Donaldson (DCI) 1 Jun 222022 Q3 Earnings call transcript

Good morning. My name is Chris and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Donaldson Third Quarter 2022 Earnings Conference Call. [Operator Instructions] Thank you. Sarika Dhadwal, Director Investor Relations, you may begin.

morning. Good joining fiscal for call. earnings third Donaldson's you XXXX quarter conference Thank me Chairman, Financial Robinson, Carpenter, are Officer. and With Tod Scott CEO today President; and Chief This for the summary of fiscal provide performance morning, details balance Scott third and outlook our quarter a our on XXXX. Tod and of will

reconciliation release. within today's attached the During A to we non-GAAP to this reference will GAAP call, press schedules metrics metrics. morning's non-GAAP of is provided

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

Good Sarika. everyone. Thanks, morning,

quarter, perspective, taken a Before all in ongoing product make want have conflict to comments we sanctions Russia Europe. and to of step getting shipments performance Belarus. a a From complied into the into and Eastern this with business I direct stop about our further few the impact

As company represent a revenue foreseeable reminder, our X% future. forecasting and for are sales of any the region not than less we sales to this total

in impact, maintaining our strong efforts I fiscal which forward corporate this our people empowering report the Polish which reporting initiatives recently the €XXX,XXX we and side, part the our all Donaldson. of team, end, with and We where of which have in engaging corporate sustainability our local to exemplify I those quarter, help teams donation they to Several On also various time. outlined is in Red Cross to reducing actions future behalf extend governance. operate. important our impacted. sympathy on contributed facilitating our our like would the support look personal our to and and published Cross. of To Donaldson over communities donated efforts to Red the to progress environmental commitment and has we drive always Europe relief an These responsibility been commitment Ukrainian also of our by creating that XXXX

of third Now at I'll our turn million, $XXX to quarter XX% quarter Donaldson up had record sales another results. year-over-year.

largest our to pricing of As these outpace $X.XX cost the continued negatively year versus Consequently, energy the up has and impacting Raw to increased increase year-over-year, profitability. a $X.XX EPS costs freight, I'm ago. inflation material, was were efforts pleased third expected, the projections. driver as sales organization agility labor with to quarter significantly our and

some or highs. This remain quarter, made leveling meeting which we historic demand saw our near progress at in backlogs and in

for be biggest While not inflation, or supply to our in the chain from of the are the impactful such bit lockdowns headwinds, factors immune over area in is COVID-XX more Eastern a and including us continued China strategically China from on Touching important we newer lockdowns long-term. business conflict challenges the a shortages the China. increasingly COVID-XX FX and in Europe. labor disruptions, those as impact

continuing been gain and have our to in in win share PowerCore We this platforms ability to are technology market. our confident using

issues impacts end and and declined the in OEM total sales lockdowns. a COVID-XX This included felt secondary logistics supply we in primary Year-over-year, These market shutdowns, XX%. and quarter, hours. decrease working chain about from China

this current third were total this, X% size sales about our somewhat compares However, ago. X% sales China limited. year is quarter company exposure of a and To to

challenges. certain we increases. to and of Pricing. to global we quarter actions pricing combat implement benefits supply from We following made will footprint to we back the progress this leveraged the costs to continue realized company headwinds areas: global in footprint; Utilization we overall continue our the facing, to our Going the as chain are circumvent rise, our

capacity, out-of-region increase some our able commitment region, proactively needs we as geographies our we have sheet inventory customers. different to capacity. a that our we region and has levels utilize product into sufficient customers. our we plants facing balance in to For constraints with the to pivot investments; our of in meet through to Inventory exceeded support tap followed one example, sourced have Also, while make have have every been where effort from and demand

While this our been unforeseen strategy. Donaldson challenges, has fiscal year lost team not sight full has the of of longer-term

filtration. continue our We Sciences. integration investments are The end and share acquisitions the position Solaris and of gaining in focus are including Pace to as on we businesses. is current R&D going scaling these on within the Life acquisitions, focused and cementing markets in our future and leader our Through technology-led well we ongoing

expect of negative by the we that, incremental pricing for our sales expectations we full year. sales With levels benefits, Looking continued to increasing demand currency translation. offset and high reflect ahead, partially are

