Donaldson (DCI) 3 Sep 202020 Q4 Earnings call transcript

Ladies and gentlemen, thank you for standing by and welcome to the Donaldson's fourth quarter and full year 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. I would now like to hand the conference over to your speaker today Brad Pogalz, Director of Investor Relations. you. Thank ahead. go Please

of morning provide full you X, call. year Tod Tod and today Good Financial Robinson, fourth This Officer. With joining quarter are morning, President we CEO considerations I want Chairman, August to and a summary along XXXX Scott included Carpenter, and everyone. performance, you. release Scott XXXX. XXXX for which business Chief with an press will everyone that for reference Thank that and Donaldson's issued me Donaldson details of our Thank update a earnings update conference on call. we key this on some remind on will morning's

metrics we During to We reference attached a within this will morning's metrics. press non-GAAP non-GAAP the also today's release. schedules reconciliation call, included to of GAAP

that, keep press please subject are described risks Finally, statements forward-looking mind and Tod the any Carpenter. release this SEC will in in made which Tod? call during With call over and I are our now to uncertainties, turn to that filings.

Brad they keep I I start appreciate our work by thanking fiscal day every resilience, want for forward. commitment greatly good everyone. their Thanks today employees XXXX. flexibility the to us and morning moving to do and in

that position cash prior shareholders while than performed we things in we share investing as and remain maintained strong and and we gross parts economic things equipment from while focused to our there reduced growth first-fit products, planned, returning expenses our always, replacement the discretionary dividends increased financial year, As through a including of repurchase. margin businesses the a better on under went shift XXXX, Despite several were in those sales significant control. environment new fiscal during

give priorities economic in We year, capabilities overall are anticipate environment. and entering confidence market make progress strategic our strong XXXX do initiatives that any conditions our not on robust can but diverse this operational clear me model we and engaged business We with employees. fiscal

We the longer term opportunities will in our talk later call. more about

sales. with to So sequential forecast sales the were I turn experienced a consistent Compared and XX% much will the is pandemic. decline the of million variability in $XXX remain we now increases which segments largest first-fit segment, The quarter under cyclical the engine the of a quarter with and was early provided a overview results. in August. XX%, for most however prior in July. with is June on-road Class prior year. year, similar Fourth of Total the the decline down were pressure. was down truck accounted In sales fourth businesses as in the bit Both magnified from within U.S. the it there brief quite on-road sales our production by the the of portion were X slowdown quarter

only U.S. exhaust oncoming As an and of the to decline particularly to regulatory market total and equipment on-road off-road a duty are Sales our at heavy and In products is were exhaust change in depressed, of first-fit More emissions the volumes. last is XX% There reminder, sales, aggregate exposure the to production yet industries. U.S., Europe programs in meaningful related for the remains new construction pre-buys year for not the was Donaldson about emissions. X% in that in were so and half due down off-road than quarter. limited. our mining

nearly China in Chinese XX% On The fourth other off-road activity business. benefiting which hand, quarter. to is investing off-road were sales is our up the the in government stimulate

equipment produces more manufacturers the heavy of local country and with programs anywhere new some PowerCore. the relationships programs in in one win to were than those are world. new continue with duty These we Additionally, customer that

XX%, see team in the best know low geopolitical transportation market, opportunity and as the will gas spread America, slowing volatility, predictably we the as of the we that we these come long in as aftermarket across were than engine the impact utilization Sales Fourth independent demand, fourth our but The is and is to digit sales a which of channel experienced is third reflecting businesses. Latin U.S. were sales Sales large inventory more remained we customers. the offset with continue in with consistent local how strong quarter channel. was as the in order China U.S., combined decline aftermarket of continue share. the significant customers aftermarket In Eastern in a Sales with pulled growth with support single better from down the quarter. are mid-teens gaining through activity. by trends learning for region manufacturers compounding partially uncertainty. quarter through fairly fell headlines In in channel term first-fit decline. collapse our growth. the match the And are our motivated share down modest We virus Europe OEM for with our for local to independent oil slowing China strong sales gaining

level In winning we a with innovative programs were to last sales new record China see fact, we a continue and in expect long quarter at aftermarket runway technology. as

Our low portfolio of This well up aftermarket were and single sales total in the fourth digits. of in fourth innovative portfolio quarter up the the makes nearly quarter performed products quarter. revenue a

core by helicopters. Sales as and time quarter in stability portfolio business X% XXXX, The in will are a down inventory of quarter. in to technologies update growth expanding improving, critical strong for defense relative is you some razor strong driven create also fiscal very Beginning a related to new timing were from re-categorizing products distributors two but significant our we sales continue change decline we mature. these been on for growth retention of classification. the rates. in products our commercial so in to the vehicles, a soft razor invest to sell still build related have for I in partially After nearly to to decades, by and defense offering opportunity want have our time, that and aerospace These business defense all to come. ground of we engine blade we offset a was fourth key reinventing for sales strategic increase For products. the long

