DCI - Earnings call transcript Q2 2020 | Donaldson Company, Inc.

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Operator

Ladies and gentlemen, thank you for standing by and welcome to the Donaldson’s Fiscal 2020 Second Quarter 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 Mr. Investor of Director Pogalz, Relations. Brad sir. Please go ahead,

Brad Pogalz

the we and joining Thanks, performance an XXXX quarter Tod morning, Chairman, of Tod what for Officer. will overview Chief me of Megan. morning. Thank Carpenter, our Donaldson; year. for President the and a Good and Donaldson’s CEO Robinson, earnings This and planning balance are are our Financial second of today you Scott provide conference summary Scott With call. quarter second of

During non-GAAP call, non-GAAP to uncertainties, press which filings. Please the subject today’s forward-looking I may we metrics. in any made release described reconciliation and are attached SEC that release. statements note reference are a to is during want risks of that everyone call our to this schedules metrics and there morning’s press GAAP remind to within this

turn With Todd? that, over I'll carpenter. now to Todd the call

Tod Carpenter

We quarter. profit Good strong performance morning Brad. second everyone. in Thanks delivered

Our in momentum initiatives to increase are softer-than-expected environment. a controlling building we and demand gross margin are expenses

We things under discipline to their control our our our thank those under and for want focus. filtration control. I businesses employees our Strengthening portfolio is and managing are

I announcement. last comment to To on end, that want week's

second Global Products mufflers for purchase tractors. we on non-filtration. XX, We business when began characterized that as selling a and it XXXXs oldest we could our February and only As business Exhaust Emissions binding Exhaust offer Exhaust discussed Emissions to and into made Nelson is our got be business. Emissions in our is the and

customary that with is that the strategy. expertise, replacement core months. sense. razor sell the consultation but leverage nor our technologies science razor other Exhaust our owner material transaction Europe Through in would close with works Pending makes great and aligns working have and Nelson coming to along model Emissions Exhaust councils with our customers, a regulatory expect Donaldson so We to is and parts there approvals, lens, the not and in or employees not employee Emissions, with we blades best of does

a Turning from equipment headwind to expected currency high sales our results, new and conditions down by quarter minutes. were in the during coronavirus a February a down. cautious few translation. I'll offsetting level, our on a compounded with At second Customers and were benefits that quarter first-fit were from businesses worsened total broad-based outbreak. declines second touch more then in X% in with pricing,

segment first-fit the from sales Turning thirds back X%, of came were about Engine businesses. decline to off-road and on-road second two quarter, down our

XX%, Class from Second of on-road production sales predictably U.S. came down half the decline as were quarter X truck slowed.

However, that market. to third-party indicates overall outperform data the continue we

Donaldson. sales compare to quarter local down and second year were difficult was expectations, nearly quarter On-load many decline with we are sales last we our In as the comparisons new last customers ramp from about China manufacturers, a were of as up in from and We off-road, programs revenue whom also Emissions, of down Exhaust prebuys. with had the XX% year's consistent choppy remains quarter. prior against the

off-road. pressured also conditions market Soft

were in to sales the will to our OEM equipment lower Similarly, last in on market. the with by continue. customers channels we sales and agriculture of contributed single-digits many uncertainty, variability from in X% mining trends sales, and quarter were these and Second persistent largest the region utilization expect Based independent mid both decline down construction, year. aftermarket down

year. in a the while in prior after is For example, soft business Europe U.S. oil Eastern and is gas recovering headwind still the

complex problems develop in single aftermarket continued innovative sales the PowerCore. validates strong solve our with our continue products success about drive were and quarter digits, quarter Importantly, their a counterparts. PowerCore are and The legacy aftermarket outperform up innovative aftermarket mid These strategy, to total retention with products of products retention. second that including

