PH
#Thanks Cathy, and welcome to everyone on the call
We appreciate your participation this morning
I'd like to take a moment to congratulate Cathy on her new role as Chief Financial Officer, which we announced earlier this month
We will certainly miss Jon Marten, who announced his retirement; we thank Jon for his great leadership and service during his 30 years with the company
We're very fortunate to have someone of Cathy's leadership and experience to step into this important role, Cathy has 30 years of experience in operational and financial roles at Parker, and has been acting CFO since November of last year
This seamless transition is an indicator of the effectiveness of our leadership succession planning at Parker
Now, moving onto the results, I'd like to share highlights of our third quarter results, which were strong across many measures, give you an update on the CLARCOR integration, and comment on our changes to the fiscal year 2017 guidance
Before I get into the financials, I'd like to first report on our safety performance since keeping our people safe is our highest priority and our most important measure
During the third quarter of 2017, we were able to reduce our recordable injuries by 28% compared to the prior year
Importantly, we reduced our lost time due to injuries by 39% compared with the prior year period
This builds on a significant year-over-year improvement in the last several years, and it's even more impressive considering the increase in volume we've experienced this quarter
This improvement is being driven by strong leadership, training, and engagement of our team members globally through high-performance teams that are focused on achieving the goal of zero accidents
Now onto the financial highlights for our third quarter results: This was another strong quarter for Parker across many measures, third quarter sales were $3.12 billion, a 10% increase compared with the same quarter a year ago
Organic sales increased 6%, and acquisitions contributed 5%, while currency was a negative 1%
We are particularly pleased with the strong organic growth, driven by improving conditions across many of our end markets
This is noteworthy as it is the first quarter of organic growth since the December 2014 quarter
As you know, we closed the CLARCOR acquisition in late February, and had one month results included in the quarter, which drove the 5% increase from acquisitions
Order rates, which do not include the impact of acquisitions, also continued to move in a positive direction for the third consecutive quarter
Total orders increased 8% compared with the same quarter last year
Industrial North America orders increased 9%, Industrial International orders were double-digits at 13%, and our Aerospace Systems Segment orders were flat
Again, we see encouraging signs of recovery in demand levels
We'll provide more color on the markets in our Q&A portion of the call
Net income for the third quarter increased 28% to $238.8 million, as reported compared with the same period last year
Earnings per share were $1.75 as reported or $2.11 on an adjusted basis, a 40% increase in adjusted earnings per share compared with adjusted earnings in the same quarter last year
Our overall segment operating margin performance this quarter was very strong at 14.8%, as reported, or 16.1% on an adjusted basis
Adjusted segment operating margins increased 140 basis points compared with the third quarter of fiscal 2016, an excellent year-over-year improvement
Year-to-date cash from operations excluding a discretionary pension contribution was 11.8% of sales, demonstrating our ability to be a strong generator of cash on a consistent basis
Now just a few highlights, updates on capital allocation
As we announced at the end of February, we closed the transaction to acquire CLARCOR
Since the transaction closed, we've welcomed the global CLARCOR team to Parker and have begun the process of integrating our businesses
Filtration Group President Rob Malone has formed a leadership team for the newly combined business
We have also formed a dedicated integration team staffed with some of our most experienced and talented operational and functional leaders
I feel very good about the progress we've made with the integration and I'm confident we can generate the $140 million in cost synergies we initially expected from our combined filtration businesses
We've incurred the expected amount of one-time acquisition related expenses, which Cathy will highlight in her slides and we will provide FY-2018 CLARCOR costs and EPS projections when we provide full year guidance in August
Also during the quarter, we completed the acquisition of Helac Corporation to add specialty rotary actuators and attachments to our hydraulics portfolio
During the quarter, we announced a 5% increase in the quarterly dividend
We've now increased our annual dividends paid for 61 consecutive fiscal years
This is among the top five longest-running dividend increase records in the S&P 500. We've also continued our 10b5-1 program and bought $50 million worth of shares in the third quarter
These actions reinforce our commitment to being a great deployer of cash in ways that generate increased long-term returns for our shareholders
Just one other strategic update to comment on, this week, we launched our Voice of the Machine Internet of Things offering at the world's largest trade fair for industrial technologies in Hanover, Germany
The Voice of the Machine IoT platform is an open, interoperable and scalable system of connected products and services
