Donaldson Company, Inc.

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. 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 followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star 1. Thank you. Sarika Dadwa, Senior Director of Investor Relations, you may begin your conference.

Good morning. Thank you for joining Donaldson's third 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 third quarter performance and an update on our outlook for fiscal 2023 during today's call we will discuss non-gap or adjusted results a reconciliation of gap to non-gap 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. Please go ahead.

Thanks, Sarika. Good morning. Third quarter was another record quarter for Donaldson Company. We continued the trends seen in the first half of this fiscal year. Compared with prior year, We grew our top line to a quarterly record, expanded both gross and operating margins over 100 basis points, delivered double-digit earnings growth, and produced cash conversion of approximately 105%. Before diving deeper into the quarterly results, I would like to express how pleased we were to have had so many of you participate, either in person or virtually, at our Investors Day in April. It was a big day for our company, and I will recap some key takeaways. We demonstrated our leadership position and strategy across all three segments that together drives our expectation to achieve sales of approximately $4 billion and operating margins in the 16% range by fiscal 2026. More specifically, I would like to highlight our new Life Sciences segment where there are significant, compelling opportunities driven by organic and inorganic investments, including the recent acquisitions of Solaris, PureLogix, and Isolair Bio. These businesses combined with Donaldson's technologies and expertise provide a portfolio of opportunities across several end markets, such as food and beverage, alternative proteins, bioprocessing, and medical devices. Focusing in on bioprocessing, for example, we see game-changing opportunities to support the development of vaccine and advanced cell and gene therapies with our newly acquired technologies. Traditional chromatography systems are slow and not optimized for larger molecules such as mRNA and plasmid DNA. Purologic's innovative technology provides faster flow rates and puts less stress on cells and Isolar Bio allows us to introduce breakthrough technology that provides purification in solutions with no size limitations. Together and combined with Donaldson's capabilities, we are at the cusp of driving scale across vaccine and cell and gene therapies to solve the world's greatest health risks. To that end, We will continue to grow these businesses by investing organically and pursuing strategic M&A in adjacent areas, which will further us on the path of continuing to create value for all of our stakeholders. Now some third quarter highlights. Sales were up 3% year over year, driven by pricing of 8% and partially offset by a currency translation headwind of approximately 3%. Volume was down in the quarter as our aftermarket business was negatively impacted from OE customers continuing to reduce inventories as service levels normalized. Also, negatively impacting volumes was our disk drive business, which remains muted from market-related weakness. EPS was 76 cents, a 14% increase over the prior year. Our strategic pricing implemented to offset elevated input costs continues to be a big driver of our quarterly sales and earnings results. Most input costs have stabilized at higher levels. However, some areas such as labor remain a headwind. Therefore, pricing remains critical in our recovery from this period of sharp year-over-year inflation. Turning to our operations, I'm pleased by our improvements in fill rates, on-time deliveries, and late backlog levels across the organization. We are working to meet the needs of our customers today while investing in capacity projects, including in North America, to meet the needs of our customers in the future. We are also committed to furthering our long history of innovation to expand our product offerings. For example, this quarter, we released our proprietary AlphaWeb filtration media. This new hydraulic technology improves fluid cleanliness up to four times and creates additional value for customers by extending critical component life. In addition to our organic investments, we are working through our M&A pipeline and actively pursuing life sciences opportunities with a focus on revolutionary technologies and applications such as those we acquired through Solaris, PuraLogix, and Isolair Bio. Now I'll provide some detail on third quarter sales. Total company sales were $876 million, up 3% from prior year. In mobile solutions, total sales were $555 million, roughly flat versus a year ago. Pricing added 9% and FX was an approximate 3% headwind. Our first fit businesses continue to perform well with sales in off-road of $116 million up 11% year-over-year and sales in on-road of $38 million up 5%. These results reflect healthy levels of equipment production rates across all our major geographies. Mobile Solutions aftermarket sales of $401 million were down roughly 3% year over year from OE customer inventory drawdowns to more normal levels. Lastly, for Mobile Solutions, an update on China. Sales increased 5% versus 2022 and 14% in constant currency. While this year over year growth marks a considerable improvement from what we reported in the second quarter, The one thing to note is that last year's third quarter sales were depressed from COVID-19 lockdowns. Overall, China continues to be challenging given the weaker end market conditions. That said, sheer market size combined with our world-class technology and high-quality offerings should result in Donaldson's success in the Chinese market over the long term. Now I'll turn to the industrial solution segment. Industrial sales grew 14% to $262 million. Pricing added 6%, and FX was roughly a 3% headwind. Industrial filtration solutions, or IFS, grew 13% to $223 million, driven by dust collection and industrial gases part sales. Aerospace and defense sales were up 22% supported by the ongoing strength in the commercial aerospace industry. Now on the life sciences segment. Life sciences sales were $59 million, down 13% year over year. Weakness in the overall disk drive market continues to drive the majority of the decrease. However, we are now seeing a flattening and forecasting a slow demand recovery during the second half of calendar 2023. Our food and beverage business remains solid in the quarter with continued momentum in both new and replacement parts sales. We look forward to continuing to provide updates on all of our businesses within this segment in the future. As we progress through the final quarter of fiscal 2023, we've been extremely pleased with our ability to deliver strong financial results thus far this year while making strides across our strategic initiatives. As such, we are reaffirming our sales and earnings guidance for the full year by tightening our previously provided outlook ranges and remain confident in our achieving our long-term targets laid out at our recent Investors Day. Now I'll turn it over to Scott who will provide more details on the financials and an update on our outlook for fiscal 23.