Hello, and thank you for standing by. My name is Tiffany, I will be your conference operator today. At this time, I would like to welcome everyone to the Donaldson Company Q1 FY2026 Earnings Webcast. 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 that time, simply press star, then the number one on your telephone keypad. I would now like to turn the call over to Sarika Dhadwal, Head of Investor Relations. Sarika, please go ahead. Thank you for joining Donaldson Company's first quarter Fiscal 2026 Earnings Conference Call.

With me today are Todd Carpenter, Chairman, President and CEO; Brad Pogalz, Chief Financial Officer; and Rich Lewis, Chief Operating Officer. This morning, Todd and Brad will provide a summary of our first quarter performance and our outlook for fiscal 2026. During today's call, we will discuss non-GAAP or adjusted results. First quarter 2026 non-GAAP results exclude a pre-tax gain on the sale of fixed assets of $9.3 million and a pre-tax charge of $5 million for restructuring and other charges primarily related to footprint optimization and cost reduction initiatives. 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 Todd.

Thanks, Sarika. Good morning, everyone. Donaldson Company's first quarter results were strong, and I'm proud of what our team was able to accomplish: growing sales, operating profit margin, and earnings. We delivered once again on our commitments to all of our stakeholders—our customers, our shareholders, and our employees. We did this through our leadership position in filtration, which was built on decades of solving our customers' most difficult filtration problems with our razor-to-sell razor blades model, our best-in-class technology, which is uniquely powerful because we focus on filtration capabilities and then leverage these technologies across markets. Our ability to help customers meet evolving environmental and operational goals by helping to protect equipment and maintain cleaner work environments and our clear strategic and balanced growth strategy. That is why our success continues. I will start by discussing our first quarter performance, touch briefly on our expectations for fiscal 2026, then Brad will detail our financials. Lastly, I'll provide some closing remarks before opening the call to questions. In the first quarter, we grew sales to an all-time first quarter high of $935 million, a 4% year-over-year increase with growth across many key businesses, including mobile aftermarket, power generation, food and beverage, and disk drive. Expanded operating profit margin to a record 15.5% driven by leverage on higher sales and cost optimization initiatives. Delivered record earnings per share of 94¢, 13% above prior year. Returned $127 million to shareholders through share repurchase and dividends and continued cost optimization initiatives including our footprint optimization laying the foundation for higher future profitability. Now a few highlights by segment. In mobile solutions, our razor-to-sell razor blades model continues to drive through cycle performance. Our aftermarket results are robust. For example, we continue to gain share in the independent channel where sales grew nearly double digits.…

Thanks, Todd. Good morning, everyone. Before getting into the financials, I want to thank the Donaldson team for producing strong first quarter results, giving us confidence in our ability to deliver on our increased profit guidance for the full year. The team continues to display their talent and focus quarter after quarter, and we're excited to build on our momentum. I want to start this morning with a few highlights. Note that my profit comments exclude the impact from the nonrecurring net gain that Sarika referenced earlier. Total sales increased 4%, Operating margin was a first quarter record of 15.5%, up 60 basis points over prior year with an incremental margin over 30%. Adjusted EPS was 94¢, up 13%. And cash conversion was strong at 101% due to improved working capital management. Altogether, a solid quarter for Donaldson Company. Digging deeper into the P&L, our strong first quarter operating margin was driven by expense favorability. Operating expense as a rate of sales improved to 19.9% from 20.7% a year ago. Reflecting leverage on higher sales that was compounded by benefits from the structural cost optimization initiatives launched during the prior fiscal year. Gross margin was 35.4%, down 20 basis points from the prior year and slightly better than our internal expectations. We partially offset increased operating costs with pricing, including pricing related to tariffs as we are successfully mitigating that impact. We still expect gross margin expansion for the full year, with most of the favorability in the second half as our footprint optimization projects come to completion and we benefit from volume leverage that accompanies our typical seasonality. In terms of segment profitability, mobile solutions pretax profit margin was 18.6%, up 30 basis points from prior year. Due to mixed benefits from higher aftermarket sales and leverage on higher…

Thanks, Brad. As we turn the page to our second quarter, Donaldson is in a position of strength. We are maintaining our focus on doing what we do best, solving our customers' complex filtration challenges through our technology-led products and services. With this focus, and through our execution, key investments, and strategic initiatives, I am confident in our ability to create value for all of our stakeholders in the future and we look forward to reporting on our ongoing progress. To close, I want to thank our talented employees around the globe who each day are building our future success. With that, I will now turn the call back to the operator to open the line for questions.

