Donaldson Company, Inc.

good morning ladies and gentlemen thank you for standing by welcome to donaldson company's fourth quarter and full year 2022 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 you'll need to press star followed by the number one on your telephone keypad if you require operator assistance at any time please press star zero i would now like to turn the call over to sarika dodwell Director of Investor Relations, please go ahead.

Good morning. Thank you for joining Donaldson's fourth quarter and full year 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 fourth quarter performance and details on our outlook for fiscal 2023. New and beginning this quarter, we are also providing investors with a supplemental quarterly earnings presentation summarizing our results and outlook, which can be found on our investor relations website at ir.donelson.com. As a reminder, 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 filing. With that, I'll now turn the call over to Todd Carpenter. Please go ahead.

Thanks, Sarca. Good morning, everyone. Fiscal 2022 was a challenging year given the macroeconomic and geopolitical environment. And I'm really proud of the way our team rallied together in support of our mission of advancing filtration for a cleaner world. We ended the year with revenue over $3 billion, including a $1 billion contribution from our industrial business. Adjusted earnings per share were $2.68 in line with our most recent guidance. We also returned $281 million to shareholders in the form of dividends and share buybacks. We lived up to our principle of enriching our communities throughout the year and gave back, for example, donating to the relief efforts in Eastern Europe and delivering meals to our employees in Shanghai during the recent COVID-19 lockdowns. We also achieved our fiscal 2022 ESG goal of reducing our CO2 emissions by 6,000 metric tons, representing a 5% reduction from the 2019 baseline. We invested for our future across several areas. In our customers through our research and development and capacity expansions, in our long-term profitable growth through our advance and accelerate portfolio, including acquisitions, particularly in the life sciences sector and in our team, including the addition of new leadership positions supporting ESG and diversity, equity, and inclusion. Now, on the fourth quarter, we closed the year strong. Sales were up 15% with a pricing contribution of 12% and a negative impact from currency translation of approximately 7%. Adjusted EPS, of 84 cents was up 27% versus the prior year despite ongoing inflation and supply chain related headwinds. Touching on pricing for a moment, as we have been talking about through the last several quarters, our efforts aimed at offsetting increased input costs have been one of our main focus areas. While we have made significant progress in achieving the appropriate levels of price across most of our customer base, In some areas, we have more work to do. Moving to the operational and supply chain side, the challenges we have been facing throughout the year continue. However, in fourth quarter, we began to see some areas of stabilization, including pockets of commodity cost leveling, albeit at high levels, and a slight easing of global logistics and labor pressures. With that, we've started to move back to relocalizing our manufacturing and capitalizing on our region for region strategy. Aided by these dynamics, we are seeing some reductions on our late backlogs and improvements in our fill rates. While encouraging, we view these recent trends as fragile and are cautiously optimistic regarding their sustainability. In fourth quarter, we continued to lay the foundation for our future growth, pursuing organic and inorganic opportunities to ensure we remain the leader in technology-led filtration. In June, we announced the acquisition of PureLogix, another pearl in our String of Pearls life sciences strategy aimed at creating a comprehensive solution offering across the upstream and downstream bioprocessing value chain for biopharmaceutical and food and beverage products. PureLogic's novel membrane chromatography technology platform, which provides advantages over traditional resin and bead chromatography, along with our membrane expertise, global sales, and manufacturing footprint, will allow Donaldson to bring a broad portfolio of purification tools to the market for a wide range of biologics. I'm excited to welcome the PureLogix team to Donaldson and look forward to reporting on our progress in the future. Now I'll provide some segment context on our fourth quarter sales. Total company sales were $890 million, up 15% from last year. In engine, total sales were $620 million, up about 18%. Sales in off-road of $108 million were up 21%, with growth in all major regions driven by continued high levels of equipment production and significant growth in our exhaust and emissions business in Europe. On-road sales of $35 million were up 5% from the prior year. Excluding currency, sales were up in all major regions, with the exception of Asia Pacific, where general market weakness continues to weigh on results. Overall, on-road growth was positive in the quarter as we began lapping the discontinuation of some directed-by equipment to a large OEM customer in North America. That said, supply chain challenges, including chip shortages, are improving more modestly in this segment and limiting growth. In engine aftermarket, sales were $442 million, an increase of 18%. Both the OE and independent channels were up double digits. Proprietary product performance continues to be a very important driver, and fourth quarter aftermarket sales of PowerCore were up 30% year over year, in line with performance in the third quarter. On the independent side of engine aftermarket, we continue to build our presence and see encouraging growth rates in under-penetrated markets such as Mexico and Brazil. In aerospace and defense, sales of $35 million were up 21% year-over-year with strength in replacement parts as we continue to benefit from the recovering commercial aerospace industry and market share gains. Before moving on to industrial, a comment on our engine business in China. China engine sales were down 6% versus the prior year and down 2% in constant currency. Overall market weakness, including that stemming from the COVID-19 lockdowns, which resulted in plant closures for two weeks in the quarter, negatively impacted results. While our business in China will certainly continue to be impacted by the overall market trends, I remain optimistic and excited about our future growth prospects in-country, and we remain committed to growing share. Now turning to the industrial segment. Industrial sales increased 10% to $270 million. Sales of industrial filtration solutions, or IFFs, grew 14% to $196 million, mainly driven by industrial dust collection, new equipment, and replacement parts. Our process filtration business also delivered robust sales, benefiting from new program wins. This business hit an important milestone for the full year delivering approximately $100 million in sales, excluding the impact from currency translation. Fourth quarter sales of gas turbine systems, or GTS, were approximately $34 million, reflecting a 39% increase, bolstered by the timing of replacement part sales in EMEA. Sales of special applications were $40 million, down 17%, as the COVID-19 shutdowns in China continued to dampen disk drive sales. Importantly, our venting product sales, which fall within special applications, 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 opportunities that lie ahead in this rapidly expanding market. In conclusion, Our fourth quarter sales and earnings were a high watermark in the company's history, and I look forward to carrying that underlying momentum forward into fiscal 2023. Although there are many puts and takes as we think about our outlook for 2023, which Scott will discuss in a minute, we are forecasting another year of record revenue and record earnings. Importantly, we are also expecting year-over-year gross margin expansion in addition to a full-year operating margin, which is forecasted to be a multi-decade high. Now I will turn it over to Scott for more details on the financials and our outlook for fiscal 23. Scott?