However, the pressure progress we are offsetting previously driven challenging margin inflation. Despite we gross to team. efforts of Donaldson see backdrop, in mainly by through this headwinds continue mentioned these making the

fourth As gross such, margins quarter. the we uptick forecasting are another incremental and in margin improved sequential

as of regions, replacement quarter in visibility, $XXX a sales continue. high this and are of parts our narrowing except growth and currency on Total were with now production from fiscal range X And increased growth When to some details I million $XXX later to and were of outlook both XX% our due XX% between Pricing sales. the these an XX%. increase between 'XX fiscal roughly last Off-Road up million, was translation of our reflects factors In provide all $XXX guidance up total adjusted XX% of points. equipment in in contributed so sales businesses. percentage first-fit the will and and approximate sales we Scott of elaborate context XXXX X% levels on up EPS result XX% China, results, headwind As call, Sales will million, with to in third a be $X.XX. net Engine, $X.XX our compared were approximately major year.

strength and business Emissions Exhaust We Europe. saw ongoing also in in our

supply to a in customer of shortages $XX headwind. million were segment. chain this at sales near-term customer As a results North including On-Road buy of sales America. come prior impacting a the modest Also from limit reminder, the these lower OEM down continue were sales challenges, presenting in margin X% discontinued year. large growth Global a equipment chip some directed negatively to mix

$XX aftermarket, Excluding commercial industry sales increase this million, in aerospace of the were share again flat $XXX sales year-over-year impact, XX% aftermarket XX% record. Aftermarket, Sales XX% channels as end channel In the over contributing year, products Engine increased to of in an as Aerospace globally and of sales are we were demand up digits. our were PowerCore America. North market were continues. up In OE strengthening both On-Road another total aftermarket our replacement In up double gains. proprietary growth. XX% sales and prior from market for in and million benefited Defense, about quarterly products

to and by million, industrial to in sales regions industrial the Now, of collection mainly increased segment. all to or million. XX% dust APAC. Sales $XXX $XXX Industrial Filtration driven turning with Industrial grew X% IFS, except Solutions, growth

Continued strength in process filtration also contributed to the results.

a up special macro rapidly use in vents disk is proud strong to the This the for Systems, Applications, market. this area down deliver approximately U.S. sales within the challenges expand million, a pricing new Donaldson pipeline sales. Europe work quarter were through million, or meet due of as customers underlying record and venting key applications the reflecting COVID-XX China were high-tech sales. X% given Special GTS, opportunities increase XX% sales equipment to strategic execute our were Sales done Overall, Also the demand, the team excellent drive of shutdown sales batteries of negatively Third quarter for products Turbine the industry. of in I and the impacted $XX of of work has of $XX as Gas powertrains expanding auto in in another on and am to

over will on more for the Scott to turn Scott? it details I Now, financials.

morning, everyone. Good Tod. Thanks,

This were top pleased results. line quarter, with we the

XX%, expectations, materials, above inefficiencies is the manufacturing mainly of summary, and step-up our in supply margin one basis below issue key on an points were XX%, However, quarter. XX such was margin greater was favorable was due third Operating Operating sales up $X.XX a supply driven our acute headwinds, EPS basis continued over year-over-year $X.XX of quarter and Other temporary impacting our raw Gross more In as points raw by the freight, up in expense income factor of than down inflation driven expectations materials and as margin, energy XXX costs. and grew a quarter challenges our was X% negatively chain gross was operating while it by prior was continued to by pressure. XX.X% last sequentially year. also sales year, up primarily this profitability. percentage sales of labor leverage.

Accelerate as portfolio. expenses by strategically investing to growth actively Advance our continue our areas and We manage such in

statement. flow before Now, turning I'll balance the sheet cash profitability segment to touch and on

was quarter on margin the timing Unfavorable XX.X%, points impacted The XX margin also Third year-over-year. year-over-year. was driven sales Engine the margins. costs. we negatively profit XXX to as lag I margin. would pricing pretax down two realization highlight points There are Industrial of down by industrial mix catch things was basis XX.X%, basis up decline

in Pace over into progress the have Industrial First, the with Overall, to integrating be scale. recent acquisitions additional as has expect in margin resulted the the pleased made of them accretive quarter. businesses expenses integration Solaris we are and we they segment time these and this

acquisitions, margin industrial was year. flat prior the to Excluding

Secondly, negatively impacted unfavorable results. sales mix also

statements. sheet balance the to turning Now, flow and cash

is which be due to Inflation, sequentially were negatively free increased $XXX primarily increasing ended the impacted quarter year-over-year. million inventories. by Our deliberate challenges, chain our and supply and the to up continues positions both approach to with our drivers. externally working capital and internally cash We elevated $XX million inventories flow our

are our quarter about this As talked increase a the committed due highly we year we this answering inventory. the Also call. and decision availability was our receivable valued higher type is to accounts as made negatively to increased balance possible environment have of sales. being Product in to capital the in earlier to before, prepared working impacting proactive as we