Second replacement were our to helicopters year business up and sales the perform and continues from aerospace up quarter prior to were parts Sales defense X%. well. almost in

systems. Second Filtration Solutions or moving quarter decline sales turbine Filtration in for X.X% the Industrial segment several The Solutions were by IFS driven has down Industrial pieces. gas and X.X%, Industrial

which Sales year related high a investments comp were growth, new focused are up their equipment. to about resulting appears digits, immediate driven. Customers be is and the lower dust rest for needs versus a attributable XX% future from the in collection, of single make the decline in down IFS of sales about market quarter to tough last on to and

extending replacement trends of purchases. quarter. do Lower dust are change view. the long were customers holding and the Sales collector off our replacement also not down cycle utilization on near-term in parts is term These

gains will continue regions. share with our for with to major we products gains go-to-market all in happening of invest We share specific see strategies innovative evidence already. So,

more in new equipment the sales Second in proposition than believe value strong blade We were and up aftermarket gains of mid to dust products razor quarter dust retention sales profitable and collectors will selection. and up drive down replacement parts sound for XX%. high for the share low the were teams continue

another the Sales low share up last digits Process of were gaining filtration double in quarter. is example and margin. growing

We our are large with extending strategic winning expanding new relationship with accounts accounts globally. existing and customers

margin be the filtrations and into process believe powerful to well future. continue will drivers a We sales

delays will parts. a for GTS quarter. new replacement Demand in for in low projects demand were and maintenance parts replacement Gas in planned Systems as We maintenance decline the down and do, however, or remains about sales expect contributed second in recover Sales Turbine happens. turbine XX% to

to our business business year. up of is $X job and about once growing know done on in down Year-to-date profit team. last difficult these The an repositioning team before calls, are a sales cycle while incredible dollars profit making I I've progress GTS for from are recognize million, feel great success. on they're doing meaningfully it long-term this GTS I but again compelled

Wrapping industrial quarter. XX% last special of up sales grew applications

we pursue We're shared drive not line growth will our anticipating Our disk near this disk overall highly storage. but strong to drive in will due business for to continue continue, gains technical was market. unexpectedly in demand business

We venting up digits were filled last solutions with quarter. also are where in getting low-double sales the

including our the the for an us. powertrain battery demand expand products markets opportunity These automotive technical offering well to exciting events. creating cars growing growth continue We passenger for for with electric line and

would as model Overall, working our expect. we is

to New in gaining and the has be are Overall, amplified was theme market. coronavirus. proprietary and equipment a second prevailing sales and been our products innovative the down a appears quarter margin, that during by share by cautiousness wide Replacement first-bit are growing. parts of outperforming

outbreak. Scott, Before turning to I want the share call the on some thoughts to

health employees. our Our top safety of is and the priority

to work-from-home schedule restrictions, and in of closures implemented China extended like flexibility, where We sanitizer appropriate. travel hand have cleaning them mitigate incremental several countermeasures facility masks the risks availability and including items face to specific

of as our infected coronavirus. of reported I'm today, none with very employees being happy have that

will to world. following to promote and closing China, February online. back our after stabilizing and We Since up safety our continue the operations been New suppliers are period all ramping on Specific staff in are Wuxi an production health as around all Chinese nearly in XXth, facilities we've our the Donaldson extended work returns reopening Year. to

our to backup as they which from ramp started down resumed is but are customers operations. be to expected, Orders forecast, have

but our Disk clearly to X% of China not X% cautious reminder, China have visible. Outside of quarter production. a significant the Drive about is of stance yet we revenue, global is As disruption, a including total experienced

Italy, Korea, closely monitoring Japan. while plans, the South situation contingency places on in executing and are We like

near-and Overall, I'm companies is response of have impact collaboration to and the assessing part proud global demonstrated from the medium-term very is It teams The impressive. level all our hard of the outbreak. coronavirus. in us truly for

cover We in some fiscal more uncertainty Scott 'XX his our let remarks. have factored which incremental I'll into forecasts,

Scott?

