Thank you for standing by. And welcome to the Donaldson Company First Quarter Fiscal Year 2025 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. [Operator Instructions]. Thank you. I'd now like to turn the call over to Sarika Dhadwal, Senior Director of Investor Relations. You may begin.

Good morning. Thank you for joining Donaldson's first quarter fiscal 2025 earnings conference call. With me today are Tod Carpenter, Chairman, President and CEO; and Brad Pogalz, Chief Financial Officer. Also on the call is Scott Robinson, Former CFO and current Strategic Advisor. This morning, Tod and Brad will provide a summary of our first quarter performance and reaffirm our outlook for fiscal 2025. During today's call, we will discuss non-GAAP or adjusted results. For first quarter 2025, non-GAAP results exclude pre-tax restructuring and other charges of $3.3 million, primarily related to cost reduction initiatives in the Life Sciences segment. 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 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.

Thanks, Sarika. Good morning. Before we get started, on behalf of the Board of Directors and Donaldson Company, I want to thank Scott Robinson for his contributions over the past nine years. We are better as an organization because of him. He led us through several significant global initiatives, which undoubtedly resulted in improved financial performance and shareholder value creation. He also built a world-class finance team, the best Donaldson Company has ever had. So, Scott, enjoy your retirement. You've earned it, and we look forward to hearing stories about your continued adventures, hunting, fishing, traveling, and the like. With that, I also want to formally acknowledge Brad Pogalz, our current CFO. Many of you already know Brad from his former positions, including as Head of Investor Relations for Donaldson. He's been with the organization for nearly a decade, and I'm confident his experience and deep understanding of our business will enable his success in his new role. Now, on to the first quarter results. Our record first quarter earnings mark a strong start to fiscal 2025. We increased sales in all three segments, gained share in key business units through our technology-led solutions, and maintained strong gross margins. Also, as part of our ongoing work to optimize and elevate the margin profile of the company, we took actions to focus our expense structure within the Life Sciences segment in response to continuing market pressures. This work is part of the footprint and cost optimization program we began last quarter. In summary, this quarter, we executed and laid the foundation for higher profitability. Now, some highlights from each of our segments. In Mobile Solutions, we delivered strong sales growth and improved profitability with the backdrop of weak end-market conditions, including in agriculture and transportation. We achieved this through higher volumes…

Thanks, Tod. Good morning, everyone. Before discussing our first quarter results, I want to take a moment to thank Scott for his leadership and the smooth transition over the past several weeks. I'm excited for the opportunity to lead the finance and IT functions at Donaldson and to build upon all the great work that has been done. Now, on to results for the quarter and our outlook for the full year. Note that my profit comments will exclude the impact of the restructuring charges Sarika referenced earlier. First quarter, total company sales were up 6% versus 2024. Operating margin was up 20 basis points and EPS of $0.83 increased 11% year-over-year. Gross margin of 35.6% was flat to the prior year. Benefits from select input cost deflation were offset by increased costs, including investments in manufacturing, efficiency, and distribution, which allow us to better serve our customers, and we also had higher labor costs. Operating expenses or rate of sales was 20.7% compared with 20.8% a year ago. Leverage on higher sales was partially offset by an increase in people-related costs. This expense leverage increased operating margin to 14.9% from 14.7% in 2024. Now, a few comments on segment profitability. Mobile Solutions pre-tax profit margin was 18.3%, up 120 basis points year-over-year, driven by higher volume, favorable mix related to replacement part sales, and lower select input costs. Industrial Solutions pre-tax profit margin was 15.9%, down 170 basis points due to a couple of things. We had increased costs, including those related to our footprint optimization initiatives, combined with an unfavorable mix of sales. Importantly, our industrial backlogs remain high. As we work down our backlogs through the balance of this year, we expect profitability to improve as we get leverage on higher sales. Life Sciences had a pre-tax…