capital cash and initial reaching target. week, quarter, have investments form a the a quarter we dividends returned $XX driven year-to-date, mainly by X% in expenditures always repurchased Last priority were this announced $XX quarterly our is outstanding, and share PowerCore. shareholders expansion, Returning million and Third of our for of capacity to already including capital million increase we repurchases. in XXXX dividend shares we fiscal

their quarter capital Our be ended sheet investments. have important an balance a and We towards to of ratio the X.Xx. approach managing asset net with a to debt-to-EBITDA us proactive allowing continues

sales. I'll our starting fiscal updated through outlook, Now, walk 'XX with

XX.X% our from XXXX and to impact to We sales of translation Engine a increase about outlook. driven as negative third fiscal between range previous XX% This our business guidance are guidance of XX.X% our quarter which includes XX% X%. a by and increasing currency performance from

are Industrial unchanged. the segment for expectations Our

we segments and Americas both geographical expect Europe from the a to in For results APAC offset standpoint, stronger softness.

of versus between XX%, aftermarket from our the increase an between quarter. driven combined off-road of expect by forecast XX% In and XX% previous our For from up previous to are expected are teens in forecasting our pricing in now results of growth XX%, with we high additional in teens, Engine, sales up previous the Off-Road, and now your fourth the high realization year-to-date Aftermarket we teens. up mid-XXs to be low estimate. And expected guidance

expected America. On-Road our are strength low-single-digits, market for Aerospace Aerospace Defense. commercial line in supported are in the sales including particularly customer Defense XX% product down segment, we collection of to in year-over-year be continued projected to increase this by guidance low-margin and new of are are digits as to given Industrial in sales In We and the and sales prior to increase of North expect continued the and double aerospace low chain challenges, the of chip shortages discontinuation guidance. maintaining grow. and equipment XX% IFS with Sales for On-Road supply with the and of range in the to growth projected the low line dust parts, midpoint filtration process replacement XXs. sales

'XX sales most Aftermarket up high-single-digits, Moving in is Turbine to forecasted mid-single by led business growth digits Large Applications to fiscal up prior year to with sales. GTS; growth be we units. and be expect Special versus

on margin our touch I'll Now, outlook.

improvement. we quarter fourth the margin to sequential another quarter, as anticipate of mentioned, Looking do gross

deeper basis and gross and and revised are underperformance last a resulting an a points, between by the additional XX year expect pay our including margin XX.X%, headwinds, of updated XX% now and more we our margin down we this range to between on forecasting XXX third manufacturing by XXX the or given efficiencies. quarter, labor points. freight, for XXX as pressures, operating Digging XX%. our outlook are below lowering basis more $X.XX to range guidance basis XX.X% on to well our decline gross temporary energy outlook, as are of versus in we Adding operating our inflation, materials we for margin little Based between previous However, over full in a to approximately including year-over-year the XXX forecast, and range the pressure $X.XX raw $X.XX. XX.X% to and points. year, the in range year's EPS adjusted Driven guidance to from margin of XX.X% outlook decrease previous $X.XX our year-over-year

Moving to are between given times result of and chain flow to forecasted Capital supply to expectation outlook. a expenditures million $XXX ongoing $XX our balance sheet versus cash as of previous $XX $XXX and lead million, million million our longer-than-expected project be issues.

related have is the due investments year, summary, inventory that to XX% down our with to I free now would financial on controlling while macro world like for are our discussed over expect In increasing all future be colleagues we receivables. to they do my and XX% for to XX%. primarily the of This weighed we cash laying the from higher foundation flow, we have future. out successful previously thank time. aggressive guidance control working along conversion for to XX% of ensure terms results, challenges capital of for profits on previous about build near-term thoughtfully to to the around the In sales our increasing in what our the can been investing

the back Now, call Tod. I'll turn to

our to We've to up sincerest the environment. operating extend our commitment of lot the with and extremely a Scott. advancing through and over achieving thank world. we taking I gratitude goals want hardworking and would we the to past clear and Thanks, about path my day this we a in employees showed and organization, are few achieving challenging vision steps a times. to inflationary have we every At a have filtration jointly shareholders. to faced work as long-term quarters for like I purpose customers I Donaldson have the volatile suppliers our difficulties within also right who know customers a Donaldson, talked these the our cleaner our