Scott Robinson

I Good to everyone. morning Tod echo want sentiment.

doing are excellent an navigating teams by the coronavirus. challenges Our the job granted

serious, coronavirus beginning quarter what second close. outbreak and am That's impressed long a financial making time customers is the The list in I together support item quarter As our the we China stressful becoming things really in was on of that our one by any rally they more cautious. outbreak teams a accomplished. are process. the to were more

full the We let push metrics. a and of me leverage of second about second of revised profit more record But quarter slowdown across financial overview into provide a X%. We converted markets, about items a on growth quick decline later. sales for first, EPS quarter we forecast. I'll our general Based that talk our key year X% EPS $X.XX. non-operating good feel our

Operating points Engine were and operating quarter from XX XX.X% basis margins depreciation XX the up and in headwind segments basis including second margins capacity expansion, basis points both a to grew XXXX. XXX Industrial XX and points incremental respectively. with also strong Profit our strongest margin that's since

about optimization XX.X% substantially we year. Consolidated to initiatives. XX% point improvement, basis from gross XXX a Off point the margin estimate from our came last grew

New capacity is coming online.

chain. supply adjusted steadily are We

are manage our teams commercial and procurement to driving Our continue pricing. teams reductions cost

sales of mix favorable our costs. by complemented was lower initiatives these on material progress Solid raw and

a is priority As with progress. from we leverage year, to of gross driven and we're year, XX.X% said lower of expenses XX% the operational on increasing coming the loss margin as sales sales last quarter. top rate pleased increased by into primarily the our in Operating

funneling spend portfolio. R&D and managing while discretionary by and to dollars expenses, advance towards continue accelerate We our wisely

non-operating better than about driven Second year was last by income quarter, $X foreign and million on exchange. loss lower our forecast

of from earnings. of rate XX.X% tax activity stock and also unexpected, benefits reflecting was mix a consolidated favorable Our option

and our repurchase our any the things of did payments and leverage in wrong in the made vary. share take report We amount dividend and We of needs, liquidity the many a which shares. business that of can quarter ratio, quarter not any million including outlook repurchase $XX second view means consider

this still amount in quarter. year are and of the half committed purchased first to that We X% have

we slower is one down as times prior receivables in good optimizing year, a and our quarter, and the sheet we make payables. sales expect balance would what capital remains At Our a working the of which net environment had in from we end the debt-to-EBITDA shape. converting was progress our

sheet feel priorities. that are especially pursuing we down. where continue is today, our strategic advantage, long-term markets a Our can we Based balance we as turn on competitive confident

With had our As environment. study we by half economic can. we of walk thinking controlling second long-term I'll about fiscal 'XX, with what we through one the the think goal guidance that, act

give Regarding world in of sales estimation too China consistent second in impact. quarter. were of the coronavirus, long-term February with trends near rapidly the the the changed the situation more rest to soft, precise has or but a was

wide. Given factors ranges forecast uncertainty we of our a variety a guidance kept the from coronavirus, downer to revision of our made and including overhang

including 'XX. pricing. full back X% the be single-digits change expect sales the between in of down projections sales About decline We to should the be to of forecast partially X% expect a offset to XX% from lower now currency fiscal X% and that second headwind half in year. now from our to a half mid We X% relates of in last by

increase anticipate third smaller historic will second sequential from over Within long we the our to much quarter than the period. average back-half, a be

We X%. in aerospace to not X% single between declines which forecast expected change defense are digits. is sales our did the up full-year segment Engine mid the In and

For mid-teens on-road and further. off-road, in production we as now equipment declines full-year expect slowest

level We of the also mid in utilization, now estimate are sales down so aftermarket forecast lower single of a digits. low equipment to

continue our as we innovative share legacy to Importantly, technology. expect products gains outperform