Thanks, Brad. When we completed the organizational redesign of Donaldson Company two years ago, we did so to better serve our end market customers. The intent was to enable a more efficient deployment of resources and to strengthen commercial execution. Our results are proof of our success. We have gained share in several businesses, including Mobile Solutions aftermarket, Industrial Dust Collection, Aerospace and Defense, and Disk Drive. Through our filtration technology expertise, we have expanded our addressable market and grown a diversified portfolio of businesses with strong long-term fundamentals. This has allowed us to withstand pockets of market weakness and deliver record earnings to our shareholders. Now we're focused on building on this success. While we continue to optimize our expense base in response to macro conditions, we are intent on capitalizing on our growth potential through impactful strategic investments in all three of our segments. In mobile, our teams are focusing on building our alternative power solutions business. We are enablers of a greener and more efficient modern economy and are committed to helping our customers achieve their sustainability goals through advanced filtration. In industrial, connectivity and services will support future growth. We are strengthening customer relationships by providing smart connected solutions that provide real-time performance information, reducing equipment downtime, and decreasing total cost of ownership, including maintenance. In Life Sciences, we are targeting investments in the scaling of our bioprocessing businesses and strengthening our ability to gain share in businesses like food and beverage. All of this is underpinned by the talent and fortitude of the Donaldson team, which combined with our balanced growth strategy position us well to deliver on our fiscal 2026 financial targets. With that, I will now turn the call back to the operator to open the line for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question today comes from the line of Angel Castillo from Morgan Stanley. Your line is open.

Good morning, and thanks for taking my question and congrats on another strong quarter here. Just wanted to touch base on maybe just to start on the pre-cash flow conversion, you mentioned that that's kind of in line with your expectations, but can you just give us a little bit more color on maybe the 47% conversion and just as you think about, it seems like it was maybe more kind of working capital, just kind of those drivers and maybe how you get back to that 85% to 95% for the year.

Hi Angel, this is Brad. Yes, you are right. It's about working capital investments and as Tod and I both touched on a little bit, investments, especially in inventory to get on-time deliveries in good shape and make sure we're delivering for the customers. So that's really the story. And then it just sort of cascades through the year as we expect more sales in the build and the typical stronger second half and more working cap or better use of working cap as we go through the year.

Okay, that's helpful. And then on Life Sciences, I was wondering if you could kind of break out a little bit more. Just remind us how much Disk Drive is, and likewise maybe how much F&B was, particularly as you think about kind of the international expansion and more color on that. And then just kind of the last piece on the kind of underlying Life Sciences vertical as well. You know how much each of those kind of makes up for fiscal year ‘25.

We typically don't break out the details on the specific businesses, but I would say that the thing to keep in mind with Disk Drive is remember about a year and a half ago, we cratered off the bottom. That market collapsed, which was very well documented publicly. It created a big pressure on our businesses and so the growth rates and the growth this year are just continuation of that, along with some share gains there.

Yeah, just maybe a little bit more. It's just a renormalization overall and market within Disk Drive is what's taking place.

Understood. Thank you. Brad, looking forward to working with you and Scott. Congratulations and wish you all the best in your time here.

Thank you.

Same here.

Your next question comes from a line of Bryan Blair from Oppenheimer. Your line is open.

Yes, good morning, everyone.

Good morning.

Brad [ph], thank you for your help over the years. It's been a pleasure.

Thanks Bryan.

Brad, obviously congrats on the promotion. Well-deserved.

Thanks Bryan. I appreciate it.

Of course, one of the levels that are a little bit on mobile aftermarket results remains encouraging there. We're still lapping where we're lapping, or we channeled destocking from last year. Was that the source of all of the double-digit growth on that side? And then on independent channel, is it strictly share gains that continues to drive growth there, and what are you contemplating on that front in the reiterated guide?

Yeah Bryan, this is Todd. So when you look at our aftermarket performance, the big story is share gains. Its share gains with a large customer that we talked about, NAPA before. It's also a share gains across the independent channel. It's a slight lapping of the destocking on the OE side and returning back to normal pull through levels, let's say. But the story within our aftermarket organization is share gains and they are pretty broad as evidenced by almost double-digit growth across all regions of the world.

I appreciate the color. And on price costs, sorry if I missed the detail, how did that shake out in Q1? And assuming the 1% price realization that you've got it in current visibility on costs, how is your team thinking about the price cost impact and cadence over the coming quarters?

Hi Bryan, this is Brad. So price costs, you pointed out, it was about 1% in the quarter. The thing to keep in mind is pricing it as a much more normal level now. This is typically what we'd expect, is in that low single-digit range. And we would see that for the rest of the year, about 1% in the quarter. We guided to 1% for the full year. So that averages out pretty similarly. The point on cost is, it's still kind of a mixed bag. Some were up, some were down. Labor is up, certain input costs are up, certain input costs are down. So I would say from our side, the teams are working really hard to balance that. And obviously, we want good relationships with our customers too. So that's something we have to take into the equation. But for us, the way we sit right now, we think it's pretty well-balanced.

Okay, understood. That's helpful. Thank you.

Your next question comes from a line of Brian Drab from William Blair. Your line is open.

Thanks for taking my questions. Hi, Brad. Nice to have you back. And Scott, congrats again.

Thank you.

