I want to focus my comments on FY '20 and the progress that we've made, and I'm also going to talk about the progress over the last 6 years. So let me just start first by saying thank you to our shareholders for their confidence in our company and to my fellow partner team members for all their hard work, their dedication that drive results. FY '20, clearly a unique year and a unique time, but a very strong year for the company even with the pandemic. During highly unusual times, we proved the power of Parker, our portfolio and our people, the technologies that we have, our products are needed and essential to society. And our purpose statement, which is enabling engineering breakthroughs that lead to a better tomorrow was never more evident than it is right now during the COVID-19 crisis. I wanted to just run through a few highlights of FY '20 just to kind of provide some illustration of how strong a year it was. So from a safety standpoint, we had a 35% reduction in recordable incidents, and that put us in the top quartile of our peer group. We're not top quartile in safety. We also had an all-time high and all-time record cash flow from operating activities of $2.1 billion. Cash flow from our operating activity from a margin standpoint in percent of sales was 15.1%, and our free cash flow conversion was 152%. Our adjusted EBITDA margin for last year was 19.3%, and that was up 110 basis points versus prior year in obviously a very trying time. So a really significant year all the way around. But I want to take a moment to reflect in the last 6 years since Lee and I were named to our respective positions. And again, just make a couple of comments on the progress that I would think, hopefully, the shareholders' view is very strong and they appreciate it. A couple of points to highlight then. First is on safety, again, 70% reduction over this period of time. Our top quartile in safety are also now a top quartile in engagement of our people, which are 2 leading indicators of future top quartile performance for the rest of financial measurements. Our EBITDA margin over this period of time has expanded by 460 basis points. And during this whole time, we've had double-digit cash flow from operating activity on a percentage of sales and over 100% free cash flow conversion. We made 3 transformational acquisitions: CLARCOR, LORD and Exotic, which have all been accretive to growth in margins. And also, over this period of time, our dividends increased 89% in FY '14 of $1.86 to $3.52 for FY '20. And we've become a much more resilient business, raising the floor and ceilings on margins in a less cyclical in the top line when you compare our performance to past performance. So you might ask, how? How has that happened? And it's really a combination of the portfolio and the changes we made via the acquisitions. And the performance of the company, which was driven by Win Strategy 2.0, which was a change we made in 2015, and now Win Strategy 3.0 we made in 2019 at the end of the year. Our values, the culture of the company and our purpose has driven and alignment and an inspiration and has helped drive our success. So we're confident in our ability to perform in the middle of the pandemic, and hopefully, you feel that, see that in the numbers, and that we're confident in the future. And that as I told other shareholders in other meetings, with the amount of recessions that we've had in pandemics and the amount of progress we've made to self-help is pretty significant. Imagine what will happen with some more normal times. So the best days are yet to come, and we feel very good and hopeful for the future. So those are my comments. Just a little bit about the business.

And so now we would like to open the meeting for shareholder questions. Only validated shareholders will be able to ask questions in the designated field on the web portal. Out of consideration for others, please limit yourself to one question in accordance with the rules of conduct. Additionally, please note that we will not be commenting on the first quarter results, as I mentioned earlier, until our scheduled earnings call next week. And I believe we have 2 questions. And on the questions itself, it looks like it's best for Joe, as our General Counsel to answer them. So Joe, I'll let you take them.

Yes. Thank you, Tom. Happy to do that. So we'll just take them sort of one at a time. As Tom mentioned, there are 2 questions. And we appreciate these questions, certainly. The first one is around -- and they're kind of somewhat related. The first one is around -- it basically says appreciate Parker's commitment to diversity within Board searches. Will the company consider a skill/diversity matrix in the future proxy statements to enable shareholders to easily see that commitment? And I guess I'd say that a couple of things in response to that question. First of all, absolutely, the Board does -- is committed to diversity in Board searches. If you look at our proxy statement on Pages 15 and 16, it really takes you into some level of detail as to what our Board searches look like. And there's really 3 key components that our Board looks at. Diversity is certainly one of them. We firmly believe and our Board firmly believes that diversity is critical to a well-functioning Board and certainly committed to enhancing that. And in all of our Board searches, we require a diverse slate of candidates. But in addition to that, cultural fit matters, too. We place a high value on cultural fit. And then beyond that, it's our skills and qualifications matrix. And we do use the skills and qualifications matrix internally. It highlights a key set of skills and qualifications that we think are very important to our Board, very important to our company. And it really covers a broad range of skills and qualifications that really go beyond the C-suite. So on 15 and 16, you'll get a good sense, I think, of what that process looks like. But if you flip over to Page 3 of the proxy statement, you'll see, we do give a breakdown of what the current skills matrix, how that sort of shakes out. We don't put the matrix in there with names and everything attached to it, but you can see it shows that the key skills and qualifications that show up on that matrix. We gave you a good percentage of directors, and you'll see a very high percentage in each of the key areas of skills and qualifications. So hopefully, that's helpful. And hopefully, that answers that question. And then the second question we've got is sort of similar to that. As institutional shareholders, we value the disclosure of Board composition and skills matrix in the proxy. We'd first like to thank you for providing both and recognize Parker as a leader in this area. Many companies have begun to provide shareholders with self-disclosed Board attributes, such as race/ethnicity in its proxy. Is this something the Board is considering? And I guess I'd say to that, we have not collected that sort of data from our directors. It's certainly something that we're taking a look at. It's a trend that we are recognizing as well, and we will continue to look at that. We'll continue to consider that as we talk about Board composition going forward. So that concludes the questions that we have so far. Tom, I'll turn it back over to you.

Yes. At this point, we have no further questions. And I just like, on behalf of our Board of Directors and all of our team members around the world, thank you for attending and participating today and for your continued support of Parker-Hannifin. Paul, it's over to you.

This now concludes the meeting. Thank you for joining, and have a pleasant day.