At this time, if you would like to ask a question, press star. Then the number one on your telephone keypad. To withdraw your question, simply press star 1 again. Your first question comes from the line of Brian Drab with William Blair. Please go ahead.

Thank you. Good morning, everyone. Good morning. Hello. Sorry if I missed the detail. What was IFS first fit in aftermarket revenue? Fiscal Q1? And then how should we think about first fit and aftermarket contribution to mid-single digit full year growth? And on the aftermarket side, is it still your expectation to increase connected machines by over 30% this year?

Brian, this is Brad. I'll start with the numbers. In IFS, both first fit and replacement were up. We didn't go into the details on it. I think, notably, power generation continues to do very well for us in terms of the projects. And a lot of power needs for data center build-outs. So that business continues to do very well, and that's on the new projects and then a little more tepid elsewhere.

And relative to this is Todd. In relative to connected solutions, we continue to do well and execute the strategy very well. We do expect to connect between two and three thousand dust collectors this year, and we continue to be on target.

Okay. That's great to hear. And then you would emphasized a little more so last quarter that you know, the team remains in the heavy lift phase of footprint optimization. That being said, are you willing to speak to what you know, structural benefits have been realized to date and, you know, what we should anticipate in terms of pending efficiencies, cost savings, etcetera. As the know, initiatives, you know, conclude the back half of this year into early next year.

Sure. This is Brad again, Brian. In terms of structural efficiencies to date, very limited. I think if you look at this morning's report, one notable thing is a gain on sale of $9 million. So we've been moving a lot of product out of facilities. This was related to a plant in the UK that's completed now. So there's two aspects of this work, and the heavy lift has been that kind of final wrap-up. And then the next tranche of work is gonna be, I'd call it, start-up in the new home of this production. So as we ramp up there, it's gonna be teams getting used to this new delivery, new products, that'll happen over the course of this fiscal year, but that's where we talk about more of a building benefit towards the back half of fiscal 2026.

And, Brian, Todd, just a little bit more. So I also want to emphasize that we have taken, taken our best shots according to our, all the planning that we have. For those benefits, that you're looking for, and we have put those in the current guide that you're, now in possession of.

Okay. Understood. Appreciate the color.

Your next question comes from the line of Angel Castillo with Morgan Stanley. Please go ahead.

Hi, good morning, and thanks for taking my question. Wanted to touch on the pricing trends a little bit. You had a 2%, I think, in this quarter, but kept the full year guide around 1%. Can you just talk a little bit more broadly about what you're seeing in terms of pricing dynamics in the market and just how should we think about kind of the full year and ability to potentially have that be what you saw in the first quarter or why that doesn't persist?

Hi, Angel. This is Rich. Yeah. Just talking about pricing. I would say, in general, if you think about where we're at and I go back to sort of what we're to do principally, which is have fair and balanced relationships commercially with our customers. We are in a fairly normalized pricing cycle after the past few years. And I think what you see in the guide is exactly that. So costs are being managed well. And we are pricing competitively in the market. But, again, more normalized to sort of back pre-COVID type conditions.

Got it. That's helpful. And then you gave a lot of helpful color on some of the end markets here. I was hoping you could dive a little bit deeper maybe on the regions and what you saw during the quarter. And in particular, I would be interested to kind of hear what you're seeing in terms of November to date and how some of these trends may or may not be kind of progressing given that most of your guides other than onward were essentially unchanged. So just yeah. Just how things are progressing in November.