Our elsewhere, mature with businesses services deliver technology, long to new with business while critical committed wins businesses over that driving solid for new markets cash we these time our allows expect relationships. returns geared core defense gains The are capabilities programs existing horizon. will robust investment a towards and are has won generating share in engineering and

with within of and new sales or solutions continue appreciate collection guest by XX%. defer still the teens parts We being products to turned sales are quarter We were the Downflo about replacement filtration low large to the only the has it to of the grown orders ability as platform energy down projects in business put Sales quote dust to part the to on industrial customers resonates. Downflo driven value as total down investment quarter than collection tend the and large retain smaller move the IFS. sales parts rapidly At forward. our we building value in were results. collectors of it replacement XX% is the we today, must-do The on space XX%, and remains while Turning segment. encouraged The our our ability but collection savings sales Fourth reduce year order business and Evolution hold dust Fourth up dust output. also of are customers grew time, of and elongated proposition the family those to earlier were systems take projects cycles dust industrial shop.donaldson.com. and aftermarket collection dust through offers this by e-commerce our more same

collection our believe number sales simplicity customers delivery were parts with filtration increase process after replacement The robust dollars we small, still in while With model, the about seen While down dust new our customers. a of incremental XX% prior decline another platform were flat more reason are we by of choose driven the significant sales digits to e-commerce and gives year. of have new Donaldson. of quarter an single equipment year. the low last than was Fourth

We highly and progress industry. penetrating beverage valuable the continue to make food

We efficiency proposition can fulfill this our product to gave beverage have We prove positioned processes. industry pandemic to The an ability teams as a quickly food our in customers and improve customers' about with process to opportunity that partner our this value excited delivered. ourselves our and the market we in and us market. help filtration engaged very orders the remain

gas profitable applications sales to having drive business. significant profit Sales prior from quarter. turbine So due was in while and of we increase strength or turbines. special XX% in the and market invest of automotive the third were Once will venting Fourth were solutions. quarter quarter in this small sales drive increase up in fourth growing in a continue primarily slowdown year dollars after in of lower in team new sales both to adding rate. the GTS force GTS resulted the Disk to delivered another the in down again, down terms X%, systems tools

are opportunities for are and streamlining highly into they reclassifying large our shifted to an focus isolated that was selective and in has which Saudi driving incident. strategy the to go-to-market it transitioned focused is being on deciding GTS the we job are Once to team to The success the turbine joint path on ago. we profitability GTS strategy and has the fixing we small we know, the Based their delivering also us, you in job team portfolio. GTS from while not thank In in and commitment. business best GTS rightsizing years them as today. the again, As has a an The we strategy executing done the past determined quarter, what and delivered their four front pursue. company. GTS our of I The footing mature turbines in projects incredible we solid want profitability. and consolidate business incredible team on in We executing did we on on to our forward in parts GTS GTS Arabia enhance results. our the that see chose venture replacement

our with people Our stakeholders. great working value results confident company for is in create I all our to together future. deliver and comfortable why am and filled That's

call briefly Before fiscal to want I to Scott, on turning XXXX. touch the

ultimate impact sure its our last are not pandemic on business. are sure We long we how will the about nor

focused pursuing opportunities uncertainties, share executing world, Scott we includes XXXX safety of growth priorities. to on strategic market health filling initiatives around making some which our enhancement fiscal will approach we our details. customer and and a our expense share Prioritizing control. balanced advance employees, what margin management remain investments those to will targeted the Given and the commitments, maintaining more

Scott? call turn now the will to I over So him.

over the supported my working for deepened do. the relationship our Thanks Tod. six suppliers with world, team Good collaboration, increased quickly to of around disruption. we very morning pivot. job months and everyone. am we accomplished. Like to our and past I excellent companies, critical we of world an that Overall, had minimal with impressed of new all most customers To did a level adjust employees by We and our the what our you around colleagues thanks businesses way

As firm fiscal on yet foundation. have XXXX, solid not the we a we turn But footing. to markets are

Decremental highlight results. in historic for fourth and stronger but XXXX first Given however year. notable our those possible the are some will in will We I XX% XX% us. want this we some including a shape of recovery, do outcomes, assumptions. delivered of range the was the issuing thoughts averages. I call later results Those the the margin timing detailed the fiscal for planning quarter no provide cover guidance our are of and full at inevitable to share XXXX We than on wide time.

