Earnings call transcript Q3 2023

Due to licensing restrictions, you must log in to view earnings call transcripts.

Operator

Good morning. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Donaldson Company, Inc.

Third Quarter 2023 Earnings Conference Call. [Operator Instructions].

of you Director conference. begin Senior Dhadwal, Investor may Relations, your Sarika

Sarika Dhadwal

Carpenter, President; for morning. Donaldson's Officer. a With of on Conference Tod joining you This update me and an our XXXX. CEO Quarter are Good Scott for summary Earnings morning, Third Tod Thank will Chief Scott and Robinson, Fiscal fiscal and XXXX today third outlook Chairman, Financial performance and provide our Call. quarter

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

Additionally, please risks during and that SEC our forward-looking to this are which statements and described in keep made in mind uncertainties, press subject call are release any filings.

call ahead. Please Tod the over With to that, go now Carpenter. I'll turn

Tod Carpenter

Good Thanks, Sarika. morning.

another record for quarter Donaldson quarter Third was Company.

continued seen We growth XXX our record, cash fiscal of margins and half year. we of conversion and line operating with first expanded to this XXX%. the grew double-digit prior approximately earnings a points, quarterly delivered year, gross top trends Compared produce in both basis the over

$X across Before approximately we X that of diving virtually so Day together XXXX. to segments company, and expectation XX% for and our I April. position achieve range the deeper of would will person recap in some many were the sales key all fiscal leadership and drives takeaways. in participate It you We either operating have demonstrated strategy by our a at to margins our billion express how our results, big day like or I to into Investors was pleased in quarterly

combined and are beverage, compelling Solaris, across including recent Life organic driven opportunities medical and provide would Sciences opportunities businesses Isolere I food with like of our and specifically, to Donaldson's proteins, technologies inorganic such segment expertise where alternative as of a and acquisitions and These end bioprocessing new portfolio there several significant Bio. More markets investments, Purilogics the devices. by highlight

we advanced solutions gene Focusing the with for risks. to with cusp slow and we chromatography newly therapies are and cell optimized of our on in organically capabilities, game-changing we end, will businesses our and to adjacent of with all scale M&A are vaccine example, bioprocessing, Traditional vaccine size on see no opportunities therapies systems greatest support further world's across limitations. not and Together, of grow create technologies. in continuing and larger value development To of plasmid which will Isolere introduce rates at allows DNA. provides and stress the and purification what's flow on technology Bio that faster investing continue and for Donaldson's to and the for provides driving cell breakthrough less health pursuing us by stakeholders. as and such areas Purilogics' cells and technology acquired molecules strategic mRNA us innovative these that combined the gene solve path to to

Aftermarket of approximately highlights. third some business the Now impacted to EPS was headwind down weakness. our volumes was quarter from Also, the $X.XX, X%. service inventories were OE our XX% from was was pricing normalize. as a a Drive quarter in by muted Volume market-related which translation X% currency year-over-year, and by X% customers reduce increase levels continuing remains year. business, negatively Disk over impacting prior partially driven of as negatively up offset Sales

pricing be a quarterly strategic offset our driver continues higher input levels. stabilized costs costs of results. and earnings elevated to input have at to big Our implemented sales Most

Therefore, critical headwind. pricing a remain labor remains period our from as such recovery in sharp year-over-year areas this of some However, inflation.

late organization. rates, backlog operations. on-time levels across deliveries to by the I'm improvements our fill Turning pleased our and in

the future. the the in projects, meet needs North capacity customers investing America, We while including today needs in are in our to working meet of to of customers our

furthering We innovation expand long product also our of committed are our to to offerings. history

For cleanliness creates component to hydraulic fluid technology example, filtration improves by Alpha-Web This proprietary extending new and released critical we additional Xx life. our value up media. quarter, this for customers

we actively a organic focus our pursuing those our Isolere M&A working to opportunities are such technologies with and we through Sciences pipeline Solaris, investments, Life through on applications and acquired Bio. Purilogics addition and In as revolutionary

