DONALDSON Co INC Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Total sales increased in constant currency, and earnings rose faster due to margin improvement despite macro headwinds. The team navigated a choppy environment with a diversified portfolio, achieving higher sales in higher margin businesses.
• Mobile Solutions: Aftermarket performance drove growth, with fill rates near 100% and a partnership with Daimler Truck North America on hydrogen fuel cell project.
• Industrial Solutions: Aerospace and defense business outperformed, with strong demand in commercial aerospace and defense. Connected machines and customer facilities grew double digits.
• Life Sciences: Pretax profit margin improved sequentially and year over year, with cost optimization and leverage on higher sales. Bioprocessing pipeline remained solid.
• Consolidated sales: $870 million, down 1% year over year; adjusted EPS $0.83, up 3%. Expense discipline was maintained while investing in the future, including R&D and CapEx.

Segment Performance

• Mobile Solutions: Total sales were $548 million, down 1% versus 2024. Excluding currency, sales grew 1%. Aftermarket sales of $442 million were up 4% year over year. Off-road sales of $80 million were down 13% due to agriculture weakness; on-road sales of $25 million declined 24% due to truck production decline. China sales increased 1% with aftermarket offsetting first fit softness.
• Industrial Solutions: Sales decreased 4% to $254 million. Industrial Filtration Solutions (IFS) sales decreased 8% due to slower CapEx investments. Aerospace and defense sales grew 19%, partially offsetting IFS weakness.
• Life Sciences: Sales of $69 million grew 9% compared with the prior year. Pretax profit margin improved, driven by cost reductions and leverage on higher sales. Bioprocessing early stage capital spending was constrained, but the therapy pipeline remained solid.

Guidance

• Full year total sales forecast flat to up 4% vs prior 2-6% guidance, impacted by FX headwind and softer end markets.
• Mobile Solutions: Sales forecast down 1% to up 3%, off-road now mid-single digits down; on-road unchanged. Aftermarket growth projected low single digits.
• Industrial Solutions: Sales projected 1-5% increase vs prior 4-8%, IFS low single digits growth; Aerospace and defense up high single digits.
• Life Sciences: Sales projected high single digits growth, breakeven profitability. Operating margin guidance 15.6-16%, midpoint 15.8%. Adjusted EPS guidance $3.60-$3.68.

Risks

• Macro headwinds affecting end markets like agriculture, transportation, etc.
• Uncertainty regarding global tariff policies, with potential impacts on supply chain and pricing if tariffs are enacted.
• Weak end market conditions in agriculture, industrial, and life sciences project-based businesses.

Question and Answer

Q: Discussion on recent win in China and implications for Donaldson going forward.

A: Tod Carpenter mentioned it's a continuation of technology wins in China, specifically in liquid and hydraulics for tractors, building on momentum in air-based applications.

Q: Split of profitability in Life Sciences segments.

A: Tod and Brad explained traditional businesses are profitable, while acquired businesses are pre-revenue, but new products expected to lift profitability in 12 months.

Q: Aftermarket divergence between OE and independent channels.

A: Tod stated OE channel has more focus on parts, independent channel had pullback, but overall share gains and strong execution with near 100% fill rates.

Q: IFS visibility and guidance.

A: Tod explained power generation project timing moved, but power generation business guide unchanged; project-based businesses in IFS have timing shifts.

Q: Aerospace and defense strength.

A: Tod said both aerospace and defense are strong, with supply chain improvements helping overcome prior headwinds.

Q: Off-road dynamics and outlook.

A: Tod mentioned no pre-buys due to tariffs, but customers asking about building products outside US; outlook reflects current end market conditions.

Q: Life Sciences CapEx projects update.

A: Tod noted large bioprocessing projects in upstream process were shipped, but no new large CapEx projects yet in life sciences.

Q: Mobile margins and second half outlook.

A: Brad explained margin improvement in second half through sales leveraging and expense control across the company.

Q: Industrial connected solutions adoption.

A: Tod stated year-to-date growth in connected machines and facilities at 30% and 29% respectively, driving parts sales.