collection in level years. pandemic-related it's So XX% connected quarter. part process were due let significantly, the expenses with in growth sequentially I which filtration, some down quarter we me flat Discretionary travel maintained solutions. to walk our four $XXX and our fourth restrictions in dust through expenses, and That's the to strategic in and will investments lowest declined start million details. of like operating fourth businesses

expense we the balancing are on fourth focus investment pleased to with quarter. savings continue with in the performance and will We

pleased depreciation full was margin XX projects. up gross to basis also sales and are up and rate despite gross We expansion our with performance. was Fourth from XX lower points our higher than basis quarter the related our year margin year headwinds capacity point, prior

are note, planned side projects now expenditures the are As $XXX last a year. XXXX in capital completed and our so below of invested we fiscal many these well million

service by or Our improving the opportunities our has shifted levels. focus plan now maintaining while to We to optimization cost structure these enabled lower investments.

out material time, offset list ramp gross While to benefits impact optimization initiatives up strong of returns raw from these project of can assets. leverage confidence the with Lower costs are will me loss we new these that the helping over gives margin. on deliver

prices petroleum-based supplier for they also while savings media to want have procurement We incremental in I seen pricing. driving our and steel, is market favorability touch network products strengthen team improving as and our terms. on

a hasn't a been year-over-year to it margin hasn't it major While increase, the been headwind. gross contributor

in drive channel those seems of businesses of executing like We many strategies. have of replacement work. the have lot our a and more that to it takes independent parts pricing pricing engine job done an excellent consistently latitude in I know aftermarket our

favorable difference, needs in A meeting gross in So a difference the world for margin. terms retention. realized I of the total aftermarket a benefits thank invest value technology is greater technology It are a making year, economic a parts sales. the to mixed quarter programs service. To big these their win this to promoting have for customers' that of commercial we of mix environment. drive as and also want around bring extent, In we to make the design. in share We sales teams especially while the and mix first-fit replacement most benefits by up certain fourth of makes

we business some creates giving parts the and revenue gross our an relative economic provides recurring some base sales, XX% our Replacement now of confidence stability of As strong for insulation. total move us account margin through in durability model. of cycle,

in story quarter. I segment of margins. of is cost Mix resulting P&L, material talk benefits and the year-over-year about to profit margin the basis quickly increase of with consistent The after points leverage down results. further the engine lower raw consolidated the moving Before loss fourth a want XX

industrial loss growth the strategic of businesses. magnified the Within leverage in by was investments our segment, continued

deliver the back our industrial time. us margin of up mixing company's We margins expect helping will bounce over goal

by the expense the fourth Other performance to related in These $X.X expense optimization joint Improved the ventures was reflects charge to in our benefit our fourth million the fiscal a allowed $X.X prior compared an and back of us initiatives, prior in initiatives. to global mind, in to P&L. income in to of a quarter million Moving With tax XXXX legal enabled of the excluded tax with streamline our entity a which was quarter year reported cash year. reform calculation in share rate charge with legislation. of the also adjusted excluded earnings nonrecurring the We reform. XX.X% adjusted quarter charge XX.X%. we structure, year's last were per compare related tax from best prior the that fourth year's and rate it's tax

The settlement rates While quarter from benefits we rate prior of current benefit audit. point the I typically were favorable the the rates expect. earnings XXXX jurisdictions will across delta below out and between what nonrecurring favorable that is not a fourth rate a would of well while mix an XXXX included to related significant, adjusted

in XX% in line XXXX our rate estimate term we up of going long As to full about be XXXX, XX%. to with see our fiscal tax we year think more

of about we we year. position, the good where financial our terms feel ended In

bolster net caution. our leverage as paid in the a and our proactively ratio Our days loan debt pandemic X.X was to borrowings a to we an we liquidity of off the $XX on our by for reduced way term abundance times of in from revolvers the fourth revolvers and early $XXX million out million. drew We of EBITDA quarter

from was this confident plan on expect still down year, While focus which also longer leveling year this environment. the for the is but down as we current were layer markets with extra what position security. no we we are Receivables that further in Inventory improvements in need of prior and demand. are feel uncertain, we our meaningfully

year. year Our fourth to XXXX rate increased we to this exceed cash XXX% quarter and and meaningfully plan conversion respectively and full XXX% XXX%, again

fiscal products Our the replacement of directionally consistent parts and to are with recent vary by Sales and markets our sales continue outperform for widely company XXXX sales assumptions should geography new average. trends. to expected and market for are

when sales half due of Additionally, began. timing pandemic year XXXX the versus of to be first down prior the during we expect will the the

trend saw these be performing the due in year from are region sales in August APAC quarter. down the part in past play China. faring the in in match year. seeing versus are will the what fourth is we prior for typical we month trends will Europe currency. We seasonality. from the July prior down Regional Total August by expect be XX% to also growth in Sales better, best that's but about led which sales the out