Pricing Now million, I'll X% and year. were added were company third headwind. was roughly an approximate FX detail year provide million, X% on flat sales Total Mobile some quarter versus up total $XXX $XXX In prior sales Solutions, a sales. from ago. X%

in X%. XX% sales continue Our down equipment up were of all businesses results to well of rates Mobile from up and production $XX of $XXX drawdowns normal healthy year-over-year levels. perform sales On-Road million, geographies. roughly Aftermarket X% to of across reflect OE sales our year-over-year These customer with $XXX Solution's million more million, First-fit major in inventory Off-Road levels

increased Mobile Sales versus constant China. for Lastly, an on Solutions, currency. XX% X% update XXXX and in

market sheer the offerings technology be market note result reported Donaldson's to While in Chinese thing that year's improvement COVID-XX should considerable second quarter the to combined market in with Overall, this X the said, year-over-year depressed high-quality given end conditions. and quarter, continues in success third sales marks over China weaker term. were we growth from last is what That long world-class size, the from a challenging the our lockdowns.

the pricing strength sales. million or Solutions a Industrial roughly $XXX Industrial Now industrial was Aerospace $XXX to and sales supported to Industrial part gases up and industry. grew headwind. XX% and driven sales IFS, defense million, X% by dust I'll FX X%, XX% collection Filtration turn added Aerospace the XX%, segment. to Commercial were grew in the ongoing Solutions, by

Now million, decrease. the to sales majority the Disk Drive in on drive down were overall Sciences of segment. market Weakness Life $XX the year-over-year. continues Life XX% Sciences the

the are However, demand half a slow we a forecasting now flattening seeing calendar of XXXX. and recovery second during

our with businesses of future. Beverage within all forward and part new to remained this in the provide updates Food We momentum segment sales. in business replacement quarter in solid Our to and both the continued on look continuing

we've of financial As we strong our final while ability fiscal XXXX, pleased making our strategic with initiatives. extremely deliver across this to thus far strides progress through year the results been quarter

year sales provided outlook earnings out for Day. guidance by remain our the in recent previously full and As confident our at such, laid targets our are our we long-term ranges and Investor tightening our achieving reaffirming

who more for to turn Now the update Scott? details over I'll outlook will financials 'XX. on Scott, our fiscal provide it and an on

Scott Robinson

Tod. Thanks, Good morning, everyone.

laying for planted our results quarter I quarter for a and first, details another objectives. Third we'll the longer-term groundwork provide profitable contributions. our results solid our achieving financial the on reflect customers employees and employees this for delivered give for our minutes, in for will Donaldson growth, seeds future I color quarter. the year outlook our few strategic thank the around but more in the daily for their on balance globe of which

pricing sales timing were quarter inflation. and Similar strong due consistent benefits improvement second XXX Gross X% was as XX.X%, internal with of first Operating of from the stabilization versus expectations. grew by To of Overall, margin year. basis income versus half gross in up year-over-year. and was valuation deflation. prior expected our year, EPS a XX% $X.XX sequentially increased we down point to summarize, to XXXX. and quarter, margin third margin part was inventory of cost Gross results input the driven the our an XX% unseasonably the saw quarter, this

of an down was were margin ago. Operating versus gross was margin my with points hiring. The up an margin, in high sales a slightly Operating improvement. on and investments operating XX.X%, expenses gross was expenses post basis a Covid margin Life to driven above due operating year by XXX unseasonably XX.X%, second XX.X% to deleveraging the as of sequentially comments in year, quarter Sciences, prior increase line quarter. In due percentage

XX and pretax profit both XXX Now Industrial Mobile a driver basis margin I'll discuss pretax prior from was Gross profit basis year-over-year points was margin Solutions XX.X%, Solutions segment of these segments. key was in points XX%, the profitability. expansion year. margin up up

side, margin a Sciences X.X% was ago. was profit Life sales Drive the On largest in versus The pretax decline driver. Disk the XX.X% year

negatively including our in investment results. Isolere pre-revenue Bio, also impacted However, acquisitions,

for are phase are acquisitions We the them these investment priming growth. in of future and

better approximately been basis profit would pretax points. XXX acquisitions, by Excluding margin have