Yeah. Sure. This is Todd. So the best region or the most consistent region right now is Europe. Europe continues to actually strengthen a bit. We saw that within the quarter. From the fourth quarter last year to the first quarter this year. So Europe's doing quite well in a broad-based manner across our businesses. US, we're seeing a bit more careful, within the first quarter, of this year. But still, on solid foundation. Latin America, also, we're being very careful across Latin America. It's got some highs and lows. It's really pretty uneven across Latin America. Asia Pacific is doing okay. Obviously, we had a nice quarter in China based upon the wins that we have and the share gains that we continue to continue to have in China. But we're just trying to be very careful on China. We've had two up quarters in a row but we're still not really ready to call it economic recovery or green shoots or things like that. We'd really prefer to see more data points. All in all, though, we grow in everywhere, in the world. Right now, we're actually executing really well as a company. And I'd say that's the regional summary.

Helpful. Thank you.

Your next question comes from the line of Adam Farley with Stifel. Please go ahead.

Good morning, everyone.

Good morning.

We'll start on the mobile aftermarket piece. Really strong growth there. It's good to see. You know, did you win any incremental share gains this quarter? Is this mostly carryover benefit from prior wins?

Little bit of both. Look at the OE aftermarket, little bit above.

Sorry. Go ahead, Adam.

I was just gonna say on the OE aftermarket channel side, do you think you're seeing any potential restocking activity?

On the independent channel, a little bit of both. Some share gain, some carryover obviously from share gains that we've been talking about in the prior 02/2002, particularly on the OEs, we do see a dip as the OEs really do some balance sheet management, typical behavior. We did start to see that a little bit in October, and so we think it will be on the OE side. The typical behavior for them and we put that within the guide. But it's not anything more than behavior, and we're at culture levels, and we're feeling really good about both the independent and the OE channel, on the replacement parts, and we're actually executing very, very well for our customers.

Okay. That's good to hear. Maybe on the industrial side, what were the primary drivers of the decrementals this quarter? Was it mainly the lower volumes in A and D? Or were there any other maybe one-time items of note?

Hi, Adam. Brad here. So the decrementals, it was about flat for the total segment, but definitely pressure in the gross margin from higher operating costs and expense leverage, the pressure on those costs. So it's kind of the combination of those two things. We do expect it to build up from here over the course of the year. The challenge is timing in these businesses, and you touched on it with A and D. This can be a very lumpy business. And when that comes through, that's very good. And obviously, we'll have some fits and starts like we have for probably the last eight quarters in that business. And then project timing on the IFS side.

Yeah. Adam, this is Rich. The only other thing I would add is we spoke about our footprint optimization work. The vast majority of that sits in that space. And so that work will continue, and we'll see the benefits in the latter part of the year.

Okay. Thank you for taking my questions.

Your next question comes from the line of Brian Drab with William Blair. Please go ahead.

Hey, good morning. Thanks for taking my questions. The first one, just wanted to dig into the industrial outlook a little bit further, you know, up one and a half percent or so in this quarter, but the outlook for stronger growth, so acceleration. And can you just, you know, put some detail around that forecast?

Yeah. Brian, this is Brad. So I think part of it is this timing that we mentioned. I mean, defense was particularly challenged in the quarter. There's still some supplier issues that we've been talking about for a while in this business that pushes some of those sales out, also some project timing. Particularly with power gen. I mentioned earlier in this call that had a good quarter, but, obviously, these are big projects, and we have a lot in queue. That we're working to get out. So those are the couple things that build. I mean, it's hard to say exactly the date, and we won't go into quarter by quarter guidance. But like I said in the earlier answer, in industrial, we do expect it to build up from here. In terms of sales volume and profitability.

Okay. And then in the disk drive business, can you talk a little bit about what's driving that in the near term? And you know, what are the what's the long-term secular outlook for that business now? And I know you probably don't want to talk about how significant that is in terms of revenue dollars, but if you could give us any sense for how large that business is now, that would be helpful.

