Donaldson Company, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Donaldson's Q1 FY20 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Brad Pogals, Director of Investor Relations. Please go ahead, sir.

Thanks, Julianne. Good morning, everyone. Thank you for joining Donaldson's first quarter 2020 earnings conference call. With me today are Todd Carpenter, Chairman, CEO, and President of Donaldson, and Scott Robinson, Chief Financial Officer. This morning, Todd and Scott will provide a summary of our first quarter performance and an overview of what we are planning for the balance of the year. During today's call, we may reference non-GAAP metrics. Please note that there is a reconciliation of GAAP to non-GAAP metrics within the schedules attached to this morning's press release. I want to remind everyone that any forward-looking statements made during this call are subject to risks and uncertainties, which are described in our press release and SEC filings. With that, I'll now turn the call over to Todd Carpenter. Todd?

Thanks, Brad. Good morning, everyone. I want to highlight two important points in our quarter. First quarter market conditions were consistent with what we expected, and we are pleased with our improvement in gross margin. As we look ahead, our perspective on fiscal 20 sales, operating margin, and EPS is aligned with our prior guidance. We are planning for an uneven demand environment this year, and we saw that in first quarter. During 2020, we expect softer sales of new equipment, a stable base of recurring revenue, and strong increases in our strategic growth areas. We also expect operating margin will be up from last year, driven by gross margin. Scott will provide more details later, so I'll now turn to an overview of first quarter sales. Total sales of $673 million were down 4% from last year. Currency was a headwind of 140 basis points, which we offset with the benefits from BOFA and price realizations. Sales in the engine segment declined 4.5% driven primarily by our first-hit businesses. On-road sales were down 11% in the quarter, with China accounting for nearly half the decline. We are now lapping some of our earliest fuel winds in the region, and demand has yet to stabilize. As we expand our business with Chinese manufacturers, we expect on-road sales will grow over time. Until then, we are focused on building and deepening these new relationships, winning programs, and launching PowerCore in China. In the U.S., we are seeing early signs of the peaking truck market. After growing more than 30% in each of the last two years, on-road sales in the U.S. were about flat with last year. Glowing production of Class 8 trucks is widely expected, and that's reflected in our full-year forecast as well. First quarter sales in off-road were down 10%. Exhausted emissions accounted for more than half the decline, due in large part to timing. We benefited throughout 2019 from pre-buys in Europe related to an upcoming regulatory change, so we expect the business will be down this year before ramping up again in 2021. Slowing market conditions are also affecting off-road. We estimate the construction cycle is at or near its peak. For ag and mining, the recoveries are muted as manufacturers navigate geopolitical and trade-related uncertainties. As our first-fit markets predictably cycle, we remain focused on winning new programs with innovative technology. We have a robust pipeline with more than half a billion dollars of future opportunities, and our razor-to-cell razor blade solutions are outperforming legacy technology quarter after quarter. We see similar dynamics in our aftermarket business. Total aftermarket sales were down 3.6% in first quarter, while technology-based razor blade products were up in the mid single digits. We saw most of that benefit in the OE channel of aftermarket, which was down in the low single digits as innovative products could not fully offset the impact from slowing market conditions. Backlog and order levels have been fairly stable in recent months, so we believe the OE channel performance is more about demand pull-through than destocking at this point. The independent channel, which is about 60% of total aftermarket, was also down in the low single digits. We are seeing weakness in the U.S., due in part to oil and gas, while sales into Europe are strong. The independent channel tends to move with more demand, so it's a useful proxy for equipment utilization. Our aerospace and defense business had another strong quarter. Sales were up 11% with helicopter and ground defense programs driving the growth. Turning to our industrial segment, first quarter sales were down 3%. Sales in gas turbine systems, or GTS, declined 19%, due in large part to small turbines. Our backlog supports increasing sales over the next couple quarters, so we expect that first quarter will be the lowest level for GTS this year. In special applications, sales were down 4% last quarter due to the secular pressure in the disk drive market. Sales of industrial filtration solutions, or IFS, were about flat with last year, but that includes a mix of results across several areas. I want to first point out that BOFA added about $10 million to IFS in the quarter, with incremental sales of more than $8 million as we hit the one-year anniversary of the acquisition. The largest portion of IFS is our dust collection business, which we call industrial air filtration, or IAF. These products account for about 60% of the total IFS, and sales were down in the high single digits last quarter. As expected, the market for new equipment remains soft. Quoting activity is stable, but customers still appear cautious as they deal with macroeconomic uncertainty. First quarter sales of IAF replacement parts were about flat with last year as share gains helped offset slowing industrial production. China is one example of where we are gaining share. We are capitalizing on the momentum created by the Blue Sky Initiative, and sales of IAF replacement parts in that region were up, in the high teens last quarter. IAF replacement parts represent a large portion of our advance and accelerate portfolio, and we expect sales will continue to ramp up this year as we make incremental investments to support that team. Process filtration is also all about share gains, and we are targeting the food and beverage market where the margins are above our company average. First quarter sales were up in the low teens, and that's on top of a 20% increase last year. We are expanding the Lifetech brand, investing in new capacity, and developing a strong sales team to build on the momentum we have in process filtration. There are a lot of positive things happening across the company, and they are not isolated to our advance and accelerate portfolio. The critical core businesses are winning new programs for future revenue, Mature businesses are generating profit and cash flows that can be reinvested, and our fix and reposition teams are pursuing margin enhancement opportunities. We are confident that we have outlined the right mission for each piece of our portfolio, and we expect that will drive value creation well beyond this fiscal year. I'll now turn the call to Scott for his update. Scott?