strength including as our under process remains under relative new and And equipment of businesses, which While in pressure. some up remain most have the aftermarket filtration U.S. America more of from we Europe, Latin and most expected, are pockets the more engine pressure. while stable

and time, strong gross ourselves we product raw in position mix prior In should as terms tailwinds to execute lesson gross optimization projects will material same long year. costs the we margin. increases fiscal of for benefits from margin, term XXXX against the our At lower compare in

expenses, have puts some spend explore makes see that annual an a optimization year. and Our restrictions further fiscal from will the make We against Should from pandemic-related also investments half strategic planning generates about $XX to offset will incentive by XXXX of likely of which plan to and benefits we opportunity from operating some see the additional comparing of increases the takes. these higher Resetting sense, we plan controlling substantially prior first initiatives. will level businesses million technology and expenses in development. also we growth our compensation headwind and our are

will Any compensation. balance above fiscal agenda. Finally, of high we and in unreasonable we for X% not in consistent any it sheet At macroeconomic long investment new opportunities which our metrics. conditions, outstanding XXXX level least X% dilution the repurchase governed by go fiscal is Should repurchases offset XXXX. plan objective will are our conditions beyond strategic shares stock-based at the be our to with that from level, our assume to improve, term should a year

deliver We that making businesses, These strong will strengthen working disciplined and will the deployment and and our opportunities of in our our capital capital gross to control advance in accelerate in confident investments portfolio position are can through financial protect control discretionary pursue XXXX. share initiatives market drive and and targeted management. we am optimization ability while actions margins, growth I expenses

call the our Europe Relations region. committed as After going over Investor Finance in the Brad little be for back to when I uncertain, turning to Thanks, our five facilitating take Before we IR. to as Director, COVID East is news. makes a I to to some timing to all transition work want a Middle share years Tod, he know Director moving replacement. of smooth find his but is your Brad, Belgium

will You to now have done Donaldson. with exciting the on Tod. job an new turn and I Tod? excellent call congratulations the adventure back

Thanks Brad my Scott. to as offer congratulations And I well.

will but clearly missed be great all You know in opportunity. it's we role, this a

very in confident needs customers. equally value confident evolving current complexities you. environment I I long term meeting are the of ability our am for navigate our and excited our in am to we the the of by to So ability create

to with biggest of have range our customers the they owners. and from brands strong some We relationships small business world's

the our have company. for of and for support partnership their around grateful continued we world to I want thank our are customers the We

filtration I and our customers' deliver that we complicated them way allows Our think that to efficiently doing objective. a challenges well are against great products solve is in goal to

team maintenance me that filter of minder mean. what equipment. share a our wireless system for helps segment, on-road managers engine I Let off-road their fleet examples schedules optimize In the monitoring and released some

this making customers into it technology. telematics system adopt existing for and fleet Our integrates valuable infrastructure, to their our easy management

unplanned adopt. solutions We performance, made equipment with them IQ with we dust also into monitoring again, the save offering. of real-time it our This expanding Once reduce energy collection customers and are easy connected service to provides market their helping costs downtime.

any setup very brand collector simple. dust of and can used on process the be IQ retrofit Our is

real-time for another they or is efficiently. offers customers and helping has tool personalization more need platform new reach e-commerce and Shop.donaldson.com features Our what place functionality, operate like to making availability repeat easy global and find it for orders. customers a

looking products As expand to a and and help success can is continue always, we technology customers drive their our technologies reduce emissions new part goals. solutions our formula and to them are engine growth. economy to improve of critical achieve Many and fuel of our our

have We use they end-users consistent our alternative help PowerCore it retain our value economy like have have a fuel solutions The Hybrid platforms and for hybrid solutions growing see with diesel specifically air see powertrains needs. engines we of and many of portfolio parts with as their shown of more and that hydrogen we meet also can is different liquid improve air today so We provides fuel we that and and with products designed a the still that equipment. system cells. cells have specialized filtration to to opportunity opportunity needs fuel customers leverages business. opportunities OEM good are can we those

membranes for In our in we and venting systems, to addition have growing participate air With technical are our we capabilities, market. specialized cells. to well-positioned fuel products this also

markets XX% are in more pursuing million also of three and fiscal of past process filtration We the about an food years. over beverage. increase $XX That's were than Sales XXXX. like non-engine

will capabilities technologies life in expansion sciences. new investing We our have and that we into building are facilitate continued future

Our our long is team. success on term dependent

making to great a committed are company place to work. we So our

We value commitment, place high have innovation. and integrity, strong a on we a culture respect and

continuous mindset. We also a have improvement

in important and want this employees is identify stronger will led by passionate equity that company. and practices we being us council inclusion journey. up a group diversity, I of recently to them created implement to So a to for council move us and thank stepping make help a along The

journey we towards Implementing engaged a for of maintaining cleaner drive and our began for is more of had our We our year. filtration identified sustainability practices. practices and sustainability are emissions, have gas one greenhouse developing world. we list reducing a a global wastewater. our long last way on advancing projects and stakeholders sustainable consumption strategy also purpose We with We energy

our forward I I to I again I as employees we accomplished contributions to want what for year. of today's close As successful am thank during look another and Donaldson proud fiscal call, XXXX. new their One

I Now open the back turn Lisa the Lisa? to line for call questions. will to

of first And from comes the [Operator Nathan Instructions]. Jones our from question line Stifel.

line is Your open.