Turning few flow highlights. sheet statement and to balance a cash

Third XXX% the approximately conversion America quarter capital XXXX. inclusive North mainly Cash were in was in million. in continued expenditures XX% capacity investments expansion versus quarter of $XX

now inventory working related capital from of are levels easing constraints. from experiencing the chain supply conversion, above-average of resulting benefits We

million In $X and terms of returned $XX acquired million $XX to Isolere and million dividends other in shareholders inclusive $XX capital share for Bio deployment, repurchase. of we form million the in

of strong, ended balance quarter X.Xx. and net Our sheet ratio debt-to-EBITDA is with a the we

outlook. moving to 'XX our updated fiscal Now

First, on sales.

translation of X%. We expect includes which is of and negative X% impact line This currency fiscal previous between from increase X%, approximately our a sales about X% and a guidance. in midpoint of pricing with to XXXX

we incremental prior stronger lapped less forecasted, the each move as year. we resulting an actions have year as quarter through of in progressed, has the pricing As year benefit

quarter. this We tend expect fourth to in continue the

a we sales Aftermarket between anticipating prior digits. digits, are single to of Mobile single and For our sales to consistent mid-single high X%, and projected be up forecast sales expectations. respectively. Off-Road Solutions, up, are be On-Road with low X% increase digits and

the XX% X% Industrial are up the are with essentially growth the the and increasing XX%, segment increase For driving and we sales Solutions of segment, midpoint expected to improvement. pricing previously. from between XX% to across now volume Robust our entire guidance,

single industrial from gases low forecast by an double collection up mid-teens, are IFS expectation. Within from our double-digit and high low and grow strengthened digits, grow are sales digits previous previously. Defense Aerospace projected Solutions, Industrial increase sales robust [dust] [part] to sales to

a drivers are bioprocessing outlook in of and sales. decline Within the Disk and Drive Life change weakness XX% sales versus continued The the X% between of the Sciences previously. or segment, forecasting Solaris timing sales X% between and a reduced main now equipment are we XX% decline

Now operating on margin.

fall result of of This our we XX.X%, as scaling down Life to is acquisitions. margin focus mainly on XX.X% pre-revenue a operating of previous from our between XX.X% range a year and our slightly investments guidance Science full expect We and within between XX.X%.

exercise have macro we continue As discipline environment. to uncertain stated, particularly given consistently expense we the

reinvestments reflects is The the from midpoint the driven the updated However, future increase we to by expansion. business. gross margin a basis range XXX building operating are year of our committed point back into through and prior our for margin

from between terms a $X.XX but XX% represents XXXX. $X.XX guidance range and previously. increase we maintaining midpoint outlook range are of year, our of from approximately EPS, In $X an for fiscal our record narrowing to and the The this $X.XX adjusted

our our conversion slightly to balance Now however, still down above to to Cash of range sheet XXX% is XXX%, cash from flow the and forecast on in averages. XXX% historic XXX%, outlook.

year normalize. chain Our optimization and cash as supply a as processes of towards increase this inventory our conversion above-average is levels capital more conditions we move normalized working by efficiency driven through

technology. and forecast commitment including and other Life towards products weighted our to capacity Sciences tooling best expenditures heavily priorities, at evaluate With our and is and continue equipment business capital share to initiatives, acquisition to capital million to respect and expansion growth we for dividends $XXX allocation in repurchases. remains for maintain long-standing Our the and $XXX million investments new opportunities

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

Tod Carpenter

Thanks, Scott.

close work. earlier about segment. With want hard I around lies we some of to and for the for their game-changing another Life bright, this future opportunities pursuing outstanding excited place, the Donaldson ahead globe are As we our our the Sciences and about company. is record colleagues out in I'm thank what spoke dedication in quarter, my team I

