Donaldson Company, Inc.

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. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, please press star one again. Thank you. Sarika Dadwal, Director, Investor Relations. You may begin.

Good morning. Thank you for joining Donaldson's third quarter fiscal 2022 earnings conference call. With me today are Todd Carpenter, Chairman, CEO, and President, and Scott Robinson, Chief Financial Officer. This morning, Todd and Scott will provide a summary of our third quarter performance and details on our outlook for the balance of fiscal 2022. During today's call, we will reference non-GAAP metrics. A reconciliation of GAAP to non-GAAP metrics is provided within the schedules attached to this morning's press release. Additionally, please keep in mind 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.

Thanks, Sarca. Good morning, everyone. Before getting into our performance this quarter, I want to make a few comments about the impact of the ongoing conflict in Eastern Europe. From a business perspective, we complied with all sanctions and have taken a further step to stop direct product shipments into Russia and Belarus. As a reminder, our sales to this region represent less than 2% of total company sales, and we are not forecasting any revenue for the foreseeable future. On the personal side, on behalf of the Donaldson team, I would like to extend our support and sympathy to all of those impacted. We recently donated 150,000 euros to the Polish Red Cross, which is facilitating relief efforts with the Ukrainian Red Cross. Several of our local teams in Europe have also contributed by creating various donation drives to help the communities where they operate. These actions exemplify our commitment to corporate responsibility, which has always been an important part of Donaldson. To that end, this quarter, we also published our fiscal 2021 sustainability report in which we outlined our commitment and efforts in reducing our environmental impact, engaging and empowering our people, and maintaining our strong corporate governance. I look forward to reporting our progress and future initiatives over time. Now I'll turn to our third quarter results. Donaldson had another quarter of record sales at $853 million, up 12% year over year. As expected, pricing was the largest sales driver, and I'm pleased with the agility of the organization to increase these efforts as cost inflation has continued to outpace our projections. Raw material, freight, energy, and labor costs were up significantly year over year, negatively impacting our profitability. Consequently, third quarter EPS increased to 67 cents versus 66 cents a year ago. This quarter, we made progress in meeting demand and saw some leveling in our backlogs, which remain at or near historic highs. While inflation, supply chain challenges, and labor shortages continued to be our biggest headwinds, We are not immune from newer, increasingly impactful factors such as FX or business disruptions, including those from the COVID-19 lockdowns in China and the conflict in Eastern Europe. Touching a bit more on the impact of the COVID-19 lockdowns in China, China is a strategically important area for us over the long term. We have been continuing to win platforms using our power core technology and are confident in our ability to gain share in this market. This quarter, we felt primary and secondary supply chain and end market impacts from the COVID-19 lockdowns. These included OEM shutdowns, logistics issues, and a decrease in working hours. Year over year, total sales in China declined about 16%. However, our current exposure is somewhat limited. To size this, third quarter China sales were about 6% of total company sales, and this compares to 8% a year ago. Going back to the overall company, this quarter, to combat the headwinds we are facing, we made progress in the following areas. Pricing. We realized the benefits from our pricing actions And as costs continue to rise, we will continue to implement increases. Utilization of our global footprint. We leveraged our global footprint to circumvent certain supply chain challenges. For example, while facing constraints in one region, we've been able to pivot and tap into a different region to support our customers. Also, in some geographies where demand has exceeded capacity, we have sourced product from out-of-region plants that have sufficient capacity. Inventory investments. We have followed through with our commitment to utilize our balance sheet and proactively increase our inventory levels as we make every effort to meet the needs of our customers. While this fiscal year has been full of unforeseen challenges, the Donaldson team has not lost sight of our longer-term strategy. We continue to focus on gaining share within our current and future end markets, including life sciences. Through our investments in R&D and acquisitions, we are cementing our position as the leader in technology-led filtration. The ongoing integration of the Solaris and Pace acquisitions is going well, and we are focused on scaling these businesses. Looking ahead, we expect sales to reflect continued high levels of demand and incremental pricing benefits, partially offset by negative currency translation. With that, we are increasing our sales expectations for the full year. However, we continue to see gross margin pressure mainly driven by inflation. Despite this challenging backdrop, we are making progress in offsetting these headwinds through the previously mentioned efforts of the Donaldson team. As such, we are forecasting another sequential gross margin uptick and improved incremental margins in the fourth quarter. As a net result of these factors, And with increased visibility, we are narrowing our EPS guidance range to be between $2.67 and $2.73. When compared to our fiscal 2021 adjusted results, this reflects an approximate increase of between 15% and 18%. Scott will elaborate on the details of our fiscal 22 outlook later in the call, so I will now provide some context on third quarter sales. Total sales were $853 million, up 12% from last year. Pricing contributed roughly 9%, and currency translation was a headwind of approximately three percentage points. In engine, Total sales were 601 million, up 13% due to sales growth in both our first fit and replacement parts businesses. Sales in off-road of 108 million were up 13% with growth in all major regions except China as high levels of equipment production continue. We also saw ongoing strength in our exhaust and emissions business in Europe. As a reminder, these sales come at a lower margin, presenting a modest mixed headwind. On-road sales of 36 million were down 9% from the prior year. Global customer supply chain challenges, including chip shortages, continue to limit near-term growth in this segment. Also negatively impacting results, were the discontinued sales of some directed by equipment to a large OEM customer in North America. Excluding this impact, total on-road sales were flat globally and up 12% in North America. In engine aftermarket, sales were 425 million, an increase of 15% as end market demand for our replacement products continues. Sales in both aftermarket channels were up double digits. In the OE channel of aftermarket, proprietary products are again contributing to our growth. PowerCore sales in aftermarket increased about 35% over prior year, another quarterly record. In aerospace and defense, sales of 31 million were up 29% year-over-year as we benefited from the strengthening commercial aerospace industry and market share gains. Now, turning to the industrial segment. Industrial sales increased 12% to $252 million. Sales of industrial filtration solutions, or IFS, grew 9% to 179 million, mainly driven by industrial dust collection and with growth in all regions except APAC. Continued strength in process filtration also contributed to the results. Third quarter sales of gas turbine systems, or GTS, were approximately 31 million, reflecting a 19% increase due to new equipment sales in Europe and the U.S. Sales of special applications were 43 million, down 4% as the COVID-19 shutdown in China negatively impacted disk drive sales. Also within special applications, sales of venting products were up as customers expand the use of our high-tech vents for batteries and powertrains in the auto industry. This is a key strategic area for Donaldson given the strong pipeline of opportunities in this rapidly expanding market. Overall, I am proud of the excellent work the team has done to meet underlying demand, execute on pricing, and work through the macro challenges to deliver another quarter of record sales. Now I will turn it over to Scott for more details on the financials. Scott?