Good morning everyone.

Good morning.

Nathan. Hi

on than the the kind sales Fourth topline. down of any to little about about the XX%. quarter how And progressed talk exit And over comparisons of quarter Maybe us down the rate in Or XX% out how fourth of here Can a last the things said, about better was XX% it's aggregate start give range? kind the have and few that you the in down months? we can is minus color fourth a hovering can started that bit XX%. August on August quarter? that's in Just settle down you progressed? you comparison

and out Nathan. And of start. you that down few May and course will expected. XX% way Brad. a sales This be came we months will reminder announced that as the I the for is a ago, group, we

and June July months. they So in that down would as typically in double in and consistent more pretty saw decline trends get put typical seasonality. from towards August together, the when We August. falling The also not which you winter were is digits, year-over-year is a off July see with we we the fall low

business are the would to there you Which July of and June, through gradually a I as recovery? of which the levels seeing begin Can of then, the said, to consistent about has fairly to been parts we here? go there. you recover? business improve on comparison anticipate back August those lagging parts some the slower are the parts talk half year of as calendar And Maybe

Tod. This Nathan. Sure, is

as mixed, businesses might are So the you very imagine.

aftermarket, so vehicles significant United on-road channel States at off-road more channel, production headwinds both the rest first-fit has quarters business. the first-fit So a as headwinds previous The most independent first-fit company with the with most pull-through and or and type really the significant the that that see two on-road is of businesses have in in the occurred are modest level. business, in such any vehicles the and do we destocking like OE the headwinds

As business. we in industrial significant filtration first-fit to be the going to headwinds the industrial side, equipment most turn air are our

slight expect COVID replacement the expect the production would hit back, in because see the also the to first levels the be last first in we and year. of second to would headwinds States, half growth more headwind half in second that We our not the then overall be for the we United half, are course, fiscal such, the would has at because where year, to of easier company half particularly and we expect. in of parts moment. the come the industrial predominant That's especially comps the We with

as should I July get those June, the with you see double in of bit we you back XX% now probably where half. So low through are kind some in better August, at guess go digit decline and of lagging businesses a little

say least it than be double digits that rather down first the at revenue somewhere fair in in half be the the comparison to to it down for that digits? is single So should potential

in a have where, built is that high specifically clearly, say doubles to models Tough we any not of out the low single the first half of here. to

Thanks will it I on. much. pass very Okay.

Nathan. Thanks

Nathan. Thanks

line Blair Our next from Bryan the question of comes Oppenheimer. from

is line open. Your

Good Thanks. guys. morning

Bryan. Hi

Bryan. Hi

could gross we from despite hoping it dig operational was but year could bips on you in little a I parse headwind, hoping was out. up margin more the obviously stands topline initiatives. your out your for I performance, XX the lift

the hit material you benefits lower to utilization. I costs and targeting XX favorable there points relative think clear and then of from mix basis XX were to

Yes.

here So while. think with there. points And margin we obviously I gross you been focused are pleased performance. for covered I quite the mean It's overall a something on main the we have

and mix basis points put at range. If look you probably that we XXX in raw material, the would

basis leverage If XX you have had, that to improvement. that some a lot at probably to other And by us little all imperatives sum in have somewhat we takes of the the the and look that points. and down you overall puts offset things loss that, then took of depreciation

spared great or forward of moving on and mix year, help completed. those that and been by it's which the will projects the a more then saved optimization all loss into year materials we been our an and we of quite one have that So margins to hand this And leverage look future. phase projects raw bit of but to next

gross sounds I expectation too it. gross Or of dynamics to fiscal mix early your on outlook, is had? have be the you front, it margin appreciate in for raw then somewhat that XXXX? the favorable Given less will similar impact from And further current lower year? it an is and margin Just call? Got like improvement that the detail. this

No.

to We margins going margin to hit drive we head. are levels of I the on push to are right improving reasonable gross continue pending to And and those think you improvement, sales. it committed

kind understand, CapEx not revenue your for a hard on are XXXX? Okay. as question. looking that guide. forward, there percentage a I we of And in of of providing a CapEx then And range normalize number a about Is shift range? any And you should to housekeeping thank X% sales

Yes.