We Industrial Solutions Mobile in and growth are pursuing also investing Solutions in our segments.

connected initiatives our on of customers increasing and our cleaner ahead our commitment our Industrial Underpinning our filtration of solutions. solutions Industrial, making purpose people, to we For by are business advancing power pushing And building world. Mobile, with we through all are leveraging a Donaldson's communities growth offerings. progress future alternative is for of in Services our goal our portfolio in of example,

our reduction X Day Scope baseline. we XXXX To emissions that In an with in greenhouse and we absolute ESG targeting outlined our in Report by Investors summary, are we gas fiscal from X end, Sustainability XXXX by XX% coinciding published which XXXX ambitions. April, fiscal XXXX, of

years, increase year giving of And Donaldson expect XX% fiscal XX% through to XXXX. reach $XX.X from by charitable a baseline. the plan we terms We cumulatively XXXX to starting from every at and global million starting least women Foundation giving in January X leadership positions,

the forward look we closing, in on goals are we the initiatives all future. longer-term of our In key making to reporting progress strategic towards and financial

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

Operator

the with Nathan today [Operator first comes Stifel. question of from line Your Jones Instructions]

Nathan Jones

unseasonably high, a morning, on margins. guys about margin have up with start gross than is maybe Obviously, everyone. bit could catching we talked to more expected I Good being gross would just here lower bit you with color cost. XQ price Maybe but a

so it's I mean could drives higher gross So I a headwind there? talk the probably inputs maybe assume you about margin, this there.

for think the of Just level? and could at headwinds of Drives thinking -- about the we cost what margins all price we once you're where maybe, Disk out where you normalized see normalization a gross

Scott Robinson

this Nathan, Scott. is

interesting So margins. yes, of an gross run we've kind had of

was quarter and at quarter first then The XX.X% XX%. XX.X%, in came third second the quarter

As remember, end statement sales. down the be we there you to in quarter of a inventory and second in income costing quarter took this a was. the on with the we quarter, of reduction And third with and going continues to that said Drive at inventories inflation be pretty our decline and expected Disk we lot in significant it along things

So soup at there, but the XX%. really a lot landed there's in we

and situation out things the hopefully be third whole quarter expect certainly for kind our slow balance normalize to down from We fourth as quarter bit. starts up a price to world and cost in of

quarter tougher little margin. on So bit it was gross a

did. expected We down it to and it come

expect for up, of to be so quarter high-level you. We that's kind fourth summary a

Nathan Jones

created to If I get should XX.X% you some be XX% and noise. range year. that. a before expectation of back We're 'XX issues and reasonable 'XX I maybe at full for going capacity COVID of to for in had for Is lot we're like the XX% obviously, and running know few that what in gross go XX% the business a a between the So years, back margins? kind

Tod Carpenter

bit XX% Tod. is mix us activities, new is that of the all and expect Life Nathan, Yes, believe in we give but the a putting And Yes, we're reasonable X a where coming we this would Sciences have of to is XX% little we still variable land. will is. pressures, the it investments into which that to obviously there

Nathan Jones

is about said, those that that I we step likely as like here? expectation those, an the to And continue of magnitude yet, those talk go in maybe investment year-on-year forward any is just are the this in lasts investments mean, as assume invest X those more Sciences. you would there not you generating continue a on duration revenue businesses. years I of at mean Life so them to those? even Can up you we're to -- that cycle an few I

Tod Carpenter

the for way look the as information of year, balance at days. far, balance believe full in investment to year here going guide for thing with the it will fiscal we Yes, fiscal we're detail through it about it's we actually evolving column, We so you all clearly, out balance column as -- in all year full in this would bit for Nathan, so here we more the that the XX would year to be but But this we we'll we a expected. -- see the when come investment calendar of give have when guide. expect, be more this we