Yeah. Brian, this is Rich. I'll talk about the outlook and what's driving it. Clearly, our customers in this space continue to evolve their technology. We talked about HAMR in the script. It's the latest technology driving really technical challenges in the filtration space. So we're seeing both share gains and market upturn. A lot of that's being driven by the AI and the cloud-based storage. That's the predominant driver of that. Our expectation is we'll continue to see a lot of strength this year. And we believe that that trend will moderate, but still continue to grow in the coming years. Following that secular trend.

Hey, Brian. Brad again. We can triangulate that for you. It's a couple percent of total rep. Couple percent of total Donaldson sales.

Okay. Got it. And by the way, Brad, after like, fifteen years, I do recognize all of your voices really clearly. But it's for the AI, man.

Yeah. Yeah. No. I know it's not for me, I guess. Actually, it's been seventeen years. So yeah. Who's this again? Quick question. Last quest yeah. So this is Brian Drab with William Blair. One last quick question. Is data center in general, you know, maybe for your industrial business? I'm thinking, like, Torit dust collectors. You know, is this data center opportunity going to materially impact your business going forward? Like, what are the opportunities in data centers?

Brian, this is Rich. It you know, this crosses actually both our life science segment and our industrial. And so if you think about these data centers, we're touching them in a lot of ways. They use a lot of power. So it's really good for our power generation business. On the input side. We have a microelectronic business where we're doing chips. These are also being fed into these data centers. Our disk drive business, clearly, we just talked about. And we're also seeing some new opportunities using some of our food and beverage products in the cooling, the water cooling. And so we've seen some pretty nice upticks in demand based on there's a lot of these folks were using air cooling before, they're switching over to a liquid cooling. And that's driving some nice business opportunities for us. So we're coming at it from multi angles. Probably a little bit less so on the dust collection standpoint. That's more of an HVAC play. But for the rest of our business is touching this, in a lot of ways.

Okay. Very interesting. Thanks very much.

Your next question comes from the line of Laurence Alexander with Jefferies. Please go ahead.

Good morning. Could you help just with the overall rate of share gains? What the impact is on either the first quarter sales or what you're baking in for the full year? Just to give a sense for how much you're outperforming the end market?

Well, just generally, as you look at your models, you know, share gains typically within our more mature markets are more low single-digit type of gains that help us to grow on an annual basis. So if you just kind of think of it that way in our mature markets, in our more immature markets, it could be pretty lumpy or in our project-based businesses, could be lumpy like power generation, obviously. You know, where you have multimillion-dollar projects. But the best way to look at that is in our mature markets, it's a low single-digit type of situation.

So I guess if your power gen, for example, were to accelerate over the next couple of years, does that mean the net contribution from share gains is increasing or declining from this year?

Increasing. Because our overall power generation business will continue to grow as we look forward. For example, we told you in the script that we are at full capacity for the balance of this fiscal year.

And then, I guess, just lastly, just if you look how four, five years, what's your view on kind of how much capacity you might need to add in some in those in those businesses to sort of keep up with their projected data center build-out?

If you look back to the last five years of Donaldson Company, and you take a look at our investment levels, our CapEx, etcetera, the new manufacturing facilities that we put, we sit in really strong shape. To position ourselves for when the end markets that have headwinds presented to us today, when they recover, we'll be able to answer. And so we feel as though we sit in really strong position to really take care of our customers. It's one of our guiding principles and that's the way we invested into the corporation. We'll be fine when that recovery happens. And so, overall, plant expansions, etcetera, it'll just be a normal cadence standard work for Donaldson. There won't be typical rushes that other people may experience. We are really happy with where we sit.

Thank you.

Your next question comes from the line of Tim Thein with Raymond James. Please go ahead.

Oh, great. Thank you. Good morning. The first question was just on the aftermarket business within mobile and just thinking about this for the balance of the year. You grew nicely against what was the toughest comp from last year. So I know sometimes these things are you run the risk of cutting it too finely. But growth appears that you're expecting it to maybe settle a bit from what you experienced in the first quarter. Can you just is that a fair assumption? And maybe just kind of walk through any assumptions that may be included as to how you're thinking about the balance of the year for that.