X% projected a segment between industrial X% sales increase. Our and a decline are now

applications We to continue in low level driven rate second to year, replacement of increasing in unwind have we special as with a of by digits now projected single parts. flat down growth strength the quarter. market lower sales expect in will be be about the last the certainty is GTS

but perform market, remain is now spend. continued Based software market XX.X% our to replacement digits from and it's is collection. on both conscious that dust are customer a by conditions the for new through and low sales a in forecast segments, likely still the process equipment projected pressure offset better We IFS single down full-year expect Sales XX.X%. margin in alteration lower now between will than parts under in operating and strength

margin, from to expect We continue gross we in year-over-year reflecting outlined increase a initiatives the notable earlier. benefits

unexpected and compensation versus the plan forecast. which our in XX% sales we X in implied from prior of view incentive will strong less prior as range, than our is headwind XX keep to control we be tight decline. expenses decrement in guidance current The million we operating given million down our Additionally, low margin expect of

handful now to about change we quarter projected other share between projected still expenditures interest our X We the million. with is to by and million, XX a of Full-year forecast and cash is expect XX.X%. full primarily million and expense XXX tax Altogether, year driven to conversion $X.XX also our second now $X.XX. and of adjustments XX between We EPS between made X% favorability, a of XXX is and rate forecasts. effective million to Other be million, capital repurchase expect income of XX% XX%. XX.X% GAAP

for to comprehensive adjusted divestiture steps necessary we Please the been completion and mind forecast is closing keep the more not we unable the financial we’re beyond our provide metrics potential detailed impacts transaction, a provide view of the that our of will E&E in Until shared. how transaction. Pending close, what's outlook. and

look market the and current we year, the uncertain. projections next impact coronavirus As more our fiscal make conditions to from XX

today, are last provided we operating margin in will the Day where on range April. expect we be sales Based our fiscal below Investor at our is ‘XX and

themes While the direct increase forecast review, Investor gains the portfolio, advanced investment remain will under We Day for share to which the accelerate is our profile. and drive intact. and our margin plan

are returns it returning extend approach XX% total technologies and disciplined positioned up while managing deployment, to strong effectively more makes capital we have a base sales, new existing focus economic execute initiatives, to stable leveraging more cash developing new the by cycle. portfolio, on a will uncertain shareholders. believe, which recurring to and to generating well to markets of We With than on we we revenue, of our a we

the now Tod? turn back to I'll call Tod.

Tod Carpenter

Scott. Thanks,

markets uncertain, priorities our While are supporting through strategic our focused we innovation. and customers remain driving on

positive. we our confident acknowledgement feel While efforts, is external also in

products some fleet wireless important the monitoring potential Minder ability included innovation, bottom-line. publication, XX recognition issues system on their judged well for were on recently enjoyed Our of regarded team a industry Filter industry the list a Products address to our XXXX. and to improve from which top

systems, Customers them pleased better to to about and optimize easily device launch the our into and giving this ability We of monitoring our we're onto retrofit existing on performance service their solution. are visibility filtration excited commercial list, year's intervals. the be can

late we world coming our plan year, began We other the launch of the the expand U.S. are last parts IQ. selling in also to solutions connected expanding industrial segments of in and to We IQ months. the

can users their IQ and Filter up to real offerings, time collection about Minder provides performance the our set equipment. Like easily information of dust be

example We of ago year. is A years launched products. portfolio also product running long continue We million XX to existing XX last our made innovate with the our PowerCore. and filters

resolve to continued us better more produce. for have customers efficient it PowerCore, We and making for our to