Operator

the line Your with comes from next of question Blair. Drab Brian William

Brian Drab

When the and it ship, et timing. it ship? was just I bioprocessing was does wondering bit on the the to timing of could equipment cetera? you elaborating if little This start when a by issue, expected

Tod Carpenter

this Tod. Brian, Yes. is

type on year in so activities plan next will take revenue based is customers days. is activities meet was upon That So generating, the the full to project-based. when about and from guide right? project go it's for shipments, could shipments that this what again quarter-to-quarter and here of we're Solaris' X Solaris ready are components, guide to already in year actually XX year,

ahead at and revenue Isolere us the look revenue you their Bio when is then Purilogics, of But other that's X. generating X, today that

so certainly, We'll solid next year for we here that -- of with would balance those that's both so be more give future more of or activities bit seeds both little And to of you for expect future that we're the we headwinds fiscal, calendar growth when next report revenue. this color those but in a planting businesses, year.

Brian Drab

know, had Okay. the got impression, to forward? I starts right. fiscal Drive I I I newer the don't we stable? segment next that do at maybe, it you in then fiscal All Sciences, a you growing? recently, Disk the when guess, And analyst And growth if -- the whole grow and under I then Or but Life guess year, going that business, year, the in least Life pieces impression normalizing business Sciences meeting in get stable the was is that the the is headwind think be this

Tod Carpenter

We if for now run half believe difficult year. will. very that a that been flattening, almost we're you stabilizing cut in this fiscal It's business, within

think example, a this flattening at the business start the slight For lift it cost point taken into for we that We forward. business. of in looking levels will of have crawl time. necessary the or slight calendar balance turn support forward We're actions to to year, current we'll so this growth get

Brian Drab

lastly, beverage did recent period? What did you in it. then business How the that do and missed And food I say just about specifically? most

Tod Carpenter

quite the we're really very point to in are do currency, Yes. And this Food up really continuing at expand and and the in with low portfolio. local quarter performance. beverage and happy again, continues strong our did time, digits to double well in in

Operator

question of Jefferies. comes from next the Alexander line Your with Laurence

Dan Rizzo

Dan Rizzo is Laurence. This on for

with as just quarters, the occurred the, diminished have of I is just lack been in know, X all occurring, of have kind don't to Just the as next for of expectations given China, regards yet? the X guess, at of, your we kind given look to that's a they I everything strong in rebound and region

Tod Carpenter

the Not term, at strong. Actually, long look at very the company opportunity when all. for it remains you China and

that China just continue China. to We national I to want remind support win continue which share to gain everyone in we within to based will region. programs, are

with that's thing for a it's to based the largely as simply with We continue now we're is to customers, even confidence China-based PowerCore. not China. that. gives which nationally is But just experiencing exporter, given such a China-based bit China us the support in China are economy, the China's win outlook example, muted And of on the we recovery, programs, direction long-term and careful economic so obviously, technologies

Dan Rizzo

what of years hard then with quarters if the wondering find hiring. cost labor over are that's significantly was except couple whatever? I reading Okay. if you we're some doing people labor think, I still mentioned, was understandable, the it's mentioned things more hiring And be now up. or more given tightness Well, of X next and to you but you to being or going also

Tod Carpenter

within not I region. fine. different certainly within So a manufacturing improved, it's Europe, but but levels, based pre-COVID little base, great, certainly if improved. that Within will, not our you U.S., by say would it's bit the it's

Asia, it's fine. it's America, Latin strong.

So headwinds really, concerns, and the really anything, U.S.-based. the if are

little more careful board. plans People Within have able just We that do to that salary-based positions, actually. are careful bit of be have. strategic expect everywhere come to we expansions to support the being on the we

So we in little we're pretty a have with to but to harder order get there, bit our pleased work progress.