We are excited about the launch of this new capability that offers benefits to our customers such as improved safety, reduced maintenance cost and downtime, while simultaneously uncovering opportunities to improve operational performance
Moving to our revised FY 2017 guidance
We are increasing our full-year sales growth forecast from a negative 0.5% to an increase of positive 5.9% at the midpoint in our new guidance to reflect higher organic growth and the impact of acquisitions
For fiscal year 2017, we are updating guidance for as reported earnings in the range of $6.90 to $7.20 per share or $7.05 at the midpoint
On an adjusted basis, we expect EPS in the range of $7.70 to $8.00 for a midpoint of $7.85. Earnings are adjusted for our anticipated business realignment expenses of approximately $0.25 forecasted for fiscal 2017 and for acquisition related expenses of $0.55. To be clear, our revised guidance does include the benefits and costs from the CLARCOR and Helac acquisitions
For now I'm going to hand things back to Cathy to review more details on the quarter and the fiscal 2017 guidance
We've continued to make progress through fiscal 2017 and our third quarter continued this momentum
I'd like to thank our team members around the world for their dedicated efforts
We are making meaningful progress with the new Win Strategy, which is designed to drive top quartile performance versus our proxy peers and generate long-term shareholder value
All signs point to a strong close to the fiscal year
More importantly we continue to see opportunities that will allow us to achieve our key financial objectives by the end of fiscal 2020, which includes organic sales growth of 150 basis points higher than the rate of global industrial production, 17% segment operating margins and a compound annual growth rate and earnings per share of 8% over this five-year period
This is a special year for us at Parker as we celebrate our 100 year anniversary
We are very proud of our history and confident of the bright future that we see in front of us
So, with that, at this time, we're ready to take questions
So, Shannon, if you could go ahead and get it started
Question-and-Answer Session
<UNK>, this is Tom
Because aerospace was a little challenged with some extra development costs in the quarter that kind of deflated the marginal return on sales a little bit
If you back that out, just look at industrial and then also take all the acquisitions out, we're in the mid-50%s
Now, I would not project a mid-50% MROS for us going forward
We tend to have the first quarter to up about that level, and then glide back down to a more steady state of plus 30%, but these margins are really, really stellar that we put up in this quarter
Okay, <UNK>, I'll start then I'll hand it over to <UNK> for the markets
On MROS, I think with CLARCOR all in (27:43) you should see us do what we've historically done
If – that plus a little bit more, because everything we've done as a company, with the new Win Strategy, the fixed costs that we've taken out, simplification
So I think you could model historical plus a little bit better
On the integration, it's going terrific
I'm very pleased with integration so far
The teamwork between both companies basically becoming one, they are the talent that the cultural fit, all the synergies, very interesting, the synergies we thought when we're kind of looking at it, more isolated now that we're looking at it jointly
There is a lot of harmony between both teams looking at and saying we've created, this is a dynamite list
So we're very encouraged and there is – as we go forward, we update you in August give you a better clarity as to the cost to achieve and the savings for that fiscal year, but we're off to a good start with that
And then on the markets, I would just tell you that's it's nice – it's really nice having sat in this room now for 10 quarters to have a quarter where we have an exciting organic growth story to tell you
I mean, it's across pretty much board, and I'll let <UNK> give you the color on that
<UNK> - Credit Suisse Securities (USA) LLC Sorry, Tom, just a follow-up on the incremental though, but in – obviously it's very encouraging that you think you can do a little better than where we were historically and you don't see sort of price cost is an issue as well like that's not to be short-term
<UNK> - Credit Suisse Securities (USA) LLC Okay
Sorry, <UNK>
Go ahead
The trend – Joe this is Tom
The trends through the quarter, North America and Europe showed steady progress through the quarter and Asia Pacific and Latin America were pretty much consistent, stayed at a high level for the quarter, and April is consistent with what we saw and it's reflected in the guide
So, in general, I think <UNK> kind of hit it, we're encouraged, but couple of more quarters would just solidify that for us
<UNK>, I'll start at a high level and I'll let Cathy fill in, add any more details, but our goal is, we're about 3.2 times debt-to-EBITDA
Over the next 24 months to 36 months, we want to drive it down to the 2.0 debt-to-EBITDA
So, we're going – the cash flow, we're very proud of at almost 12%, CFOA, we're going to be using that to help pay down the debt and we're encouraged by what we've seen so far as far as synergies and our ability to put these businesses together, so we think cash will continue to be a very strong component of it
But that's the focus is driving that down
In fact, when you look at all the end markets in China, it's hard to find anything that's red
<UNK>, it's Tom
We can't predict it at this point
I mean I know everybody would like me to start talking about FY 2018 in April, but FY 2018 is hard enough to talk about in August