We will committed with now we existing come. our businesses our share of the the increase are and years to providing we benefits for capital businesses, the sales to to Within investments are making and Advance and reap market required margins. Accelerate optimize

investments. product portfolio expanding our through and also are new R&D inorganic We our

quarter with we Life expand our this the to On in reach look and for acquisition Solaris to completed continue first in our ways front, sector. acquisition Sciences the second

of Looking the right are have grow beyond the profitably place right XXXX, the company. fourth and in the to quarter we the and into investments fiscal team that we people, the encouraged by right and the resiliency strategy know

line Now, call I'll questions. to open for the the to the operator back turn

Brian Instructions] William with [Operator Our question Drab Blair. first from is

as we're probably think operating midpoint the So right in I to what sure model speak we ask get to the want sure margin you about because that want the in make for just But this I of I specifically a I'm to is fourth margin of to have the this XX.X% question something here. and a this just since type make make quarter. comment that's of risk did implying. updating to operating you're range quarter getting fourth the guide, I kind

year. points we the year that's gave point XX.X% compared have over But XX% for the basis you'd into the to that quarter guidance Well, operating think last you get the back updating as for And calculate. on of down I high to for margin math, XX.X%. fourth [ph] XX to full to

Yes.

Okay.

we're right. I'm to yes, getting just doing confirm over wanted math I the XX%. that So And

just it. this. would I curious -- won't that what say you here's you guess then and So I'm about a answer question

this caught from kind because there, and is that we one is a pop look any pricing? level just costs the -- a way? is that as input and you in you that now of extrapolate up of with forward As is pricing look dynamics volatility can Or

our our expect I good seasonally mean, is has do I look but -- Well, will historically, always pretty year-over-year And we think all, margins generally back to if margins continue quarter our fourth I would first improve. of you strongest quarter. say

quarter of increases. bit are that's now had quarter this us. a our a pricing tougher had we this We a big supplier issue our gross said, on factors lagging that increases driven quarter cost margin and behind we whereby by was As material

to We're margins expect So to levels sales for committed of higher that. continue we would our to higher always profitability improve. on we're investing and

expect we year-over-year And forward. a so we basis greatest continued not margin the improvement feel but we this do as quarter the move on about performance

Okay, think great. was growth the years touched newer in as What and you higher Accelerate And the markets if in what the about And I Accelerate of getting the of on business and couple the segmented you're water update cetera. specifically, markets? like -- you I'm of are then, couple about but areas it a et you could you could how kind wondering ago. Advance on you Advance of a you also -- filtration, growth some just if the seeing wondering seeing into of even just some

Sure. Right.

So when of portfolio. of portion portfolio, is suggest portion the what we you that digits. and it core, was the in look at third mid-single In growth experienced we mid-teens a would Accelerate our our across take Advance the quarter

how is really of portions significantly company. other and can Accelerate Advance more than our you So see

So we that. feel good about

Alexander Laurence The next Jefferies. question with is from

guess, from behind just those the line that. I to likely was want price This it's increase top actually between guess, is your which is of I wondering pricing about, guys just thoughts for I on you actions? I I'm it get destruction and or price Laurence if mix had largely just guess -- your just wondering I guess if the demand maybe I thought [ph], one volume I'm Kevin in Alexander. And I for outlook. about the I contributions midpoint guess

Yes.

the third X% So headwinds revenues volume pricing quarter, quarter, X%, will fourth even offset larger be a was by In X%. currency in the impact. by and of impacted pricing

increases layering commercial certainly don't we're price we demand. and understand They're with increases. grow two, that to it's I our costs these reasonable our to and we're prices. mean raising our long do on our customers. customers. pass of to pool have cost and continue to impacting have maintain that as so pass are suppliers them as They margins profit And them continue relationships reasonable feel part those One, we're then trying to going like to up we their And see we as from costs the up. to

do So, that we're right the increases seeing hopefully it's strong. and neutralize demand to affecting some we very hope expect here at off cost think I now, and level will soon. point mean, relatively demand. I start don't is But

some I think company in proprietary through and out we invest program slowly even and hard challenging continue to market share our work light in kind our we of conditions gain technology to that of continue the wins with on there. are strategy

[Operator with from Instructions] is Mason Baird. Rob The next question

your I said, the little visibility of that. far be increase. to How sequentially the wanted month in I'm to margins on Or in to sequential exit up back they out quarter? how go the a curious around XX.X% you out thus margin commentary provide May I'm as just third did to fairly quarter. margins healthy outlook relative a played gross the for teasing on gross have the gross

Tod. Yes. this Rob, is

acute we thing that had that an We to Scott remarks, happened us. plants. gross in all detail. it And goes in manufacturing not that third for execution on get petroleum-based I'll to significant referenced quarter issue that a start headwinds quarter a One So supply his the did was more pretty manufacture the little Scott it company. see relative but that that maybe bit us and I'll the about really coming was in presented let products into suddenly then was prepared became of air-based as our we It a XX% unobtainable. chemical margin multiple across significant the

of we result of in work of third plant XX of direct did shifts quarter. affect XX between result as and lost a the shifts our significant that, a a amount were As And lost. that that, margins

now. issue that solved have We

that was that in us clearly not QX a get repeat. the significant enough have to et to quarter, through action third cetera. We But should

margin let So, I'll Scott pick building...