X% to kind we So said was that's what the normalized a have sales. say, always a of of range where I going

of done million I a were period now year number be that we can we quite bit. to for a quite our net be which think of next of We at $XXX are for under is this completion kind year, that happy we investment with. said

rate under So FYXXXX. expect run be significantly to we would normal our obviously under then and

CapEx. be I next partly greater capital cash working conversion we we in than XXX% going on that our to of level get noted by and year a into driven lower to then a and improvements that's expect So point. for are

there pipeline? have are Got I can the been bit at you it. funnels one, right update for proprietary It little like has companies that quick Any least activity, last certainly uptick more an capacity One have you your a of if in offer can. M&A on there? if and seems deals

Yes. Bryan, Tod. is this

that work philosophy, to We will work continue M&A change suggest continue to an the no We part do we we term it because pipeline important We we deal. that to continue our to that's and stance, our so long believe still remains in strategy. our you robust of a just it ability have. would do our and

guys. again Thanks Okay.

you. Thank

William from line from Blair. Our next the Aiken question Joe comes of

line open. is Your

Joe, Hi. Thanks is today. questions. taking Brian for This my on for

Hi Joe.

Hi Joe.

the all, model. of just first on So

for million quarters Looking to expense, in hit particular, you the any you XXXX. me? can remind expected $XX fiscal at comp operating incremental Is incentive that mentioned in expected

will most That half in second of XXXX. the it, Yes. of be, year-over-year

am temporary well? run permanent of much looking that been rates the in costs that are there $XXX I as dollars fourth million quarter. And of some out taken primarily have there How the Okay. OpEx that out? Or at been taken costs

I restructurings or structure we like big cost any changes. had mean permanent haven't

are control We the that in expenses do are drive term some are we discretionary world in help still protect And We trying our could success control investments hard hard making to have the working those existence restrictions from expenses. spend longer we that benefit the travel been been today. obviously our to we we that really because working to to company. of get

Joe, a So just will I bit give little color. of

around can game controlling while the And offense fantastic the can the company term expenses play of here. invest So discretionary the they is to we just the where the macro our way right are controlling and job strategy are world what long the control, at play people long term this, we a level look continues now offense. expenses, from allowing the you the if in us at playing to doing we approaching are

And the doing are it excellent so thank world employees that's would at and for the around how all just we we and job. an looking congratulate

of How some the investments Got in some long of pulled these now. just forward? some projects can of forward And then you seeing some it. as of color projects right tailwinds some looking long Sky result I there. seen economy? seen Have you appreciate last? switching of are the momentum the And is the gears, can at making Have Initiative last? those in tailwinds and China how Blue you stimulating a pulled China

it's digit still one So almost single every is China there. to markets important that of our across representation in understand low our

based are so actually time. very, China we to for some multinational momentum national we customers consequently, the it expansion getting shipping from is can had there. a And very based with which wins that last just long now customers, And very, technology-based us that are

industrial particularly China business. PowerCore. broad. our with gaining first-fit are time our momentum. first-fit of It's So that the business gain side on continue technology the engine-based the we can and as the on side, we very expansion It's Sky momentum in it's in it's Initiative the Blue And a IAF on last long aftermarket in to also

Okay. will it on. pass a Thanks lot. I

Joe. Thanks

Dillon question next Our Stanley. comes line from of Morgan the Cumming from

is line Your open.

Great. Thanks. Good morning guys.

Good morning.

Good morning.

I was back to industrial just to jump wanted margins a for second.

mentioned mix extending more was obviously in Scott, decrementals, bit I decrementals investments that the a versus mentioned think by would loss been how your remarks, you much kind you up this but general internal and favorable then of guess, I quarter. driven the just margins year-to-date leverage? you some have operating guys but of stepped sales say, and of of you

mean make hit to spread are then comps, the exactly about the would it's to talking the on bit. those quarter little Hit those are we weaker across factors. I say, a it mix And about to investments on we compared I loss questions of year-over-year think and volume. leverage industrial. on I head. those even continuing We finally, three to Yes. keep percent want continue down you to a how targeted which here and little higher had drove we the in

have expect abate. mix headwind And that got so we and the probably time. ultimately over will to So to starting those improve we sales get increase to

can get issue. deleveraging rid we So the of

areas headwinds weakness more in in the the guess, end-market engine aftermarket there, the helpful. few That's just related rank where was kind Scott. acute of and one the to a to sales gas within bit. is pressure versus much it. had falling still Got I utilization would general maybe I say or like And think then of on something of you how you if verticals else? oil revenue Thanks that on aftermarket kind side, is of kind knife

transparent that oil even headwinds, so the Yes. specifically, to more we modeled, tell you the We significant would than originally had pullback, fraking there. well and be as gas were fully as

then be slowdown likely utilization general most would a have. more broad-based significant the And course we just of that's headwind So that the second hit. largest

Or it. And levels past I have bit the a point? side. two more kind a anticipating sneak Tod. declined that on are I inventory the first on it quarter. and particularly kind pretty seems still can of in if in I guess, Thanks quarters have levels Okay. the the It volatile like rightsized over are Got half? been of some OEM here. at view of in like aftermarket one do this then seems kind the level you whether inventory you of destock mean

little a the channel OE tweaked say, The not dramatic first. would channel destocking. actually a just destocked We independent bit, Yes.

