DONALDSON Co INC Q1 FY2025 earnings call

• Thanked Scott Robinson for his contributions and acknowledged Brad Pogalz as new CFO. - Segment highlights: Mobile Solutions opened a new distribution center; Industrial Solutions Aerospace and Defense performed excellently with strong sales; Life Sciences expanded in food and beverage markets and had product launches in bioprocessing. - Consolidated company: Record first quarter earnings, sales growth in all segments, margin management, and investment in future growth across segments.

Mobile Solutions: Total sales $572 million, a 6% increase vs 2024. Aftermarket sales $451 million up 11%, Off-Road $89 million down 6%, On-Road $32 million down 15%. China sales up 4% with aftermarket double-digit growth. Industrial Solutions: Sales $258 million, up 5%. Aerospace and Defense up 27%, Industrial Filtration Solutions $212 million up 1%. Life Sciences: Sales $70 million, up 17% y-o-y, driven by Disk Drive and food and beverage.

• Full year sales expected to increase 2%-6% including 1% pricing benefit. - Mobile Solutions: Sales flat to up 4%. Off-Road up low single digits, On-Road down low double digits, Aftermarket up low single digits. - Industrial Solutions: Sales 4%-8% increase. - Life Sciences: Low double-digit growth. - Adjusted EPS range $3.56-$3.72. - Capital expenditures $85M-$105M.

• End-market conditions in some segments like agriculture and transportation. - Potential tariff impacts, though 75% of manufactured products are regionally produced. - Delays in projects, especially in Life Sciences due to elongated downstream projects.

Q: 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...

A: 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.

Q: Good morning, everyone. Bryan Blair: Brad [ph], thank you for your help over the years. It's been a pleasure. Bryan Blair: Brad, obviously congrats on the promotion. Well-deserved. Bryan Blair: 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?

A: 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.

Q: Thanks for taking my questions. Hi, Brad. Nice to have you back. And Scott, congrats again. Brian Drab: 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?

A: 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.

Q: 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?

A: 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.

Q: Good morning. This is Adam Farley on for Nathan. 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?

A: 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.

Q: 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?

A: 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.

Q: 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?

A: 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.

Q: 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?

A: 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.