Hey, just a couple of questions. And Todd, you touched on it a little bit I think. But can you elaborate on how you are thinking about and what you are seeing from your customers and the environment post-election? You mentioned that maybe there are some power project delays. And I'm just wondering, like have there been other challenges in the business kind of leading up to the election or project delays that you are seeing that you think might get released now in just the overall environment? And then any concerns you have or how are you thinking about the tariff situation or potential situation?

Yeah, Brian. So when you really look at the macro across the company and the overall broad-based portfolio of businesses that we have, the election really kind of normalizes if you will. You get some positives in the power generation business potentially, of course, based upon incoming administration's positioned relative to that. We have some potential risks in the sense of tariffs. But I do want to mention that 75% of Donaldson's manufactured product to customers, are manufactured within region to support that region. So we do not cross region a whole lot. And when we do, the U.S. remains as Donaldson Company, for Donaldson Company, a net exporter. So the tariff story for us is really more of a, should they go within region, north and south Mexico and Canada, clearly we would feel some pressures there. It's just uncertain what's going to happen. I think the bigger story for us would be more what happens in the raw materials sector. In the last Trump administration, they really hit tariffs on steel and steel is our number one commodity used, and therefore that's when we really started to feel things. But overall, as the manufacturing sector goes and how Donaldson supplies its customers, we're pretty comfortable there. And we would have some opportunities relative to manufacturing expansion, relative to power generation expansion, and just generalized improved economy across the U.S. clearly would give us a nice bump as well.

Okay, thanks. And then just on the IFS business, you mentioned – again, you mentioned this power project timing. You've got an up 1% result for this quarter, but up high single digits forecast for the full year. Can you just give us a little confidence or like a window into what you're seeing for the back half of the year? Maybe this project that was delayed is going to hit, etc.

Yeah, it's just timing. That business always has timing kind of hanging over it. The projects just float on delivery from one quarter to the next. But at the macro, as we see relative to our backlogs in that business are strong. They clearly support our forecast. There's potential upside there. We're already filling in some of the backlog for next fiscal year. It's a pretty solid business cycle in power generation at this point.

Hey Brian, this is Brad. I'll just add one thing that's a bit more of the math on IFS specifically. Unlike most of the rest of the company, IFS toughest comp is actually in the first quarter of last year, whereas the rest of the company, this is one of our easier comps, IFS builds as a result of that too. So just keep that in mind, please.

Yeah, perfect. Thank you.

Your next question comes from a line of Laurence Alexander from Jeffries. Your line is open.

Hi, good morning. This is Dan Rizzo on for Laurence. You mentioned restructuring and reducing costs within Life Sciences. I was wondering where we are in terms of which inning – I mean, is that – was that going to continue to the end of the year? When should we expect, I mean, that business to be kind of right sized?

Yeah, so where we are within the cycle of that is that the macro of the Life Sciences businesses we've been talking about, clearly the end market conditions within the Life Sciences have really met with some headwinds, larger CapEx-based projects. So what we would call upstream of the overall bioprocessing cycle has really slowed. And then the downstream products have really, those projects have elongated. And it's typical in a Donaldson business, when say a mobile solutions project elongates, it'll slip by one quarter or two, but a Life Sciences project slips by one year and sometimes two. And so consequently, we round all that up and took a solid look at where we are and where the market condition is, and we adjusted. At this point we have made the adjustments that we have planned. We continue to look at standard work across every business inside Donaldson Company, where we are, meet the end market conditions as well. And should there be further necessary actions, clearly we'll take them. But we feel like at this point in time, we're in a good spot to execute longer term, our strategic plan and deliver on our guide, which is to return the business to flat profitability within the fiscal year.

Okay. And then within – sorry, within bioprocessing, I mean, once you're restructured, are you going to need any macro improvement to kind of get beyond the returning to just basic profitability? Can you grow from a smaller footprint if nothing really gets better for the next three to five years?

Yes, we can. What we've really done is, we had a broader base list of projects that we were working on in order to ready the market, and so we just focused those projects, if you will. We really kind of sharpened our pencil relative to our choices, because the market appears to be a little bit slow to take on some of those new opportunities that we were starting to press. So we backed down away from those. We elongated those out and said, ‘hey look, we'll put those on the to-do list than the now list.’ And we really focused our attention on what we can deliver quicker in order to monetize.

Okay. And then finally, last question, you mentioned that you saw a little bit of acceleration off-road after five quarters of things inclined. Do you think we've reached an inflection point where things should start to get better or is it really too soon to tell if there is actually a real rebound there?