Dan Rizzo

Okay. final then And question.

long-term On over you was remind know can all is? cash target because next the conversion, about we out the as fluctuations, but of the the couple us I years? free of flow should think what what it just model elevated we

Scott Robinson

Yes.

unusual customers, year up So inventories got make right? So our we've to we this our by $XXX we you've up take fight chain and we help and the as sure then $XXX living out. took million of were going said we to COVID sure conversion into seen, we supply that had commitments were kind cash I'm to million to during

year. go to inventory we've to I flow good cash so average longer-term about quarter, guess, you we said on $XXX million or to cash through XX you're that flow and gone was -- down XX% our from see third our deck, there, in investor this the slides my million, the $XXX made And that conversion. starting our Page, the conversion if of As has progress

Operator

line Rob Your next the from [Operator Baird. question of Mason Instructions] with comes

Rob Mason

destocking curious business, kind the commenting when in Tod, the as here also Aftermarket, third about inventory you what business that -- quarter I'm just Solutions dealer of were well. that And activity normal then OE the talked the on activity that you levels. channel action third to complete Is Aftermarket bringing Mobile had quarter? impact on down is

Tod Carpenter

in Solutions aftermarket, the OE you So OE a in quarter. the specifically what is channel across Mobile to step third see down

of on mid-single quarter, level, the being you So teens level think revenue so certainly out the independent. it channel, call the in in low have we terms digits growth to pulled an at growth independent that would on whereas see

have get Now That back is of through little see slightly the a pricing, have we up the out, kind OEs be that the would to levels pullback able of would them bit pretty would we point. they is expected the based of means expect the where here there. we to that you'll and of independent at because to this were behavior stock actually as on pull-through down. pulling their the but down volume We a we channel, would never upon that so level feel so are OEs expected it summer, independent get won kind normalize is comfortable that to

Rob Mason

sequentially, -- and the the case, doing And of just of looks it decelerate Mobile quick wanted like back That's that's seasonality? shipments some helpful. some quarter, a of just for that. the to function normal And fourth in the that Or I'm just is catch-up in the but there were here, back the revenue if quarter? third would math business check I envelope -- the math First-fit

Tod Carpenter

Yes.

kind be the First-fit cetera. of at what of for activity side us. we type it point based this just actually, upon et of backlogs, see seeing normal in seasonality a comfortable So we're with production would Very

end to it. the the of first markets, it more on It over-the-road first-fit construction, pull do in to happy a the was than bit continues aftermarket The kind we back ag, We're the would have side all that's came with on this And quite little OE quarter expected. across mining, well. trucks. that

Rob Mason

around question larger a finally, price. just then And Sure.

labor prices is the if to raw you material to still price have ability then think that take how were you behind labor pricing here from needed? a just going drivers I'm offset your curious the main the full what do noted kind for that And the of up the impact did extent extent to year. forward normalized, You pressure, expectations your but about increase?

Tod Carpenter

question, I'll second I'll the Scott the part first for the additional here color start let Maybe in of jump half. on with then

Scott Robinson

this Yes, Scott. is Rob,

manage of did continue that up I we we is to related comments year. the sure that got our costs and and cost, of our estimate and If price X%. the to to to XX that made. compensated we just pass and to to labor the refinement years. part to going market, is a be take up, So our prices Part mean we're going we our make for continue in are going our of guide calculation the we're adjust And have Tod next for those for prices previously price for on.

So a our we a continue sure say. to treat within customers we we're I have price commercial a increases the push appropriate and continue with we range normal X% is us, increase those going to to and where market make for reasonable into would just to properly. suppliers that drive relationship But our

Tod Carpenter

Yes.

world. in price So the of across to company I all we've behaving the would a regions more say normal returned activity that

price However, I should so that cost it, to action say also means would and an take which we necessary. that recovery, to we on be want very out-of-cycle remain we committed eye an keep

Operator

today. This concludes back to closing turn Carpenter I the our Q&A remarks. call now for session Tod for

Tod Carpenter

of to a August. the our fourth call forward look participated, Have reporting week. I in rest great who results concludes everyone Goodbye. late Thanks That to today. and the quarter

Operator

today's concludes call. This

may disconnect. You now

Donaldson (DCI) 31 May 232023 Q3 Earnings call transcript