And that the would channels to that have so orders behaviors that suggest you we forward-looking pull-through today both the based levels. upon and we at are

Thanks That's for guys. time it. helpful. the Got

you. Thank

you. Thank

question comes of next Alexander line Our Laurence Jefferies. from the from

line open. Your is

are Daniel It's guys. Rizzo, you? on Hi How Laurence. for

Hi Dan.

Dan. Hi

back there? on justify is it you Could great. just we work? Do How Just I mean Can rebates any you have it before? color you circle does some would mentioned pricing increase? price to your you negotiated every the have give or color time? be any

downs term On the the side particularly price first-fit have our contracts. annual of of within long engine we on pricing, side business,

revenue. in aftermarket piece the And start a we to year, negative OE that each relative So also that position of business. in would be that

clearly do basis there a aftermarket, more channels leeway based on independent local we On of it and have we upon region-by-region conditions. the

company, of revenue that it project-based more the being On resets business. side more the of industrial quickly with

lead wash new channel an pricing back old And where So and the come the four, times, course, control. out as have you then wash quoted three, like better aftermarket, of five months, we typically out base. project-based is you independent project to will more with

very, Thank other you. just That's then helpful. actually CapEx. And very question one on

projects am mix was but the but a that there it's going of what sorry know had how should I that's temporary down. missed end, percentage the and the think you this, wondering was long just term? over I Because just it mentioned response I there if is You I to about pandemic? big some

Yes.

think you it right. have I

So we we a projects. in-flight. completed and were are many as have in of report period we those that have the And said that to were we majority happy been have investments projects we high that

focused investment equipment. so be down. will those year, projects we optimization are the next going driving come new And And of our on way really instead in to bringing of

to drive improvements company the to in conversion that great time for things from FYXXXX. the is a that get fine having we which it's expect why already we tune have in additional dollars strong a versus So cash and invest we

of a just bit And color. maybe little

strategic what our our have we three years, And CapEx seeing upon will are in to a internally. to supply a to optimize try here equating you our chain Remember, plan connect So people fiscal based dot past the reductions run-up often pandemic, of really significant our this not behavior. the year. had based that's

we expand And internally investment. significant chain. now the optimize shuffling to so the coming back gross to supply our we now essentially our are pretty will margins to that And end be and of continue

is fact and the that to term. year have longer and priorities we So executing what connected pandemic more we CapEx less are the this fiscal to strategic less our

very much, Thank guys. you

from next Baird. Richard of line the Our from Eastman comes question

Eastman, is line Richard is your Your line open. open.

Thank you. Yes.

of best congrats. Sorry, I This luck questions. And the exciting, And on thanks Brad. be mute. for was to can Congrats Brad.

to price but going price on is for a year? on Again, But a margin for it's there the gross wanted the engine the second. for curious the XX gross a was bips. will I were, the spoke than for back with of And around gross to margins total, margins. kind you with, presume the little that what, in it's neutral move question bit. I presumably also net, to And impact quick this just, margin a one made year volume mix, In net was full progress to just year? I Just segments. more price go industrial Tod, gross the the am move it versus plus

across the the Yes. total Net businesses result pricing company, the Obviously, flat in net, different very out company. mixed but it Rick, was flat. comes

Relative versus that XX the side? Okay. the consolidated? industrial to And progress on engine points overall basis then

overall that the the raw benefit, the costs, story script offsetting engine is my loss material in consistent by of noted which lower mix I with leverage. is Yes. results consolidated

have the For industrial, and mix. of but weaker added probably they factors they comfort little similar little a had more investment bit also a

about So when those two you industrial. additional play think factors come into

Okay.

a that the Or consolidated was margin in there bit a basis the by progress gross industrial drag of was on So engine year-over-year? points XX was side? side driven the any and made

that progress by say is unfortunately this made. there's a masked Rick, Brad. bit It's would just I [indiscernible].