With creating study conducted of advantage more small a By performance proposition. with XXX you efficiently, a environmental fuel of trucks to which in estimate helping competitive use on much consistent PowerCore $XXX,XXX fuel offerings, year, a we last as number and that our against compared up. Based PowerCore, as engine value fleets continues hold can save can PowerCore costs. per reduce year work consumption, strong we economic

economics. also products IFS Our provide benefits beyond just the

customers us products that on penetrated ownership in seeing Mexico our they our and historically environmental total allow like Places are the Sky in we as focused address Recently, where of Manufacturing of certain engagement have cities where safety customers against launching levels helps technology China, well pollution higher new initiative, measure. are and and regulations. being our implemented Blue to controls perform are cost under expand business markets. increased

are Donaldson a cleaner play our filtration environmental social I is statement media that. deep have will advancing do we and of role world, solutions exactly filtration growing and driving for about design and that I'm we meet that excited economic, towards and propositions. strong company's value to the With purpose how positioned needs. understanding uniquely Our are development, believe in these opportunities

inspired conviction teamwork. Donaldson stay The outbreak. to am the mindset power and our the global top I I'm and adding am going to witnessing the coordination leader our on by working be that impressed of efforts I close of Donaldson in I prepared team’s they're related it. level about situation filtration I will firsthand, the global inside the coronavirus to As rapidly and changing Company once truly again a and further that remarks, the amount recognize of one is by Company industry. continue to support am often We as my talk of acting to

Now to open line I'll to back the Megan Megan? turn call questions. the for

Operator

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

open. is line Your

Brian Drab

Emissions what's Exhausted make profit even that it is within Just comment is business, to first any relative average? on where the or can the business you corporate operating on

Tod Carpenter

the XXXX, Tod, you the revenue we've is below is that Company what also profitability We roughly Brian. was in that $XXX the million. tell This the said release would Overall, average. Yes.

Brian Drab

Industrial doing quarter like particular anything is of level the for happened business And well obviously in GTS possibility that? then there in that that main and profitability. terms segment? Was that outperformance really drove Is is sustainable sounds the in of that drove the profitability factor that was and the

Tod Carpenter

really doing and their plan plan work just execution. to Nothing be Frankly, just That years expect they're a just and plan they job. together it's unusual a their truthful, that work strategic didn't three excellent ago. put great we

Brian Drab

there level main and is think main be the going business sustainable industrial? So, would that and that there profitability on Is quarter it in you, driver? my in that reason I your think the possibility expectations was the Or and anything I for expectations, industrial? that

Tod Carpenter

No.

Company I strong have year of level think regions. in Company, the overall that on the all all across and really to margins plans the been we've gross really improvement main execution on our all margin working gross all had driver we broad-based is the

And of line. to that so, we're you see very the leveraged proud way and bottom can all the reflective and that

Brian Drab

contribution you year? second filtration that what are And price? that can down Commodity media. is what price the of you generally to then for growth the getting you're prices imagine, of to revenue been you these are I would half have pricing, year? to full price expecting headwinds. maybe polymer derivatives, offset you mentioned see the allow some you going as in how for on there’s expecting oil And guys steel coming and and And

Brad Pogalz

down in single was like-for-like a in on digits savings realized second quarter. The Brad. the the is this Brian, low

material. mix it still some creates It's because a price, buy though really is of certainly raw favorability. So, interesting

actually the as So, in as cost whereas filtration what is down, out for ticked seeing a aligned you're quarter, slightly up you the us more in indices. media point steel, with

on us initiatives. think to favorability we that's these execution start some and back But of on we're progress narrow procurement well I'd because to Todd's lot towards on they're smart we back had of buying made a last how end favorability be our the comment terms In the helping echo of work and as as will about side, year, of half, the also. we some doing

Brian Drab

getting points -- So a in comments a revenue growth, terms price talking more could any of is there or or about you basis of there you're price that XXX as to increases basis contribution if points like, are specific? little XX be

Tod Carpenter

pricing pricing In terms materials? or of of raw

Brian Drab

Maybe I misheard.

So, let's I some be that some in seeing of we're he there the thought that clear. comments that you're about Scott's price? headwinds pricing would just assuming that and I'm said offset selling talking

Scott Robinson

This Brian. correct, is You're Scott.

mention I correct. pricing customers. did our prices You’re to which meant

expect will small help a we the that benefit, expecting. some to to pricing So, offset impacts currency which have of negative we're continued

So you had that correct.

