Donaldson Company, Inc. (NYSE:DCI) Q1 2020 Earnings Conference Call - Final Transcript

Dec 03, 2019 • 10:00 am ET

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Donaldson Company, Inc. (NYSE:DCI) Q1 2020 Earnings Conference Call - Final Transcript

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Presentation
Operator
Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Donaldson's Q1 FY '20 Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Mr. Brad Pogalz, Director of Investor Relations. Please go ahead, sir.

Executive
Brad Pogalz

Thanks, Julian. Good morning, everyone. Thank you for joining Donaldson's first quarter 2020 earnings conference call. With me today are Tod Carpenter, Chairman, CEO, and President of Donaldson and Scott Robinson, Chief Financial Officer. This morning, Tod and Scott will provide a summary of our first quarter performance and an overview of what we are planning for the balance of the year.

During today's call, we may reference non-GAAP metrics. Please note that there is 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, which are described in our press release and SEC filings.

With that, I will now turn the call over to Tod Carpenter. Tod?

Executive
Tod E. Carpenter

Thanks, Brad. Good morning, everyone.

I want to highlight two important points in our quarter. First quarter market conditions were consistent with what we expected and we are pleased with our improvement in gross margin. As we look ahead, our perspective on fiscal '20 sales, operating margin, and EPS is aligned with our prior guidance. We are planning for an uneven demand environment this year and we saw that in first quarter.

During 2020, we expect softer sales of new equipment, a stable base of recurring revenue and strong increases in our strategic growth areas. We also expect operating margin will be up from last year, driven by gross margin. Scott will provide more details later.

So, I will now turn to an overview of first quarter sales. Total sales of $673 million were down 4% from last year. Currency was a headwind of 140 basis points, which we offset with the benefits from BOFA and price realization. Sales in the Engine segment declined 4.5%, driven primarily by our first-fit businesses.

On-Road sales were down 11% in the quarter, with China accounting for nearly half of the decline. We are now lapping some of our earliest fuel wins in the region and demand has yet to stabilize. As we expand our business with Chinese manufacturers, we expect On-Road sales will grow over time. Until then, we are focused on building and deepening these new relationships, winning program and launching PowerCore in China.

In the US, we are seeing early signs of the peaking truck market. After growing more than 30% in each of the last two years, On-Road sales in the US were about flat with last year. Growing production of Class 8 trucks is widely expected and that's reflected in our full-year forecast as well.

First quarter sales in Off-Road were down 10%. Exhausted emissions accounted for more than half of the decline, due in large part to timing. We benefited throughout