Donaldson Company, Inc. (NYSE:DCI) Q1 2021 Earnings Conference Call - Final Transcript

Dec 03, 2020 • 10:00 am ET

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Donaldson Company, Inc. (NYSE:DCI) Q1 2021 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 First Quarter 2021 Earnings Conference Call. [Operator Instructions]

I would now like to turn the call over to Charley Brady, Director of Investor Relations. Thank you. Please go ahead.

Executive
Charley Brady

Good morning. Thanks for joining Donaldson's first quarter 2021 earnings conference call. With me today are Tod Carpenter, Chairman, CEO and President of Donaldson; Scott Robinson, Chief Financial Officer and Brad Pogalz who you all know. This morning, Tod and Scott Will provide a summary of our first quarter performance along with an update on key considerations for fiscal 2021.

During today's call, we Will also reference non-GAAP metrics. A reconciliation of GAAP to non-GAAP metrics is provided within the schedules attached to this morning's press release.

Finally, 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 Tod Carpenter. Tod?

Executive
Tod E. Carpenter

Good morning, everyone. I want to start by welcoming Charley to the team. He joined Donaldson last week after two decades on the sell side, which included 15 years of covering our company. He already knows us well, so our Investor Relations program is in good hands. Welcome, Charley.

Turning to the quarter, we feel good about our results. First quarter sales were up 3% sequentially, which is not typical seasonality, signaling that the worst of the impact from the pandemic on our business may be behind us. Sales of replacement parts outperformed first-fit by a wide margin providing valuable stability, and we saw continued evidence of share gains in strategically important markets and geographies helped in part by our robust portfolio of innovative products. First quarter profit performance was another highlight. Gross margin was up 60 basis points from the prior year resulting in the highest first quarter gross margin in four years, and the best sequential improvement in at least a decade.

We reduced operating expenses by 5% while maintaining investments in our strategic growth priorities, particularly as they relate to the Industrial segment. And altogether, we had a decremental operating margin of only 4% which we view as very positive given the uneven economic environment. Finally, our company remains in a strong financial position. We had excellent cash conversion during the quarter and our balance sheet is solid. We're on track to deliver our strategic and financial objectives in fiscal '21 and we'll talk about those plans later in the call. But first, let me provide some additional color on recent sales trends.

Total sales were down 5.4% from prior year or 6.4% in local currency. In the Engine segment more than a third of the decline came from Aerospace and Defense, due largely to the significant impact from the pandemic on commercial aerospace. We have a great team and strong customer relationships, so we expect our Aerospace business Will recover. In the meantime, we are pursuing optimization