the true on things help find lot about either talking that that us been of negotiate there vendors, procurement for a company. and That's like is differently same pricing team example, try savings, ways the both locally, that across say, benefits would segments. I is new to doing have happening find to So things the the we with discipline. qualified that and work

are varied by is that. long thing, with benefit we industrial it the technology are mentioned, These business. As then And capacity, of industrial putting benefit the dollars to And markets probably new where as lot some one game will mix. also over is disproportionately more time. Tod industrial going high-tech year, a favorability from of we of quite the into then are segment, grow certainly this

you takes then on incentive And just other the But cost and of just lots of in kind as the and just my question. back Obviously, there. it gross commentary side, maybe, Okay. leads then and actions puts OpEx. some also as coming the then we addressed me into next around the have margin

was cost reference But additional curious, were or if operating you to at where finished I exited XX.X%. your the fiscal optimization, also am necessary. you XXXX, think when I made some look I margins think

figure target flat would here assumption margins commentary I assumption, as the decrementals.. have for at well, as But takes to mean flat a is the around flat year, With maybe sales? year, be percentage would to well? that sales am gross and if the the of that goal are hold my may here trying margins the looking this but the assumption, the flat under under margins target I assumption the in are as OpEx, how be you the be to puts operating out here and that is incrementals, and revenue here

Rick is Tod.

even margin, we moving the to sales, flat our on expand still with So slightly pieces, of expect, would obviously. all though very operating

Okay.

likely be company because continue by across gross margin. we the And the are to on very that do we work would that focused driven gross margin

do is in your Anything you around Okay. maybe All some there the and your how there around these any IFS first-fit are has last is of where look capital XXXX about one talked in businesses your in first-fit budgets backlog for maybe first-fit thought hit in? backlog here elongated at But start of calendar of And just and waiting you particular that Or we trend. maybe right. to seeing, businesses good. particular. in kicking quote to that some some Very business, bottom sense are order these you IFS?

the on first-fit IFS, the on have its rate, roughly, kind double conversion business, within right. behavior, So it's seen from to we than quote order,

over are must-do. China. doing slow And really environmental rest, world. making issue to of days exception say, world pretty it's protect, out and projects. with it's people the The decisions. are They XXX but they be. as the as or to They the must-do they not a that's rest things the around notable are of They that deciding before little more is the in have So are out. But on do order the whatever case forward. particular a continue to the the broad-based been slower, China slow pushing may

base. across are that our think industrial And I not bit we little gain competence to change? So backlog? yet can gear again. the level of just more up will people so factories for take production do look waiting really out what a that on When confidence that their they is there customer

sense. Yes. Makes Okay. total

Okay. fully help. he be to am and all contributor Thank sure will Europe. And engaged a And you his again, I from Brad for again. thanks

Rick. Thanks

But congrats, yes. Thanks guys.

Stifel. question Our line Nathan the from Jones from comes next of

open. is line Your

Hi I think this. narrowed here. point the on on a finer expense wanted expectations to operating you just maybe I in put have And guys.

of about million $XXX level. half is First the that at year running

is Second half the per about at of year $XXX million quarter. running

to some You going of going stock go probably here travel, are the And back in. increase that comp like forward. have coming got things we reductions, cost have as obviously you to temporary these are

on is to XXXX flat. you gross bit, think a expense annual would mostly said, in would flat at that margins little margins, which roughly operating be the expanding operating sales, I imply bit on a you look probably targeted

going more of and plans structural temporary those kind through go expenses roll coming reasonable So for to to there take a see this reopen, that is to And economies to back? offset the it order as million we actions are are where costs any is start some as cost naturally these expectation think in to $XXX us to XXXX? that low off

We to of just we Nathan, have below $XXX rate, to the million hit basis be investments do because would not online. on quarterly level coming that expect would aggressive. a simply

and that new So strategic material up research for in here example, have we have. other stepping that online we be putting center QX investments and our will

we And chain we So term, al to this aggressive, really our our below we is have year to to what then would out strategic gross plan advanced internal million built longer our margin have our our operations three within plan, we and with initiatives, will. expansion internal normalize all be we done have footprint, suggest. done if five $XXX supply would have after you get that

to that's continue just at that actions. or to we we forward, playing look tweaks steps actions of, at operations playbook and that relative we necessary? at we be what next order But plan? And any so would in are company's where actions. the would in be expand the in kind within to it. that are look margins that plan looking say, that we move And our place are restructuring continue Clearly, operations we are those to gross take how relative is, there And are what first would looking should our we are our doing the

Okay.

$XXX clarify below I million, said to not million. just low that, So $XXX Tod.

am I sorry.

and I aggressive. you. that Thank be heard Okay. below $XXX would million

$XXX million more low sense. makes So

Thanks Okay. very much clarification. the for

Yes.

Thanks Nathan.

you Thanks well. to as

remarks. turn the Carpenter over Tod will closing now for I to call back

want today's interest safe. all listening friends that call. I for I And And concludes in your thank and Company. and That families you everyone hope and Donaldson are your time to Goodbye.

gentlemen, this you concludes today's conference for call. participating. and Thank Ladies

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