Yeah, tough to say. We're just kind of aggregating all the inputs across the customer base at this point in time, but it is tough to say on that first fit size. We follow all the agriculture news, which continues to get a little bit tougher. The construction news is a little bit more muted, if you will. But one of the other stories that we have, obviously a positive one, is China in a quarter. But China didn't feel like an inflection point where we're drawing a line forward. It just felt like a moment. And so consequently, we'll just keep our eye on that. It's also too soon to call anything on China. So there's just a bowl of uncertainty out there and we'll just keep our eyes on it.

Thank you very much.

Your next question comes from the line of Nathan Jones from Stifel. Your line is open.

Good morning. This is Adam Farley on for Nathan. I wanted to follow-up on the aftermarket question.

Good morning.

Hey, good morning. I wanted to follow-up on the aftermarket question. How should we think about the underlying demand level there, kind of adjusting for the de-stocking comps and the market share gains? Is it kind of Steady-Eddie or are you seeing any acceleration there?

Yeah. So if you really take a look at overall vehicle utilization, it's steady. There's not really an expansion, if you will, taking place, which really speaks to my earlier comment that the story of our quarter and the story of what's taking place in mobile solutions aftermarket for a Donaldson company is share gains. We're executing extremely well. We're making the necessary investments, such as standing up new distribution centers to take care of our customers extremely well and as a direct result, we're continuing to gain shares. Should there be more of an economic uptick, clearly we're positioned well to take advantage of that up-cycle. But in the meantime, we'll just continue to win share and move forward. I do – maybe this is a good moment to suggest that when you look at our mobile solutions aftermarket business, and as we enter Q2, November, December, and January, that's typically our toughest quarter, right. And so because you are not planting and you are not harvesting, and there's not a whole bunch of construction projects going on. So I do want to remind you as you build your models out, that Q2 is a little bit softer, typically historically for Donaldson Company, but we do still expect to deliver positive things.

That’s very helpful, color. Thank you for taking my question.

Your next question comes from a line of Rob Mason from Baird. Your line is open.

Yes, good morning. Thanks for taking the question. Maybe Tod, just to kind of follow-up on your last comment, are you still thinking about the year, kind of breaking down first half versus second half 48%-52%, or does that percentage change any?

No, it hasn't changed. We said last time closer to 49%-51%. We're actually right about in the middle between a 48% and a 49%, if you build your models out. So it could swing a tenth or two-tenths and round down or up, so we're right there. And again, I do want to, Rob – because your model is exceptional. I do want to remind you that Q2 is typically because of the holidays and such, as you look to your 48%, 49%, that's usually the toughest Q of the year.

Yeah. Yes, makes sense. Of course, you didn't change your outlook for any of the segments. So including aerospace defense, you got off to a really good start. I mean, your guidance looks conservative based on the first quarter start, but do you have visibility just on shipment timing to support that or is this – should we think there's potential upside to that aerospace defense?

Yeah. Thanks for the question. So we know that we have a strong first quarter. What the guidance of flat really embraces is the fact that more than any other business inside Donaldson Company, we have supply chain bubbles there. Particularly, we have a couple of piece parts that are really holding back seven-figure projects to be delivered. And so, should we be able to resolve those, there's clearly some upside, right. But right now, they are incredibly stubborn, because we have been chasing them for over a year. And as you know, in aerospace and defense, when you want to recall and get a new supply, it's highly different than the other businesses that we have. And so that's why it's just been taken so long to try to drive down that supply chain challenge. But it does have upside, should we be able to get the product in here.

Rob, this is Brad. I'll just add on the cadence. Keep in mind, fourth quarter last year in this business was up around 40%. So there's clearly a comp story at the back end of last year. And part of that big jump was exactly what Tod just talked about. Some of these parts as they come in, we'll sell it and send it as quickly as we can when we get the shipments from our suppliers.

Understood. Okay, that's helpful. And just last question. I'm curious, Medicare was in the results this quarter. How did that influence the Life Science op profit? Was it a contributor, detractor to overall profit?

Yeah, it was neither of those. I mean, essentially, it was immaterial in the quarter, rounds to zero. The biggest thing in the quarter was the cash outflow that I mentioned in my remarks, $71 million for the 49% stake.

Yeah, okay. Very good. Well, congratulations to both Scott and you, Brad.

Thank you.

And that concludes our question-and-answer session. I will now turn the call back over to Tod Carpenter for some final closing remarks.

That concludes the call today. Thanks to everyone who participated. We hope everyone has a nice holiday season, and we look forward to reporting our second quarter fiscal 2025 results in February. Goodbye.

This concludes today's conference call. Thank you for your participation. You may now disconnect.