Tim, that's a fair assumption. And maybe just to be a little bit more granular, when you break up the OE growth versus the channel growth in Q1, I would tell you that the OE growth is low single digits in the independent channel is more double digits. So that kind of shows you the mix. It also speaks to the share gains that we continue to win. But we do think, particularly in the second quarter as is typical every single year, the OEs will balance sheet manage, will go more muted. And then we'll bounce back in our typical secular fashion year over year in the second half.

Okay. And alright. And then the, just on the you know, these four plus 40% incrementals are pretty impressive. In terms of the benefits related to the footprint optimization, is there a way to help us think about what that is yielding as you as we exit the year? You know, kind of a starting off point thinking about next year once these savings are kind of fully in the numbers? Is there any help you can give us on that?

Thank you. I guess I hi, Tim. I'd point back to the comments I made about triangulating the full year. I won't break it out into the specifics of this is where exactly that number lands. But if you think about operating profit tilted 55% comes in the second half. And all of the I shouldn't say all of most of that is gross margin expansion. We'll continue to get expense leverage as we go through, but a lot of that is gross margin. And some of that is from the footprint optimization. We will have the natural volume leverage, but we do expect to start to build on the momentum as those projects are complete.

Alright. Thank you, Brad. Appreciate it.

Your next question comes from the line of Rob Mason with Baird. Please go ahead.

Hi, good morning. Good morning, Rob. And congratulations on a good start to the year. Thank you. And just around that, you know, Todd, it's somewhat uncharacteristic or at least recently for you to change guidance or raise guidance after the first quarter. And it looks like maybe I can trace that to the improvement in the margin expectations. As you kind of walked around the world there recently, you used the word careful, a lot as also. So I'm just maybe a little more context on where the confidence is and to go ahead and raise the guidance. Is this all kind of self-help driven margin control there? Is there anything else moving around within the sales outlook you know, within the ranges that you have that did not change, but is anything moving up?

Sure. Absolutely, Rob. So, you know, when we take a look at the portfolio, right, we have a strong diversified portfolio of businesses. You know, all the puts and takes. We do have some headwinds in the portfolio, but we are winning share gains. You look at our aftermarket businesses, industrial, our mobile solutions businesses, the way our life sciences business, particularly food and beverage performed, you take the highs. The highs are higher highs than the lows are on the step down. And so consequently, you know, we pride ourselves on being transparent for all of you and helping you understand our company and we felt as though we would do that again this time, rather than hold back, and that's our guiding principle. We feel very good and confident about where we are, to execute the year. And so that's why we did that.

Oh, very good. Well, maybe I'll press you on the transparency. Can you speak to you've talked about your power gen business having a lot of demand, order books full. You also seemingly sound comfortable on where your ability to improve capacity. But can you give us some feel for how that business can grow this year, given it is in kind of a sold-out position? Yeah, with at least within the context of the mid-single digit for IFS. You know, where that may land for this year. Power gen?

Yeah. The biggest challenge for us within power generation is because of full capacity utilization is the ramp-up. And, you know, ramp-ups to the level when you see that business really go as hard and as fast forward as it is. Are usually more complicated than just kind of running it as you might imagine. These things are you know, one order could take 40 semi-trucks full of fabricated metal to be shipped somewhere in the world. So it's really that part of it that will determine our overall growth rates. We've baked that into the guide. We've taken our best opportunity to do that. We believe that at this point, that year over year will be kind of mid-single digits on the growth. There is a chance we could have some upside if we execute better. But because those projects are also multimillion-dollar projects, if you have a site not ready at a customer, they could push out delivery into another quarter. As you know, you've been following us a long time and even into a fiscal year. So we've tried to just balance all those macro factors into the guidance that we gave. It's obviously an important component of our story right now. And we're working hard to execute it for our customers.

Oh, that's helpful. Thank you.

That concludes our question and answer session. I will now turn the call back over to Todd Carpenter for closing remarks.

That concludes the call today. Thanks to everyone who has participated. We all at Donaldson wish all of you a safe and happy holiday season. And we look forward to reporting our second quarter earnings in about ninety days. Goodbye.

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.