So we'll give you the color on that, we just started our process internally
So, I'm going to just ask you to wait until we get to August
Really, so I mean, have to go do that math, but part of it'll be (43:15) doing that math, but also, we'll be talking to our customers, looking at economic forecasts
So, it's not just trying to take current quarter and projecting it out and comparing it to prior periods
It's actually looking and understanding end demand and what's going on
So, we will do that, but that's not the only factor that will influence it
<UNK>, I think the best approach would be take it offline
You and Robin and Ryan can talk about in the follow-up call
This is Tom
We actually think the supply chain side has a tremendous amount of synergies because CLARCOR is a very decentralized company similar to us
However, they ran a very decentralized buying organization
So they didn't leverage any of their spend or very little of the spend across their various businesses
So, you've got leverage there, first, just by itself
But then combining it with our spend as well, you have that aggregation
So, we see big upside
And I think all of you know, we've been careful on breaking the buckets up, because obviously, some of those buckets are sensitive to how you – how we would disclose these things
But you can rest assured, we have a very finite detail by major cost bucket and supply chain being one of the largest actually, and it's the natural things you would think of
The Win Strategy initiatives, corporate SG&A, supply chain, leveraging the manufacturing capabilities for both of our companies
And the advantage here is not just looking at one isolated, it's the combination, so looking at both of our manufacturing capabilities and leveraging that
And just part of how we did – we did this with our own insight and what's really been great is now with the CLARCOR team's viewpoint, and we've been spot on as far as in agreement as what we think we need to do, which has been very encouraging
I think what we'll certainly do is every quarter, starting in August we'll give you the projection that we think we'll do for that fiscal year as far as cost to achieve, then the synergies that we're going to get and then we'll update how we're doing every quarter against that
The supply chain savings, I am not worried about disclosing that, so if that's something in particular that you'd like to see, we can provide more detail
I also don't want to scatter the herd on my suppliers either, so we'll have to think about how much of that we actually do
But the team on the phone has to – you have to be very confident that we have this down to a very finite detail by major bucket
There is various sensitivities as you disclose that, that we'll just have to consider, but certainly we're going to give you the total and how we're tracking against it
<UNK>, it's Tom again
I guess the encouraging thing is there's been no negative surprises, it's all been positive reinforcement and affirmation of the assumptions we made
And I am very pleased with the leadership talent and the strength of the organization
I am pleased with the cultural fit, I am pleased with the fact that both teams are working as one
When I look at these synergies and there's been a lot of buy-in as to what we have to do to make both of our filtration businesses, the best filtration business in the world
So – and I'm knocking on wood, I couldn't be happier with the start
Yeah
Millie (52:47), it's Tom
Well, first of all, when we set those targets, they were top quartile performance threshold for our peer group and that continues to be a good number
I am very happy to relook at that number once we've achieved it
I don't want to de-motivate the team by moving it before we've actually achieved it
So, we're going to achieve it first, we're going to obviously continue to drive continuous improvement and we'll also look at what top quartile is running at that time because we see our abilities to continue to get more profitable all the time, but we're not going to move the 17% target until we actually achieve it
Unknown Speaker Okay
And then I guess just as a quick follow-up
More of a clarification, I think, you mentioned price cost a little bit earlier in the Q&A session
I just want to clarify, you said, you don't think that that's going to be a challenge as the year goes on?
Joe, it's Tom
Again, I'd characterize it as early days still
There's some things that we moved out more on division consolidations and those type of things
But we'll continue to look at that and we'll certainly update you on the plans we might have there in the future
But the bigger area that has, I think, the most upside is that whole revenue complexity that looking at the product line simplification, that last couple percent of revenue and the complexity associated with that want to service our customer to make it faster and better experience for them, but also to redesign our organization and our processes and SG&A cost that supports that
So I am very encouraged because every time we look at that, I still see tremendous upside
That part that I just described, the product line complexity is hard work, I've described this as hand-to-hand combat, you got to go part number by part number to go through that
So that's why I characterize that it's still very early days because a company of our size with the number of part numbers, there's still a lot of work we're doing and we're very active on that, and I think you'll see that'd be a contributor for margin expansion for multiple years
