Donaldson Company, Inc. (NYSE:DCI) Q3 2018 Earnings Conference Call Transcript

May 31, 2018 • 10:00 am ET


Donaldson Company, Inc. (NYSE:DCI) Q3 2018 Earnings Conference Call Transcript


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Good morning. My name is Denise, and I will be your conference operator today. At this time, I would like to welcome everyone to the Donaldson's Q3 Fiscal Year 2018 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session (Operator Instructions).

Thank you. Brad Pogalz, Director of Investor Relations, you may begin your conference.

Brad Pogalz

Thanks Denise. Good morning, everyone. Thank you for joining Donaldson's third quarter 2018 earnings conference call. With me today are Tod Carpenter, Chairman, CEO and President of Donaldson and Scott Robinson, our Chief Financial Officer. Tod and Scott will provide an overview of our recent performance and outlook along with an update on some of our strategic priorities.

During today's call, we may reference to non-GAAP metrics such as adjusted earnings per share. You can find 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, the most important of which are described in our press release and SEC filings.

Now, I'll turn the call over to Tod Carpenter. Tod?

Tod Carpenter

Thank you, Brad. Good morning, everyone. We are pleased to have delivered another solid quarter for both sales and EPS, which grew 15% and 18% respectively. We also saw year-over-year pressure on margin moderate to 10 basis points last quarter, and we were up 210 basis points from the prior quarter. The strong sequential improvement was driven by both gross margins and expense control, but pressure on gross margin remains. We continue to face price inflation for steel and media, our two largest inputs. Mix of sales was also a headwind as demand for new equipment outpaces the replacement parts. In addition to those factors, we are still adjusting our supply chain to accommodate the strong demand. We are committed to maintaining our position as a valued supplier, so we are choosing to make this customer centric investments.

While we have made some progress on addressing these pressures, our work is not finished. Last quarter, we further focused our expense investments and we initiated price increases for products around the world. While it's still early, we are seeing positive traction from these efforts, and we continue to pursue initiatives that drive incremental margin. Scott will provide more details later in the call, so I will now turn to an overview of our third quarter sales performance. Total sales grew 15% last quarter or 9% when you exclude the benefit from currency. We saw solid gains in both our engine products and industrial product segments, led by first-fit sales and complemented by continued strength in the sales of replacement parts.

In engine, total sales increased 16%, driven in part by another quarter of sharp growth in both the on and off-road first-fit businesses. Sales in on-road grew 46%, driven primarily by growth in the U.S. and China. Continued