In terms third on said we a revenues of I the price Rob, quarter. in impact pricing, had X%

The in we'll impact layer have We in mechanisms. a pricing the quarter up. expect larger we plants are additional as back cranked fourth

pricing forward we we're move additional each have catch month. We as that to going here

margin back what question as about And Brian's so just fourth pick expect feel the from fourth operating quarter part quarter mentioned gross the well improvement Certainly, to quarter. and expectations Tod we margins up based in margin pretty in as our and improve there. to we behind pickup that were good in recover sequential third original the on a reasonable

increasing So that next fourth sales. and in higher margin into we're the quarter levels on to committed of year

margins And quarter apply thought, higher, I the Scott, margin. that in you quarter your earlier that, to fourth apply margin? Does that year-over-year, commentary, would operating fourth the referenced to gross

Yes.

Okay.

question. follow-up quarter have the call in just view year, this seasonality? look if it, around third seasonality a thoughts on as I'm like elevated, it Last calendar preliminary some causes backlog curious in you change half Just that. calendar any just peak call, your sounds given any maybe I'll make that still they're your, you second into around whether a your particular commentary did second you half for

best know fourth of COVID still that of mean can back expect on we Yes. kind and guidance provided. the I quarter I just our had year, to we kind into based you be last quarter mean you madness.

into, you said, to early So a little obligated mean of give be year. good try demand our guidance strong. next prospects like our continues we feel growth part felt we to I more bit about the to

Channel As are the backlogs low high. we are inventories still levels. said, at

see can the And sales. I well there's And least what higher to levels we're, future. so profitability we in higher committed said, of there, as feel demand on of for at reasonably we like plenty

a that year. revenues price on tailwind with by about think next we're the year comes month to this in in year, there'll next be in, had layer that -- all increases If based next we've year's layering pricing this that month, quarter solely you quarter, by

kind put of the And that would in mid-single-digit range. so we

Currencies were headwind is that. be next One stay would offsetting year. currencies they at factor quarter, they certainly. And if level, into headwind a this this to a

feel good. we for business to speak away overall, look through partners year finance are next we teams with about We're coming forward back with that a planning come pretty process. along XX plan. up to think, I working good as and our The we days. So cranking solid with in you their to

next The is Jones Stifel. question with Nathan from

Nathan. This channel very is about to Adam continues on the show growth. Farley builds? channel robust wanted for Aftermarket to I talk Engine first any Are you inventory seeing

Yes.

Tod. is this So

So there the a when not visit distributors. you really of We look builds. at quarter, the the to inventory have been overall aftermarket, within opportunity took number different

pull-through And Scott that us fourth have firsthand this mentioned, confidence he at, that talked current would so the levels It's as channel quarter. in that also we the in our we're about gives at build. when seen know time, levels point what not the continue, we the

the the of receivable the Okay. capital. and inventory accounts into flow from impacting run you Or guidance, you inventory on return ahead looking understand XXXX, And would in free working levels the Maybe cash medium-term? expect I then capital? higher cash higher would working

on away team said, catch commit continue. do conversion slightly hoping plan. hopefully Well, finance inventories the I conversion cash based our year. Things down next see that year. the to I expect and would on we're expect supply we material up. we I to really But cash to those will improve chain to now we right our improve seem as to what trend situation. want next would certainly, But We'll start we make to cash not to to we're But as would certainly still would would with be balances to call a trustee is expect will cranking we expect improve. conversion things have this, improving say, while raw on

Yes.

of maybe a Just little color. bit

us. that the we've third on quarter, issue would -- been solved. have chain-based seen quarter has some that issues clearly we chain in as do issues. we've I hurt slight improvements on Going that quarter, see that experiencing had to the been the going that, into that our been say acute We unforeseen gaining we again, compared that supply third But fourth supply in into

pressure be we'll as bring And put the so making to when to a inventories to down. call

for further at time. have I'll We back remarks. no it turn the any presenters closing to questions this

results That fourth year XXXX concludes Goodbye. participated today. in and late the Thanks, Chris. quarter call full I to look our forward to Thanks who and August. everyone reporting fiscal

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

may You now disconnect.