Operator

Jefferies. from Alexander Laurence from is question next Your

Your open. line is

Dan Rizzo

this Or from Dan the you and for talk gains? Hi, that is is improvements that products? Rizzo increased is When productivity mixed margin gross of about improvement probability, new Laurence. the more

Tod Carpenter

several Number important gross Our was the are our is that undertaking specifically this it up, which drive initiatives to by always for gross one, improvement margin and most we is plan driven try margins year. factors. really and

were estimated pricings a of basis driven improvement that deleveraging this improvement offset also of slightly volumes. the get material basis a had to initiatives. points, mix benefit So, reduce We we by and quarter do of solely our due raw by XXX benefit we a points XXX

of the is driving the we're undertaking. which that biggest initiatives factors So, there's several

Dan Rizzo

And questions. then a couple of

within have defense? exposure XXX you the some MAX First, to aerospace

Tod Carpenter

No.

Dan Rizzo

how potential affecting, you kind dynamics the violate positions? pipeline And given changed and of or that I the M&A finally, landscape, guess, the do have just is of

Tod Carpenter

you so that we quarter-over-quarter. remain if we disciplined principles, point the real that M&A that a in view no buyer, to remind changes relative behavioral still a we buyer, that activities, the selective have would a no you you I full And we at we Yes, metrics activity. from suggest real that The there's this M&A will strategic. view pipeline, the change way evaluation

Operator

Nathan with from question is Johnson next Stifel. Your

Your line is open.

Adam Farley

This for Farley on Nathan. is Adam

so today? pockets the in Going the not Are back business? demand and business there in capacity guys of any easy declining is where's to the issues? capacity experiencing terms added, across capacity still the the the constraints line kind you Or gross margin of business

Tod Carpenter

Tod, is this Yes, Adam.

our The we're paying in with are talked internal so that supply as corporation our we strong where And capacity that us normalization, across execution year, of comfortable We done of the capacity, helping the of gross within in are things quarter. chain where are relative balance that margins we the past fiscal part of have but that the off. side expansions really utilizations you that normalization on year lifts capacity. and We about we're we and saw still comfortable ahead very the some the of Company. have that,

Adam Farley

to and quarter? know on are Turning can end it what down quarter, versus color OE that aftermarket then last you aftermarket was demand, weakest were over color any markets provide I the engine channel seen progressive how would the And said, in you destock aftermarket, real be you great? more quarter,

Tod Carpenter

U.S., it's If So, a chain the by we is take that does some when business. compare supply it the and decline America, have of led at a of the piece aftermarket Latin to had strategic it look biggest normalization. have if it shift our you statistically nuance you

flat down X.X. and about Latin X% roughly look rather just normalize be America and about then will be would you the U.S. reported If that, than

a small nuance. that's So

story all overall really as But I a by said, but across at the it's down of regions. by utilization, level, led now aftermarket, macro across guess a U.S.

lot helping a oil in oil to gas piece more a good and story and And and moves less of cycle. into with transportation, therefore us so, U.S. lead starts moved then it with this The the to downward it be being gas.

is how really at equal versus is both And to so, OE that. off channel independent look about

to you and industry. destocking kind business. slowdown that step of we a not overall down you aftermarket we're through tell the seeing, and across see you are that we normalized factor can would would the some everything that acute that reduce more just pull and suggest a when it's in We So of you seeing

Operator

closing the Tod turn for back call remarks. to Carpenter now And

Tod Carpenter

time employees, all That call. thank and to your listening want to interest for thank I everyone want Company. And to do. XX,XXX today's Donaldson I you in our concludes you for

our is Your priority. safety

So to do please excellent dynamic job continue in situation. navigating this an

you goodbye. and Thank

Operator

and conference call. this gentlemen, Ladies concludes today's

may now disconnect. You

Donaldson (DCI) 5 Mar 202020 Q2 Earnings call transcript