Donaldson Company, Inc.

Hello and thank you for standing by. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the Donaldson Company Incorporated's first quarter 2023 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 would like to ask a question during this time, simply press star and the number one on your telephone keypad. If you would like to withdraw your question, press star 1 again. I would now like to turn the conference over to Sorica Dodd-Wall. Please go ahead.

Good morning. Thank you for joining Donaldson's first quarter fiscal 2023 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 first quarter performance and an update on our outlook for fiscal 2023. As a reminder, we have posted a supplemental quarterly earnings presentation summarizing our results and our outlook on our investor relations website at ir.donaldson.com. During today's call, we will discuss non-GAAP or adjusted results. For fiscal 2023, non-GAAP results exclude $7.6 million in pre-tax restructuring and related charges stemming from our previously announced organizational redesign. It is important to note that the redesign is ongoing and there will be additional charges forthcoming. For fiscal 2022, non-GAAP results exclude $3.4 million in pre-tax charges related to the termination of our operations in Russia. 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 the 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. Please go ahead.

Thanks, Sarika. Good morning, everyone. I am pleased to report a strong start to fiscal 2023 as we built upon momentum we had in the fourth quarter. Once again, we delivered double-digit top and bottom line growth. Our margins improved Gross margin increased both sequentially and year-over-year, and operating margin of 15% reached a six-year quarterly high. This improvement resulted in solid incremental margins and contributed to strong pre-cash flow conversion. Before diving deeper into sales, I will address the organizational redesign we announced in October. This company-wide redesign is aimed at better positioning us to serve our end market customers. One of the key value propositions of Donaldson is our deep, long-standing customer relationships. Once completed, this redesign will allow us to more efficiently direct resources to strengthen commercial execution across our entire customer base. We have moved away from our previous matrix organization structure, which included a regional focus, towards a more comprehensive, end market customer focused model. That said, due to our global presence, all of our employees play an important role in our growth. With the new model, our three focus areas now include, one, end market customers. We're aligning resources and cost structures to meet the specific needs of each end market in which we operate. This will enable expedited decision making and allow us to serve customers in a more efficient and effective manner. Two, employee development. This simplified structure reduces our organizational complexity and enables clear advancement paths for our employees. Three, profitable growth. Our business units will now have full P&L responsibility as opposed to that previously shared with the regions. This creates greater internal ownership and accountability for short and long-term performance. It also provides strong alignment with respect to strategic capital allocations. With these changes, and as of the beginning of second quarter, we have three new reportable segments. Mobile solutions, industrial solutions, and life sciences. We expect to provide new financial segment information to help with modeling under the new construct during the second quarter. Now I will cover some highlights from our first quarter. Sales were up 11% year over year, driven by the combination of pricing of 11% and volume growth of 8%, partially offset by a currency translation headwind of approximately 8%. Adjusted EPS of 75 cents was up 23% versus the prior year. As expected, pricing implemented to offset inflationary pressures drove much of the sales growth and is a reflection of the hard work the Donaldson team put forth over the last year. From a cost perspective, inflation continues to be at high levels. However, we've been encouraged by the moderation of input costs throughout the first quarter and expect to be price cost positive for the balance of the year when comparing to the prior year. On the demand side, overall in-market conditions remain favorable. Further, With the stabilization of global supply chain pressures, we have worked down some of our late backlogs and are seeing improved fill rates. And once again, our region for region strategy is paying dividends as the relocalization of our manufacturing is enabling a return towards more normal on-time delivery rates. Customer service is always our focus and our investments in the first quarter, such as those for capacity expansion, are aimed at continuous improvement in this regard. This quarter, we also reinvested back into our business through R&D and the scaling of our acquisitions. We are strengthening our organic growth capabilities through R&D, which is forecasted to be up approximately 10% for the full year. We are also expanding upon our inorganic growth, leveraging our recent acquisitions to further diversify the company. We announced that Solaris Biotech, the first life sciences acquisition we completed in fiscal 2022, entered into a new agreement with San Francisco-based Wildtype, a company focused on creating cultivated seafood. We will collectively collaborate to develop and design a next generation family of bioreactive systems to help meet the growing demand for seafood. When we acquired Solaris, we knew the company was uniquely positioned for growth in the food and beverage industry through its product portfolio, and this is the first step in expanding into the rapidly growing market of alternative proteins. Second, following the acquisition of PA Industrial Services, we further expanded our service capabilities through our IQ monitoring service, which offers remote monitoring of industrial dust collection equipment by Donaldson product specialists. This accelerates response time and service levels. IQ provides operational insights to customers via a web-based dashboard. In conclusion, from an operational and strategic standpoint, we are pleased with what we accomplished this quarter. Now I'll provide some segment detail on first quarter sales. Total company sales were $847 million, up 11% compared with 2022. In engine, total sales were $605 million, up about 15%. Pricing added 13%, and FX was an approximate 7% headwind. Sales in off-road of $108 million were up 15%, with growth in all major regions except APAC, and were driven by continued high levels of equipment production and growth in our exhaust and emissions business in Europe. On-road sales of $36 million were up 14% from prior year, supported by an increase in medium and heavy duty truck builds, particularly in North America. Supply chain conditions are improving, but are still limiting growth in this business. Excluding currency, sales in both off-road and on-road were up in all major regions. In Indian aftermarket, sales were $427 million an increase of 14% with both the OE and independent channels up double digits. As always, proprietary product performance is an important driver, and power core sales were up over 20% in the quarter. On the independent side of engine aftermarket, we continue to focus on expanding share in underpenetrated markets, such as Mexico and Brazil, where we're seeing encouraging growth rates. In aerospace and defense, sales of $34 million were up 22% year-over-year, with strength in new equipment and replacement parts as the commercial aerospace industry continues to recover from pandemic-related softness. Now I will touch specifically on our China engine business, given the importance of the geography for us over the long term. Sales were down 6% versus the prior year, but up 1% on a constant currency basis. The overall market continues to be challenging and is further negatively impacted by ongoing COVID-19 lockdowns. That said, our strategy has not changed as we see opportunities to grow our share through our technology and the best-in-class quality of our offerings. We look forward to reporting on our progress in China in the quarters to come. Now I'll turn to the industrial segment. Industrial sales increased 4% to $243 million. Pricing added 7%, and FX was an 8% headwind. Industrial Filtration Solutions, or IFS, was the largest contributor, growing 9% to $181 million, mainly due to industrial dust collection, new equipment, and replacement parts sales. Our process filtration business continues to exhibit strong growth and growth potential. Excluding currency, this business grew greater than 20% over prior year. Sales of gas turbine systems, or GTS, were approximately $26 million, reflecting a 53% increase. Timing of orders is a big factor in the cadence of GTS sales, and last year we had an unseasonably soft first quarter due to order timing. Sales of special applications were $36 million, down 29% and the story centers largely around our disk drive business. Last year, our disk drive customers pulled forward orders in an effort to mitigate global supply chain issues and are now destocking. This and an overall reduction in disk drive market demand has caused the sales degradation larger than expected. Although disk drive performance has driven an overall decline in special applications, One bright spot continues to be sales of our high-tech venting products for batteries and powertrains in the auto industry. This remains a key strategic area for Donaldson, given how well our venting technology can serve this rapidly expanding market. To summarize, we feel good about the way we've started the year. We are reiterating our full-year guidance, which reflects record sales and record earnings results, gross margin expansion, and operating margins at a multi-decade high. Now I will turn it over to Scott for more details on the financials and an update on our outlook for fiscal 23. Scott?